US-Ecuador Frequencies / Answer of AIA / May 19, 1997

Application of

for allocation of U.S.-Ecuador scheduled all-cargo frequency

Docket OST-97-2492

Application of

For Additional Frequencies (U.S.-Ecuador All-Cargo)

Docket OST-97-2443

Application of

for reallocation of U.S.-Ecuador all-cargo scheduled frequencies

Docket OST-97-2423

Application of

for reallocation of U.S.-Ecuador all-cargo scheduled frequencies

Docket OST-97-2342

Application of

for reallocation of U.S.-Ecuador all-cargo scheduled frequencies

Docket OST-97-2444

Pursuant to the Department's Procedural Rules (14 C.F.R. §§ 302.6 and 302.17), American International Airways, Inc. ("AIA") hereby submits the following consolidated answer to the applications of Arrow Air, Inc., Challenge Air Cargo, Inc., Fine Airlines, Inc. and Polar Air Cargo, Inc., for allocation of frequencies for U.S.-Ecuador allcargo service. AIA also requests leave to file its answer to Fine Airlines out of time, and to file a surreply to the answer of Florida West International Airlines, Inc. ("FWIA") as an otherwise unauthorized document. /1

In its reply to the answer of AIA, FWIA stated that several important facts had been "obscured" by AIA's application. Most notably, it said that the DC-8 aircraft is the ideal aircraft for the U.S.-Ecuador market, that the market is predominately north

1/ AIA has chosen to consolidate its answer to all other pending applications for U.S.-Ecuador frequencies, except for that of Florida West, which AIA answered on April 23, 1997. Since these applications were filed at various times, and no procedural schedule has been established, the deadlines for answers ranges from May 15 to May 23. Accordingly, in order to simplify the record and avoid repetitive filings, AIA seeks leave to file this document 4 days past the deadline for the answer to Fine, and prior to the deadline for the other applicants. Further, AIA seeks leave to file this document as a surreply to the consolidated reply of FWIA to answers filed by Millon Air, Inc. and AIA, which is otherwise unauthorized and out of time. Since the Department is unlikely to act on any of these competing applications until it has considered all of them, together with responsive documents, filing of this document will assist in a full development of the record, and will not cause any delay in the proceeding.

bound, and that virtually all air cargo is bound for Miami, from whence it is trucked elsewhere. The conclusion that FWIA draws from these points is that widebody aircraft are unlikely to be used in the foreseeable future, and that thus the "larger and more diverse nature of AIA's fleet is essentially irrelevant...."

AIA disagrees emphatically with this statement. AIA has proposed use predominantly of the DC-8 aircraft because under the bilateral frequency restrictions, use of a DC-8 would allow it to operate three weekly flights -- not because the DC-8 is the ideal aircraft for this market. In fact, the L-1011 is the aircraft best suited, and AIA expects to use such aircraft at least part of the time, with adjustments to its schedule, as necessary.

FWIA apparently greatly underestimates the size of the Ecuador cargo market. As AIA mentioned in its application, it has been approached by leading exporters of flowers asking it to begin service to Ecuador, as soon as possible; the aircraft they specifically asked for was the L-1011, due to the superior economics and capacity of these airplanes. The size of the northbound loads is such that, during last Valentine's Day peak, AIA operated two B-747s, fully loaded, on a short term wet lease to AECA. AIA has, moreover, operated L-101 1 s to Ecuador on wet lease to Challenge; this operation was interrupted only because the Ecuadorian officials reprimanded Challenge for exceeding its frequency limit (due to the higher frequency value assigned to L-1011's). AIA currently has pending before the Department a request for expansion of its wet lease to LAS, a Colombian carrier, to serve Quito and Guayaquil over Call and Bogota. This operation would primarily use the L-1011, and will begin as soon as the approvals from the relevant governmental bodies are secured.

The L-1011 is ideal for bulky but light-weight cargo such as flowers because of its greater relative volumetric capacity. The DC-8-55, for example, typically has a maximum payload of 95,000 pounds, and a cubic capacity of 6,750 cubic feet. An L-1011-200, on the other hand, has a payload of 125,000 pounds, but a volume of 16,800 cubic feet, enabling it to accommodate more than twice as many boxes of flowers. Thus, far from being irrelevant, the diversity of AIA's fleet is one of its greatest advantages in this market.

Contrary to FWIA, fleet size also is relevant. With very small fleets, such as FWIA's fleet of one aircraft, there is little if any backup in case of mechanical delays or scheduling problems, which invariably arise. Even with the additional aircraft-which FWIA states that it expects to obtain through an interchange agreement, there may be little flexibility, since use of interchange aircraft is, by the nature of the agreement, shared with one or more other carriers; thus they are only available to a carrier part-time. Since this agreement has apparently not been concluded and FWIA has not revealed its details, the Department cannot know how much FWIA can depend on these aircraft to provide backup on the Ecuador route. Thus, AIA's large fleet provides the important factors of reliability and dependability -- particularly essential in a market consisting largely of perishables which depend on consistent and timely air transport.

FWIA also states that AIA "acknowledges that its domestic service network would be essentially irrelevant to any new Ecuador service." This is a mischaracterization of AIA's statement. The American International Freight ("AIF") system is, in fact, a powerful adjunct to any international service which AIA mounts at the Miami gateway. What AIA sought to clarify, in the interest of candor, was that "a large portion of U.S.-Ecuador freight" would not begin flowing over this system immediately. It stressed, however, that integration of this system into AIA's South American service pattern was "a top priority for this year," and that it had hired staff specifically for this purpose. Far from irrelevant, the AIF system will, even in the short run, provide an important new alternative to shippers and forwarders; in the coming months and years, this system will prove increasingly valuable, particularly for shippers of southbound cargo, -which is routed from various points-around the United States. Unless the Department plans on limiting this route authority to a very short duration, it should carefully consider the added advantages which a true hub-based nationwide freight system can bring to such a market. No other carrier now in, or vying for, the U.S.-Ecuador market, can offer a comparable advantage.

FWIA makes much of the fact that the U.S.-Ecuador market is heavily unidirectional northbound, and for that reason plans to serve Ecuador in connection with its service to Lima. It is true that there is a strong directional imbalance in the Ecuador market, as is the case with many other South American markets, such as Peru. This is what makes FWIA's service proposal troubling.

Combining Ecuador with another stop makes good sense ~ for southbound cargo. The problem with FWIA's proposal, however, is that its other stop is approximately 800 miles beyond Quito. Since FWIA would presumably stop in Quito or Guayaquil after its stop in Lima, the aircraft would already have a significant amount of northbound Peruvian cargo on board, limiting the amount of capacity available for Ecuadorian shipments. This would especially be the case during the three annual seasons for export of asparagus, one of Peru's leading perishable exports, which is harvested in the Spring, Summer and Fall. During these periods, aircraft routinely operate out of Lima full; there would be no room at all for Ecuadorian exports.

Thus, reduced to its essence, what FWIA is proposing is two weekly flights with only a partial DC-8 capacity, at best -- not a very adequate response to the urgent need in this growing market, nor a very efficient use of scarce bilateral rights. -AIA, in contrast, proposes to operate from Quito and Guayaquil nonstop to Miami. -Any additional stops would be in Colombia, southbound. AIA anticipates more than enough Ecuador-originating cargo to warrant overflying Colombia on the return leg.

FWIA goes on to make the equation that since it is a small carrier, and Ecuador a small market, it is a better match, and would have more incentive to develop the market. Simply because AIA is a larger carrier than FWIA, however, does not mean that it has any less incentive to make the most out of this limited but important opportunity. Like any air carrier in today's competitive environment, AIA must maximize revenues from all of its aircraft. It cannot afford to dedicate considerable aircraft time to a market which will not generate substantial revenues. If AIA did not intend to exploit this opportunity fully, it would not waste the time and effort needed to enter the market.

At this point, AIA should note that it is probably in a better position to market the south-bound portion of the journey than is FWIA, or for that matter, any other carrier applying for these rights, because of its AIF system. It is in the south-bound market that this system should have its most significant effect, since the variety of freight and its points of origin is much greater than for the north-bound cargo.

Arrow, an incumbent in this market, suggests that rather than opening the door to new entrants, the Department should divide the three frequencies among the incumbents (except Challenge), and one "former incumbent," FWIA (by virtue of its corporate predecessor, the old Florida West). AIA opposes this idea as contrary to well-established DOT policy and precedent, and as deleterious to the competitive state of the market.

In two recent and closely analogous proceedings involving allocation of cargo frequencies in South American markets, the Department chose to use the opportunity to bring new entrants into the market, rather than giving more frequencies to incumbents, despite their efforts in developing the market. In the 1995 U.S.-Argentina All-Cargo Frequencies proceeding, the Department wrote:

(Order 95-1-9, at 4, 8-9. This decision was affirmed in Order 95-3-30.) A similar rationale was used in the 1996 U.S.-Peru All-Cargo Service Proceeding (Order 96-10-2), where the Department granted frequencies to new entrants, rather than consolidate more in the hands of the one incumbent, Challenge. /2

Challenge asks for up to three more frequencies with which to increase its already dominant hold on the market. Challenge operates seven weekly cargo flights, plus "frequent extra-section flights." The whole point of this proceeding ought to be not simply to ensure prompt use of currently unused frequencies, but to improve the competitive structure of the market. Consolidating more power in the hands of one carrier is certainly not the way to do that. The Department rejected just such an alternative, presented by Challenge, in the U.S.-Peru case, cited above.

2/ See also, U.S.-Philippines Schedule Increases, Order 87-9-7.

Fine's principal argument is that giving it all three frequencies would most enhance competition in the market. It asserts that the dominance of Challenge has distorted prices in the market, and that only by giving it a total of five frequencies can the seven-flight allotment of Challenge be balanced. /3

Fine fails, however, to explain how giving it, or any other carrier, almost as many weekly frequencies as Challenge will bring down prices in the market. In fact, prices are high in the Ecuador market primarily because of the dearth of capacity, particularly since Millon's suspension. It is likely that prices will reflect this scarcity so long as air service remains artificially constrained by a restrictive bilateral. The comparison Fine makes to the Bogota market is not valid; even though that bilateral (according to Colombia's interpretation) and the 1996 MOC restrict the number of cargo carrier designations, they do not restrict the number of frequencies. The amount of capacity in that market is far higher than in the Miami-Quito/Guayaquil market.

Another factor which drives the Ecuadorian rates up is the comparatively higher value of the flower exports compared with Colombia. Ecuadorian flowers, particularly its roses, command a premium over Colombian flowers because of their higher quality. (Ecuadorian roses are now considered the finest in the world.) For this

3/ AIA also wishes to clear up an apparent misunderstanding on Fine's part. Fine asserted that it was "not credible" for FWIA and AIA to assert that they could start up service within 30 days or one to two weeks, respectively, given the time required for obtaining Ecuadorian authority. Both carriers, however, referred to the length of time to start service after Ecuadorian authority had been granted.

reason, many Colombian growers are moving their operations to, or establishing additional operations in, Ecuador.

The Department has generally found in the past that increasing the number of competitors in the market is more important than increasing the market shares of incumbents, so long as they are not confronted with an overwhelmingly powerful foreign carrier competitor, which is hardly the case here. Fine would still not be able to match Challenge's daily-plus service -- but this is not essential in order to have an impact on the competitive structure of the market. Allocation of frequencies to a strong competitor such as AIA, especially given the other advantages it can bring to the table (as discussed elsewhere), will increase the capacity and service options available in the market. This should have a beneficial effect on rates.

Fine also emphasizes that it could make the quickest use of the frequencies, given that it already has Ecuadorian authority. This is undoubtedly true, though it could also be said of any of the other incumbents. This should not sway the Department's decision on a permanent or potentially long-term reallocation, however. The Department may well find it expedient to let Fine (or another incumbent) make temporary use of the frequencies pending authorization of another carrier or carriers to make long-term use of these frequencies, but should nevertheless reallocate them to the carrier which can make the best and most efficient use of them.

Polar proposes to operate one weekly B-747 flight on a Miami-Rio-Viracopos-Guayaquil-Quito-Miami routing. This proposal does not deserve serious consideration for a number of reasons. First, an aircraft departing Quito for Miami would have to take an enormous weight penalty because of the altitude - probably 70,000 pounds. Given this penalty alone, the carrier would be operating the equivalent of an L-101 1, but at a much higher cost. It could not realistically price as service competitively.

Further, Polar proposes to serve Ecuador after two stops in Brazil. Unless Polar intends to severely limit is loads out of Brazil, which is highly unlikely, it will operate with much-diminished available capacity. Ecuador will, as with FWIA's proposal, -serve only to fill up leftover room. This is not an appropriate allocation of scarce bilateral resources, especially in the face of the serious needs in the market.

* * *

All of the carrier applicants for these frequencies have presented a strong case that the Department should not delay in reallocating the frequencies assigned to Millon Air. Despite assurances for the past several months that it would return to service shortly, Millon is still in suspension, and whether it will be able to use the Ecuador frequencies in the foreseeable future is highly questionable.

Given all of the factors discussed above, the most logical choice for reallocation of all three frequencies is AIA. Through the diversity and large size of its fleet, and its ability to utilize AIA's hub-based nationwide freight system, AIA is best positioned to provide long-term benefits and improved service to the U.S.-Ecuador market both northbound and southbound. Furthermore, the Department will best achieve its policy goals to fully utilize bilateral rights, increase competition and improve overall market structure by reallocating the frequencies to AIA, and thereby increasing the available capacity and service options, as well as providing downward pressure on rates through the entry of a strong competitor to the incumbents.

WHEREFORE, for the foregoing reasons, AIA, respectfully urges the Department to allocate to it all three additional scheduled all-cargo frequencies in the U.S.-Ecuador market.

Respectfully submitted,

Mark W. Atwood

Steven Y. Quan

SHER & BLACKWELL

2000 L Street, N.W.

Suite 612

Washington, D.C. 20036

(202) 463-2500

Attorneys for AMERICAN INTERNATIONAL AIRWAYS, INC.

May 19, 1997