OST-97-3139 / OST-97-2548 / OST-97-2848, 2594, 2852, 2578, 2855, 2648, Undocketed / 96-1042 / Undocketed / 1997 US-Argentina All-Cargo Frequency Proceeding

Joint Application of

FEDERAL EXPRESS CORPORATION ARROW AIR, INC., AND FLORIDA WEST INTERNATIONAL AIRWAYS, INC.

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

Applications of

SOUTHERN AIR TRANSPORT, INC.

for allocation of frequencies and/or exemption authority (U.S.-Argentina All-Cargo Frequencies)

Application of

for renewal of exemption authority and frequency allocation

Motion and Request of

CHALLENGE AIR CARGO, INC.

for clarification of Department's August 14, 1997 Notice Regarding U.S.-Argentina All-Cargo Services

Application of

CHALLENGE AIR CARGO, INC.

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

Joint Petition for Review of Staff Action of

FEDERAL EXPRESS CORPORATION and ARROW AIR, INC.

regarding August 14, 1997 Notice on U.S.-Argentina All-Cargo Services

Pursuant to Rule 37 of the Department's Rules of Practice, Challenge Air Cargo, Inc. ("Challenge") hereby petitions the Department for reconsideration of Order 97-11-35 (Nov. 20, 1997), to the extent it singles out Challenge's U.S.-Argentina frequencies for possible reallocation and not those of all other all-cargo carriers holding scheduled frequency allocations in the

Petition of Challenge Air Cargo, Inc.

Page 3

market. 1/ By Order 97-11-35, the Department is, in effect, instituting an unjustified and unlawful frequency revocation proceeding that cannot be sustained as a matter of law. Accordingly, Challenge respectfully submits that the Department must reconsider Order 97-11-35 and either rescind the Order in its entirety or expand the Order to place under review all frequencies currently held for all-cargo operations in the U.S.-Argentina market. Alternatively, if the Department wishes to adopt a standard of frequency use that differs from its existing 90-day dormancy policy, the Department should rescind Order 9711-35 and institute a proceeding to redefine its frequency use requirement, on a prospective basis only, to provide carriers adequate notice of the standard to which they will be held. In support of this Petition, Challenge respectfully states as follows:

1/ Order 97-11-35 also places at issue the frequencies held by Florida West and Arrow Air, which are the subject of an application for transfer to Federal Express.

Petition of Challenge Air Cargo, Inc.

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I. BY SINGLING OUT CHALLENGE'S FREQUENCIES, THE DEPARTMENT HAS, IN EFFECT, INSTITUTED A LICENSE REVOCATION PROCEEDING. THERE IS NO LEGAL BASIS FOR THE DEPARTMENT TO INSTITUTE A REVOCATION PROCEEDING, MUCH LESS REVOKE CHALLENGE'S FREQUENCIES.

In February of this year, a scant nine months ago, the Department renewed one of Challenge's two U.S.-Argentina allcargo frequencies for a two-year period, subject to the Department's standard 90-day dormancy requirement. 2/ Order 97-3-6. Significantly, Challenge's frequency renewal application was unopposed. Although the Department could have elected to limit the duration of such authority to six months, to renew it for a standard one-year term, or even to impose a more stringent dormancy requirement, the Department opted not to do so. Instead, it renewed the first frequency through February 19, 1999 -- a full two years -- and deferred action on the remaining frequency until it was ripe for renewal. Accordingly, Challenge presently holds a frequency entitlement through February 19, 1999, subject to the Department's 90-day dormancy condition imposed by Order 97-3-6. Having decided to issue a two-year renewal, the Department cannot now, barely nine months later, institute a proceeding to

2/ The Department deferred action on Challenge's request for renewal of the second frequency, currently set to expire December 1, 1997, but subject to the renewal protections of the Administrative Procedures Act. Challenge requires the use of both frequencies in order to continue operating wide-body service in the U.S.-Argentina market.

Petition of Challenge Air Cargo, Inc.

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revoke that license 3/ without some evidence to suggest that Challenge may have violated one of the terms and conditions of the license, and no such basis exists. To the contrary, only two things have changed since the Department renewed Challenge's authority: In compliance with Order 97-3-6, Challenge has operated regularly scheduled service in the market at a level which easily satisfies -- and far surpasses -- the Department's 90-day dormancy requirement; and a couple of carriers, which stood mute through the entire renewal proceeding, have now stepped forward to say that they would like to serve Argentina. These competitors' interest in Challenge's frequencies, however, is not a lawful basis for subjecting Challenge to a frequency revocation proceeding when Challenge continues to utilize the frequencies. Absent violation of a condition of its authority, Challenge should be entitled to operate with the security of knowing that its stake and investment in its Argentina service is

3/ A frequency constitutes an operating authorization or license permitting the holder to utilize its underlying certificate or exemption to operate one roundtrip flight between the U.S. and a foreign country. Frequency authorizations are licenses subject to the terms of the Administrative Procedures Act ("APA"), 5 U.S.C. § 558. See, e.c:, Order 97-3-6 renewing Challenge's frequencies in this proceeding, wherein the Department cites the applicability of the APA to Challenge's frequencies. See also, Air North America v. Department of Transportation, 937 F.2d 1427, 1437 (9th Cir. 1991) ("the definition of license in the APA is extremely broad. The relevant section says that a license "includes the whole or a part of any agency permit, certificate, approval, registration, charter, membership, statutory exemption or other form of permission." 5 U.S.C. § 551(8)" (emphasis omitted)).

Petition of Challenge Air Cargo, Inc.

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not subject to the risk of loss merely because a competitor expresses interest in the route. 4/

Should the Department now deem it appropriate to impose a more stringent use requirement on frequencies in this market, then all carriers in the market, including Challenge, must be subject to those conditions. Moreover, such conditions must be applied prospectively. In the meantime, however, any attempt to retroactively apply a previously unannounced use standard as a basis for reviewing Challenge's allocation would constitute disparate and discriminatory treatment, would deprive Challenge of due process of law, and would constitute clear error.

The Department has previously stated, in no uncertain terms, "It has not been our policy to reallocate frequencies that carriers are currently using." Order 96-10-23 at p 4 (emphasis added).5/ In this case, Challenge has used its Argentina frequencies and is continuing to use them. Challenge has

4/ See C.A.B. v. Delta Air Lines, 367 U.S. 316, 331 (1961).

5/ Although Challenge recognizes that one of its frequencies is awaiting renewal, on several occasions the Department has renewed carriers' frequency allocations even when they have not been using the frequencies, and even in the face of competitors' challenges that they could put the frequencies to better use. See, e.g:, Order 96-7-4, affirmed by Order 96-10-23 (American petition for allocation of 3.5 U.S.-Ecuador frequencies held by Continental (and subject to a pending renewal application) denied where Continental reaffirmed its plans for expanded service in the Houston-Ecuador market); and Order 96-9-26 (renewing 3 U.S.Philippines frequencies held by United over Northwest's objections, despite the fact that United had not been using the frequencies and did not intend to use them for the next six months).

Petition of Challenge Air Cargo, Inc.

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justifiably relied on the Department's 90-day dormancy condition contained in its license, as well as the Department's previous statements of policy and decisions concerning the use of frequencies. The Department cannot now reverse itself and single out Challenge's frequencies for review when Challenge has operated in full accordance with its license and Department policy. Under fundamental principles of due process and the explicit terms of the APA, if the Department believes that Challenge has violated any term of its frequency authorization such as to give rise to risk of revocation of that authority, it must provide Challenge adequate notice and an opportunity to correct its alleged deficiency. 6/ The APA provides:

5 U.S.C. § 558(c) (emphasis added).

6/ As detailed in Challenge's August 25, 1997 Request for Clarification (undocketed), however, Challenge's use of its frequencies fully satisfies, actually far surpasses, the only notice given here -- the Department's 90-day dormancy requirement.

Petition of Challenge Air Cargo, Inc.

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The Department's action in this proceeding violates the explicit terms of the APA in several respects:

· Challenge has fully complied with all conditions of its frequency allocation; the Department cannot now hold Challenge to a previously unarticulated use condition of which Challenge had no notice;

· The Department has, in essence, initiated a frequency revocation proceeding without providing Challenge prior written notice detailing the alleged violation of its frequency allocation that could give rise to a revocation prior to institution of the proceeding; and

· If, indeed, the Department contends that Challenge has violated a term of its frequency allocation, the Department has not provided Challenge the opportunity to demonstrate or achieve compliance with that requirement.

Any one of these actions by the Department would violate Challenge's due process rights and fatally flaw this proceeding.

In Air North America, id. at 1438, the Ninth Circuit emphasized that Congress enacted Section 558(c) of the APA in order to afford licensees as opportunity to comply with the requirements of their license prior to instigation of a termination proceeding. The court stated, "This policy suggests that the key consideration is whether the written notice of a regulation's requirements is sufficient to allow the licensee an

Petition of Challenge Air Cargo, Inc.

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opportunity to comply with the regulation." Id. The court underscored that the notice must clearly detail the alleged violation, provide the requisite "second chance", and sufficiently warn the licensee of the "parameters of acceptable conduct" and thereby prevent "unfair surprise." Id.

There is no question that the Department has not met the APA's minimum mandatory standards in this proceeding. The only indication of the "parameters of acceptable conduct" of which Challenge has been given notice is the Department's standard 90day dormancy condition attached to its frequency allocation. Without question, Challenge has completely satisfied the terms of that and all other conditions of its license. Therefore, there is no lawful basis for revoking -- or even considering revoking -- that license., 7/ The Department cannot take action against Challenge's frequency allocation through this proceeding without clearly violating Challenge's due process rights and committing plan error.

7/ To anticipate the likely retort of those who would advocate reallocation of the frequencies, it is not correct to say that a carrier is at risk at any time of losing its frequencies even if it satisfies the dormancy requirement where, as here, the Department's order clearly specifies the precise conditions which must be met in order for the carrier to avoid a finding of dormancy. The Department imposed its standard dormancy requirement on Challenge's allocation with the full knowledge of the circumstances of the Argentine market, and it opted not to impose a more stringent requirement. Similarly, the Department could have limited the duration of the frequency renewal to a shorter period in order to afford an early opportunity to review conditions in the market, but the Department likewise chose not to do so.

Petition of Challenge Air Cargo, Inc.

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II. IF THE DEPARTMENT DECIDES THAT IT MAY BE APPROPRIATE TO REALLOCATE FREQUENCIES IN THE ARGENTINE MARKET, IT MUST DO SO IN A COMPREHENSIVE FASHION AND NOT IN THE PREJUDICIAL AND DISCRIMINATORY MANNER WHICH IT HAS PROPOSED.

Challenge does not question that the Department has broad authority to institute a proceeding to reallocate the frequencies in the Argentine market where good cause exists to believe that circumstances in the market have changed since the frequencies originally were awarded; however, in the absence of a legally cognizable basis for instituting a license revocation proceeding, there can be no supportable, rational basis for singling out the frequencies awarded to only a handful of carriers, so long as those carriers' use of their frequencies comports with the conditions attached to their licenses. Any such frequency review must apply evenly to all carriers across the board.

By limiting the scope of the proceeding to the frequencies that have been awarded to Challenge (and Arrow and Florida West), an action that is unlawfully discriminatory and highly prejudicial to the carriers affected by such action, the Department also has deprived itself of the opportunity to examine the needs of the whole Argentine market. This underscores the fact that the fundamental thrust of this proceeding is not to even-handedly weigh the needs of the market but to penalize certain carriers which took the Department at its word by adhering to the literal requirements of the dormancy condition.

Petition of Challenge Air Cargo, Inc.

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So long as the scope of this proceeding is unfairly and restrictively drawn to encompass only a few of the U.S.-Argentina frequencies, the Department cannot support the position that it is actually addressing the changing needs of the Argentine market. The Department stated in Order 97-11-35 at 6, "[W]e find that a comprehensive approach is required to ensure that we can adequately consider the public interest and ensure a result which maximizes future public benefits." Unfortunately, however, the Department did not adopt a "comprehensive approach." If the Department concludes that a comprehensive review of U.S.-Argentina frequencies is justified, that review must put at issue all scheduled frequencies in the market, and not merely the selective frequencies that the Department has designated in Order 97-11-35.

III. THE ROOT CAUSE OF THIS PROCEEDING IS NOT ANYTHING THAT CHALLENGE (OR ANY OTHER CARRIER) HAS DONE OR NOT DONE, BUT RATHER THE INHERENT AMBIGUITY AND VAGUENESS OF THE DEPARTMENT'S DORMANCY CONDITION. THE DEPARTMENT CAN ADDRESS THIS DEFICIENCY, ON A PROSPECTIVE BASIS, BY PROVIDING CLEAR AND EFFECTIVE NOTICE OF THE USE STANDARD TO WHICH CARRIERS WILL HEREAFTER BE HELD.

Unless the Department is prepared to place at issue all of the Argentine frequencies and require all carriers to re-apply for allocation or renewal of their frequencies, then the only legally permissible course available to the Department is to institute a proceeding that will prospectively re-define the limits of its dormancy policy. As Challenge has demonstrated, it

Petition of Challenge Air Cargo, Inc.

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has fully complied with the only stated use condition to its authority -- the Department's 90-day dormancy condition. If the Department seeks to hold carriers to a higher standard in limited-entry markets such as this one, that standard must be clearly articulated at the time a frequency allocation is granted, not after a carrier has made an investment of time and resources in establishing a route, and has relied on the Department's stated policy. Challenge has done so here. Challenge has, in good faith, complied with all Department conditions to its frequency allocation. Challenge should not now be unfairly and unlawfully held to an unarticulated higher standard.

Challenge submits that the appropriate course of action here is for the Department to determine and clearly set forth exactly what its standard of dormancy will be in cases such as this. Challenge, and other carriers, can then conform their operations to the Department's new requirement and be assured that their frequencies will not arbitrarily be placed at risk. Challenge has fully complied with the Department's explicit conditions to its frequency allocation, and should not now be penalized for failure to satisfy a new use condition of which it had no notice.

IV. CONCLUSION

It is incumbent on the Department to engage in an evenhanded, non-discriminatory, approach to frequency allocations.

Petition of Challenge Air Cargo, Inc.

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If the Department believes that its existing dormancy conditions are insufficient, the Department should clearly and concisely articulate a new standard and apply it even-handedly and prospectively, in accordance with the law.

WHEREFORE, for the foregoing reasons, Challenge Air Cargo, Inc. respectfully submits that the Department should reconsider Order 97-11-35 and either rescind the Order in its entirety or expand the Order to place under review all frequencies currently held for all-cargo operations in the U.S.-Argentina market. Alternatively, if the Department wishes to adopt a standard of frequency use that differs from its normal 90-day dormancy policy, it should rescind Order 97-11-35 and institute a proceeding to redefine its frequency use requirement, on a prospective basis only.

Respectfully submitted,

ZUCCERT, SCOUTT & RASENBERGER, L.L.P.

William H. Callaway, Jr.

Cathleen P. Peterson

888 Seventeenth Street, N.W.

Suite 600

Washington, D.C. 20006

(202) 298-8660

Counsel for CHALLENGE AIR CARGO, INC.

November 24, 1997