OST-97-2970 / America West / Exemption, High Density Rule, O'Hare and LaGuardia / Motion and Reply of United Air Lines / November 6, 1997

Application of

AMERICA WEST AIRLINES, INC.

for an exemption pursuant to 49 U.S.C. § 41714

Columbus - New York LaGuardia

Phoenix - Chicago O'Hare Airport

REPLY OF UNITED AIR LINES, INC.

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America West begins its Reply by claiming that its application should be granted because none of the answers to the application addressed what it describes as key points in the application. The fact is, however, that America West's self-described key points are essentially unresponsive to any of the issues the Department has previously indicated are relevant to a determination of whether an application for exemption slots at a High Density airport is consistent with the statutory

2/ The Department's decision in Simmons was issued after United filed its initial answer to America West's application. United has not, therefore, had an opportunity to address whether America West's application is consistent with the criteria for slot exemptions set forth in Simmons. America West, on the other hand, was able to address the Simmons criteria in its Consolidated Reply, filed after the date the order was issued Due process and fundamental fairness require that United have an opportunity to respond to America West's application in light of the changed exemption criteria the Department set forth in Simmons.

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requirements set forth in 49 U.S.C. § 41714(c). Thus, it is entirely beside the point whether America West believes these points have been addressed or not.

Certainly, America West's size relative to other carriers, or the fact that it was not operating at High Density Airports prior to the adoption of the Buy-Sell rule have no bearing on whether its request to be given a significant number of free slots at O'Hare and LaGuardia satisfies the "exceptional circumstances" requirement of the statute. 3/ If these were relevant considerations, then any application by America West for slots would have to be granted, no matter what use America

3/ Indeed, to the extent a carrier's size is relevant at all, it would seem that America West's status as the industry's ninth largest carrier, which already holds seven slots at O'Hare, several of which it chooses not to use but to lease to American for a substantial cash payment and slots at other airports, would undermine rather support America West's application. Moreover, if the Department grants America West's current application, the carrier would be free to lease the balance of its existing O'Hare slots to American, and use the exemption slots to maintain its current level of Chicago-Phoenix service. America West has a history of selling assets obtained for free from the Department. In addition to the slots it leases to American, America West sold a limited-entry route to Japan it obtained in a contested proceeding to Northwest. America West's propensity to maximize the value of such assets would seem to be as relevant a decisional criteria here as the fact that America West operates a higher percentage of its service at O'Hare at off-peak hours than other carriers. Of course, America West fails to note that it must operate at off-peak hours because it leases three of its better-timed O'Hare slots to American.

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West intended to make of the slots, 4/ because it would always be true that America West is

• A major full service airline;
• The holder of fewer slots at O'Hare than the seven largest carriers;
• The only carrier unable to serve its primary domestic hub from LaGuardia because of the perimeter rule; and so on.

These types of status criteria (most of which are contrived in any event) simply do not provide a reasoned basis for a finding that America West's application satisfies the exceptional circumstances requirement of the statute, whether exceptional circumstances are defined as the Department did in its Simmons order, or as it did originally in Order 94-9-30.

In Simmons, 5/ the Department redefined the criteria it intends to use in deciding whether "exceptional circumstances"

4/ For example, most of the so-called key points cited in America West's application would be equally true if the carrier were seeking slots to serve the Chicago-Detroit market, rather than the Chicago-Phoenix market.

5/ In this pleading, United will address the merits of America West's application under the changed exemption criteria the Department adopted in Simmons without commenting on whether those criteria are themselves a reasonable interpretation of the statute. United does intend, however, to file a petition for reconsideration of the Simmons order in which it will show that using different criteria from those set forth in that order in deciding whether to grant carriers exemptions from the HDR at O'Hare would better serve the public interest.

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6/ The Department also indicated that it intends to favor proposals based on using jet aircraft that meet Stage 3 noise requirements, and to require a showing by applicants that there is a reasonable expectation the service proposed would be operationally and financially viable. Order 97-10-16 at 4. The Department apparently intends to rely on these two criteria to limit the applications it will consider under the exceptional circumstances criteria of the statute. However, the use of Stage 3 aircraft, and a showing that a proposal appears to be operationally and economically viable, clearly do not in themselves constitute exceptional circumstances. If they did, almost any application for exemption slots at a High Density airport filed by a "limited incumbent carrier," as defined in the statute, would satisfy the criteria. If Congress had intended such a result, it would not have included the "exceptional circumstances" requirement in the statute. It is a cardinal rule of statutory construction, however, that a statute must be read so as to give effect to all of its provisions. 2A Sutherland, Statutes and Statutory Construction § 46.06 (N. Singer rev. 5th ed. 1992). And "[t]o read out of a statutory provision a clause setting forth a specific condition or trigger to the provision's applicability is ... an entirely unacceptable method of construing statutes." Natural Resources Defense Council v. U.S. E.P.A., 822 F. 2d 104, 113 (D.C. Cir. 1987).

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In its Consolidated Reply, America West is utterly unable to show that its application for five exemption slots at O'Hare satisfies either of these requirements. First, America West simply cannot show that either the Chicago-Phoenix or Chicago-Las Vegas markets are underserved. 7/ With respect to Chicago-Phoenix, four carriers currently operate a total of 16 nonstop frequencies per day in this market. These carriers are United, American, America West and American Trans Air. In addition, Southwest Airlines, the quintessential no-frill, low-fare carrier, operates multiple daily single-plane services between Chicago and Phoenix, and three other carriers offer convenient on-line connecting service in the market. /8

7/ America West is seeking slots at O'Hare in order to double the number of daily roundtrip frequencies it currently offers in the Chicago-Phoenix market. In its application, it also claims, however, that the grant of its request will allow it to add more service in the Chicago-Las Vegas market. Therefore, United discusses herein service and competition in both of these markets in order to demonstrate that neither market satisfies the criteria set forth in the Simmons order.

8/ These three carriers are TWA, Frontier and Western Pacific. The latter two offer online connecting service via their hubs in Denver; TWA's service is offered via its hub in St. Louis.

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As for Chicago-Las Vegas, four carriers currently operate a total of 12 nonstop frequencies daily in the market, and a fifth, Kiwi, operates nonstop service four days per week. The carriers offering daily nonstop service are United, American, America West, and American Trans Air. In addition, Southwest offers multiple daily single-plane services, and TWA, Frontier and Western Pacific offer convenient on-line connecting service.

This level of daily nonstop service offered by multiple carriers precludes a finding by the Department that either the Chicago-Phoenix or the Chicago-Las Vegas markets is underserved, as that term is used in Simmons. In the Chicago-Reno market, by comparison, there was no nonstop service available at all when the Department granted Reno Air its initial exemption from the HDR pursuant to 49 U.S.C. § 41714(c). And Reno Air is today still the only carrier offering nonstop service in the market. Thus, neither the Department's original decision to give Reno Air free slots at O'Hare, nor its decision in Simmons to give the carrier two additional slots, support a finding that the Chicago-Phoenix or Chicago-Las Vegas markets are underserved, or provide any basis for granting America West five additional free slots at O'Hare Indeed, if markets receiving 16 and 12 total daily nonstop flights from four network carriers, multiple daily

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single-plane services from Southwest, and convenient online connecting service from three other carriers can be found to be underserved, then the criteria announced in Simmons are meaningless and completely fail to delimit the "exceptional circumstances" the Department must find before it can grant an exemption from the HDR pursuant to 49 U.S.C. § 41714(c). 9/

Nor is America West able to show that either the Chicago-Phoenix or Chicago-Las Vegas markets are noncompetitive. According to the Department's Domestic Airline Fares Consumer Report, for the first quarter of 1997, the average one-way fare in the Chicago-Phoenix market was $166, lower than the average fare in 60% of the city pairs surveyed in the same mileage block. In the case of Chicago-Las Vegas, the average fare was $131, lower than the average fare in 88% of the city pairs surveyed in the applicable mileage block. Certainly, city pairs where the average fares are already lower than the average fares

9/ The Department has some discretion in defining what constitutes "exceptional circumstances." However, it is not free in effect to read the requirement out of the statute. If Congress had intended to give the Department authority to grant limited incumbents, as defined in the statute, slots at High Density airports without limitation, it would not have included the "exceptional circumstance" requirement in the statute. That it did so, however, precludes the Department from defining the exceptional circumstances requirement so loosely as to read the requirement out of the statute. See, supra note 6.

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in 60% and 88%, respectively, of the markets the Department defines as comparable cannot be found to be noncompetitive.

The low level of the Chicago-Phoenix and Chicago-Las Vegas average fares simply reflects the fact that both markets already have significant competition from no-frill, low-fare carriers. In short, neither Chicago-Phoenix nor Chicago-Las Vegas are city pairs "where consumers ... [are likely] to obtain significantly lower fares" through the grant of America West's application. Order 97-10-16 at 4. America West's application does not, therefore, satisfy the exceptional circumstances requirement of § 41714(c), even as re-interpreted and relaxed in the Simmons order.

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America West claims that if O'Hare and Midway served the same market, there would be a high level of cross-elasticity between fares at the two airports. It further claims that no such elasticity exists, citing as "proof" an alleged existence of "significant fare differentials" at O'Hare. Reply at 9. Despite its claims, America West provides no evidence that fares at O'Hare are higher than those at Midway in city pairs where there is nonstop service available from both airports. Nor does it provide any other empirical evidence that there is any lack of cross-elasticity in fares between the two airports.

The only support it does provide for its assertion is an oblique reference to the Department's May 1995 Report to Congress on its Study of the High Density Rule. Reply at 9. In that Study, the Department did not find that O'Hare and Midway Airports serve different markets, or that carriers serving O'Hare are able to charge higher prices than those serving Midway for comparable service, the only findings that would be relevant to America West's claim that Midway and O'Hare serve separate markets.

In any event, even if average fares at O'Hare were shown to be higher than average fares at Midway, this in itself would not establish that the two airports serve different markets. A

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simple comparison of average fares at the two airports (or yields) assumes that the trips taken from the two airports are identical. For such a comparison to be valid, it must be shown that there are no differences in the length of haul for the routes served from each airport, that the number of plane changes passengers make on trips originating at each airport is the same, that the traffic mix at the airports is the same, that the identity of the carriers serving the airports is the same, and that the number of frequent flyer tickets sold is the same; all of these factors can effect carriers' yields, and unless they are the same at both airports, a simple comparison of average fares collected is the classic apples and oranges type of comparison.

Unless all of these factors are the same at both airports, a difference in average fares standing alone can be consistent with a finding that the airports serve the same market, as well as a finding that they serve separate markets. The record is clear, however, that the mix of carriers serving Midway is different from the mix serving O'Hare. Most notably, Southwest, the largest carrier at Midway, does not serve O'Hare. Southwest offers no first class service on any of its flights, and generally charges lower fares for its no-frill service than full

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service carriers charge for theirs. United and American, on the other hand, the two largest carriers at O'Hare, offer a first class product on all of their services. This fact alone ensures that the average fare at O'Hare will be higher than the average fare at Midway.

America West also argues that the Department specifically found in the Simmons order that O'Hare represents a separate market from other airports in Chicago. Reply at 9. The Department, of course, made no such finding. Although the Department did refer in the Simmons order to a report in which

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the General Accounting Office ("GAO") found average fares at O'Hare to be higher than the average fares at 33 other airports the GAO identified as unconstrained, this "finding" is wholly irrelevant to whether Midway and O'Hare serve the same market. /10 Furthermore, to the extent the Department did review average fares at Midway and O'Hare in the Simmons order, its findings, as noted above, strongly suggest a high degree of cross elasticity in fares between the two airports. Thus, the Department's findings in Simmons provide no support whatsoever

l0/ In its Report, the GAO identified 10 airports where it believed entry was constrained by the FAA's slot rules or by a lack of available gate. At nine of the 10 airports, the FAA concluded that average fares were higher than at 33 other airports classified by the FAA as large hubs. The so-called fare premium the GAO identified at O'Hare was lower than the premium it found at any of the other nine airports studied where a premium was found to exist. This is consistent with United's position that competition at O'Hare is vigorous. Moreover, while the methodology the GAO used in this study was not explained in detail in the Report, economists Steven Morrison and Clifford Winston have criticized similar GAO studies as misleading because they fail to adjust for critical factors that cause yields to vary. See, Morrison and Winston, The Evolution of the Airline Industry, 1995 at 44-49. Controlling for factors such as frequent flyer tickets, traffic mix, route distance, number of plane changes, and carrier identity, Morrison and Winston conclude that fares at concentrated hub airports may be 5% higher than fares at a control group of airports, a differential so small in their judgment as to pale in comparison to the savings consumers have gained from deregulation. Id. at 48-49

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for America West's claim that Midway and O'Hare serve separate markets.

America West also argues that if Midway and O'Hare were economic substitutes it would not be so hard for non-incumbents to get slots at O'Hare because there would be a more even distribution of traffic between Midway and O'Hare, and United would not have invested $300 million to acquire slots at O'Hare rather than operate flights at Midway. /1l Reply at 10. Both of these arguments wholly ignore the fact that United (and American) operate hubs at O'Hare and can increase service there only by acquiring slots. Traffic is not more evenly distributed between the two airports because United and American, Chicago's

1l/ America West also seeks to equate O'Hare with Heathrow Airport, which is the preferred airport in London for business travelers. The analogy is not apt, however. Heathrow Airport is preferred by business travelers for a number of reasons, including its proximity to Central London as compared with Gatwick. Passengers utilizing Heathrow can easily get to or from the airport by taxi or London's subway system; passengers utilizing Gatwick generally must get there by train, requiring a taxi or subway trip to the station before boarding the train. This makes travel to Gatwick, which is farther from London's business district or the West End than is Heathrow, significantly more difficult and time consuming than travel to Heathrow for most business travelers. Similar difficulties do not exist in Chicago, where there is convenient access available to both O'Hare and Midway for business travelers.

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two largest carriers, do not serve Midway, not because the airports are not economic substitutes.

United's and Americans willingness to acquire slots at O'Hare even though they could add service at Midway for free is explained by the fact that both carriers have made substantial investments in developing their O'Hare hubs, which would be undermined if the carriers offered competing services at Midway. Indeed, neither carrier would gain the economies of scope and scale that a hub-and-spoke operating system makes possible on services operated at Midway. In these circumstances, United's and American's willingness to acquire O'Hare slots hardly shows that O'Hare and Midway are not economic substitutes for each other. By comparison, carriers like Northwest and Continental serve both O'Hare and Midway from some, but not all of their hubs, indicating these carriers believe service to Chicago can be effectively provided at Midway, avoiding the need to acquire additional O'Hare slots.

America West also argues in its Reply that its application should be granted because giving it more free slots at O'Hare

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12/ While America West claims fare savings will incur in 95 city-pair markets, the Exhibits to its application include fare comparisons in only five California city pairs which America West already serves from Chicago via Phoenix. See Exhibits 14 and 15. The 95 city pair number represents the total number of domestic points America West serves. Most of these points cannot be served conveniently from Chicago via an online connection in Phoenix regardless of the number of slots America West holds at O'Hare because of the high degree of circuitry involved. For example, no one is likely to utilize America West's hub in Phoenix to travel from Chicago to Atlanta, Philadelphia or Miami. Thus, the claim of fare savings in 95 markets is entirely bogus.

13/ America West also claims that these fare differences demonstrate that O'Hare and Midway serve separate markets. This claim is a total non sequitur. America West's service to these West Coast cities from Chicago is offered at O'Hare. Thus, these supposed fare differentials exist in service offered between O'Hare and these points, not in service offered at O'Hare compared to comparable service offered at Midway. In any event, as explained in the text, the fare differences exist because America West is comparing very different products - high value nonstop service versus low value connecting service. This is a classic apples and oranges comparison indicative of nothing.

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Moreover, it is hardly surprising that America West offers lower walk-up fares in these California city pairs for its one-stop product than United and American offer for their non-circuitous, nonstop service. Unrestricted walk-up fares are used primarily by time-sensitive business travelers who place an extremely high premium on the value of their time, and who need the travel flexibility available only to purchasers of full-fare tickets. America West's one-stop services are clearly less

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attractive to these passengers than the nonstop services American and United offer, and it should not be surprising that America West finds it necessary to offer lower fares than United or American to attract these passengers.

Nor is there any evidence available in the record that granting America West five additional slots at O'Hare is likely to lead to significantly lower fares in either the Chicago-Phoenix or Chicago-Las Vegas market, the test the Department established in the Simmons order for a finding of exceptional circumstances. Quite apart from the fact that both markets are well served and highly competitive already, there is no evidence that the low average fares collected in these markets are in any way attributable to America West's presence in the markets, or that giving America West more free O'Hare slots would lead to a

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further reduction in the average fares in these or any other markets.

America West, United and American are not the only carriers offering service between Chicago, on the one hand, and Phoenix and Las Vegas, on the other. As noted above, American Trans Air provides daily nonstop service in both markets, and Southwest offers substantial single-plane service. United believes the low average fares prevailing in these markets are attributable more to the high degree of competition Southwest provides in these markets, as opposed to America West's presence in the markets.

This is borne out by a comparison of average fares in other Phoenix city pairs served by America West where the other end point of the route is another carrier's hub. In those city pairs where Southwest also provides substantial service, the average fares tend to be similar to the Chicago-Phoenix average fare. But in city pairs where Southwest is not present, the average fares tend to be significantly higher than in Chicago-Phoenix, despite America West's presence in the market with nonstop service.

For example, America West currently provides nonstop service in the Atlanta-Phoenix, DFW-Phoenix and Philadelphia

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Phoenix markets. Southwest does not provide single-plane service in any of these markets. According to the Department's Airline Fares Report, the average fares in these three city pairs during for the first quarter of 1997, were $229, $222, and $270, respectively, significantly higher than the average fares for the Chicago-Phoenix and Chicago-Las Vegas markets. /15 On the other hand, in the Cleveland-Phoenix market where Southwest had a 13% market share, the average fare was $154, comparable to the average fare in the Chicago-Phoenix market, where Southwest's market share was 18%.

These comparisons strongly suggest that the lower average fares obtained in the Chicago markets are attributable to Southwest's (and to a lesser extent American Trans Air's) presence in these markets, not to America West's presence, and that giving America West additional free slots at O'Hare will have no appreciable effect on the average fares in these or any other markets.

America West also contends that giving it additional slots at O'Hare will save consumers $51 million in the first year.

l5/ Measured in terms of yield, the average fares in these markets per mile were 14.4C, 25.5¢, and 13.0¢, respectively, while the Chicago-Phoenix yield was 11.5¢.

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Moreover, because any new service to O'Hare or LaGuardia is likely to increase economic activity, this gain to the economy can hardly be characterized as an "exceptional circumstance"

16/ It is worth noting that America West's estimates of the economic impact of its proposed service were derived from a 1991 study of passengers utilizing LaGuardia and JFK airports. Even if the study's results are reasonable, which cannot be determined since the study is not in the record, it is unclear whether the results can be extrapolated to discretionary travel markets such as Chicago-Phoenix/Las Vegas, which do not in any event involve travel to New York.

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justifying the use of the Department's extraordinary exemption authority. In any event, to the extent gains in economic activity attributable to new services are a relevant decisional criteria in deciding how best to allocate scarce resources such as airport slots, it would seem to favor the award of exemption slots to carriers proposing new international services, especially in city pairs where there is no nonstop service today, not to carriers like America West proposing to provide the seventeenth, eighteenth, and nineteenth daily frequencies in an already well-served leisure travel market.

17/ Long haul, international services cannot be offered to or from Midway. To the extent the Department's giving away of exemption slots is a zero sum game, each slot given away for domestic services that could also be provided at Midway reduces the number of new international services that can ultimately be provided at O'Hare without really increasing the total number of domestic services that could be provided.

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1995 Report to Congress on the HDR, the Department concluded that "significant consumer benefits could be realized if ... the number of international operations ... increases, since these flights are conducted with relatively large aircraft over long haul distances and generate substantial economic activity." Report at 66. 18/ The Report also finds that unless the HDR is eliminated entirely, authorizing some additional services at O'Hare is unlikely to have a significant affect on fares. Id.

* * * * *

In Simmons, the Department recognized that exemption slots are a finite resource, and emphasized that it cannot grant all of the applications for slots that are likely to be filed. Order 47-10-16 at 4. For the Department to grant America West's

18/ The Report goes on to find that "[s]ervice to new cities would be particularly desirable." Id. The Department notes in the Simmons order that the number of exemption slots it can create is extremely limited. If the Department intends to use this admittedly scarce resource to maximize consumer welfare, its own Report to Congress on the High Density Rule clearly demonstrates that America West's application is not the type that should be granted.

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application for slots at O'Hare would be a particularly poor use of these "very limited" resources. Id. As noted above, the markets America West proposes to serve are neither underserved nor noncompetitive. Nonstop service is already available in the markets from both Midway and O'Hare, and no-frill, low-fare service is available from Southwest and other carriers. To the extent America West believes the local Phoenix and Las Vegas markets can support additional service to Chicago, it is always free to add flights at Midway where it already provides a significant level of service. It is also free to use all of the seven slots it already holds at O'Hare to increase its Phoenix service, rather than lease those slots to American for a significant cash payment and slots at other airports.

The Department cannot grant exemptions from the HDR pursuant to 49 U.S.C. § 41714(c) unless it can find that exceptional circumstances exist. Whether the test for establishing such exceptional circumstances is the newly articulated standard set forth in Simmons, or the test the Department originally announced in Order 94-9-30, America West

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simply cannot show that its circumstances are exceptional. Its application must, therefore, be denied.

Respectfully submitted,

JOEL STEPHEN BURTON

GINSBURG, FELDMAN & BRESS CHARTERED

1250 Connecticut Avenue, N.W. Suite 800

Washington, D.C. 20036

(202) 637-9130

Counsel for UNITED AIR LINES, INC.

DATED: November 6, 1997

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