OST-98-3419 / US-Japan Combination / Answer of American / February 17, 1998

ANSWER OF AMERICAN AIRLINES, INC.

American Airlines, Inc., pursuant to the Department's Notice of February 3, 1998, hereby answers the applications for long-term U.S.-Japan authority that were submitted on February 10, 1998. /1

American has applied for four U.S.-Japan routes and 28 weekly frequencies to serve Chicago-Tokyo, New York-Tokyo, Boston-Tokyo, and Dallas/Ft. Worth-Osaka. American also proposes same-country codeshare services with US Airways, Inc., requiring 14 weekly frequencies, on the Dallas/Ft. Worth-Tokyo and Dallas/Ft. Worth-Osaka routes.

Applications for U.S.-Japan authority were also submitted by Continental Airlines, Inc. and Continental Micronesia, Inc., Delta Air Lines, Inc., Hawaiian Airlines, Inc.,

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Trans World Airlines, Inc., and US Airways, Inc. In total, the applicants are seeking 127 weekly frequencies for services they propose to operate with their own aircraft, and 56 weekly frequencies for same-country codeshare flights. /2

The new Memorandum of Consultations between the U.S. and Japan, signed on January 30, 1998, authorizes 90 weekly frequencies for additional U.S. carrier operations, and 28 weekly frequencies for same-country codesharing. Accordingly, a carrier-selection proceeding is required, as there are insufficient opportunities under the new U.S.-Japan agreement to satisfy all requests.

In its Notice of February 3, 1998, the Department stated that "the public interest calls for procedures that will facilitate the introduction of new services ... [to] maximize the early use of our newly acquired rights by ensuring a final decision on allocation of the available frequencies as soon as possible. Accordingly, we intend, on a highly expedited basis, to process certificate/frequency allocations for long-term authority using show-cause procedures" (p. 2).

2/ This figure does not count the 28 same-country codeshare frequencies in TWA's late amendment, which American has moved to strike.

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American supports the Department's determination to use expedited show-cause procedures. In the show-cause proceeding, American will show that its application should be granted in full.

o Chicago-Tokyo (seven weekly non-restricted frequencies) is American's first priority. American operates a large hub at Chicago, and will provide substantial public benefits in local and connecting markets. American will begin service on may 1, 1998, the earliest start-up date proposed by any applicant, under pendente lite exemption authority granted by Order 98-2-12, February 13, 1998.

o New York-Tokyo (seven weekly non-restricted frequencies) is American's second priority. New York is the Nation's leading gateway for international service. American offers significant service at New York in domestic and international markets. American will start service within 90 days of receiving final DOT authority, or by November 1, 1998 if landing slots are not available at Tokyo until the winter season.

o Boston-Tokyo (seven weekly restricted frequencies) is American's third priority. Boston has a large and growing base of U.S.-Japan traffic, and significant operations by American in domestic and international markets. American will start service within 90 days of receiving final DOT authority, or by November 1, 1998 depending on slot availability at Tokyo.

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o Dallas/Ft. Worth-Osaka (seven weekly restricted frequencies) is American's fourth priority. American has successfully served the Dallas/Ft. Worth-Tokyo route since 1987. American's Dallas/Ft. Worth hub is the best gateway for developing a new route to Osaka, Japan's second-largest international gateway. American will start service within 90 days of receiving final DOT authority, or by November 1, 1998 depending on slot availability at Osaka.

o American also proposes same-country codesharing with US Airways (14 weekly frequencies) over the Dallas/Ft. Worth-Tokyo and Dallas/Ft. Worth-Osaka routes. The Tokyo flights will originate and terminate at US Airways' Charlotte hub, and the Osaka flights will originate and terminate at US Airways, Philadelphia hub.

In its exhibits and brief, American will demonstrate that, consistent with the public interest, the Department should grant 28 weekly frequencies to American to support its direct services in the Chicago-Tokyo, New York-Tokyo, Boston-Tokyo, and Dallas/Ft. Worth-Osaka markets, and 14 weekly same-country codeshare frequencies to support its proposed operations with US Airways in the Dallas/Ft. Worth-Tokyo and Dallas/ Ft. Worth-Osaka markets.

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In keeping with the Department's intention to process long-term U.S.-Japan application "on a highly expedited basis" (Notice, p. 2), American proposes the following procedural dates for this proceeding:

American believes that this schedule will provide ample opportunity for the applicants to develop and present their proposals, and for the Department to issue its final decision, in order to "maximize the early use of our newly acquired rights by ensuring a final decision on allocation of the available frequencies as soon as possible" (Notice, p. 2).

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Continental and Continental Micronesia have requested a total of 35 weekly frequencies to be provided with their own aircraft. Continental is also seeking 28 weekly frequencies for same-country codesharing with Northwest, and 21 weekly frequencies for beyond-Tokyo blind sector codesharing with Northwest.

Northwest is by far the largest carrier -- U.S. or Japanese -- in the U.S.-Japan market. On February 10, 1998, in announcing new service between Osaka and Taipei, Northwest stated that it holds 316 weekly slots at Tokyo's Narita Airport and 142 slots at Osaka's Kansai Airport. Northwest stated that it "holds more slots at Narita than any carrier other than Japan Air Lines and provides the most service between Osaka and the United States ... Northwest operates 145 weekly flights between the United States and Japan and carriers about one of every ten passengers who departs Japan by air. The airline boarded 1.6 million passengers in Japan during 1997" (see Attachment 1).

On January 26, 1998, Northwest announced "a strategic global alliance with Continental" that, "when fully implemented, will connect the two carriers, networks and will include code-sharing, frequent flyer program reciprocity, cooperation

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between Continental and KLM Royal Dutch Airlines, Northwest's transatlantic partner, and other cooperative activities." John Dasburg, Northwest's president and CEO, stated that "[r]ecent developments in the airline industry, particularly the concessionary bilateral talks between the U.S. and Japan, have convinced Northwest of the need to increase our scope by means of a long-term alliance" (see Attachment 2).

In light of Northwest's dominance of the U.S.-Japan and U.S.-Asia markets, the proposed Northwest-Continental global alliance, and the Continental and Continental Micronesia applications for 35 U.S.-Japan frequencies, 28 same-country codeshare frequencies, and 21 beyond-Japan blind sector frequencies, the Department should require a complete evidentiary submission from Northwest and Continental. These carriers should be ordered to provide the following information and documents as an information response in this proceeding, consistent with the Department's evidence request in the American Airlines, Inc. et al. and the TACA Group Reciprocal Code-Sharing Services Proceeding, Order 96-9-15, September 13, 1996 and Order 96-11-12, November 18, 1996 (OST-96-1700): /3

3/ In this request, "Continental" refers to both Continental Airlines, Inc. and Continental Micronesia, Inc.

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1. Complete copies of all "agreements/arrangements," including marketing and any other cooperative agreements/ arrangements, that involve the creation or implementation of the proposed codesharing relationship and related relationships between Northwest and Continental.

2. Separate description of each party's strategic objectives in forming the codeshare agreements/arrangements.

3. All studies, reports, and analyses, dated or produced within the last two years, that discuss route development, internal expansion, service expansion, or marketing plans or strategies, concerning air services between the U.S. and Japan, and air services behind and beyond the U.S. and Japan.

4. All studies, surveys, analyses, and reports, dated or produced within the past three years, that were prepared by or for any officer, director, or individual exercising similar functions that evaluate or analyze the subject of potential codesharing or other cooperative agreements/ arrangements between Northwest or Continental and any other U.S. carrier. (If not contained in the document itself, the date of preparation and the name and title of each individual who prepared each such document should be included.)

5. All studies, surveys, analyses, and reports, dated or produced within the last two years, that were prepared by or for any officer, director, or individual exercising

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similar functions for the purpose of evaluating or analyzing the proposed agreements/arrangements with respect to market shares, competition, competitors, fares, markets, potential for traffic growth or expansion into geographic markets. (If not contained in the document itself, the date or preparation and the name and title of each individual who prepared each such document should be included.)

6. All documents that discuss any service or operational changes planned or anticipated as a result of the proposed agreements/arrangements.

7. A list of all routes that each of the parties is currently serving, and of routes each would serve if the agreements/arrangements are approved. Additionally, fully identify all of the parties, current codeshare/alliance arrangements and their route systems and any plans to alter such arrangements or alliances if the Northwest/Continental alliance is approved.

8. List all "overlap" markets now existing between Northwest and Continental, including markets served in combination with other codeshare or marketing partners (specifically, include all gateway-to-gateway, all nonstop, and all connecting markets).

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9. List all of the new markets that would receive "first on-line service" as a result of the alliance, and provide estimates of the number of passengers that would benefit from this new "on-line service" and how many of these passengers would be U.S.-originating travelers.

10. Provide a discussion of the level of service that each carrier party intends to provide in the U.S.-Japan market including behind- and beyond-gateway markets.

11. Provide a discussion of significant service and equipment changes that the parties would expect to make within two years of DOT approval of the proposed alliance.

12. Provide an analysis of how much traffic each codeshare partner carries in each "overlap" market, and differentiate between local gateway-to-gateway traffic, behind traffic, and beyond traffic.

13. Provide a discussion of whether and how the alliance is consistent with the public interest, and what public benefits are expected to result from the agreements/ arrangements.

14. Provide a discussion of how the agreements/ arrangements would affect important international aviation policy objectives of the United States.

15. Provide a discussion of the agreements/ arrangements' impact on both U.S. domestic and international airline competition.

16. Provide forecast information and data concerning any traffic diversion anticipated from other U.S. flag carriers should the agreements/arrangements be approved.

17. Provide complete information describing the extent to which airport facilities, including, but not limited to, gates, counter space, and ground-handling, are or will be made available to any U.S. airline desiring to begin or increase service at airports in Japan.

18. Provide all studies, surveys, analyses, and reports, dated or produced within the last two years, that discuss airline competition in any U.S.-Japan market.

19. An assessment of availability of commercially usable slots at airports in Japan for U.S. airlines:

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20. Submit complete copies of all "agreements/ arrangements," including marketing and any other cooperative agreements/arrangements, that involve Northwest, Continental, or any computer reservations systems with which they are affiliated, either individually or jointly, related to participation in U.S. CRSs, and all studies, surveys, analyses, and reports that discuss (i) the impact of the proposed codesharing and cooperative arrangements between Northwest and Continental on the marketing of computer reservations systems in Japan and Asia or on competition between U.S. computer reservations systems in Japan and Asia, and (ii) the use of the proposed codesharing and cooperative arrangements for promoting the marketing of any computer reservations systems Northwest or Continental are affiliated with, either individually or jointly, in Japan and Asia, dated or produced within the past two years.

The foregoing evidence request, which is virtually identical to that imposed by the Department on American and the TACA Group with respect to their codesharing application in OST-96-1700, should be adopted here with respect to the proposed Northwest/Continental codesharing and global alliance. Indeed, Continental supported the Department's request in the American/TACA Group proceeding, "based on the scope and nature of the arrangement proposed," and American's alleged "domi-

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nance" of the Central America region. See Continental Answer, OST-96-1518, et al., October 4, 1996. In light of Northwest's dominance of U.S.-Japan services (including U.S.-Tokyo and U.S.-Osaka slots), and Northwest's dominance of the U.S.-Asia market generally, Northwest and Continental should be required, at a minimum, to provide all of the evidence outlined above, in addition to any other evidence that the Department deems relevant.

The Department should institute an expedited show-cause proceeding on the U.S.-Japan applications that have been submitted, as requested herein. American's request for Chicago-Tokyo, New York-Tokyo, Boston-Tokyo, and Dallas/Ft. Worth-Osaka frequencies, and for same-country codesharing with US Airways on the Dallas/Ft. Worth-Tokyo and Dallas/Ft. Worth-Osaka routes, should be granted in full.

Respectfully submitted,

CARL B. NELSON, JR.

Associate General Counsel American Airlines, Inc.

February 17, 1998