OST-97-2845 / OST-96-1988 / Continental / United and Mexicana / Answer of Continental / November 21, 1997

Application of :

CONTINENTAL AIRLINES, INC.

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

(San Antonio-Mexico City)

Joint Application of:

UNITED AIRLINES, 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 C.F.R. Parts 207 and 212 (reciprocal code-sharing services)

The Department should issue immediately a final order confirming its decision to designate and grant exemption authority to Continental /1 for its own services in the market with its own aircraft and to withdraw United's designation in the San Antonio-Mexico City market.

1/ Common names will be used for airlines.

Answer of Continental

Page 2

No one has objected to the Department's proposal to award Continental authority to operate its own aircraft between San Antonio and Mexico City, although United's concurrence is contingent upon retention by United and Mexicana of their underlying operating authority to offer code-share services between San Antonio and Mexico City and reversion of the San Antonio-Mexico City designation to United if Continental discontinues service in the market with its own aircraft. In the interest of expediting action on its application, which has been pending for over 13 weeks, Continental does not object to the conditions suggested by United, at least on an interim basis, and urges the Department to act immediately on Continental's application.

Continental states as follows in support of its position:

1. Continental does not oppose United's requests that Continental's designation be subject to the usual U.S.-Mexico dormancy condition, that the designation immediately revert to United should Continental terminate nonstop services in the San Antonio-Mexico City market and that United and Mexicana retain their underlying authority to offer code-share services in the market subject to a condition allowing their exercise only if a designation is available. /2 If Mexico permits a third designation in the market for code-share services or agrees that code-share designations will not be counted against the designation limits under the U.S.-Mexico air services agreement, both Continental and United will be able

Answer of Continental

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to serve the market. For this reason Continental does not object to retention of the United/Mexicana underlying authority pending further negotiations with Mexico.

2. Although the Department's recently-announced policy clearly gives a priority to carriers operating their own flights in U.S.-Mexico markets, United's request to retain its underlying authority and have it spring into effect automatically seeks for code-share carriers greater rights than the Department grants to carriers operating their own U.S.-Mexico services. U.S.-Mexico certificate authority expires "the 90th day after the holder discontinues service on" a segment or the carrier notifies the Department of the dormancy. Continental does not oppose United's retention of its underlying authority on an interim basis while the Department considers whether underlying U.S.-Mexico authority should be retained in the case of dormancy regardless of whether the authority is certificate authority or code-share authority. In either case, the only action required by the Department would be re-designation of the carrier holding dormant authority in the event that a designation becomes available either by agreement with Mexico or by the dormancy of another carrier's authority.

When the Department considers whether United's authority should become effective automatically if Continental's authority becomes dormant, however, it should consider the broader implications of that decision. Continental believes that unlimited back-up authority should not be extended to code-share operations unless such authority is also extended to direct operations. Under United's

Answer of Continental

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proposal, if Continental terminated its San Antonio-Mexico City service, United/Mexicana would have priority over another airline which wanted to operate its own flights in the market. Such a policy would be directly contrary to the Department's policy favoring direct operations and require direct operators and the Department to take the time and effort to supplant a code-share partner before the direct operator could institute service. For the same reasons the Department's back-up authority is limited to only one year, any replacement for dormant direct operations in the U.S.-Mexico market should be based on circumstances at the time the route becomes dormant rather than being based upon the suspension of a previous code-share designation. Because Continental must have authority immediately to begin selling its San Antonio-Mexico City service, Continental urges the Department to consider this issue in connection with a broader review of dormancy issues in the U.S.-Mexico market rather than in this proceeding. /3

3. As both the Department and United recognize, direct carrier services provide benefits and service options superior to code-share operations and the Department has the authority to suspend or revoke code-share services in favor of services by U.S. carriers with their own aircraft. Withdrawing United's designation to code-share with Mexicana will also send a clear signal to Mexico

3/ United has claimed that Continental is holding out and selling San Antonio-Mexico City service, but Continental has not been offering such service for sale in reservations systems, and the schedule has not appeared in any edition of the OAG except for the November Worldwide edition, where it appeared in error.

Answer of Continental

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that its carriers would benefit from permitting additional designations in the U.S.-Mexico market.

For the foregoing reasons, Continental urges the Department to affirm immediately its tentative decision, subject on an interim basis to the conditions proposed by United, withdrawing the designation of United and designating Continental and awarding it exemption authority to provide daily roundtrip service in the San Antonio-Mexico City market.

Respectfully submitted,

CROWELL & MORING LLP

/s/ R. Bruce Keiner, Jr.

R. Bruce Keiner, Jr.

/s/ Steven A. Mirmina

Steven A. Mirmina

Counsel for Continental Airlines, Inc.

November 21, 1997