OST-97-2970 / America West Airlines / High Density Rule, New York LaGuardia / Petition of America West / May 11, 1998

Application of

for an exemption pursuant to 49 U.S.C. § 41714

Columbus - New York, LaGuardia Airport

America West submits that the Department's decision to impose an arbitrary limit of nine additional operations despite the Congressional directive to use exemptions to promote competition at the slot controlled airports should be reversed. The substantial competitive benefits for travelers between LaGuardia, Columbus and the West provided by America West's highly competitive full service should not be sacrificed to an arbitrary operational limit unrelated to any environmental or safety issues. In addition the recently announced alliance

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agreements between the largest slot holders at LaGuardia constitute an important new factor which supports grant of an exemption to America West.

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§ 41714(c) to stimulate low-fare competition at slot constrained airports. America West appreciates that the Department recognized these benefits by granting the five requested slots at O'Hare. Significantly, in both order 98-4-21 and Order 98-422, the Department also recognized that the grant of slots to America West at LaGuardia, as at O'Hare, would substantially benefit the public and meet the public interest and exceptional circumstances requirement. However, having arbitrarily imposed a cap of 30 new operations at LaGuardia, the Department concluded it could not grant America West's request given "the very limited number [of exemptions] we can grant." /2 As discussed more fully below, the Department's own environmental review of LaGuardia demonstrates that the approval of 46 or even 68 additional operations would not have a significant impact on the area surrounding the Airport.

The need for the Department to reconsider its decision is underscored by the recent flurry of Congressional hearings held in the two weeks since the Department issued the LaGuardia Order that specifically addressed airline competition issues. /3 Both the

2/ Order 98-4-22 at 23.

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members and witnesses considered the immediate need to take steps to promote domestic competition through every reasonable means including the granting of exemptions at slot controlled airports. /4 These hearings considered the new domestic marketing alliances announced by United/Delta and American/US Airways only days after the Department's decision. /5 The new relationships being formed by these airlines which control the substantial majority of slots at LaGuardia, will likely affect competition on the East-West routes from LaGuardia on which America West seeks to provide important competitive options for travelers. /6 American, Delta, US Airways and United have long controlled the vast majority of slots at LaGuardia. As of May 1995, "USAir control[ed] approximately 29 percent of LGA slots, followed by Delta with 25 percent, American with 17 percent, and United with

Judiciary Committee also held hearings on airline competition issues in March and April.

4/ See, e.g. Testimony of John H. Anderson, Director Transportation Issues, General Accounting Office, April 23, 1998, and testimony of Mark S. Kahn, Vice Chairman Spirit Airlines, April 23, 1998.

5/ American Airlines and US Airways announced on April 23, 1998, a broad new marketing relationship that initially links the two carriers' frequent flier programs. Soon after, Delta Airlines and United Airlines announced an alliance with plans to eventually code share in virtually all-domestic markets.

6/ Susan Carey & Bruce Ingersoll, "Airline Marketing Linkups Draw Opposition", Wall St. J., Apr. 27,1998, at A2.

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9 percent." /7 Thus, the new American-US Airways and United-Delta alliances will control approximately 46 percent and 34 percent LaGuardia slots, respectively. In short and apart from the possible impact of these new marketing arrangements, these four carriers hold 80 percent of the slots at LaGuardia and create a compelling need for competitive service by America West. /8 While alliances may be pro-competitive in many markets, at a restricted airport like LaGuardia where slots are a significant barrier to entry, the proposed alliances further limit competition.

By awarding slots to America West, the Department will permit market forces to restrain fares by eliminating unnecessary government constraints on competition in major markets from LaGuardia. The few slots requested by America West will stimulate substantial competition by creating highly competitive one-stop through service to many Western

7/ DOT, Report to Congress: A Study of the High Density Rule, May 1995, at 91.

8/ Between 1986 and 1996, the total percentage of LaGuardia slots held by just American, Delta and US Airways has increased from 27 percent to 64 percent. In the same period, the percentage held by post-deregulation airlines has declined from 15 percent to 2 percent. GAO, Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation, Testimony before the U.S. Senate Subcommittee on Aviation (GAO/RCED-97-120, May 13, 1997)at 10.

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destinations, with no negative environmental impact. The recent development of domestic alliances between major slot holders at LaGuardia presents a new and additional reason for the Department to grant America West's request.

The Department found that America West's application would provide substantial benefits to many travelers, and that it met the public interest and exceptional circumstances standards. The Department also recognized in Order 98-4-21 that America West, as a major, full-service carrier, is "uniquely disadvantaged" in its ability to serve high-density airports. In companion Order 98-4-21,approving the application for five slots at O'Hare, the Department recognized, "America West faces the same barriers and disadvantages in its attempts to gain access to [LaGuardia and National] as it faces at O'Hare." /9 However, Order 98-4-21 continues, "In an order we are issuing simultaneously with this order, we found that we are unable to grant slot exemptions to America West for new LaGuardia service,

9/ Order 98-4-21 at 14.

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notwithstanding our finding that America West's proposal there would have produced substantial transportation benefits." /10 The basis for this denial was the Department's October 24, 1997 Environmental Assessment, conducted on an assumption of 30 new operations. This cap had been reached by the awards to Spirit and ATA. /11 However, in the Assessment, the Department referenced the findings in its May 1995, Report to Congress: A Study of the High Density Rule which:

Assessment at 14. /12 Presumably, for this reason the Assessment, explicitly stated the 30 operations assumed in the analysis was for analytical purposes only, and not a target for the number of additional operations the Department would approve at

10/ Id.

11/ Order 98-4-21, at 12 ("In deciding the applications now pending . . . we will remain within the bounds contemplated by the previous environmental analysis.").

12/ Moreover, the 1995 analysis was performed before the phased reductions in Stage 2 operations required by December 31, 1996.

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LaGuardia. /13 Since an increase of between 46 and 68 daily operations also would have no significant impact on noise at LaGuardia it is apparent that the self-imposed 30 operations is arbitrary. Significantly, the Assessment's analysis of 30 operations was based on a worst-case scenario involving the noisiest types of aircraft, /14 while the Department has required the use of noise compliant Stage 3 aircraft for any approved exempt operations. /15 In Order 98-4-22, the Department found that any adverse impact from new awards "would be minor and clearly would be outweighed by the benefits" from the exemptions. Clearly the Department could double the number of operations it could approve without any undue impact on the environment. /16 An

13/ The slot exemption numbers used in the assessment "were selected for modeling purposes only; they should not be construed as agency targets for slot expansion." DOT, Environmental Assessment and Finding of No Significant Impact for Exemptions from 14 CFR, Subparts K and S for operations at O'Hare Airport and LaGuardia Airport, Oct. 24, 1997, at 14.

14/ Id.

15/ America West confirmed that it would operate any newly granted LaGuardia slots with Stage 3 aircraft. America West's consolidated reply, October 27, 1997, at 4.

16/ The Department's 1995 High Density study shows there are no other environmental or safety restraints that would prevent the award of additional exemptions or even abolition of the slot rule. The Department found that except for the fare premium to incumbent carriers, the economic benefits, which would flow from abolition of the slot rule, would outweigh the detriments. No

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additional eight slots at LaGuardia would bring the Airport's total exempt operations to only 38, significantly less than the 46 to 68 the Assessment concluded would have no significant impact on noise, safety or congestion. Thus, contrary to the Department's conclusion in Order 98-4-22, the Environmental Assessment does not compel or even support a cap of 30 slots.

As discussed below, given the focus of the Department and Congress on promoting competition, the Department should make available as many operations as possible without causing a significant environmental impact. Accordingly, the Department should reconsider its decision and find that grant of eight slots to America West would have no negative environmental impact, but rather would substantially benefit travelers by promoting low-fare competition in major LaGuardia-Columbus-West Coast markets.

In support of its request for exemptions at both airports, America West pointed out that the Airline Deregulation Act is intended to foster and promote competition, and specifically to

consideration should be given to preserving fare premiums as a justification to limit new entry at LaGuardia.

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promote key public interest factors including "[a]voiding unreasonable industry concentration, excessive market domination, [and] monopoly power," and "[e]ncouraging . . . the continued strengthening of small air carriers to ensure a more effective and competitive airline industry." /17 In Order 98-4-22 at 14, the Department stated that it is guided by these principles and that "[I]t is a logical extension of that definition of public interest factors that the Department heed the Congressional expression of intent that we use the exemption authority Congress has given us as one tool for implementing those goals."

There is no doubt that America West can produce the competitive impact that Congress, the Department and the public seeks. One indicator of America West's competitiveness is its low operating cost per available seat mile, the lowest of all major full service hub-and-spoke U.S. carriers. For 1997, it was 7.27 cents, approximately 23 percent less than that of the average major carrier. In addition, the Department has identified America West as the low-fare carrier in the Columbus-

17/ America West's application for exemption, October 3, 1997, at 9 (citing 49 U.S.C. §§ 40101(a)(10) and 40101(a)(13)).

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New York market, /18 and recognized the benefit of America West's expanding its service to many West Coast destinations, which could be accomplished via Columbus. See Order 98-4-22 at 23.

Unfortunately, the perimeter rule and slot restrictions have limited America West's ability to vigorously compete with the major incumbent carriers at New York's most important business-travel airport. America West remains the only major U.S. airline prohibited by the perimeter rule from offering nonstop service from LaGuardia to its primary hub, and the only major carrier that did not receive any grandfathered slots LaGuardia. 19 The 1995 High Density Report specifically noted:

18/ See DOT, Domestic Airline Fares Consumer Report, September 1997, at Mileage Block--401-450 miles.

19/ America West's consolidated reply, October 27, 1997, at 2. See also, GAO, Domestic Aviation: Barriers to Entry Continue to Limit Benefits of Airline Deregulation, Testimony before the U.S. Senate Subcommittee on Aviation (GAO/RCED-97-120, May 13, 1997) at 4 (perimeter rule limits America West's ability to compete with the seven largest established carriers, which can serve LaGuardia from their principal hubs, because it prevents America West from serving LaGuardia from its hub in Phoenix). See, Anderson testimony before House Aviation Subcommittee, April 23, 1998.

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High Density Report at 84, emphasis added.

As America West stated in its exemption application and its reply comments, it is virtually impossible for it to maintain a viable competitive service from LaGuardia to Columbus with only two roundtrips a day. Two roundtrips are particularly inadequate since one trip does not match well with the Columbus connecting bank and limits America West's ability to attract beyond passengers on those flights. America West is currently in the very tenuous position of trying to compete with US Airways' four flights per day and its LaGuardia hub.

In this connection, the GAO has recognized that "in order to mount competitive service in a market, an airline generally needs about six slots, with at least three slots falling during the peak periods so that the airline can offer a flight schedule that is attractive to business travelers." /20 In the awards to Spirit and ATA, the Department recognized the need to create a competitive pattern of service. In order to compete effectively in the increasingly concentrated and business-oriented LaGuardia market, America West requires eight slots. The four slots it

20/ GAO, Airline Deregulation: Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED-974, October 1996) at 6.

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currently operates are inadequate not only because of their small number, but because, as the GAO also has recognized, "leasing places a non-owner at a competitive disadvantage for two reasons. First, because the established airlines obtained most of their slots directly from FAA in 1986 at no cost, the non-incumbent incurs a cost that the established carrier never incurred. Second, leases are sometimes only for a short period of time." /21 Indeed, America West could in fact lose its LaGuardia slots at any time and be forced to abandon this critical market. A loss of America West's competitive service would have a negative impact on fares and service, not only between LaGuardia and Columbus, but also for passengers traveling from LaGuardia to Phoenix, Las Vegas and America West's 35 other West Coast points. Indeed America West now offers non-stop service to Los Angeles from Columbus.

In terms of overall benefits to business travelers, the grant of eight slots to America West to expand its LaGuardia service would certainly be more substantial than the benefits flowing from the Spirit and ATA proposals. Moreover, both the American-US Airways and the United-Delta arrangements will link East-West markets from LaGuardia, where the two alliances will

21/ Id.

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control at least 80 percent of the market. America West is the only major independent carrier that can offer a serious competitive option to these large incumbent carriers to a multitude of West Coast cities.

Congress and the public want to promote competition and alliances may have a pro-competitive impact in many markets. However, there may be concerns as recently noted by the Deputy Assistant Secretary for Antitrust at the Department of Justice in Congressional testimony when two carriers act jointly in a concentrated market. /22 This concern applies to LaGuardia where without a viable East-West service by America West, these two alliances will be in a position to control the high value business traffic between LaGuardia and West Coast points.

Therefore, America West urges the Department to rescind its arbitrary and newly self-imposed limit of 30 operations at LaGuardia and enable America West to establish a viable competitive service at New York's most important business airport by expanding service from LaGuardia via Columbus to the,

22/ See, testimony of John Nannes before the House Aviation

Subcommittee.

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West. As discussed in I above, although America West strongly believes the Department can take this step based on the existing Environmental Assessment, the Assessment could be quickly updated if necessary. As an alternative, the Department could, as many have suggested, withdraw a small number of LaGuardia slots from incumbent carriers and allocate them to America West and other new entrants.

The Department found in Order 98-4-22 that America West's service would substantially benefit travelers through new competitive service between LaGuardia, Columbus and the West Coast. The award of eight slots to America West would clearly further the objectives of the Airline Deregulation Act and recent Congressional directives to expand competition by new entrants at slot constrained and concentrated hubs. Given the dominant position of US Airways, United, American and Delta at LaGuardia, the Department must make every reasonable effort to create opportunities for new entrants to succeed. The Department can make a major contribution to enhanced competition by eliminating the arbitrary operational ceiling imposed by Order 98-4-22 and authorizing eight additional operations to America West at LaGuardia.

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WHEREFORE, for the reasons stated above, America West respectfully requests that the Department reconsider Order 98-4-22 and grant it an exemption from Subparts K and S of Part 93 of the Federal Aviation Regulations for eight operations at New York LaGuardia Airport.

Respectfully Submitted,

Joanne W. Young

David M. Kirstein

BAKER & HOSTETLER, LLP

Washington Square, Suite 1100

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036-5304

(202) 861-1532

Counsel for America West Airlines

May 11, 1998