OST-97-2970 / America West / High Density Rule, O'Hare and LaGuardia / Motion for Leave to File and Reply of America West / November 21, 1997
Application of
AMERICA WEST AIRLINES, INC.
for an exemption pursuant to 49 U.S.C. § 41714
Columbus - New York LaGuardia Airport
Phoenix - Chicago O'Hare Airport )
MOTION FOR LEAVE TO FILE AND
REPLY OF AMERICA WEST AIRLINES, INC.
America West Airlines, Inc. ("America West"), respectfully requests leave to file this reply to the unauthorized Reply of United Air Lines, Inc. ("United") to the Consolidated Reply of America West in support of its application for a limited number of slots at Chicago O'Hare Airport.
America West strongly opposes the grant of United's motion. United filed an answer in which it had the opportunity to make all its arguments. The Department's rules entitled America West to file its reply and close the record for decision. United's unauthorized reply adds nothing new to the record and merely burdens the Department's consideration of this application. Should the Department nevertheless accept United's filing, America West requests that this reply also be accepted to address United's mischaracterization of America West's Application and to complete the record.
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In its unauthorized reply, United purports to be filing in the interest of a "complete record" and to comment on the new decisional criteria set forth in the Application of Simmons Airlines, et. al., Order 97-10-17, October 24, 1997. However, as in its Answer to America West's Application, United ignores the factors which demonstrate exceptional circumstances and seeks to divert the Department's focus from the fact that America West can provide a major low fare stimulus to Phoenix, Las Vegas and the West Coast. /1 America West's ability to expand its influence as a low-fare full service carrier from the Mid-West to Phoenix and beyond markets is linked to obtaining reasonable access to O'Hare. Only through such access can America West produce the
1/ United states that it is not responding to America West's request for slots at LaGuardia but proceeds in its first footnote to contend that America West has not shown a need for service between LaGuardia and Columbus. While the grant of the eight slots requested at LaGuardia will certainly enhance competition to Columbus, the main thrust of the application was to enable America West to serve its principal hub of Phoenix from LaGuardia via its hub at Columbus. The Department in Application of Frontier, et. al., Order 97-10-17, October 24, 1997, recognized that LaGuardia is a separate market for New York. Due to the perimeter rule, there is no nonstop service between LaGuardia and Phoenix. Single-plane and connecting services are only available on the high fare carriers, as the few slots America West was able to obtain are not well timed for flights via Columbus to Phoenix. Accordingly, the grant of LaGuardia slots to America West will bring substantial new low-fare full service to a significant underserved business and leisure market. As stated in the Application, if America West receives slots at LaGuardia, it would discontinue leasing slots to American Airlines and use those slots for O'Hare service. Indeed, contrary to United's offensive footnote 3, America West would much prefer to use the slots it traded to American at O'Hare if there were any other way for the carrier to serve the essential LaGuardia Airport.
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"meaningful price competition" the Department seeks in these important markets.
As discussed below, the status of the carrier as well as the characteristics of the market are relevant to the public interest and exceptional circumstances analysis. Contrary to United's assertion, the fact that the O'Hare-Phoenix market has extremely high load factors and the seven other major hub and spoke full service carriers average 12 daily departures to their primary hubs while America West can operate only three(3) is very relevant to assessing whether the Phoenix-O'Hare market is underserved. The fact that America West must operate 40 percent of its O'Hare flights outside the peak demand periods is also directly relevant to this question. Overall, in an environment where many new entrants continue to struggle, it is critical that America West obtain the slots necessary to enable it to grow and prosper by bringing low fare full service to business and leisure travellers between O'Hare and the West.
United has opposed every application for slots filed under 49 U.S.C. §41714 (c) and offers nothing new in this unauthorized filing. United's meritless argument that America West's Application does not satisfy the exceptional circumstances requirement as defined by Simmons is based upon a reprise of the futile attempt made in its Answer to have the Department find that O'Hare does not represent a separate market from Midway, and that the Chicago - Phoenix market is well served. For the
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reasons given by America West in prior filings and as demonstrated below, these arguments remain frivolous.
I. UNITED HAS MISCONSTRUED THE EXCEPTIONAL CIRCUMSTANCES TEST AS APPLIED TO AMERICA WEST
United would have the Department construe the new entrant exception to preclude significant low-fare full service competition by America West, a major network carrier seeking to offer a reasonable level of competitive service to its primary hub at Phoenix and beyond to points -on the West Coast. United's invitation to limit this provision must be rejected. The new entrant exemption provision under which America West qualifies as a limited incumbent was specifically enacted to enhance competitive access by new entrants to slot constrained airports. The House Report accompanying the legislation stated that the current buy-sell slot system "has been severely criticized because it provided a substantial windfall to the incumbent airlines who had received slots at no expense, and because slots are sometimes not available at reasonable prices to prospective new entrants." The Report also stated that "these problems could be eliminated if the restrictions of the high density rule were removed. A less drastic step would be to increase the number of slots, which would lessen the problems which the system creates." H.R. Rpt. 103-240, 103 Cong. 2d Sess. at 29.
The Department in Simmons has, quite properly, recognized this Congressional objective by giving a broader definition to
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the statutory standards. /2 Thus the Department stated that "exceptional circumstances" includes a recognition of:
the need for competitive service in a market, especially low-fare competitive service. Airlines operating as low-fare carriers provide substantial public benefits by making low-fares available to many more travellers and thereby greatly increasing the size of the market.
Simmons at 3. In addition the Department properly found:
that substantial benefits can be achieved through increasing competition at slot-controlled airports in situations where consumers would be able to obtain significantly lower fares in noncompetitive or underserved markets. Therefore, we find that applications proposing to introduce such services can meet the exceptional circumstances criterion of the legislation.
Id. at 4. The Department stated that it would "place a premium upon the introduction" of "new competitive services where existing services do not produce meaningful price competition."
America West demonstrably meets this key exceptional circumstance criterion. The approval of America West's application will directly provide new low-fare services to travellers between O'Hare, Phoenix and the West Coast. The O'Hare-Phoenix market and the beyond markets are substantially underserved as defined by Simmons. /3 In Simmons the Department
2/ As a remedial statute, section 41714(c) should be given a liberal construction to achieve the statutory objective. See, United States v. An Article of Drug, etc., 395 U.S. 784 (1963); Hull Co. v. Hauser's Foods, Inc., 924 F. 2d 777 (8th Cir. 1991).
3/ America West also meets the other criteria specified by the Department in Simmons as it has committed to operate the new services with Stage 3 aircraft and has the experience and network to ensure the operations will be profitable.
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found the Reno-O' Hare market to be underserved although the average load factor in that market is substantially lower than either the Phoenix or Las Vegas markets. Specifically, as explained in America West's Application, the Consolidated Reply and as discussed in Section III of this Reply, the average load factors in the O'Hare Phoenix and O'Hare-Las Vegas markets are in excess of 80% and are among the highest of any O'Hare markets. As a result many potential passengers cannot benefit from America West's low-fares. Moreover, due to this lack of low-fare full service both business and leisure travellers are denied the network benefits offered by America West for travel to the West Coast.
In addition, it is strongly in the "public interest" as that term is defined by the Airline Deregulation Act, to enable America West, the only major low-fare full service network carrier, to expand its highly competitive services into the O'Hare and LaGuardia markets where the pre-deregulation incumbents average 12 flights a day to their principal hubs, and operate most of their services at peak demand periods. See, Application at Exhibits l;7,8.
The Department has recognized since its first grant of slots to Reno Air in 1994 that the nature of the services the carrier offers the public is a factor to be considered in determining exceptional circumstances. See, Application of Reno Air, Order 94-9-30, September 20, 1994. Therefore, the Department must reject United's view that America Desks status as the only major
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carrier with virtually no access from its primary hub to O'Hare is irrelevant to a finding of exceptional circumstances. United Reply at 3-4. Indeed to the contrary, as stated in America West's earlier filings, its ability to leverage the competitive benefits of the few slots it has requested through its hub at Phoenix supports a finding of exceptional circumstances.
II. UNITED HAS FAILED TO REBUT AMERICA WEST'S SHOWING THAT O'HARE AND MIDWAY ARE SEPARATE MARKETS
O'Hare is the busiest airport in the world in terms of passengers handled. It is certainly the most important connecting complex in the United States, including connections to international flights, and is the vastly favored Chicago airport for business travellers. /4 Not surprisingly, the Chicago Department of Aviation Internet home page refers to O'Hare International Airport as "the commercial aviation capital of the world," and the "hub of national air transportation in the United States." Conversely, there is very little network service available at Midway to cater to the needs of the business traveller. Moreover, Midway has no international service. If a carrier cannot fly to O'Hare it cannot serve the business
4/ United in its unauthorized reply and to a much greater extent in its petition for reconsideration of Simmons, would have the Department believe that the public interest would be better served by giving United more slots for international service. Unfortunately for United, Congress clearly indicated when it passed the new entrant slot exemption that it was concerned about domestic competition and wanted to help new entrant carriers that spur low fare domestic competition.
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traveller or provide connecting services to the thousands of international travellers that use O'Hare as a gateway to the West. To use United's language, comparing these two airports is a "classic apples and oranges comparison."
The fact that O'Hare and Midway service different markets is confirmed by the significant fare differentials between the two airports as described in America West's Consolidated Reply. In reply to United's assertion that the fare differences are only due to Southwest, as shown in Exhibit A, in markets where United competes with Southwest's Midway service, United's average one-way fares average 51% higher than the Southwest Midway fares. In the Chicago - Phoenix market, United's average one-way fare of $185 was $69 higher than Southwest's average fare of $116. However, in other markets where United and Southwest provide similar non-stop service between the same two airports the average fare differential is only 9%. This comparison addresses United's point that other factors can influence average fares. In the non-Chicago markets example, the traffic mix, the identity of the carriers at the airports, the availability of frequent flyer miles, and the fact that both carriers provide non-stop service are all the same. Using this "apple to apple" comparison United generated a 9` premium over Southwest when they have equivalent service. However, in the Chicago markets, United generates a 51` premium over Southwest. This difference is explained by the fact that O'Hare and Midway are not substitute airports. Travellers do prefer O'Hare to Midway and average
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fares are higher at O'Hare specifically because it is the preferred airport, not because of the Southwest presence. This "apples to apples" comparison conclusively demonstrates that Midway and O'Hare are separate markets.
Contrary to the assertion in United's Reply at 12, these fare differentials demonstrate there is very little cross-elasticity of fares between O'Hare and Midway. Particularly with respect to Phoenix-O'Hare, as discussed below, the very high load factor in this market precludes the possibility that Midway fares could offer any meaningful influence over O'Hare-Phoenix fares. /5
Perhaps recognizing that the average fare analysis does not support United's position, the carrier spends over a page of its unauthorized reply attempting to explain all the factors which justify why its average fares at O'Hare would be significantly higher than the average fares at Midway. United Reply at 10 -12. However, the very factors cited by United such as traffic
5/ These fare differentials also rebut United's disingenuous argument that Midway can attract business travellers. United Reply at fn. 11. Midway has never been a viable alternative to O'Hare for business travellers. This is reflected by the fact that since 1990, the major carriers including United have added and dropped after a relatively short time, service from Midway to their hubs. If Midway was equivalent to O'Hare for business traffic, American, Continental, Trans World and US Airways would not have begun and quickly stopped their service. Moreover, if the two airports were substitutes, the carriers would move service from O'Hare to Midway and sell O'Hare slots. United's desire to acquire more O'Hare slots is proof that the two airports do not serve the same market. See, Exhibit B. The preference for O'Hare by business travellers is in fact growing as a result of the substantial high tech and hospitality development in the Northern suburbs near O'Hare. See, William DeForrest, "Suburbs Show Signs of Bull Market," Midwest Real Estate News, July 1997.
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mix, the lack of first class service at Midway and the carrier mix are all factors which support a finding that O'Hare indeed serves a different market from Midway. /6
Finally, United unsuccessfully attempts to respond to America West's point that if O'Hare and Midway served the same market new entrants would be able to acquire slots at O'Hare and service between the two would be more evenly distributed by reciting the obvious fact that United and American do not serve Midway. However, the fact that United and American do not serve Midway and are willing to spend hundreds of millions of dollars to obtain as many O'Hare slots as possible, simply confirms America West's point that the market these carriers want to serve
6/ Ironically, while attempting to explain why a comparison of average fares is irrelevant to a comparison of O'Hare and Midway, United earlier in its reply seeks to rely on the average fare in the Chicago - Phoenix market to support its claim that the market is competitive. United Reply at 8. Of course, no passenger flies at the average fare and as discussed infra at one of America West's goals in seeking slots is to provide more low walk-up and first class fares for business travellers to Phoenix and the West Coast.
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is O'Hare, the airport they dominate and that business passengers prefer. /7
In sum, the evidence is clear and irrefutable that O'Hare and Midway are not the same market. No carrier that is seeking to provide low-fare full service to business travellers and international passengers can survive at Midway.
III. UNITED HAS FAILED TO SHOW THE O'HARE - PHOENIX AND WEST COAST MARKETS HAVE ADEQUATE LOW FARE COMPETITION
The weight of the evidence demonstrates that O'Hare is a separate market from Midway. Given this fact, America West has already shown that the O'Hare - Phoenix as well as the O'Hare -Las Vegas and beyond markets are underserved and would substantially benefit from additional low fare service from
7/ United contends that some service by Continental and Northwest at Midway shows that "these carriers believe" Chicago can be served without more slots at O'Hare. United Reply at 15. These flights are not to the carriers' primary hubs, and, the mere fact that these two carriers provide some service at Midway (as does America West) does not mean there is a unitary market or that the carriers would not much rather provide the service at O'Hare. In any event, as discussed in America West's Application, both these carriers currently operate substantially more service to their principal hubs from O'Hare than America West can currently provide to its primary hubs. Specifically, Northwest has 66 weekly departures to Detroit and 96 to Minneapolis while Continental operates 33, 55 and 40 weekly departures to Cleveland, Houston (IAD) and Newark respectively. America West by contrast operates 14 departures to Las Vegas and only 21 to Phoenix, its principal hub. See, America West Application, Exhibits 2,3,7 and 8. In addition as shown in Exhibit B. the major carriers have attempted and then dropped most of their efforts to serve Midway from hub airports because there is not sufficient business traffic.
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America West. In Simmons, Order 97-10-16 at 8, the Department found that "[w]hile the presence of nonstop service by two or more airlines in a market may indicate competition on a service basis, the data clearly demonstrates the importance of low-fare competition." Emphasis Added. See also, Application of Frontier Airlines, et al., Order 97-10-17 October 24, 1997 at 11.
The Department and its predecessor the Civil Aeronautics Board have always recognized that high load factors means a market is underserved. See, e.g.: Dallas/Fort Worth-Tucson Investigation, Order 79-5-35; U.S.-Japan Service Case, Order 90-4-44; and 1990 U.S.-Japan Gateways Proceeding, Order 90-10-15. America West showed in its Application that flights between O'Hare and Phoenix and Las Vegas operate at among the highest average load factors of any O'Hare markets: Phoenix - O'Hare ranks sixth at 81% and Las Vegas - O'Hare ranks second at 83%. America West Application, Exhibit 4. During the peak demand period America West's load factors in the Phoenix and Las Vegas markets are respectively 85% and 82%, using the largest aircraft in its fleet. Id. at Exhibit 5. Similarly, the load factors of American and United in these markets are also more than 80%. Id. at Exhibit 6.
America West stated as an objective of its application to bring more competitive service to business travellers. America Wastes current level of service has forced United to match America West's fares in the O'Hare - Phoenix and O'Hare - Las
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Vegas markets. /8 However, at the current load factors there are not enough seats to service the business travellers particularly in the important West Coast connecting markets. America West observes in this context that O'Hare - Phoenix load factors are much higher than Reno Air's 73% load factor in the Reno - O'Hare market. Yet, the Department nevertheless found that granting additional slots to Reno Air, which provides the only non-stop service in the Reno-O'Hare market, would "enable new price competition such as we expect Reno Air to provide." Simmons at 8. Given these higher load factors, the O'Hare-Phoenix and O'Hare-Las Vegas market are more underserved than Reno-O'Hare and therefore are clearly underserved as defined by Simmons.
Reno Air has now received a total of seven new entrant slots, two more than requested by America West, so that Reno Air could offer passengers a better pattern of service to the carrier's hub. For the same reason, America West should be granted five slots so it can offer a reasonable pattern of service to its hub, a much more constrained market. /9 This will make it possible for America West to fully compete with American and United for business traffic, both in the local Phoenix-O'Hare market and beyond. As United stated, many business travellers
9/ United's refrain, repeated again in its Petition for reconsideration of Simmons that the award of a relatively few limited purpose slots to new entrants penalizes United must be soundly rejected. United was grandfathered over a hundred times more slots than America West has requested.
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are time sensitive. United Reply at 17. Thus, these passengers need the availability of multiple flights during peak demand periods which America West cannot now offer. Accordingly, the need for six round trips a day to attract business travellers in a major market was implicitly recognized by the Department in its award of eleven slots to ValuJet to operate six round trips between Atlanta and LaGuardia. Frontier at 12-14.
Moreover, and as discussed in the Application, restraints on Phoenix service preclude America West from expanding its highly competitive services to 37 Western cities beyond Phoenix. /10 In this regard, United also concedes that its unrestricted fares to the West Coast are substantially higher than those charged by America West through Phoenix. United contends these fare differentials exist because United is offering higher value nonstop service. United Reply at 17 - 18. Non-stop service might justify a somewhat higher fare in these markets. However, it is doubtful that the differentials would be as great if America West could provide the vastly improved connecting service that would be available if it received the five requested slots and could link O'Hare service to all its Phoenix connecting banks.
Many business travellers would prefer a well-timed connecting flight that saves 30 or 40 percent in their air fare
10/ United erroneously contends that America West claimed fare savings in 95 city-pair markets from the new service at O'Hare. United Reply at fn. 12. In fact America West stated that increased service to Chicago would result in 95 new daily connections through Phoenix to 37 cities in the Western U.S. Application at 10.
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particularly when the additional travel time is minimal. /1l In addition, many markets where America West would be able to offer much improved connections do not currently have non-stop or single-plane service to Chicago on any carrier and passengers are confronted with extremely high fares from United. For example, between Chicago and Burbank the America West unrestricted roundtrip coach fare is $1,022, while United's comparable fare is $1,696. In this market America West's roundtrip first class fare is $1,606 while United's is $2,400.
Finally, United would have the Department believe that America West is not the low fare price leader in the O'Hare -Phoenix market and that Southwest is responsible for the fare level. This contention is not supported by the facts since United matches America West's fares and not the Southwest fares. Moreover, if Southwest were responsible for the lower fares from O'Hare to Phoenix, United would have similar low fares between Los Angeles and O'Hare, a market in which Southwest also provides single-plane service from Midway but where there is no non-stop service by America West from O'Hare. As shown in Exhibit C, over the last three years the average ORD-LAX fare has been 57\ higher than the average PHX-ORD fare.
In general it is apparent that the approval of America West's application would make available substantially improved
11/ As shown in Exhibit D, the circuity for connections to major West coast cities from Chicago through Phoenix is very small and much less than many of the connecting markets available for sale from United.
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service for business travellers between O'Hare and Phoenix and enable America West to offer travellers in West Coast markets important new competitive alternatives to the extremely high fare services of the incumbents. This is a factor recognized by the Department in assessing whether exceptional circumstances exist. Indeed, bringing low-fare full service competition to connecting markets through a new entrant's hub was strongly emphasized by Reno Air in its application just approved by the Department in Simmons.
CONCLUSION
America West in both its Application and Consolidated Reply submitted to the Department substantial evidence which demonstrated that: (1) O'Hare constitutes a separate market from Midway; (2) the O'Hare-Phoenix and O-Hare-Las Vegas markets are underserved within the meaning of Simmons; and (3) because of the unavailability of slots, America West cannot operate a reasonable pattern of competitive service to its two most important hubs. America West convincingly showed that its proposed service is for underserved markets and therefore is in the public interest and reflects exceptional circumstances, both under the Department's 1994 analysis and as modified by the recently announced criteria in Simmons.
United's efforts to paint a rosy competitive picture and convince the Department that O'Hare and Midway are a single
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competitive market, must be rejected. Its arguments are a subterfuge designed to prevent low-fare full service competition at the airport it dominates. United's position is not only counter-intuitive, it is not supported by any evidence. The fact that O'Hare and Midway serve different markets was implicitly, if not explicitly, accepted in the 1994 Reno Air order and the recent Simmons order. The distinct nature of these two markets is reflected in the substantial fare differentials that exist between the two airports. O'Hare serves business, international and connecting travellers. Midway does not now, and never will, service these travellers.
America West is by far the largest low-fare full service airline that caters to the needs of business as well as leisure travellers. O'Hare-Phoenix is an extremely large market and crucial to America West's ability to expand service between the West and the upper Mid-West and bring much needed competition to underserved markets. America West's ability to provide these services is critical to the Department's efforts to bring the fruits of deregulation to more markets and to business travellers.
For these reasons, the Department must reject United's spurious arguments and approve America West's application for five O'Hare slots as well as eight LaGuardia slots. As explained in America West's prior filings, the award of these slots will open up important competitive options for travellers from O'Hare and LaGuardia to Phoenix, Las Vegas, and the West Coast and
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enable America West to expand its role as a major carrier which can discipline fares for both business and leisure travellers.
Respectfully submitted,
Joanne W. Young
David M. Kirstein
Baker & Hostetler LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5304
(202) 861-1532
November 21, 1997