OST-97-2965 / OST-97-2966 / Undocketed / American and Iberia / Consolidated Answer of United Air Lines / October 17, 1997

Applications of

AMERICAN AIRLINES, INC. and IBERIA LINEAS AEREAS DE ESPANA, S.A.

for exemptions under 49 U.S.C. §40109 and Statements of Authorization under 14 CFR Parts 207 and 212

United Air Lines, Inc. ("United") submits the following consolidated answer to the above-captioned applications of American Airlines, Inc. ("American") and Iberia Lineas Aereas De Espana, S.A. ("Iberia") requesting various authorizations to support code-share services between the U.S. and Spain and to third countries. United objects to those elements of the proposed code share that would (1) involve services between Miami and points in Central America and (2) involve services over routes other than those agreed in the U.S.-Spain bilateral air services agreement. Moreover, there are unresolved issues relating to American's acquisition of an equity interest in Iberia and the degree of control that would give American over Iberia that must be resolved before the Department approves any code share between these carriers. In support of its position, United submits the following:

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1. Among the markets in which American and Iberia propose to code share are those involving American's services between Miami and six points in Central America: Guatemala City, Guatemala; Managua, Nicaragua; Panama City, Panama; San Jose, Costa Rica; San Pedro Sula, Honduras; and San Salvador, El Salvador. /1 These are among the markets under investigation by the Department in Docket OST-96-1700. The Department in that proceeding is investigating, inter alia, the "serious competitive issues" in the Miami-Central American markets that would result from proposed code-sharing between American and the so-called TACA Group of carriers: TACA International Airlines, AVIATECA, LACSA, COPA, TACA de Honduras and NICA. Order 96-11-12 at 6.

Iberia was one of the last two carriers in the major Miami-Central America marked that was operating independent services in competition with the services of American and the TACA Group. If American were now allowed to implement its proposed code shares in the Miami-Central America markets involving the TACA Group carriers as well as Iberia, these

1/ Iberia also proposes to code share on blind-sector basis on American's services between Miami and Cancun, Mexico. Iberia presently operates its own aircraft in that city pair and competes with American for local traffic. It appears that this competitive service may be abandoned by Iberia in favor of the code share. The elimination of Iberia's service in the Miami-Cancun market would reduce competition in that city pair. United has requested authority to serve that city pair under a code share with Mexicana and has filed a motion for immediate action on that request. (Docket OST-96-1988).

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services would represent 97 percent of the available services between Miami and Central America. Indeed, with the exception of Costa Rica, American and its partners (Iberia and the TACA Group) would control 100 percent of the traffic between Miami and Central America. /2 The Miami gateway, in turn, accounts for 55 percent of total U.S.-Central America passenger traffic. /3 Overall, the addition of Iberia to American's Central America cartel would give American control over 74 percent of the U.S.-Central America market. /4

The applications of American and Iberia are silent as to what intention Iberia has with respect to its existing Miami-Central America services. Iberia will not be competing for local traffic between Miami and points in Central America because its code share over those sectors is being offered on a blind-sector basis. /5 There is no proposal by American to code share on any Iberia flights over these sectors. It appears, therefore, that

3/ INS Statistics (Arrivals/Departures), 12 months ending April 30, 1997.

5 Joint Application of American and Iberia, dated October 2, 1997, at 2, note 1.

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Iberia may intend to eliminate its existing services between Miami and the following cities in Central America: Guatemala City, Managua, Panama City, San Jose (C.R.), and San Pedro Sula. Certainly, the Department needs to know more than American and Iberia have offered regarding the impact of their proposed Miami-Central America code share on competition in the markets affected.

3. The Department should consolidate the instant applications of American and Iberia into Docket OST-96-1700 to the extent they seek authority to code share between Miami and points in Central America. The issues to be resolved in determining whether U.S.-Central America code shares involving American and the TACA Group are in the public interest are closely related to whether Bode sharing between American and Iberia in the same markets should be approved, especially where Iberia has up to now been a competitor of American and the TACA Group in those same markets.

The instant applications of American and Iberia ignore this issue altogether. So far as these new applications are concerned, American and Iberia behave as though there is no ongoing Departmental investigation of the issues raised by American's code sharing in U.S.-Central America markets. And yet, the Department has already recognized that the American/Iberia U.S.-Central America code shares "involve matters relevant to our assessment of the competitive implications" that

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were being addressed in Docket OST-96-1700 where the investigation of the American/TACA Group code shares is under way. Notice dated August 22, 1997, in Docket OST-96-1700 at 3.

American's response to the Department's Notice was simply to assert that because American has no plan to integrate its code shares with the TACA Group and its proposed code share with Iberia, the Iberia code share is "completely irrelevant" to the issues under investigation in Docket OST-96-1700. American Response, dated August 27, 1997, in Docket OST-96-1700 at 2. Even American concedes, however, that there is a "conceivable connection" between the Iberia/American Miami-Central America code shares and those proposed under the American/TACA Group alliance. In that regard, American urged the Department to await the submission of its application to code share with Iberia before "address[ing] fully any perceived effects on competition that might stem from the American/Iberia agreement." American Response, dated August 27, 1997, in Docket OST-96-1700 at 8.

Now that American and Iberia have filed their codeshare applications for markets that overlap extensively with those under investigation in the American/TACA Group case, the time has arrived to address the competitive effect that even American concedes may result. In order to accomplish that, it is essential that the Department not only consolidate the American code-share applications with Iberia and the TACA Group in the markets where they overlap but also obtain additional information

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such as that relating to Iberia's intentions with respect to its existing Miami-Central America services and American's plans to acquire an ownership interest in Iberia. (See below.)

4. United has opposed the approval of the American/TACA Group code shares for reasons stated in pleadings United has filed in Docket OST-96-1700. The same reasons would also preclude approval of the American/Iberia U.S.-Central America code shares in addition to those between American and the TACA Group. The American/Iberia U.S.-Central America code shares standing alone raise competitive concerns of a different magnitude from a code-share alliance that would involve American in cooperation with Iberia plus the TACA Group. The Department must consider these issues in a consolidated proceeding because the competition issues involve the same U.S.-Central America markets.

United has urged the Department to expedite the issuance of a final decision in the long-pending proceeding relating to the American/TACA Group code share and deny those applications without further delay. Further delay is merely encouraging American to enter into an ever increasing number of code shares involving Latin American services that cannot be approved consistent with U.S. competition policy. Continued pendency of the American/TACA Group case also unnecessarily complicates consideration of proposals such as the instant

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American/Iberia applications to the extent they raise issues also before the Department in Docket OST-96-1700.

5. Another issue under investigation in Docket OST-96-1700 must also be resolved before the Department can reach a decision on the instant applications. In Docket OST-96-1700, the Department directed American to provide "complete information concerning investment by American in ... Iberia." Notice dated August 22, 1997, in Docket OST-96-1700. American has not responded to this directive in the public docket except to note that it "has agreed to consider an equity investment in Iberia as soon as appropriate financial information is available, with the consent of Iberia" and its holding company. American Response dated August 27, 1997, in Docket OST-96-1700 at 7.

The extent to which American may own or, possibly, control Iberia is obviously a relevant factor in deciding whether to approve a code share between American and Iberia. It is the position of American that the two carriers will continue to compete with each other even after they are allowed to cooperate through the extensive code-share arrangements they have proposed. As with the U.S.-Central America issues, the issues relating to the ownership of Iberia by American are already under investigation in Docket OST-96-1700. Consolidation of the two

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proceedings will also facilitate the resolution of this ownership issue. /6

6. In addition to the issues raised above which are under consideration in Docket OST-96-1700, there are also issues arising under the bilateral relationship between the U.S. and Spain which preclude approval of certain elements of the American/Iberia code-share. The bilateral agreement between the U.S. and Spain is one of the more restrictive agreements in place between the U.S. and a European country. U.S.-Spain city-pair markets are limited, particularly with respect to points in Spain eligible for service on the U.S. carrier route. Moreover, available routings between the U.S. and Spain are restricted for U.S. carriers to nonstop services or services via the Azores, and intermediate and beyond points are also limited. Schedules for new services are subject to advance filing and review prior to their effectiveness. Finally, designations of new U.S. carriers in certain U.S.-Spain city pairs (including some of those where

6/ To the extent that American may have responded more fully in Docket OST-96-1700 to the Department's request for information regarding its ownership in Iberia, such response is subject to a motion for confidential treatment. Limited access has been granted to such material but it may be referred to only in Docket OST-96-1700 under the terms of that access. Consolidation of the U.S.-Central America issues in the instant applications into Docket OST-96-1700 will facilitate consideration of such issues to the extent that they may be addressed by confidential material already on file in that docket.

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American proposes to code share) are subject to consultations between the governments before they can become effective. /7

American and Iberia are requesting approval to code share in markets where services are not authorized under the terms of the bilateral agreement. For example, American requests authority to serve several points in Spain that are not named on the U.S. carrier route: Alicante, Bilbao, Jerez de la Frontera, La Coruna, Las Palmas, Sevilla, Valencia and Vigo. American also proposes to code share on Iberia's flights to the following third-country points beyond Spain which are not named on the U.S. carrier route: Geneva, Switzerland; Porto, Portugal; and Vienna, Austria. Iberia for its part proposes to serve Washington National Airport ("DCA") as well as Baltimore/Washington International Airport ("BWI") which exceeds its bilaterally-agreed rights to serve a single airport in the Baltimore/ Washington area on the Spanish carrier bilateral route.

American and Iberia concede that the services described above exceed those available under the bilaterally-agreed routes and urge that they be approved on an extrabilateral basis. Such approvals would, however, be in the public interest only if they were consistent with principles of comity and reciprocity. The

7/ Under a 1972 Memorandum of Consultation, Spain "reserves the right to request consultations" regarding additional U.S. carrier designations in, inter alia, the Chicago-Spain market, one of those in which American would require designation in order to code share with Iberia.

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Department cannot in this instance find that comity and reciprocity exist on the part of Spain. For example, the government of Spain refused to approve a code share between United and British Midland Airways Ltd. (a U.K. carrier) between London Heathrow and Palma de Mallorca. Although the latter city is a point on the U.S. carrier route, Spain objected to the code share because it involved service via London, a point not named on the U.S. carrier route. Even though the London-Mallorca segment would have been held out as a blind sector for services under United's designator code, the Spanish government refused to approve the code share as extrabilateral. Specifically, Spain rejected United's request because U.S. carrier Route 1 "does not include London as an intermediate point to be served by [United]." See Letter dated August 1, 1995. (Exhibit UA-1).

The Spanish government's unduly restrictive application of the agreement also has the affect of precluding United from serving points in Spain via connections at points in Germany such as Frankfurt, Dusseldorf and Munich in conjunction with its code share with Lufthansa German Airlines. As a result, United is unable to offer services to points in Spain served by Lufthansa which are named on the U.S. carrier route such as Madrid, Barcelona and Malaga, as well as to Lufthansa points not named on that route such as Bilbao and Valencia. Because Germany, like the U.K., is not named on the U.S. carrier route, the Spanish government's position on the British Midland/United code share

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between London and Mallorca precludes United from pursuing such code-share services with Lufthansa.

7. The Department has previously refused to grant extrabilateral code-sharing authority for services involving carriers from countries that withhold extrabilateral code-share authority for U.S. carrier services. For example, the Department limited the United/Lufthansa code-share authority to services that fell within the specific scope of those authorized by the terms of the bilateral agreement and deferred action on those portions, such as certain third-country code sharing, that exceeded the terms of the bilateral agreement. Orders 94-1-19 and 93-12-32. It was only when Germany agreed to modify the agreement to allow expanded third-country code sharing by U.S. carriers on a reciprocal basis that the Department approved the deferred portions of the United/Lufthansa application. Order 944-43.

Similar action has been taken by the Department with respect to Canadian carrier requests for extrabilateral codeshare authority. For example, in Order 92-10-29, the Department denied United and Air Canada the right to code share on services between Toronto and Dallas/Ft. Worth and Houston via Chicago because Chicago was not a point named on the Canadian carrier bilaterally-agreed route between Toronto and Dallas/Ft. Worth and Houston:

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Order 92-10-29 at 3. As with Germany, Canada ultimately agreed to an expanded bilateral regime including flexible code-share terms governing services between the U.S. and Canada. In the case of both Germany and Canada, the Department's decision to defer approval of extrabilateral codeshare authority contributed to the conclusion of a more open bilateral regime under which code-share alliances were permitted to code share with each other. The same action should be taken here with respect to the extrabilateral code-share authority sought by American and Iberia and for the same reason. Spain cannot be expected to grant U.S. carriers and their code-share partners the flexibility they need to operate expanded services between the U.S. and Spain unless the U.S. is willing to use the bargaining leverage created by requests for extrabilateral code share authority to negotiate an agreement containing such flexibility. More recently, the Department deferred a Canadian carrier's application to code share with a third-country carrier via a point in the U.S. Air Canada/SAS Code Share, Order 97-9-6. That action was premised on the lack of an agreement between the U.S. and Canada governing code shares with third-country carrier

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partners. The Department noted that the U.S. had sought inclusion of a third-country carrier code-share term but that Canada "resisted, and consistently indicated that [it] was not interested in such provisions." Id. at 4. In those circumstances, the Department concluded that reciprocity was lacking, notwithstanding the fact that Canada, unlike Spain, had not denied any U.S. carrier the right to code share with a thirdcountry carrier. Indeed, there was evidence in the case that the U.S. had previously approved third-country arrangements involving Canadian carriers on the basis of a finding of reciprocity. The case for deferral is even stronger here given evidence of the lack of reciprocity with Spain based on the Spanish government's refusal to approve extrabilateral code-share services involving U.S. carriers.

8. American and Iberia cite the cases of the Continental/Alitalia and the Delta/Virgin Atlantic code shares as examples of U.S. approval of code sharing that exceeded the scope of authority available to U.S. carriers under bilateral agreements. In those cases, however, the Department specifically found a significant competitive benefit in the form of new U.S. carrier services that could not otherwise be offered because of agreed limits under the applicable bilateral agreement. In the Continental/Alitalia case, an additional U.S. carrier was designated, notwithstanding bilaterally-agreed limits on designations and was allowed to offer service in the New York

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Rome and New York-Milan city pairs despite bilaterally-agreed restrictions against additional U.S. carrier service in those city pairs. /8 In the Delta/Virgin Atlantic case, the U.S. gained access to London Heathrow for a third U.S. carrier, notwithstanding the bilateral agreement which limited the number of U.S. carriers that could serve that point to no more than two.

American can cite no comparable significant competitive contribution its extrabilateral authorization would have in this case. American is already designated and is operating services to Spain from its hub at Miami and is authorized to provide service to Madrid from Dallas/Ft. Worth as well. There is no compelling reason to allow American to expand its own U.S.-Spain services by code sharing with Iberia in extrabilateral markets unless other U.S. carriers Eye allowed to offer competitive codeshare services in the same markets with their own partners. There is no unique benefit to be gained from American's code sharing in additional transatlantic U.S.-Spain city pairs comparable to the extrabilateral entry gained for a U.S. carrier to Italy or London Heathrow in the Continental/Alitalia or Delta/Virgin Atlantic cases cited by American and Iberia.

8/ The government of Italy, unlike that of Spain, did not deny code-share authority to a U.S. carrier. Rather, the Department refused to grant expanded U.S.-Italy authority to carriers such as United and Lufthansa that was needed to offer code-share services to Italy. See, e.g.;, Order 96-7-44.

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9. In conclusion, United objects to the approval of the American/Iberia code shares in the U.S.-Central America city pairs as well as approval of code-share services to extrabilateral points in the U.S., Spain and third countries as discussed above. /9 The request for approval of U.S.-Central America code shares should be consolidated for consideration in the ongoing American/TACA Group Investigation, Docket OST-961700. The Department should also resolve the issues relating to American's acquisition of an ownership interest in Iberia in that proceeding before reaching a decision on any of the code-sharing authorizations sought in this case. The request for approval of

9/ American and Iberia also request an exemption and a statement of authorization, respectively, to allow American to display its code on Iberia flights between Chicago and Madrid. According to the OAG, Iberia is not operating Chicago-Madrid flights. The Department should not authorize these carriers to code share in the Chicago-Madrid market on the speculative chance that Iberia might begin services at some undisclosed time in the future. Consistent with DOT policy, code shares are approved involving carriers from restrictive countries such as Spain "only for services actually proposed by the carriers." See Notice dated September 23, 1997, in Docket OST-97-2708, dismissing certain portions of Delta/Transbrasil code-share applications where one of the applicants "did not specifically indicate how such code-share services would be conducted." Id. This is especially true here where Chicago-Madrid is one of those city pairs where Spain has reserved the right to demand consultations under the 1972 MOC prior to acceptance of a new U.S. carrier designation. Approval of American's Chicago-Madrid designation could be used by Spain in the future as a basis for refusal to accept additional U.S. carrier designations under the 1972 MOC. At the very least, if the Chicago-Madrid code share is approved, the U.S. should only do so if Spain waives its right to demand consultations with respect to future U.S. carrier designations in that city pair.

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extrabilateral code shares should be deferred pending agreement by Spain to allow expanded code sharing by U.S. carriers on a reciprocal basis.

Respectfully submitted,

JOEL STEPHEN BURTON

GINSBURG, FELDMAN and BRESS, CHARTERED

1250 Connecticut Avenue, N.W.

Suite 700

Washington, D.C. 20036

(202) 637-9130

Counsel for

UNITED AIR LINES, INC.

DATED: October 17, 1997