OST-98-3603 / Savannah/Hilton Head / High Density Rule, Chicago O'Hare / Answer of United / March 26, 1998

Application of

for an exemption from 14 C.F.R. Part 93, Subpart K and S. 49 U.S.C. § 41714 as to allow non-stop service to Chicago O'Hare Airport

ANSWER OF UNITED AIR LINES, INC.

United Air Lines, Inc. ("United") hereby answers the application of the cities of Savannah, Georgia and Hilton Head, South Carolina ("Savannah") for slots to serve Chicago O'Hare International Airport.

The application seeks eight slots at Chicago O'Hare to enable an as yet unidentified carrier to provide regional jet service between the Savannah Airport and Chicago O'Hare, pursuant to unspecified authority under section 41714. While United appreciates Savannah's interest in obtaining new service, the application fails to articulate a legal basis under § 41714 pursuant to which the Department is authorized to grant slots at

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Chicago for the purpose stated. Absent the required showing, the application cannot be approved.

The application also poses, but does not answer, important policy questions regarding the allocation of capacity at O'Hare. Despite its desire for service to O'Hare, Savannah has not shown that this desire cannot be satisfied with service to Midway Airport or articulated a basis on which the Department can, consistent with its obligation to ensure that capacity at O'Hare allocated to its highest and best use, grant the instant request.

Finally, if the Department sees fit to accept the premises on which Savannah has based its application, and to create a new opportunity for slot exemptions, United would expect the Department to invite other interested parties to submit applications on similar grounds. In that eventuality, United reserves its right to seek such exemptions.

The application seeks exemption slots pursuant to 49 U.S.C. ¿> 41714, but fails to identify the precise provision under which

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the Secretary is empowered to grant the relief requested. A review of § 41714 shows that no such provision exists. Section 41714 authorizes the Secretary to grant exemptions to enable a carrier to operate slots in three distinct circumstances. /1 Under the authority of subsection (a)(2) and orders issued by the Department interpreting that section /2, slots may be granted to carriers that propose operations to small communities eligible for service under the Essential Air Service program and to non-hubs, defined by FAA as airports with no more than 0.05 percent of the nation's annual passenger emplacements. Savannah is not designated as an essential air service point and has over 600,000 enplaned passengers annually, far above the

1/ Although the High Density Rule permits "any person" to hold a slot, and a number of non-carrier entities, such as banks, do hold them, Savannah's application is the first time a community has sought an exemption to enable service to a slot-controlled airport. The application raises the question whether an exemption from the High Density Rule is legally the same as a slot under the rule, and therefore may be granted to "any person." This is one of the critical decisions facing the Department here.

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0.05 percent mark. Savannah, thus, cannot meet the criteria for an exemption under the essential air service provision. /3

Subsection (b) of the statute involves slots for foreign air transportation, clearly not applicable here. Subsection (c) requires that slots be used by a new entrant. A new entrant is defined as a carrier that has never sold or traded a slot at O'Hare and currently operates 11 or fewer slots at the airport. 49 U.S.C. § 41714(h)(3). If this is the provision upon which Savannah is relying, only such a carrier would be eligible to operate the slots requested here /4. In this case, the identity of

3/ The application points out that the Department is considering a number of applications for exemptions to provide service to O'Hare from communities that meet these criteria. Savannah then argues that "[i]f sufficient slots were available, other communities would have been included in the applications. As a result, deserving communities - such as Savannah/Hilton Head - will be blocked from adding service critical to their economic development." In fact, Savannah/Hilton Head is not eligible for service with slots granted under this provision of the exemption statute and could not, therefore, benefit directly from additional slots as it implies.

4/ Savannah suggests that with a grant of the instant application it could negotiate with American Eagle or United Express carriers to utilize the slots or provide service. (Application at 13.) However, American Airlines is the in the process of consolidating its several wholly-owned commuter subsidiaries under a single certificate, operating as American Eagle. Simmons Airlines, Inc. (d/b/a American Eagle) already operates far more than ll slots at O'Hare, making it, and (Cont:'d on next page)

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the potential operator of the slots must be known to ensure that this criteria is satisfied before slots are granted for the service.

Subsection (c) also includes the criterion that slots may be granted only if the Secretary finds the circumstances surrounding the application to be exceptional. Savannah has failed to show that its desire for service to Chicago O'Hare rises to an "exceptional" level, even under the broader interpretation of this criterion the Department has articulated in its most recent decisions. /5

(Cont'd from previous page) presumably the combined entity, ineligible as a "new entrant" carrier. A number of United Express carriers also operate more than ll slots at O'Hare, making them ineligible as new entrants as well. Atlantic Coast Airlines, the United Express carrier that will shortly introduce service connecting Savannah to United's growing hub at Dulles International Airport, has pending before the Department an application for sufficient slots that, if granted, would also make it ineligible to qualify as a "new entrant."

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low-fare carriers. The Department also stated its intention to look favorably on proposals for service with Stage 3 jet aircraft that could be shown to be financially viable and that will provide new non-stop services /6 or new competitive services by a low cost carrier. Without knowing which carrier ultimately might utilize the slots requested, Savannah cannot demonstrate that grant of its request would satisfy these criteria. In

6/ Savannah notes that United served this market until 1995 and proceeds to offer its own explanation as to why United was compelled to alter its schedules. Savannah claims that United's decision to eliminate Savannah service was "because they had other competitive uses for their aircraft and slots not because of passenger boardings" (emphasis in the original). (Application at 7.) Savannah's interpretation of the facts is a non sequitur. A determination of what is the most competitive use of slots and aircraft is based on passenger boardings; the one inherently relies on the other. More importantly, however, Savannah's allusion to competitive considerations omits several important factors United must contend with in making scheduling decisions at O'Hare.

United is the only network carrier in the country whose principal domestic hub is slot-controlled. United must, therefore, continuously make difficult economic decisions to ensue the most efficient deployment of the slots it holds. These decisions must take account of increasing service to international destinations as well as balancing the needs of domestic markets. United also loses up to 34 slots each season to enable other carriers to provide international service at O'Hare. These critical factors are part of the calculus United must undertake in deciding whether to initiate, expand, reduce, or terminate service in a given market.

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short, Savannah cannot meet the statutory standards of § 91714 or show how its proposal will achieve the Department's objectives as articulated in Order 97-10-16.

Savannah receives service to Delta's hub at Atlanta, Continental's hub at Newark, U.S. Airways hub at Charlotte, and soon, to United's hub at Washington Dulles International. These services bring Savannah passengers the benefits of competition among these hubs, none of which is slot controlled, and access to the global networks of these major carriers.

Savannah's desire for non-stop service to Chicago, in addition to these services, is understandable. However, despite growing indications that capacity at Chicago O'Hare will be increased through the implementation of new technology, O'Hare is still slot controlled. With such a constraint, the Department continues to be charged with the responsibility to make critical policy decisions about the highest and best use of this expanded capacity as it undertakes the administrative allocation process at O'Hare. One question to be addressed in the context of arriving at the determination of highest and best

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use is whether Savannah's air transportation needs can adequately be satisfied by service at Midway Airport.

As Savannah points out, it is growing principally as an important, premier leisure and tourist destination in the Southeast. (Application at 7, e.g.) Access to this segment of the Chicago market can be achieved through service to Midway Airport. As a number of carriers have discovered, Midway is often an effective equivalent, if not a superior choice, for service to meet the needs of leisure traffic, while providing a cost-effective alternative for point-to-point business travelers.

Savannah's needs could effectively be met by any carrier willing and able to provide service to Chicago Midway. The service could be mounted on a schedule unconstrained by the limited availability of slots at O'Hare and offer frequencies tailored to the needs of this unique market. The choice of aircraft could be determined on the basis of market demand rather than the exigencies of the application process. The fact that nothing in Savannah's application suggests that this would not be a wholly functional and satisfactory alternative to service at O'Hare, should be considered by the Department as an

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important factor in its determination of whether Savannah's application would represent the highest and best use of incremental O'Hare capacity.

Savannah's application would require the Department to set aside valuable slots for six months with no assurance that any carrier meeting the statutory criteria would come forward to utilize them. Considering the continuing demand for slots at Chicago on the part of carriers and communities that have no alternative access to large carrier hub networks or that require access to an international airport, reserving slots as Savannah requests cannot be justified.

The Department has pending before it applications for 120 slots to provide service to essential air and non-hub communities. /7 These applications represent a unique opportunity for these communities to enjoy access to a global network. That is not the case with Savannah which, as noted, has service to

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Delta's hub at Atlanta, US Airways' hub at Charlotte, and Continental's hub at Newark.

A number of international carriers also are seeking slots at O'Hare. /8 To serve Chicago at all, these carriers must have access to O'Hare.

Each of these applicants is prepared to start service by a date certain to meet the needs of passengers, and to immediately satisfy the requirements of the use-or-lose provisions of the High Density rule. The use-or-lose rule, in particular, is designed to ensure that valuable capacity at O'Hare is not wasted and is efficiently and consistently utilized. Without an identified carrier, exemption slots granted to Savannah will simply be "parked" for six months, as the community works find an appropriate operator. Such a scenario is precisely contrary to the concerns of the FAA, the Department, and even members of Congress, to ensure that valuable O'Hare capacity is fully utilized.

The Department can also expect that if it grants Savannah's application, it will be flooded with similar requests from

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similarly situated communities that hope, at some uncertain future time, to induce as yet unidentified carriers to provide service with slots that will, until then, remain unused. Once the Department entertains Savannah's request, communities throughout the country that have been unable to generate sufficient traffic and competitive impact to attract a carrier will undoubtedly want to add to their own arsenals the advantage of slots at an HDR airport. These speculative applications will introduce an additional factor for the Department to consider its process of allocating incremental capacity at O'Hare.

United has consistently urged the Department to develop an economically rational, market-based framework by which to judge competing applications for slots. The most economically efficient way to allocate capacity in a deregulated environment is to allow the actual economics of providing air service to determine the results. Thus, the administrative mechanism should produce allocation decisions that most closely mirror the results that would be achieved in the marketplace.

Comparing applications that propose definite service by an identified carrier as of a date certain, while striving ensure that the results consistently reflect the needs of the

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marketplace, has proved complex enough for the Department to achieve. Adding the speculative factors represented by Savannah's application, and the others that would most certainly follow, would make this already difficult balancing task all but impossible.

If, despite these concerns, the Department determines to grant Savannah's application, United would expect the Department to invite other interested parties to submit competing applications. In such a case, United reserves the right to seek slots, and to work with its commuter partners to seek slots, based on the interpretation the Department would articulate to support granting exemptions based on the parameters contained in Savannah's application.

United appreciates Savannah's desire for access to O'Hare. The instant application, however, cannot succeed in meeting that need. On both legal and policy grounds, the Department cannot find that Savannah's request satisfies the standards of the authorizing legislation or of the important policy determinations that must accompany decisions to grant access to

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O'Hare under exceptional circumstances. On the basis of the foregoing, therefore, the application cannot be granted.

Respectfully submitted,

JOEL STEPHEN BURTON

GINSBURG, FELDMAN and BRESS, CHARTERED

1250 Connecticut Avenue, N.W.

Suite 800

Washington, D.C. 20036

(202) 637-9130

Counsel for UNITED AIR LINES, INC.

DATED: March 26, 1998