OST-97-2548 / FedEx, Arrow, FWIA / May 21, 1997

Joint Application of

for approval of a transfer of frequency allocations pursuant to 49 U.S.C. §41105 (U. S.-Argentina All-Cargo Frequencies)

May 21, 1997

Federal Express is not purchasing, or seeking approval for the transfer of, the underlying exemption authority granted to Arrow and FWIA to provide scheduled foreign air transportation of property and mail between points in the United States, on the one hand, and points in Argentina, on the other hand, and a "no-compete" agreement is not part of the frequency transfer agreement between Federal Express and Arrow and between Federal Express and FWIA.

As described more fully in Section II below, transfer of the Argentina Frequencies to Federal Express will occur pursuant to two separate "Route Purchase And Transfer Agreements", the first dated as of May 14, 1997, between Federal Express and Arrow and the second dated as of May 16, 1997 between Federal Express and FWIA (the "Transfer Agreements"). A copy of both Agreements is set forth in Exhibits JA-1 and JA-2, infra.

Following the issuance of a Final Order by the Department approving the transfer of the Argentina Frequencies to Federal Express, /1 Federal Express will increase the scope of its existing five-day-a-week B-727 freighter operations between the U.S. and Argentina by shifting from the 49,000-pound payload B-727 aircraft to the 150,000-pound payload DC-10-30 aircraft for service on a

1/ The Joint Applicants believe that the frequency transfers at issue are subject solely to the jurisdiction of the U.S. Government, and that no approval by the Government of Argentina is required or appropriate.

five-day-per-week basis. /2 Those services will provide the full array of specialized air express services and expedited time-definite door-to-door air freight services currently offered by Federal Express between the U.S. and Argentina, and throughout its worldwide operations.

The Joint Applicants submit that approval of the foregoing frequency transfers is clearly consistent with the public interest standards enunciated in 49 U.S.C. § 41105, established case-law precedent and the policy objectives set forth in the Department's April 1995 Statement of U.S. International Air Transportation Policy. Approval of the frequency transfers at issue will result in significant public benefits to shippers and consignees in the U.S.-Argentina market by enabling Federal Express to expand the frequency and capacity of its existing air express and expedited air freight services in that market.

Approval of the proposed frequency transfers will also foster the objectives set forth in the 1995 Policy Statement, by increasing the variety of price and service options available to consumers, enhancing the U.S. competitive presence and trade position in international markets, expanding the access of U.S. cities to the international air transportation system and by insuring the full utilization of valuable U.S. bilateral aviation rights.

In summary, approval of the frequency transfers at issue is wholly consistent with the settled policy and precedents pursuant to which the Department

2/ Under the existing U.S.-Argentina cargo frequency allocation formula, Federal Express would require a total of 7.5 frequencies in order to operate the DC-10 aircraft five days a week.

has established and followed a strong policy of "allowing route transfers provided that the transfer does not conflict with important international aviation policy objectives and is not otherwise inconsistent with the public interest" (Federal Express-Evergreen Route Transfer, Order 95-8-9, August 18, 1995, p. 4).

The Joint Applicants request the Department to process this application on an expedited basis pursuant to written, non-oral, show cause procedures established under Subpart Q of the Procedural Regulations (14 CFR § 302.1750) so as to enable the Joint Applicants to consummate the transfer of the frequency allocations at issue on or before July 15, 1997.

Federal Express, as Buyer, and Arrow and FWIA, as Sellers, have entered into two separate Route Purchase And Transfer Agreements, dated as of May 14, 1997 and May 16, 1997 (the "Transfer Agreements"; Exhibits JA-1 and JA-2), for the purpose of contracting for the sale of two (2) U.S.-Argentina all-cargo operating frequencies, currently issued to Arrow, and one (1) U.S.-Argentina all-cargo operating frequency, currently issued to FWIA, to Federal Express, in exchange for a purchase price of $1.5 million and $500,000, respectively, subject to Department approval. The Joint Applicants desire to consummate the foregoing transactions on July 15, 1997, or as soon thereafter as all necessary governmental approvals have been received.

Although this application involves only a proposed transfer of frequency allocations, the Joint Applicants submit the following information applicable to transfers of certificate authority pursuant to 14 C.F.R. § 201.4 and § 302.1704 of the Department's Economic and Procedural Regulations.

1. Federal Express is a corporation duly organized and existing under and pursuant to the laws of the State of Delaware, with its principal offices located at 2005 Corporate Avenue, Memphis, Tennessee 38132. Federal Express is a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15).

2. Arrow is a corporation duly organized and existing under and pursuant to the laws of the State of Florida, with its principal offices located at Miami International Airport, Miami, Florida 33102. Arrow is a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15).

3. FWIA is a corporation duly organized and existing under and pursuant to the laws of the State of Delaware, with its principal offices located at 7500 N.W. 25th St., Suite 237, Miami, Florida 33122. FWIA is a citizen of the United States, as defined in 49 U.S.C. § 40102(a)(15).

4. Federal Express, Arrow and FWIA are air carriers of property and mail in scheduled air transportation, operating such services between points in the United States and its Territories and Possessions pursuant to All-Cargo Air Service Certificates issued under 49 U.S.C. § 41103, and in numerous international markets pursuant to various Certificates of Public Convenience and Necessity issued under 49 U.S.C. §-41102 and exemption authorizations granted under 49 U.S.C. § 40109. Federal Express, Arrow and FWIA have been found by the Department to be fit, willing and able to perform the air transportation authorized by their various certificates and exemption authorizations.

5. Following approval of the frequency transfers at issue, Federal Express will expand the scope of its existing scheduled all-cargo service between the United States and Argentina by substituting the 150,000-pound payload DC-10-30 freighter aircraft in place of its present 49,000-pound payload B-727-200 operations in the Argentina market at a frequency of five roundtrips a week. The foregoing expanded service to be operated by Federal Express is described more fully in Exhibit JA-3, infra. The necessity for Federal Express to expand the capacity of its service to and from Argentina is graphically illustrated by the load factor data set forth in Exhibit JA-4, infra, which demonstrates that existing traffic demand exceeds the limits of the payload capacity of Federal Express' B-727-200 aircraft on peak days in the southbound direction between Sao Paulo and Buenos Aires, and has averaged in excess of 83 percent of total available southbound capacity during April 1997.

Arrow is not currently utilizing its two U.S.-Argentina cargo frequencies. Arrow most recently operated direct all-cargo service between Miami and Buenos Aires utilizing DC-8-63F aircraft on March 23 and 25, 1997.

FWIA is currently utilizing its single Argentina cargo frequency to operate one Miami-Buenos Aires roundtrip flight a week utilizing DC-8-61 freighter aircraft, having an available payload capacity of 90,000 pounds.

As noted above, subsequent to receipt of final DOT approval of the frequency transfers at issue, Federal Express plans to expand its U.S.-Argentina service to operate five weekly wide-body aircraft frequencies utilizing the DC-10-30 aircraft (see Exhibit JA-3, infra). Under the current frequency allocation formula contained in the U.S.-Argentina bilateral, that frequency of service with the wide-body DC-10-30 aircraft requires an allocation of 7.5 weekly frequencies.

Federal Express has been diligently working to obtain an increase in its Argentina frequency allocation for several years in order to enable Federal Express to shift to the use of a larger-capacity aircraft, thus allowing it to handle increasing traffic volumes without jeopardizing its ability to operate at the minimum level of five weekly frequencies which is essential for air express operations (see Exhibit JA-4, infra).

The proposed frequency transfer at issue constitutes a transfer of international operating authority which must be approved by the Department pursuant to 49 U.S.C. § 41105(a), based on a finding that such approval is "consistent with the public interest". /3 In addition, Section 41105(b) directs the Department to certify to certain Congressional Committees that the proposed transfer is consistent with the public interest and to include with that certification "a report analyzing the effects of the transfer on -

In a number of recent route transfer cases subsequent to promulgation of the 1995 Statement of International Aviation Policy, the Department has discussed the consistency of proposed route transfers with the policy objectives contained in the that Statement. Finally, the Department has also discussed the impact of proposed route transfers on airline workers in keeping with the

3/ Although Section 41105(a) refers only to the transfer of "a certificate", the Department has held that proposed transfers of exemption authority authorizing foreign air transportation, and ancillary authority such as frequency allocations, are also subject to approval under the public interest standard of Section 41105 (See, e.g., Federal Express-Evergreen, Order 95-6-30, p. 11).

Administration's January 1994 "Initiative To Promote A Strong Competitive Aviation Industry." /4

The proposed transfer to Federal Express of the Argentina Frequencies now allocated to Arrow and FWIA is wholly consistent with those statutory standards and policy objectives.

Section 41105 provides that a proposed route transfer may only be approved if it is found to be consistent with the "public interest." The Department has held that the public interest standard contained in 49 U.S.C. § 41105 embodies the statutory statements of policy contained in 49 U.S.C. § 40101, as well as other specific policy objectives, such as the promotion of intragateway and intergateway competition. /5 In addition, as noted above, 49 U.S.C. § 41105 now directs the Department to analyze the effects of a route transfer on the carriers involved, on competition in the airline industry, and on the U.S. international trade position.

In numerous cases subsequent to the deregulation of the U.S. airline industry in 1978, the Department has affirmed its conviction that the forces of the marketplace operate to allocate air routes in an economically efficient manner. /6 In keeping with that philosophy, the Department has consistently followed a policy

4/ Federal Express-Evergreen, Order 95-6-30, p. 8; Northwest-Delta Route Transfer, Order 95-3-19, p. 5.

5/ See, e.g., Federal Express-Flying Tigers, Order 89-5-10, pp. 6-18.

6/ See American-Eastern and Delta-Eastern Route Transfers, Order 91-8-1, August 1, 1991, pp. 3-4; finalized, Order 91-10-35, October 20, 1991.

in all route transfer cases to "generally approve such transfers unless they conflict with important international aviation policy objectives or are otherwise inconsistent with the public interest." /7 As the Department observed in its Final Order in the Delta-Pan Am Route Transfer, "[s]ince deregulation of the air transport industry, we have found that the marketplace is generally a far better allocator and provides a far more efficient solution in the long term than does government interference." (Order 92-4-33, p.20). The Federal Express-Arrow and Federal Express-FWIA transactions are a classic example of the marketplace at work.

In its route transfer case decisions in recent years, the Department has placed particular emphasis on the ability of the transferee carrier to pros 'de improved and expanded service to the public, and to make maximal use of the U.S. international route rights. /8 In that connection, the Department examines the ability of the transferee to integrate the transferred routes into its existing route system, and to flow traffic between its existing flight network and the transferred routes. /9 The Department's decisions also evaluate the probable effect of each proposed transfer on intergateway and intragateway competition among U.S.

7/ See, eg, American-Delta Route Transfer, Order 95-3-53, April 3, 1995, p. 5; Northwest-Delta Route Transfer, Order 95-4-41, April 28, 1995, p. 3; Delta-Pan Am Route Transfer, Order 91-9-53, September 22, 1991, finalized, Order 92-4-33, April 19, 1992.

8/ Northwest-Delta, Order 95-4-41, pp. 3-4; Northwest-Hawaiian, Order 91-4-3, p. 5; Federal Express-Evergreen, Order 95-8-9, p. 4.

9/ Federal Express-Evergreen, Order 95-8-9, p. 4; Northwest-Delta, Order 95-4-41, p. 3.

carriers, and on the overall level and structure of competition between U.S. carriers, and between U.S. and foreign carriers, in the affected markets. /10 Finally, the Department's decisions since 1991 have always analyzed the three specific topics on which the Department is directed to report to Congress. /11

The principal public interest benefits which will be achieved through approval of the Federal Express-Arrow and Federal Express-FWIA route transfers virtually all derive from the exceptional scope, quality, diversity and competitive strength of the worldwide door-to-door air express services and expedited time-definite air freight services offered by Federal Express. Those unsurpassed attributes, and the ability of Federal Express to expand the scope of its service in the U.S.-Argentina market, will bring about a substantial enhancement of air express and air freight services in that market over the more limited variety, quality and geographic scope of general air freight services which Arrow and FWIA currently provide.

As a result of the virtually all-encompassing reach of the Federal Express U.S. domestic distribution network, Federal Express is able to provide direct single-carrier service between Argentina and 99 percent of the entire population of the United States. Equally significant, the scope of service provided

10/ Northwest-Delta, Order 95-4-41, p. 4; American-Delta, Order 95-3-53, p. 5; American-TWA, Order 91-3-28, p. 12; Northwest-Hawaiian, Order 91-4-3, p. 5.

11/ Section 41105(b) was added to Section 41105 by Pub. L. 101-508, § 9127(2), November 5, 1990, 104 Stat. 1388-371.

by Federal Express covers the gamut from urgent documents and packages to time-sensitive containers and heavy pallets of freight.

As shown in the extracts from the FY 1996 Annual Report of Federal Express set forth in Exhibit JA-5, Federal Express continues to be the preeminent leader in every aspect of the air express business which Federal Express pioneered in 1973, and in the air freight business to which Federal Express committed itself through its merger with Flying Tigers in 1989. The Federal Express worldwide network, which currently consists of 557 all-cargo aircraft, 36,900 vehicles, and eight intercontinental sorting hubs, now links 211 countries and territories, representing 99 percent of the world's combined gross domestic product (GDP). Federal Express provides next-day and two-business-day express service between cities and nations which account for 90 percent of the world's total GDP (Exhibit JA-5, pp. 4-6).

Federal Express generated $10.3 billion in gross revenues, and net pre-tax income of $540 million, in its fiscal year ending May 31, 1996 (Exhibit JA-5, pp. 6, 17-40). Federal Express currently invests approximately one billion dollars a year in customer-serving, productivity-enhancing technologies. That investment has enabled Federal Express to maintain its industry leadership in service reliability and efficiency, customer convenience and communications, and technological innovation -- all of which are reflected in the extraordinary growth in demand for the services offered by Federal Express, and in the numerous awards and accolades which Federal Express has received for the consistent excellence of its service. /l2

Approval of the Federal Express-Arrow and Federal Express-FWIA route transfers will accomplish virtually every relevant public interest objective which the Department has articulated in its route transfer case decisions over the past ten years.

The geographic scope and quality of the service provided by Federal Express, and its unquestioned financial, operational and competitive strength, will insure the highest quality of service to the entire spectrum of large and small shippers, covering the full range of cargo service requirements, in the U.S.-Argentina market. Equally important, those qualities will insure that the United States will exploit the full potential of the valuable bilateral operating rights represented by the three Argentina Frequencies at issue.

The transfer to Federal Express of the three U.S.-Argentina cargo frequencies held by Arrow and FWIA will also serve to strengthen the U.S.-flag competitive presence in the U.S.-Argentina air cargo market, by enhancing the ability of Federal Express to compete aggressively for cargo traffic in the fast-growing and highly-competitive U.S.-Argentina market. As shown in Exhibit JA-6, infra, the U.S.-Argentina air cargo market is highly competitive, with over

12/ Among numerous honors, Federal Express was the first air express company to be awarded the Malcolm Baldridge National Quality Award in 1990, was the first global express company to receive system-wide ISO 9001 certification in 1994, and has received countless other awards for the quality of its service and work environment (see Federal Express Exhibit FX-709 in the U.S.-Thailand Cargo Frequency Case, Docket OST-96-1496).

2.7 million pounds (southbound) of air cargo capacity a week provided on high-frequency freighter and combination-aircraft services operated by four foreign carriers and five U.S. carriers between the U.S. and Argentina.

Approval of the frequency transfers at issue will have a relatively small impact on the degree of concentration in the U.S.-Argentina market, calculated on the basis of the market-concentration assessment methodology embodied in the so-called "Herfindahl-Hirschman Index" (HHI). Based on that methodology, the Justice Department and Federal Trade Commission view markets having an HHI below 1,000 as "unconcentrated", an HHI between 1,000 and 1,800 as "moderately concentrated", and an HHI above 1,800 as "highly concentrated" ("DOJ and FTC Horizontal Merger Guidelines", April 2, 1992, pp. 28-29). As shown in Exhibit JA-7, infra, the U.S.-Argentina cargo market is moderately concentrated at the present time, with an HHI of 1,349.1. That degree of concentration increases by only a relatively limited amount, to 1,562, following the transfer of the three frequencies now held by Arrow and FWIA to Federal Express and the substitution by Federal Express of the 150,000-pound payload DC-10-30 in place of its present 49,000-pound payload B-727-200 freighters (Exhibit JA-8, infra). l3/ Even with that expansion in capacity, Federal Express will have only 25 percent of the total available cargo payload capacity in the

13/ Based on the hypothetical operation by FedEx of seven weekly B-727 flights following approval of the frequency transfer, so as to eliminate the impact of the aircraft capacity increase on the HHI calculation, approval of the transfer increases FedEx's HHI to 223, its share of total market capacity to 14.9 percent, and the total market HHI to 1,430 (see Exh. JA-8, p. 2).

market, and both Arrow and FWIA will remain free to seek to re-enter the market in the event that the current Argentina cargo frequency ceiling is relaxed or eliminated.

With regard to the three specific subjects on which the Department is directed by 49 U.S.C. § 41105 to analyze and report its findings to Congress, the Joint Applicants submit the following comments.

Approval of the proposed frequency transfers will clearly benefit Federal Express, primarily by enabling Federal Express to expand the frequency and/or capacity of its Argentina operations. The route transfers will not have any effect on the "viability" of Federal Express, since the economic impact of expanded U.S.-Argentina operations will have a positive effect on the already-strong financial and operational health of Federal Express.

Approval of the frequency transfer will have a positive impact on the viability of both Arrow and FWIA resulting from the contribution of $1.5 million in new working capital to Arrow, and $500,000 to FWIA resulting from the sale of their existing U.S.-Argentina all-cargo operating frequencies to Federal Express.

Approval of the proposed frequency transfers should have little or no impact on the U.S. airline industry. The transfer will result in a relatively limited expansion of the existing international route authority and gross revenues of Federal Express, but will not substantially alter the posture of Federal Express as a competitor with respect to its numerous large and small rivals in the U.S. all-cargo and combination service industry.

Similarly, Arrow and FWIA will continue to function as a significant competitors in the U.S. air cargo industry, with virtually no diminution of their market share in that industry resulting from the sale of their Argentina frequencies. The U.S. domestic air cargo industry will continue to be highly competitive, with numerous financially-healthy providers of service, and with no significant barriers to the entry of new carriers into the U.S. domestic air cargo industry (other than capital availability and the fitness-certification process).

Finally, for all of the reasons discussed previously, transfer of the three Argentina Frequencies at issue to Federal Express is certain to enhance the U.S. trade position in the U.S.-Argentina market. That expansion of U.S. trade will result from both an expansion of the U.S.-flag share of air cargo service revenues in the U.S.-Argentina markets, and through the facilitation of U.S. exports to Argentina made possible by the modest increase in the scope of U.S.-Argentina air express and freight services provided by Federal Express which will result from approval the frequency transfer at issue.

For all of the foregoing reasons, approval of the Federal Express-Arrow and Federal Express-FWIA frequency transfers is conclusively consistent with the public interest.

In its April 1995 Statement of U.S. International Aviation Policy, the Department stated that:

The Department further stated that it had "designed our international aviation strategy to meet the following objectives:

* * * * *

Approval of the proposed frequency transfers at issue is consistent with, and will foster attainment of, all of the foregoing policy objectives.

The substantial public benefits and competitive market structure advantages which will result from the transfer to Federal Express of the U.S.-Argentina cargo frequencies at issue, which have been discussed in detail in the previous section of this Application dealing with public interest factors, apply with equal force to the international aviation policy goals articulated in the 1995 Statement. For that reason, it is not necessary to reiterate those assertions in this discussion. Suffice it to say, the transfer to Federal Express of the Argentina Frequencies at issue:

-- Will increase the variety of price and service options offered to shippers between the U.S. and Argentina by expanding the quantity of high-quality competitively-priced air express and air freight services, and customer convenience features, offered by Federal Express to every segment of the shipping public in that market.

-- Will expand the access of U.S. cities to Argentina as a result of the expansion of service by Federal Express between Argentina and 99 percent of the U.S. population which is served by the vast U.S. air and ground distribution network operated by Federal Express.

-- Will provide Federal Express with an opportunity to expand its high-quality air express and freighter services in response to marketplace demand between the U.S. and Argentina, by enabling Federal Express to obtain partial relief from the restrictions on its existing U.S.-Argentina services imposed by the current frequency/capacity limitations embodied in the U.S.-Argentina bilateral.

-- Will cause the unique service quality and diversity, marketplace identity and competitive strength offered by Federal Express to enhance the role of the U.S. aviation industry as a cost-effective and highly-competitive participant in the U.S.-Argentina market at all levels and types of air cargo service.

The proposed route transfer between Arrow and FW1A to Federal Express is the epitome of the marketplace-driven transaction which fully conforms to, and furthers, the policy goals of the 1995 Policy Statement.

As noted above, the Department has stated in several recent route transfer cases ". . . that it will carefully examine the impact on airline workers when reviewing proposed sales of route authority, consistent with the Administration's Initiative to Promote a Strong Competitive Aviation Industry announced in January 1994" (Northwest-Delta Route Transfer, Order 95-3-19, p. 5). Conversely, the Department has recognized the inherent limits on the scope of its role in airline labor matters, particularly subsequent to the deregulation of the airline industry. (See, e.g., Federal Express-Flying Tigers, Order 89-3-21, p. 11).

In this case, the transfer of two Argentina all-cargo frequencies from Arrow to Federal Express, and one Argentina cargo frequency from FWIA to Federal Express, will have virtually no measurable effect on the employees of any of the three carriers. That lack of impact results from a combination of the relatively limited operations by Arrow and FWIA between the U.S. and Argentina, and the very substantial existing operations by Federal Express in the U.S.-Argentina market. Neither Arrow nor FWIA plans to furlough any employees as a result of the sale of its U.S.-Argentina cargo frequencies.

The use of expedited non-hearing procedures to consider route transfer applications is consistent with uniform Department precedent and is warranted in this case.

The Department has utilized expedited non-hearing show-cause procedures in the context of every route transfer application, including contested applications, since 1985. /14 The proposed transfer of three Argentina cargo frequencies from Arrow and FWIA to Federal Express, at issue in this proceeding, presents no complex or contested material issues of fact, and is governed by a well-established history of precedents subsequent to the expiration of the Department's authority over air carrier mergers and acquisitions on December 31, 1988.

Accordingly, the Joint Applicants request the Department to consider this case through the use of expedited show-cause procedures, so as to permit issuance of a Final Decision in time to enable the Joint Applicants to consummate this transaction on or before July 15, 1997.

WHEREFORE, for the reasons discussed in this Joint Application, Federal Express, Arrow and FWIA urge the Department to issue an Order approving the proposed transfer of the three U.S.-Argentina all-cargo operating

14/ See, e.g., Federal Express-Flying Tigers, Order 89-3-21, p. 2.

frequencies at issue to Federal Express through the use of expedited non-hearing procedures.

Respectfully submitted,

Allan Markham for Arrow Air

Marshall Sinick of Squire Sanders for FWIA

Nathaniel Breed of Shaw Pittman for Federal Express

A. Doyle Cloud, Sarah Prosser and Warren Goff of Federal Express