OST-97-2845 / OST-96-1988 / Continental / United and Mexicana / US-Mexico / Objections of United Air Lines / November 20, 1997

Application of:

CONTINENTAL AIRLINES, INC.

for an exemption pursuant to 49 U.S.C. §40109

(San Antonio-Mexico City)

Joint Application of:

UNITED AIR LINES, INC. and COMPANIA MEXICANA de AVIACION, S.A. de C.V.

under 49 U.S.C. 40109 for exemptions (U.S.-Mexico) and route integration; and for statements of authorization under 14 CFR Parts 207 and 212 (reciprocal code-sharing services)

1. United objects to the Department's tentative findings and conclusions to the extent that they propose

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(a) to divest United and its code-share partner Compania Mexicana de Aviacion S.A. de C.V. ("Mexicana") of the underlying operating authority needed for United to offer codeshare services on Mexicana's services between San Antonio and Mexico City; /l and

(b) to award Continental Airlines, Inc. ("Continental") an exemption to operate SAT-MEX services and, implicitly, to designate Continental for such services under the U.S./Mexico bilateral air services agreement, without specifically requiring (i) that Continental must operate such services in its own aircraft and (ii) that Continental's designation would automatically become dormant and would revert to United immediately after Continental terminated SAT-MEX nonstop services in its own aircraft.

2. United has no objection to the termination of its existing designation to operate SAT-MEX services and the transfer of that designation to Continental subject to the conditions described herein. Where Continental is proposing to

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operate six weekly nonstop roundtrip services in its own aircraft /2 and United's services are limited to code shares on Mexicana's double daily nonstop SAT-MEX services, the Department has concluded that the transfer of the designation at issue to Continental is in the public interest. United has previously taken the position that a designation in a limited-entry market should be subject to transfer in these circumstances.

3. The only authorization properly at issue in this proceeding is, however, United's designation for SAT-MEX service, not the underlying exemption issued to United for SAT-MEX service or the statement of authorization issued to Mexicana. If a withdrawal is to be made in these circumstances, it is only the designation of United, which is used solely for code-share service, that needs to be withdrawn. There should be no need to withdraw other authority relating to code sharing since it may become possible for United and Mexicana to restore SAT-MEX codeshare service at a future date. This possibility may come about

2 According to the November OAG, Continental is already offering for sale SAT-MEX nonstop services effective December 18, 1997 on flight C0786/787 every day except Saturday southbound and Sunday northbound. The other U.S. carrier designated for the SAT-MEX city pair is American Airlines, Inc. ("American"). According to present schedules, American is offering a daily nonstop flight in this city pair.

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either (a) because of an agreement between the U.S. and Mexico or (b) because one of the U.S. carriers operating direct services discontinues operations in its own aircraft.

4. The Department notes in its show cause order that it has pending a request before the government of Mexico to increase SATMEX designations to three per side in order to accommodate both United's and Continental's services. Order 97-11-26 at 3. The Department indicates its intention to continue to pursue this matter with Mexico and, in that regard, the parties have agreed to informal consultations to address code-share designation issues. Those consultations are tentatively scheduled to take place in early December in Mexico City.

In these circumstances, the Department should not terminate the United/Mexicana operating authority that would be needed to continue or reinstitute their SAT-MEX code-share service in the event of an accommodation between the governments on this matter. Even if United's designation must be transferred to accommodate Continental's start-up date, United's and Mexicana's underlying operating authority should remain in effect until such time as a bilateral accommodation can be reached. The authorizations can, if necessary, be made subject to an appropriate condition limiting their exercise to the availability

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of a designation. It should not be necessary, however, for United and Mexicana to undergo the expense and delay of reacquiring these operating authorizations in the event that they can be exercised under a bilateral accommodation. /3

5. The Department in its show cause order tentatively concludes that Continental should be granted an exemption to operate SAT-MEX services "with its own aircraft (direct carrier services)." Order 97-11-26 at 4. The Department further tentatively decides that it would be in the public interest to replace "United's code-share services with Continental's direct carrier services." Id.

Based on these conclusions, relating as they do to the public benefits of Continental's operation of SAT-MEX service in its own aircraft, United objects to any withdrawal of its SAT-MEX designation and the transfer of that designation to Continental

3/ As of last Friday, United had sold 1,024 tickets for code-share services on Mexicana flights to be operated on and after Continental's proposed December 18, 1997 start-up date. United will discontinue the sale of code-share tickets for flights operated after November 17 as soon as a final order terminating its designation has been issued. United expects however, that Mexicana would honor those "UA" tickets already sold pursuant to United's designation for flights operated after the designation has been terminated. A withdrawal of the underlying authority of United and Mexicana could interfere with their ability to honor United tickets sold pursuant to current authority.

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absent a specific condition providing that the designation will automatically revert to United in the event that Continental ceases to operate services in the SAT-MEX city pair in its own aircraft. Continental should not be permitted to retain the designation in order to replace its direct service with code-share service. In the event Continental discontinues nonstop SAT-MEX services in its own aircraft for any reason, including but not limited to the offering of code-share service on another authorized carrier of any nationality, the designation should automatically revert to United.

The reversion of the designation should take place automatically after Continental has ceased to operate SAT-MEX services in its own aircraft. /4 In the event that Continental's direct carrier service should cease, United and Mexicana should be in a position to restore code-share services immediately and

4/ Although Continental is already offering SAT-MEX services effective December 18, 1997, it is far from certain that such services will continue indefinitely. Until earlier this year, neither American nor Continental operated nonstop services between San Antonio and Mexico City, preferring to route traffic between those cities via their nearby hubs at Dallas/Ft. Worth and Houston, respectively. Whether this market will support nonstop services by both American and Continental from a non-hub gateway such as San Antonio is problematic. United's proposed condition would enable it to restore codeshare services quickly in the event Continental withdraws its nonstop services.

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should not have to seek reissuance of their underlying code-share authority from the Department to do so. /5

6. In conclusion, for the reasons set forth above, United objects to the issuance of a final order incorporating the tentative findings and conclusions in Order 97-11-26 to the extent that such a final order would terminate (a) United's exemption authority to hold out service between San Antonio and Mexico City by code sharing on Mexicana's services in that city pair, and (b) Mexicana's statement of authorization under Part 212 to display United's designator code on SAT-MEX flights. United also objects to the issuance of an exemption and designation to Continental for San Antonio-Mexico City service unless those authorizations are specifically subject to a dormancy condition providing for the reversion of that designation to United in the event that

5/ There should also be some provision for allowing United and Mexicana to replace Continental should the latter reduce its services to a token level of one or two weekly nonstop flights. The competitive benefits from United's double daily code share flights on Mexicana's SAT-MEX services would exceed the benefits from such a token level of direct service.

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Continental fails to offer nonstop service in its own aircraft between San Antonio and Mexico City.

Respectfully submitted,

/s/ Joel Stephen Burton

JOEL STEPHEN BURTON

GINSBURG, FELDMAN and BRESS, CHARTERED

1250 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20036

(202) 637-9130

Counsel for UNITED AIR LINES, INC.