OST-98-3550 / Vanguard / High Density Rule, New York JFK / Reply of Vanguard / March 19, 1998

Application of

For an exemption from Subparts K and S of 14 CFR Part 93

(slot exemptions)

Kansas City - New York (JFK)

Pittsburgh, PA - New York (JFK)

REPLY OF VANGUARD AIRLINES, INC.

On February 23, 1998, Vanguard Airlines, Inc. ("Vanguard"), a low fare, new entrant air carrier, requested an exemption from the limitations of the High Density Rule (subparts K and S of 14 C.F.R. Part 93) to allow Vanguard to offer one round trip flight during slot controlled hours between Kansas City and New York (JFK) and one round trip flight during slot controlled hours between Pittsburgh and New York (JFK). While Vanguard had already instituted nonstop service in both markets during non-controlled hours at the end of 1997, the viability of Vanguard's low fare service depends on filling the schedule void in both markets during peak, slot controlled hours to enabling passengers to connect with international operations at JFK and to beyond points on Vanguard's route system.

Curiously, considering its own long term precarious financial position, TWA intemperately assails Vanguard's financial difficulties since its start-up. While the Department is well aware of the barriers faced by new carriers seeking to find a niche in the domestic marketplace, access to slot controlled airports is one significant action the Department can take to eliminate the barriers to competition faced by new competitors, thus enhancing financial viability. As the General Accounting Office has noted in a number of reports on competition in the domestic industry, (see, for example, the October 1996 study entitled Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets), barriers to entry result in higher fares at controlled airports and control of slots by a few airlines greatly deters entry at key airports in Chicago, New York and Washington. In other words, one major reason for the difficulties faced by low fare new entrant carriers in the domestic environment is the inability of more thinly capitalized new entrant air carriers to gain access to important, slot controlled airports.

The grant of slot exemptions, albeit limited in scope, obviously will increase competition, enabling consumers to obtain significantly lower fares in noncompetitive or underserved markets and, at the same time, improve the financial viability of new entrant carriers. As the Department specifically found in Order 97-10-17 at 4, applications proposing to introduce "such" service, that is service of the sort proposed by Vanguard here, "meet the exceptional circumstances criterion of the legislation." Grant of the slot exemptions requested by Vanguard will improve dramatically the financial viability of its Kansas City-JFK and Pittsburgh-JFK services by increasing the international connecting opportunities at JFK for Kansas City and Pittsburgh passengers.

The Borough of Queens, fearing an increase in aircraft noise, congestion, delays and pollution, once again objects to the grant of a minuscule number of slots to a small air carrier, asserting that the Department must consider the cumulative effects of adverse consequences on the local community. The Department already has addressed the issues raised by Queen's in Order 97-10-1, and the objections to Vanguard's limited request here similarly should be rejected.

TWA and Queens object to Vanguard's application complaining, inter alia, that enough flights already serve the Kansas City-New York and Pittsburgh-New York markets. They contend that sufficient service exists in the New York area and that whether flights are to and from Newark, JFK or LaGuardia does not matter. On the contrary, it does matter a great deal to the flying public.

In the first place, Kansas City-JFK and Pittsburgh-JFK are distinct markets that do not compete with and, thus, are not disciplined by fares and services offered at Newark and LaGuardia. LaGuardia certainly, and Newark, until very recently, do not compete at all for international passengers with JFK, a fact borne out by the inferior levels of service between Kansas City and JFK (where no nonstop service exists save for the recently introduced Vanguard flights during non-controlled hours) and Pittsburgh-JFK (where the major carriers offer only commuter-type turboprop service). US Airways, with a major hub at Pittsburgh chooses not to serve JFK at all, preferring to route its passengers on its jet services to LaGuardia where, if they need to make international connections, they must travel between airports using surface transportation.

Passenger response to Vanguard's initial flights in both markets, even at less than optimum times, has been encouraging. According to internal company reports, traffic is responding and growing quickly. In the Pittsburgh-JFK market, for example, Vanguard served 2,914 passengers in both directions during December 1997 (service began on December 17, 1997). Since December, traffic has grown to 7,637 passengers in February 1998 and load factors have risen to slightly above 60 percent. In the Kansas City-JFK market, when service began with two flights in September 1997 and was reduced to one flight in December 1997, traffic also has responded well (4,722 passengers in the first month (September 1997) compared to 7,265 in December 1997). Since December 1997, load factors have increased from the mid 50 percent range to the 70 percent range in February 1998. Without question, the introduction of a well timed flight during slot controlled hours will stimulate both markets significantly, particularly since Vanguard's normal fares are and will remain substantially lower than the fares of other carriers serving LaGuardia and Newark.

Aside from the facts referred to above, the issue of JFK as a separate market was dealt with by the Department in Order 97-10-17, where it found that Denver-LaGuardia and Atlanta-LaGuardia are separate markets from either Newark or JFK due to the airlines' "ability to disregard the fares and services offered at the other airports." Order at 10. See also Order 96-5-33 (lack of JFK service grounds for granting slots to Air South).

This ability to disregard the fares and services offered at the other airports can be seen from Vanguard's exhibits. For example, other than Vanguard's non-slot controlled flights between JFK and Pittsburgh, the only other service in this market is turboprop commuter service. Nonetheless, the airlines providing this commuter service to and from JFK charge fares as high or higher than the airlines providing nonstop jet service between LaGuardia and Pittsburgh and Newark and Pittsburgh. See Exhibits G and J. Clearly there is a market for service to and from JFK (New York's international airport) from Kansas City and Pittsburgh that is underserved directly and inadequately served by flights to Newark and LaGuardia.

In Order 97-10-17, the Department expanded its interpretation of its statutory jurisdiction and determined that new entrant air carriers could meet the exceptional circumstances requirement of the Act by introducing new competitive service "where existing services do not produce meaningful price competition." Vanguard's application meets this requirement.

Yet, without the ability to provide slot-controlled service to and from JFK, Vanguard's ability to continue to provide price competition by offering low-fare non-slot controlled flights is in jeopardy. As Vanguard noted in its application, additional frequencies at slot-controlled times are crucial to Vanguard's long-term success at JFK. In order to maximize efficiencies at JFK, Vanguard cannot continue to be foreclosed from the lucrative slot-controlled times which would enable Vanguard to connect with international carriers and to construct useful connections over Kansas City and Pittsburgh.

Both TWA and the Borough of Queens complain that if Vanguard requires JFK slots it must buy them or lease them before requesting an exemption from DOT. As Vanguard reported in its Application, Vanguard has encountered the same roadblocks as other small new entrants in its efforts to obtain JFK slots -slots are not generally available, or only are available at excessive prices, and lease arrangements often contain onerous conditions. See, e.g., Order 97-10-17 at 11-12.

"[I]n specifically authorizing [DOT] to grant slot exemptions to new entrant airlines Congress determined that the buy-sell rule should not be the exclusive means for such airlines to obtain slots." Id. Of course, the majority of current slot holders at restricted airports did not purchase their slots and have a cost advantage over new entrant carriers who propose to introduce price competition. Id. Vanguard is entitled to seek slots through the exemption process when slots are prohibitively expensive, if available at all.

IV. The Peripheral Arguments Raised By the Borough of Queens Should Be Rejected.

The Borough of Queens has challenged the authority of the Department to grant exemptions from the High Density Rule and also has asserted that there must be contemporaneous consideration of all slot applications. Both arguments should be rejected by the Department summarily.

First, the Department's legal authority to grant exemptions from the provisions of the High Density Rule is clear. The Borough of Queens, however, argues that because Congress originally directed DOT to issue a final rule regarding slot regulations no later than 90 days after August 1, 1995, DOT's authority to grant exemptions from the High Density Rule expired on November 29, 1995 with all previously granted exemptions expiring on that date as well. This argument is fatally flawed.

The statute authorizing DOT to grant such exemptions, 49 U.S. §41714, is silent as to the consequences if DOT does not issue a final rule within the period directed. There is nothing in the wording of the statute to suggest that DOT would lose its authority to grant exemptions. The statute merely provides that when the final rules become effective, certain previously granted exemptions shall cease to be in effect.

There can be no presumption that DOT's authority to grant exemptions and previously granted exemptions expired in November 1995. In fact, the opposite presumption can be made because Congress amended section 41714 in October 1996, a year after the expiration of this so-called "deadline." Without addressing the issue of the missed "deadline," Congress amended subsection (e)(2) to provide that the study on slot regulations being conducted by DOT originally scheduled for presentation to Congress more than a year earlier, on January 31, 1995, should be transmitted to the House Committee on Transportation and Infrastructure and not the House Committee on Public Works and Transportation. If this "deadline" had been a material provision of the statute that could operate to strip DOT of its authority under the statute, Congress would have addressed its passing when the statute was amended in 1996. Clearly, DOT retains its authority to grant exemptions to the High Density Rule under section 41714.

Second, the Borough of Queens argues that the granting of Vanguard's application would increase the levels of noise, pollution, congestion and delays in and around JFK. DOT has already determined that a slight increase in operations at New York airports will not have a noticeable impact on noise or congestion. See Order 97-10-17 at 14. In fact, DOT's Environmental Assessment finds no significant negative impact with the addition of thirty (30) flights. Thus, the borough of Queens has no grounds for maintaining that Vanguard's requested four flights will have a negative impact on the citizens of Queens.

Finally, there is no Supreme Court mandate requiring a hearing to evaluate all pending exemption applications contemporaneously. Despite the Borough of Queens' assertions, Ashbacker Radio Co v. FCC, 326 U.S. 327 (1945) does not require DOT to hold a hearing to evaluate simultaneously all pending exemption applications. Ashbacker merely "requires the FCC to treat mutually exclusive applications equally." Committee for Effective Cellular Rules v F. C C., 53 F.3d 1309, 1320 (D.C.Cir. 1995). It was impermissible for the FCC to engage in a statutorily required hearing for one party while granting the mutually exclusive application of the other party.

Section 41714 does not require DOT to conduct any hearings or to decide among competing applicants; it simply grants DOT the discretionary authority to exempt new entrant air carriers from the High Density Rule in certain circumstances -- such as those described in Vanguard's application. Thus, Ashbacker presents no bar to the grant of Vanguard's application.

Without an allocation of slots for New York (JFK) service, Vanguard will not be able to spur price competition, to offer an affordable convenient New York alternative to the businessman and leisure traveler and to stimulate further growth in the Kansas City-New York (JFK) and Pittsburgh-New York (JFK) markets.

For all these reasons, Vanguard respectfully requests the Department grant it an exemption from the slot regulations to increase nonstop Kansas City-New York (JFK) and Pittsburgh-New York tJFK) service by one daily round trip flight, each requiring the allocation of one arrival and one departure slot during slot controlled hours.

Respectfully submitted,

Stephen H. Lachter

LAW OFFICES OF STEPHEN H. LACHTER

1150 Connecticut Avenue, N.W.

Suite 900

Washington, D.C. 20036

(202) 862-4321

COUNSEL FOR VANGUARD AIRLINES, INC.

March 19, 1998