OST-97-3285 / American and Lan Chile / Reply of Aeromexico / March 24, 1998

Joint Application of

under 49 U. S. C. § § 413 08 and 413 09 for approval of and antitrust immunity for alliance agreement

This reply is submitted on behalf of Aerovias de Mexico, S.A. de C.V. ("Aeromexico") in reply to the comments filed by United Air Lines, Inc., Delta Air Lines, Inc., and Continental Airlines, Inc., in accordance with the Department of Transportation's (the "Department") February 20, 1998 Order Consolidating Proceedings And Establishing Procedural Schedule in Docket OST-97-3285. While Aeromexico agrees with the comments filed by these parties, it believes that they have not adequately addressed the very important considerations associated with the effects of the proposed alliance on the Latin American regional market. Aeromexico is filing, therefore, in response to this oversight.

On December 23, 1997, American Airlines and Linea Aerea Nacional Chile ("Lan Chile") filed an application for approval of and antitrust immunity for an alliance agreement. The Joint applicants plan to coordinate their service over their respective route networks as if there were an operational merger between the two airlines. The alliance agreement, which the Joint applicants claim will provide substantial public benefits without threatening competition in the Latin American market, requests permission from the Department to operate collaboratively in three main areas:

1. Coordination of various functions and activities related to passenger and cargo services the two carriers operate between the United States and Chile and beyond,

2. Reciprocal code-sharing whereby American will place its code on Lan Chile's US services and flights beyond Lan Chile's gateway in Chile, and Lan Chile will place Its code on American's U.S.-Chile services and flights beyond American's gateways in the United States. The parties may also code-share on each other's additional services worldwide where permitted by governmental authority, and

3. Reciprocity for mileage credit accrual and travel reward redemption between the Frequent Flyer programs of American and Lan Chile.

The two carriers claim that this agreement will allow them to capture the synergies of their respective route networks, establish a seamless air transport system through network coordination, achieve competitive economies of scale, and greatly enhance their competitiveness vis-a-vis other alliances. American Airlines and Lan Chile further claim that these benefits are expected to result in lower costs, enabling them to serve more efficiently thousands of city-pairs and provide the public with greater service options at a lower cost. The centerpiece of the proposed American-Lan Chile alliance is the request for antitrust immunity. This immunity would allow them to operate outside the scope of U.S. antitrust laws by being able to engage in joint pricing, joint marketing, joint sales campaigns and joint commission programs, without legal repercussion should these efforts prove anticompetitive or otherwise not in the public interest.

On March 13, 1998, United Air Lines, Delta Air Lines and Continental Airlines filed comments with the Department citing the likely anticompetitive impact of the proposed immunized American-Lan Chile alliance on U.S.-Chile air travel, and urging the Department to deny the application. Aeromexico supports the view of the opposing carriers that the proposed alliance would dramatically hinder competition in U.S.-Chile air travel, but wishes to add its views on an area not addressed in the comments filed by interested parties: the dangerous prospects of the proposed alliance in the Latin American region as a whole, where competitive travel and air cargo options have become increasingly critical to the U.S. public interest. For the reasons set forth below, Aeromexico respectfully urges that the Department not approve the American-Lan Chile application in any part. Contrary to the claims made by American Airlines and Lan Chile, approval of this application would substantially reduce, if not eliminate, meaningful competition not only in the U.S. -Chile market, but further, in the Latin American region, and likely throughout the western hemisphere.

Aeromexico's interest in this pending application stems from its concern over the increasing dominance of American in the Latin American market (defined for the purposes herein to include Mexico., Central America and South America). Aeromexico, as a Latin American carrier, seeks to be a significant player in the Latin American market, including the U.S.-Latin America market via Mexico City, and in fact has taken competitive strategic steps to advance this objective. However, Aeromexico views American's ever widening web of alliances in the region and beyond as a major threat to competition within the region and, indeed, the western hemisphere. With every new alliance between American and a Latin American carrier, another portion of the Latin American market will be foreclosed to meaningful and fair competition. Accordingly, American's proposed alliance with Lan Chile, or with any other Latin American carrier, must not be viewed in isolation, but as part of a much larger effort by American to obtain and maintain a dominant position in the Latin American market that is intended to, and would, limit or preclude other meaningful competition.

The proposed American-Lan Chile alliance is neither necessary to meet a serious transportation need nor necessary to achieve important public benefits. Indeed, the only significant benefit which could be derived from the approval of the alliance would flow to American Airlines, together with its existing and proposed affiliates, putting the group one step closer to its apparent goal of complete domination of the Latin American marketplace.

Industry reports regularly trumpet the exceptional growth of the Latin America air travel market, and expectations for continued expansion of travel to and within Latin America, fueled largely by the strengthening regional economy and increasingly strong ties between Latin America and the United States. From 1990 to 1996, the Latin America travel market grew to 20.8 million passengers. It is expected that Latin America will lead the growth of the airline industry in the near term, with total regional travel expected to rise from 45.4 million passengers in 1996 to an unprecedented 62.6 million passengers by the year 200 1. /1

As the Latin American market has expanded, American has not only expanded its own operations, but has attempted to effect substantial control of the market through a series of tentacled affiliations with other carriers, The carriers with which American has allied, or is attempting to ally, are those which are among American's principal competitors in Latin America and in key regional markets. Four such carriers -- Aerolineas Argentinas, Avianca, Lan Chile and the TACA Group -were, until their alliances or proposed affiliations with American, among the most competitive with American for traffic in Latin America and for key cities in Latin America. By proposing and entering into strategic alliances with these and other regional and national competitors, American will not merely increase its total presence in the Latin American market, but, Just as importantly, will (by virtue of its dominant market share and the fact that it has eliminated its principal competitors) lock

1/ International Air Transport Association, Total Market Region-Pair Forecasts 1997-2001 & Regional Summary.

in and essentially control many of the most important, lucrative and growth-oriented city-pair markets that the western hemisphere has to offer.

As each of the comments from the opposing carriers in this matter has noted, the Wall Street Journal recently described the market power American has been amassing in Latin America:

As this suggests, American is amassing so much market power that it is not only able to, but in fact, in a number of instances, already has distorted regional competition. While the comments of United, Delta and Continental emphasize the adverse competitive implications for travel between Miami and Santiago, it is also worth noting that American's stronghold on traffic between Miami and

2/ Scott McCartney and Jonathan Friedland, How American Airlines Is Building Dominance In Latin America, Wall Street Journal, January 9, 1998, at A 1.

Latin America as a whole has even broader and more harmful competitive implications since, as one news report recently put it, "all routes seem to lead to Miami, the undisputed gateway to Latin America." /3 Though other North American airports are increasingly seeking a larger portion of United States traffic bound for Latin America, Miami International Airport already claims about 7/0 percent of the passenger traffic and 80 percent of the freight from the U.S. to Latin America. /4 Indeed, while Miami International is already the largest U.S airport handling international cargo ( 1 5 million tons in 1997 alone), and the third-largest worldwide /5, U.S. Federal Aviation Administration officials have recently forecast that growing international traffic will bring an astonishing 22 million more passengers per year to (and through) South Florida between 1999 and 2005. /6 Because American and Lan Chile already significantly overlap at Miami, the alliance would add virtually no new service options there, while exacerbating the ability of the carriers to lock out other competition (and thus other service options) for outbound U.S. traffic to Latin America.

There are, in fact, a handful of other cities -- such as Mexico City -- that by virtue of geographic proximity should also be competitive gateways between the United States and other

3/ Charles Boisseau, Flying South, The Houston Chronicle, July 13, 1997, at Business 1.

A/ Douglas W. Nelms, Stalking Southern Wealth: As The Latin American Market Continues to Grow, More US. Airports Are Trying to Gain Some Parts of the Action, Air Transport World, March 1997.

5/ Doreen Hemlock, Emery Opens Hub in Miami; Latin Business Booms, Fort Lauderdale Sun-Sentinel, October 16, 1997, at I D.

6/ Doreen Hemlock, Region's Airports Brace for the Boom, Fort Lauderdale Sun Sentinel, February 9, 1998, at I D.

points in Latin America. But given American's growing control over traffic between the United States and Latin America and within Latin America, together with the prospect of the American-Lan Chile alliance, American will have an even greater ability to force traffic through Miami, thus adding to the power and importance of Miami as the passageway to Latin America, and eliminating other competitive options for travelers (not to mention carriers like Aeromexico which would like to offer such alternative routes to passengers between the United States and Latin America by, for example, developing a Mexico City alternative hub).

Additionally, while American's growing network of existing and proposed alliances would grant the carrier essential control over not only the principle U.S. gateway to Latin America but also dozens of critical routes within the region -- routes where few if any alternative competitive travel options exist -- an even greater concern is that the individual members of American's alliance group (see page 30) are likely to start forming multilateral alliances of their own. Already, in fact, Lan Chile and Canadian Airlines have formalized their own cooperative affiliation. There is no doubt that regional and international carriers attempting to provide competitive options for consumers in the Latin American travel market would be locked out of the regional market entirely if the arms of the American web continue to widen, and even more completely if these arms join together -- the logical next step -- in an effort to lock out competition throughout the hemisphere.

Approval of the American-Lan Chile alliance would bestow a regional power that can only lead to more aggregated market power. It is difficult to imagine, and even harder to demonstrate, that anything about the prospective American-Lan Chile alliance would create a net benefit to any entity other than American, Lan Chile and other carriers affiliated (or seeking to be affiliated) with them.

It is in this environment that the Department now must assess the prospect of an American-Lan Chile alliance, which goes beyond even the troubling American-TACA Group alliance to seek exemption from U.S. antitrust laws. It is evident from the market share data, as well as from American's regional behavior, that the critical question now before the Department is whether it will seek to preserve true competition -- and create true public benefits that arise from such competition -within the critical Latin American region as a whole. The American-Lan Chile alliance will, first, reduce (if not eliminate) regional competition, second, empower the alliance possibly to reduce flights and raise prices; and, third, increase the prospects for anticompetitive practices throughout Latin America. Indeed, Aeromexico believes that any '[new competitive benefits" the proposed alliance will bring to the market will accrue to the benefit of the very few, and at an excessive cost to the very many. As such, Aeromexico respectfully requests that the Department reject all parts of the application in question.

Before reviewing the troubling prospect of the American-Lan Chile alliance specifically, it should be noted that the Chilean market is extremely important not merely as a destination -- which United, Delta and Continental have pointed out in their comments -- but, more importantly for Aeromexico, as a key part of overall travel to and within Latin America. As such, the proposed American-Lan Chile alliance, particularly when added to American's other proposed and existing alliances, would significantly reduce competition on routes not merely between the United States and Chile, as other comments have indicated, but also between Chile and other key Latin America destinations, as well as between other strategic points intraregionally. This alliance therefore stands in stark contrast to the growing need for more competitive options for U.S. travelers and air cargo users to and within Latin America.

Chile has been at the forefront of the recent liberalization and modernization of Latin America, and is now enjoying its highest period of economic growth and stability in the last 50 years, making it an exceptionally attractive market for U.S. business and other interests. Indeed, trade flows between Chile and the United States have increased at a remarkable rate: In dollar terms, overall trade between the two countries increased from $1.5 billion in 1985 to well over $6 billion in 1995. /7 Moreover, from 1992 to 1996, U.S. foreign direct investment in Chile increased by 165 percent. /8 (See Appendix 1.)

Economic data make it clear that U.S. interests are not simply linked with Chile, but indeed are intricately intertwined with the interests of the entire, and increasingly interconnected, Latin

7/ Chile/American Trade, Trade and Investment Between Chile and the United States 1996, Economic Department, Embassy of Chile to the United States, at 25.

8/ Derived from Survey of Current Business, Bureau of Economic Analysis, U S. Department of Commerce, September 1997, at 144.

American region. In particular, the Latin American region is a major market for U.S. goods and services, since some 40 percent of Latin American imports come from the United States, making the countries of Latin America increasingly important to U.S. companies. U.S. exports to the Latin American and Caribbean grew at nearly twice the rate of U.S. exports to the world as a whole, more than doubling between 1990 and 1997 (by which time they had reached $134 billion). In the last half of 1997, for the first time ever, U.S. exports to Latin America outpaced those to Western Europe, and are expected to do the same for the current year and years going forward. Already, the value of U.S. exports to the Mercosur countries (Argentina, Brazil, Paraguay and Uruguay) are greater than the value of U.S. exports to China, while the value of U S, exports to Chile (a country of only 14 million people) exceeds that of U.S. exports to India. /9 As if that were not enough, in public speeches recently, U.S. Trade Representative Charlene Barshefsky has predicted that, based on current commercial patterns, by the year 20 10, the value of U.S. exports to the region will exceed the value of U.S. exports to Western Europe and Japan combined. /10

Several factors are driving the expanding economic ties between the United States and Latin America, perhaps the most important of which has been the strengthening of the many economies of Latin America. in 1997, Latin America experienced GDP growth of an extremely strong 5.9 percent,

9/ Data compiled by the U.S. Department of State, Office of Inter-American Affairs, from various U.S. Governmental sources, the World Bank and the United Nations.

10/ Renewal of Fast-Track Authority, Testimony of U. S. Trade Representative Charlene Barshefsky Before the Senate Committee on Finance, September 17, 1997.

and inflation reached the lowest level in 50 years (at under 11 percent region-wide). /11 Continued regional prosperity is expected, as Latin America's overall GDP is predicted to grow at a rate of 4 1 percent this year and 4.6 percent in 1999. /12

Anxious to capitalize on Latin America's thriving economy, many more U.S. businesses are establishing their own (or expanded) operations in Latin America -- and South America in particular -- where they can capture increasingly lucrative markets more easily and can compete more effectively within Latin America. Physically locating in South America has already allowed many U.S. businesses to take advantage of bilateral and regional free trade zones, such as Mercosur, which do not currently exist between South America and the United States, and which will not likely be put into place for a number of years. /13 (See Appendix 1).

11/ Data compiled by the U.S. Department of State, Office of Inter-American Affairs, from various published reports.

12/ Industry Report: Friendly Skies, Latin Trade, December, 1997, at 4.

13/ Contributing to the rising interdependence of the United States and the Latin American region are continued and intensive efforts by leaders in the hemisphere to cement a more formal regional regime of open markets and economic and social cooperation. Indeed, the United States and 33 other countries in the western hemisphere are deeply involved in the negotiation of a "Free Trade Area of the Americas" ("FTAA"), a hemispheric free trade zone that President Bill Clinton has said should be in place by the year 2005. It is virtually certain that, with the FTAA in place, economic flows between the U.S. to Latin America and within Latin America will climb exponentially.

For several reasons, the growing interdependence among the countries of the western hemisphere has naturally resulted in great increases in air traffic to Latin America from the United States, and within Latin American countries themselves. Increases in traffic result from, among other things, (1) commercial entities which increasingly seek to mind their interests or explore new opportunities in the Latin American region; (2) the appearance of greater accessibility of the region, both for business and leisure travel; (3) the lure of improvements to commercial and vacation areas that result from improved economic circumstances in the region-, and (4) increased import-export activity, which means more air cargo shipments.

Strong and growing air traffic figures in the Latin American regional market underscore the importance of having competitive travel options for consumers. Overall, U.S. passenger traffic to Latin America has grown nearly 24 percent in the five years ending 1997. Clearly, continued expectations for growth in these areas suggest that U.S. travel to and within Latin America can. also be expected to grow. United States-South America air traffic is becoming a particular area of growth, with traffic up 46.6 percent between 1992 and 1997. /14 Within South America, Chile, Argentina, Brazil, Colombia and Bolivia have had the highest rates of growth for passenger traffic

14/ April Pearson, Southern Boom, Airline Business, March 1998.

in the same period, as noted in Table 1. /15 Overall air travel for Chile, as well as for both Argentina and Brazil, has more than doubled in the six years between 1990 and 1996. /16

15/ ID.

16/ Latin America Poised for Inter-Regional Growth, Aviation Daily, December 15, 1997.

Given Chile's importance and prominence within the overall Latin American region, as well as to U.S. interests, the strategic nature of Santiago as a travel destination and point of departure is difficult to overstate. The Santiago airport remains the only gateway in Chile for direct flights from U.S. points, while processing more than 90 percent of all airline passenger and cargo traffic in Chile. /17 The Department itself reports that Lan Chile already controls 84 percent of all of the traffic moving passengers into and out of Chile. /18 As other comments on the proposed American-Lan Chile alliance have noted, the combined forces of those two carriers would give the alliance virtually complete control over air travel to this key destination. Beyond the dangerous anticompetitive implications of this potentiality for flights to and from Chile, it is important to consider the disastrous anticompetitive effects of locking out Santiago to other carriers for traffic between Santiago and dozens of other destinations throughout Latin America.

American contends that other major U.S. carriers have been permitted to enter arrangements with dominant European carriers, such as Lufthansa, without the anticompetitive consequences that Aeromexico believes are highly likely to result from the proposed American-Lan Chile alliance. Yet there are dramatic differences between the European and South American markets that make clear the fact that control over Santiago has a far greater impact on a carrier's total market power than control over a major European city. Hubs in Latin America are not interchangeable, and while other

17/ Lan Chile Fills In Gaps In American Antitrust Application, Aviation Daily January 27, 1998.

18/ Fact Sheets: Chile, Bureau of Transportation Statistics, U.S. Department of Transportation, citing Library of Congress Country Studies - Chile, Chapter 3.

Latin American cities may also be very important to U.S. interests, it Is not possible to conveniently substitute one market for another in the region, especially if one carrier is clearly working to control the majority of major markets region-wide,

Western Europe (with the European Union having so much impact on the continent's economic and social infrastructure that even a single currency is considered a near certainty in the near term) is on balance far more harmonized than Latin America, where stark national and economic differences continue to act as barriers to free-flowing movement across borders. This makes transportation from one country to another far less burdensome in Europe, where the sheer proximity of many major European cities to one another (not to mention the generally advanced transportation infrastructure connecting those cities, as compared with the spotty transportation infrastructure that differs dramatically between one South American city and another) gives U.S. travelers a variety of convenient options (air and land) for intraregional travel. The proximity of major European cities to one another gives rise to a greater number of alternative airline hub options, and thus is an environment more naturally inclined to support multiple travel options for consumers. By contrast, in Latin America, vast distances often separate the major cities from one another, making airline travel often the only feasible means for U.S. travelers to conduct intraregional travel. As such, there are few viable alternative hubs in Latin America.

To help illustrate this point, Table 2A below indicates the great distances between most of the major cities in Latin America, which typically are between 2,000 and 3,000 miles apart, Traveling from Mexico City to Rio de Janeiro, however, the distance is enormous -- nearly 4,800 miles. By

contrast, as Table 2B indicates, the distances between European cities are far closer, with London in the north and Rome in the south separated by only 893 miles.

A stark example of how the geographic and other distinctions between major European and major Latin American markets affect U.S. consumer travel options is worth noting. If a passenger wishes to travel from Washington, D.C. to Santiago, Chile, using a non-circuitous route, he can presently fly only through Miami (since Dallas/Ft. Worth is circuitous), and choose from one of the two carriers that fly directly or by interline connection. By contrast, if that same passenger wishes to travel to Munich, Germany, he can do so by traveling through one of nine different cities (New York, Philadelphia, Chicago, Atlanta, Paris, Frankfurt, London, Zurich or Amsterdam), and choose between one of the ten carriers which fly there by online or interline connection. (See Appendix 2.)

The proximity and accessibility of other major hubs to Munich, as a typical example of a European destination, simply supports a more competitive service environment than for Latin America, where Santiago is also quite typical. Given the natural limitations on the number of alternative hubs in Latin America, it is critical to preserve competitive travel options in the Latin American region for the growing numbers of U.S. travelers to be able to reach destinations as effectively and competitively as possible. Indeed, Aeromexico would like to be able to develop Mexico City as an alternative hub between the United States and Latin America, to help fill the void and add to competitive service options for the growing number of consumers in this market, Yet under the market conditions that would follow from the proposed alliance, it would be extremely difficult to sustain alternative competitive hubs such as Mexico City, leaving consumers with fewer and fewer competitive travel options from the United States to Chile and elsewhere in Latin America, and posing a dangerous threat to competition and consumer choice within the region.

It can be argued that, until now, it has been relatively difficult for the Department to make an empirical determination about whether a proposed alliance should be permitted to proceed. Certainly, the statutory basis for the U.S. Government's policy on airline alliances provides relatively little specific guidance for the Department on how to judge an alliance, except to indicate that the Department should approve alliances that are "in the public interest. /19 Given the relative newness of most immunized global airline alliances, moreover, it has been somewhat difficult to anticipate how they would impact the market and, therefore, which immunized alliances would prove themselves to be in the public interest, and which would threaten to introduce unfair competition and, as a result, not serve the public interest.

Today, Aeromexico submits, it ja possible to determine which proposed alliances are likely to serve the public interest. Aeromexico believes firmly that good alliances can yield multiple benefits to the allied carriers (including opportunities to enter new markets, add to existing services, or reduce costs) as well as to consumers (including opportunities to reach new destinations with greater ease and at lower costs, and/or to have more choice of carriers and services). The Department itself has clearly enunciated the elements of what it believes is valuable about alliances:

19/ 49 U.S.C. § 41309(b).

More recently, the Department of Justice ("DOJ") has added views on what features it believes are indicative of a beneficial alliance, and what features are suggestive of an alliance that is anti-consumer and/or anticompetitive:

20/ Office of the Secretary, Department of Transportation, Statement of United States International Air Transportation Policy, 60 Fed. Reg. 2184 1, May 3, 1995,

21/ Comments of the United States Department of Justice on U.S. Department of Transportation's Order to Show Cause, American Airlines-TACA Group Reciprocal Code-Share Application, Department of Transportation Docket OST-96-1700, January 28, 1998.

Aeromexico respectfully submits that the Department can and should apply these clear U S Government benchmarks -- which incorporate its own enunciated objectives for airline alliances, competitiveness, fairness, consumer benefit and open market ideology -- to the specific facts of the proposed American-Lan Chile alliance. Using these criteria, it is clear that the proposed American-Lan Chile alliance would do great harm to competition region-wide in Latin America, as well as to the choices and options available to the growing numbers of U.S. interests which rely on the existence of such competition. The following point-by-point review supports this conclusion.

A. The American-Lan Chile Alliance Will Neither Create Nor Improve New Nonstop Passenger Destinations/Services, Nor Will It Help American Enter Markets That It Could Not Access Alone.

As DOJ has noted, alliance agreements have the potential to promote the public interest when the combined carriers' route structures do not significantly overlap, and there are enough distinct services, features and destinations that each carrier brings to the partnership so that consumers gain significant net new opportunities from the combination of carriers, The proposed American-Lan Chile alliance is a prototypical example of the type of horizontal alliances that DOJ warns against, in that the proposed partners' combined route network is not significantly larger than either of the carriers' individual, existing networks. More troubling are that (a) in this instance, the alliance is seeking an exemption from U.S. laws of competition, and (b) the anticompetitive effects of such an exemption would reach from key points in the United States to Latin America, and throughout the Latin American region. If granted immunity, this alliance would become yet another tool by which American could simply coopt another of its principal competitors in the region, eliminating competition for key U.S.-Chile and, more critically for Aeromexico, adding to the control that American is amassing over the Latin American market.

The facts of the proposed alliance are that it would extend neither of the major online networks of American and Lan Chile, and it would add no new nonstop destinations or services that do not already exist for U.S. and international passengers. Since American already serves the lion's share of the city-pair markets that would also be served by the alliance, there is no reason to believe that the carrier could not on its own service any of the proposed alliance city-pairs that are not presently served online by American. Of the total United States-Chile air travel market, nearly 70 percent of traffic is already concentrated in city-pairs (Miami- Santiago, Los Angeles-Santiago, New York-Santiago and Orlando- Santiago) that are already served not by one or the other carrier, but by both American and Lan Chile, The pattern of horizontal coopting would also extend elsewhere in Latin America since, for example, 56 percent of the traffic in the United States-Peru air travel market is already contained in city-pairs (New York-Lima and Los Angeles-Lima) that are served on an online basis by both American and Lan Chile. /22 What this means in broader terms is that, by

22/ M.I.D.T. data for 1997 bookings indicate that the aggregate United States-Chile airline market consists of 579,334 passengers -- specifically, traffic between the most highly traveled cities in the United States and Chile, as well as traffic between all U S. cities and Santiago -- and that of that total, 398,453 passengers were currently served by both American and Lan Chile. Similarly, the total United States-Peru market consists of 771,069 passengers flown, of which American and Lan Chile overlap presently on markets which represented 428,801 passengers. M.I.D.T. data represent the cumulative bookings reported into all five of the world's major computer reservations systems -- Amadeus, Apollo, Galileo, Sabre and Worldspan -- and do not include all bookings done directly with the airlines (rather than through other CRS systems). While M.I.D.T. (booking) data is not exhaustive and does not necessarily represent the total traffic in a market, it is a strong indicator (and the best available (continued…)

permitting the alliance to proceed with antitrust immunity, the Department would authorize dramatic further reductions in competitiveness in the very markets that are clearly most important to consumers.

By contrast, the "new online city-pairs" /23 that American and Lan Chile may create through their proposed alliance are all characterized by the fact that they feature extremely remote areas where there is Likely to be very little demand. Indeed, the lengthy list of such new online markets that the proposed alliance partners argue would be created in fact represents only a small fragment of consumer demand for air travel, and moreover are principally markets that are already served by either American or Lan Chile with connecting service. Therefore, while the alliance would undercut competition in the massive area where the two carriers already overlap, and where consumers most need competitive options for air travel, it would create no real value -- certainly no value that 'is driven by consumer need or demand -- by virtue of the " new online markets" that would be established. Aeromexico respectfully submits that, if these are the new competitive benefits the proposed alliance will bring to the market, they will accrue to the benefit of the very few, and at an excessive cost to the very many.

Even more troubling is that, with the level of service overlap between American and Lan Chile, and the fact that "new online" city-pairs involve highly remote routes for which there is

22/ ( ... continued) information to Aeromexico) of market activity and growth.

23/ See Exhibits JA-9, JA- 10, American Airlines-Lan Chile Joint Application for Antitrust Immunity, December 23, 1997.

relatively little demand, it is entirely possible that if a particular city-pair route becomes (if even temporarily) less attractive or otherwise onerous to maintain, the fact that the alliance controls the market suggests that one or both carriers could agree to cancel frequencies or flights for that market altogether, leaving no significant alternative coverage on either a temporary or perhaps a permanent basis.

Setting aside the very serious possibilities that the American-Lan Chile alliance might reduce passenger services and destinations, the evidence makes it indisputably clear that the proposed affiance offers few, if any, consumer benefits. Specifically, consumers will not be able to fly direct on American or Lan Chile on flights that were not previously direct; they will not be able to stay on one or the other carrier's plane (rather than switch carriers) where the flights previously required a change in planes; they will not be able to make meaningful use of any of the "new" destinations served, since there is little or no market demand for these destinations, and critically for the business travelers whose choice of flights is most heavily influenced by convenience over price, they will not be able to choose from an addition of new flight times. The only "improvement" in services before and after the proposed alliance is that they will be listed on reservations systems under a single airline's code, making it easier to show the connections to booking agents.

Public media (such as the Wall Street Journal) are reporting the fact that the American-Lan Chile alliance would give American and its alliance partners control over 81 percent of all travel between the United States and Chile. Indeed, in a review of the 25 most-traveled U S. -Latin America markets, as Table 3 below illustrates, American and its network of affiliates would have total control of 15 of those markets, and effective control over at least one other market.

American and its proposed and existing affiliates would also have extraordinary control over travel between some of the most important city-pair travel markets between the United States and Latin America. (See Appendix 3.) If the alliance is approved, American, together with its existing and proposed affiliates, will have combined control over 91 percent of all air traffic between New York and Santiago, 81 percent over Los Angeles- Santiago; and 71 percent over Miami-Santiago. /24 Just as startling and potentially troubling -- especially in light of the growing importance of competitive options for intraregional travel -- is that the alliance would allow the immunized American-Lan Chile alliance to control the vast majority of city-pair markets linking Santiago with the rest of Latin America. The proposed alliance would give American-Lan Chile, together with their other existing and proposed affiliates, an astonishing 94 percent control over traffic between Bogota and Santiago; 83 percent control over Buenos Aires-Santiago, 78 percent control over Mexico City-Santiago; 70 percent control over Montevideo- Santiago; and 67 percent control over Caracas-Santiago, just to name a few. /24 (See Appendix 4.) Again, it is important to keep in mind that such

24/ M.I.D.T. data is for the full calendar year 1997. The market share that would be controlled by the alliance includes the market share for each city-pair of American Airlines, Lan Chile, and all existing and/or proposed affiliates of American.

25/ This data is based on Chilean Government Public Traffic Information for 1997, The market share that would be controlled by the alliance includes the market share for each city-pair of American Airlines, Lan Chile, and all airlines currently affiliated with American.

(continued...

control would have a particularly anticompetitive impact on a regional basis, because unlike in Europe or in Asia, multiple competing alliance groups do not exist in Latin America, and the geography of the Latin American region results in a limited number of alternative hubs through which passengers can access competitive service options.

The map of Latin America and corresponding city-pair market control chart, located at Appendices 4 and 5, offer a startling picture of the strategic dominance that American has been building, which would be vastly enhanced by the proposed Lan Chile alliance. The map's red lines illustrate the web of impenetrable city-pair markets which are or would be between 80 and 100 percent controlled by American and its proposed and existing affiliates, including Lan Chile. The map offers a glimpse of the breadth of regional market dominance that American and its affiliates would enjoy in an alarming number of the major business and other capitals of Mexico, Central and South America. Coupled with American's other proposed and existing alliances (see table below), the Lan Chile alliance would virtually ensure that no carrier, large or small, could compete with the American group carriers in critical markets including (but certainly not limited to) the United States-Argentina, United States- Venezuela, United States-Central America, United States-Colombia, and Chile-Peru markets, as well as many other important intraregional markets. Indeed, a review by Aeromexico of 78 major city-pair routes between and among Mexico, Central America and South America, reveals that American Airlines, together with its proposed and existing affiliates, controls more than 60 percent of the market share in two-thirds (55) of those markets, and more than 80 percent of the

25/( ... continued)

market share in half (39) of those markets. /26 The uncontestable regional dominance that the American group of carriers will be given by virtue of the Lan Chile alliance will put the carrier in a position to quite literally dictate the terms of competition to all carriers in the industry, all consumers traveling- between those points, all businesses and other interests shipping air cargo, and many of the critical sectors that make up the travel and tourism industry which, importantly, is the world's largest commercial sector . 27/

C. The American-Lan Chile Alliance Will Diminish Competitive Prospects in Latin America For New and/or Smaller Carriers.

In a policy environment in which there is increasing attention focused on the question of how to make the airline industry more competitive for small and new carriers -- an objective which the Southwest Airlines model has proven undoubtedly benefits consumers -- it is remarkable that the proposed American-Lan Chile alliance is precisely the type of affiliation that would be most likely to block new market entries as much as drive smaller carriers out of the market where the alliance dominates. The lock-out effects of American's strategic alliances in Latin America will undoubtedly

26/ The city-pair review was not exhaustive of all city-pair markets in the Latin American region, but instead included capital cities and other major business and vacation destinations of Mexico, Central America and South America. Traffic information was derived from M.I.D.T. data for the calendar year 1997.

27/ Peter Woodman, Air Policies Restricting Grow1h of Tourism, Press Association Newsfile, November 17, 1993. In 1994, the World Travel and Tourism Council reported that the travel and tourism industry accounted for 10.2 percent of the world's gross domestic product, and one in ten world jobs.

create formidable barriers to entry for new and smaller carriers that will be particularly pronounced if the immunized American-Lan Chile alliance is permitted to proceed,

TABLE4

AeroCalifornia *

Aerolineas Argentinas*

Asiana Airlines

Avianca*

British Airways*

British Midland

Canadian Airlines

China Eastern Airlines

El Al Airlines

Gulf Air

Iberia *

Japan Airlines

Lan Chile*

LOT Polish Airlines

Midway Airlines

Qantas

Reno Air

South African Airways

TACA Group*

TAM

*denotes a carrier serving Latin America

The evidence is quite clear that the proposed alliance would create not only dominance in key regional city-pairs (New York-Santiago-, Lima-Santiago), but also would extend between the United States and Latin America, and throughout the Latin American market, which is distinct as a region in that its geography does not support a large number of competitive alternative hubs and service options, and in that there are not multiple alliance groups in competition in the market (again, contrasted with Europe or even Asia). As a result, Aeromexico submits that the alliance would not only exclude small and new market entrants from key markets in Latin America, it will also ensure that they will not be able to do competitive business within entire regional route systems,

D. The American-Lan Chile Alliance Will Not Lower Fares or Increase Discounts, But Threatens To Raise Fares/Reduce Discounts.

Effectively acknowledging that there will be no new services created by the alliance, American and Lan Chile assert that the affiliation will result in lower prices in Latin America by virtue of lowering each carrier's individual costs of operation. It Is certainly true that the alliance as proposed would likely lower costs for American and Lan Chile, particularly for the routes which they both already serve, but for which they could combine their marketing and related efforts. However, there is no evidence whatsoever to support the notion that lowering the alliance's costs will cause prices to go down.

Any assertion by the applicants that prices would decrease is at a minimum unsubstantiated. Indeed, the overwhelming domination of key United States-Chile and Chile-Latin America city-pair markets by the proposed American-Lan Chile alliance would ensure that, with each carriers' principal competition now eliminated and other serious competition lacking, there would be no incentive whatsoever for the alliance partners to lower their ticket prices if their costs were reduced. In fact, with the airline industry far healthier than it was in the early 1990s (when difficult times led American to dramatically lower its published fares, forcing others to either match the fares or risk losing business), American is the strongest financially that it has ever been. /28 With American among the world's strongest carriers, it has no need to reduce its prices on a large scale in order to get business (other than on a periodic basis, possibly to undercut specific competitors in a particular market) Furthermore, with all real competition between the United States and Chile and between Chile and other key Latin America cities greatly diminished, if not eliminated, consumers would be far more likely to see price increase follow on the heels of the proposed American-Lan Chile alliance.

It should be kept in mind, moreover, that even slight price increases in these markets can have a significant impact on passengers: With well over $200 million spent on tickets between the United States and Chile in 1997, /29 for instance, a 20 percent fare increase would increase ticket prices $60 million on that route alone. If the Department allows the alliance to proceed, consumers will effectively have no choice but to pay the higher fares, even though they will be getting nothing new for the added cost.

28/ For the calendar year 1997, according to its Annual Report, American's net earnings were $972 million, up 14 percent from the prior year. Revenues from passenger operations were up nearly 5 percent in 1997, to $14.3 billion. American Airlines, Inc. Annual Report for 1997.

29/ Figure derived by applying one-half of the lowest-available, round-trip ticket price from Miami to Santiago, listed on the SABRE system, to the total number of passengers flying between the United States and Chile in 1997.

It is clear from the review above that there would be no net public interest served by granting antitrust immunity to the proposed American-Lan Chile alliance, In fact, Aeromexico submits that there is compelling evidence that a protected collaborative entity of the sort proposed by American and Lan Chile, added to American's existing network of impenetrable regional markets and its troubling industry practices, would diminish if not neutralize competition within the Latin American market, doing serious harm to other airline and supplier industry participants and, of course, threatening to undo the very public benefits -- the creation of new and better services and destinations, the introduction of strong competition into the market, and the driving down of prices -envisioned by U.S. alliance policy.

The strategic reach of American, through Lan Chile as well as through its many other existing and proposed alliances, is a serious concern to competition not merely between the United States and Chile, but to and within Latin America as a whole. Even a partial snapshot of the hemisphere makes it startlingly apparent that American is creating not simply impenetrable individual markets or routes, but an impenetrable web through multiple alliances of previous competitors. The Department has the ability to grant American the power to fortify this web, and take control of not a handful, but literally the majority of key markets to and within Latin America, giving American the power to lock out new competitors while freezing out existing ones. The danger posed by this regional dominance to the consumer, not to mention other industry and industry-related interests, is obvious. If approved, the alliance could also be protected from antitrust laws, enabling it not merely to co-market or code-share, but in fact to fix prices, commissions, discounts and other critical terms which help to define competition, all free of scrutiny from the U.S. regulatory infrastructure. It is the view of Aeromexico that approval would endanger not merely the regional aviation industry, but would adversely affect those many (arid growing) millions who use and rely on the air transport sector.

To preserve the public benefits of competition . in the airline industry, to ensure against continuing and more threatening abuses of market power in Latin America, a region that is critical to the travel and business interests of the United States, and to preserve competitive travel options for U.S. and other consumers, Aeromexico respectfully urges the Department to deny the Application for antitrust immunity submitted for consideration by American and Lan Chile.

Respectfully submitted,

Irwin P. Altschuler, Esq.

Donald S. Stein, Esq.

Kevin O'Connell, Esq.

Stephanie E. Silverman, Senior Advisor

Manatt, Phelps & Phillips

1501 M Street, N.W., Suite 700

Washington, DC 20005

202- 463-4300

March 24, 1998