OST-98-3982 / Atlantic Coast Airlines, Savannah-O'Hare / Reply of ACA / July 20, 1998

Application of

for an Exemption from Subparts K and S of Part 93 of the FAR's pursuant to 49 U.S.C. § 41714

Application of:

THE COMMUNITY OF SAVANNAH, GEORGIA/HILTON HEAD, SOUTH CAROLINA

Docket OST-98-3603 for an Exemption from 14 C.F.R. Part 93, Subparts K and S 49 U.S.C. § 41714 as to allow non-stop service to Chicago O'Hare Airport

Atlantic Coast Airlines d/b/a United Express ("ACA") hereby files this motion for leave to file and its consolidated reply to the Joint Answer of American Airlines, Inc. and American Eagle Airlines, Inc. ("American Eagle" or "Eagle") and the Contingent Answer of Exec Express II, Inc. d/b/a Aspen Mountain Air ("AMA") in reply to the application of ACA for an exemption from Subparts K and S of Part 93 (14 C.F.R. Part 93, Subparts K and S) (the "High Density Rule") to permit it to conduct five Savannah/Hilton Head-O'Hare operations. To the extent the DOT's procedural rules do not automatically authorize a reply, ACA hereby seeks leave to have the above Dockets include its response to the disingenuous arguments of the opposing carriers, thereby providing a more complete record on which the DOT can base its decision in this important matter. 

American Eagle makes many collateral arguments that do not directly address the merits of ACA's Savannah/Hilton Head-O'Hare application. To the extent Eagle and AMA deal with Savannah/ Hilton Head issues they can be dispatched quite easily and ACA will first address these contentions. ACA will also respond to the numerous arguments presented by Eagle that are more properly characterized as a regurgitation of Eagles' petition for reconsideration of Order 94-8-21 filed on May 11, 1993, objecting to tree prior grant of relief to ACA from the High Density Rule to conduct 16 O'Hare operations even though Eagle also received 16 HAS O'Hare slots in this same Order.

Eagle, and to a lesser extent, AMA question, although in little depth, ACA's contention that based on the plain meaning of 49 U.S.C. section 41714 and the High Density Rule, ACA is a "new entrant" air carrier. Neither party contested ACA's interpretation of the language of the statute or Order 98-4-21 in which ACA was exempted from the requirement to hold any O'Hare slots in order to conduct 16 operations.1/ Nor did either carrier distinguish the case law relied upon by ACA which states that the words of the statute, if they are clear and unambiguous, are controlling. An interpreter of the statute and Order 98-4-21 would be hard pressed to come to any conclusion other that ACA is not an O'Hare slot holder but was formally exempted from the requirement to be so. If

l/ In pertinent part, ordering paragraph 2 of Order 98-421 states:

ACA is not a slot holder and does not operate at O'Hare in this capacity, then ACA continues to be a new entrant carrier within the meaning of the section 41714. This conclusion is not inconsistent with the intent of Congress which wanted to encourage new entry at High Density Airports. This new entry would come from carriers that do not hold in their own right scores of slots, as does Eagle with over 250 to its name which were either purchased or the subject of an initial slot grant upon the adoption of the FAA buy-sell slot rule in 1986. A carrier that has only obtained an exemption or exemptions from the High Density Rule to serve O'Hare will never amass such numbers of slots and, therefore, remains a new entrant for purposes of the statute.

Both Eagle and AMA also argue that the communities of Savannah and Hilton Head have adequate service to the nation's air transportation system, or at least more so than do the communities they propose to link to O'Hare. In response, ACA would note that it never argued Savannah/Hilton Head lacked any adequate air service. Rather, ACA noted that the market was the largest without nonstop service to O'Hare. Acknowledging, as ACA does, that Savannah/ Hilton Head has nonstop service to several other cities, this fact is clearly not dispositive as to whether the public interest and exceptional circumstances support ACA's application.

A review of the slot awards previously made by the Secretary pursuant to section 41714 indicates that the determination of the public interest is focused on the route for which exemption authority was sought. For example, by Order 96-5-33, Air South was granted relief from the High Density Rule to serve the Savannah-JFK market. Savannah enjoyed nonstop service to many other cities at that time, as it does now, but still was found to qualify for an award under section 41714. Other examples of markets which gained access to High Density Airports but which had quality service in numerous cities is set forth in the Attachment hereto. The conclusion to be drawn from this analysis is that the DOT's focus under section 41714 is only in the city pair market involving the High Density Airport. Therefore, the arguments of Eagle and MA are irrelevant to any DOT analysis of ACA's well founded and fully supported application for Savannah/Hilton Head-O'Hare operating authority.

AMA also argues that the size of the Savannah/Hilton Head-O'Hare market is irrelevant to whether exceptional circumstances have been demonstrated in ACA's application. ACA submits that the number of passengers that will benefit by the grant of a section 41714 exemption is directly relevant to the DOT's determination of whether the grant is in the public interest. In ACA'S application it noted that it would carry approximately 78,000 passengers in the first full year of service. By contrast, AMA forecast it would only transport approximately 33,000 passengers in the Sioux City and Branson markets. The DOT must have a basis to judge which of any potentially competing applications will best meet the public interest and exceptional circumstances test and the number of annual passengers that would benefit by nonstop service to O'Hare is an appropriate part of the analysis.

AMA also argues that the distinction of being the largest O'Hare market which lacks nonstop services is too simplistic a basis on which to make the DOT decision. Contrary to the implication of AMA' s argument, ACA did not rely on this factor alone in order to justify the grant of its request for access to O'Hare. ACA also noted that its service will be provided with new, 50-seat regional jets which are the quietest jets in the commercial fleet. AMA's proposed service will be conducted with 30 seat turboprop equipment. Regional jet operations are more consistent with the DOT's approach to section 41714 exemptions in which if has stated exceptional circumstances are met when proposals are based on "jet aircraft that meet Stage 3 noise requirements." Order 97-10-16 at 3.

Second, ACA noted that it would profitably serve the Savannah/Hilton Head-O'Hare market at the same time making the service available at a low average fare of $124.00. AMA has not stated at which fare levels it will offer its services. ACA forecasts a segment operating profit of over $1.5 million in the first full year of service. ACA forecasts a far more marginal return of only $116,000 in the first 12 months of service. 2/ In other words, the financial viability of the route has been amply demonstrated and AMA's suggestions that ACA has relied solely on the size of the market to justify its application is incorrect.

2/ Even this meager result is suspect because it fails to take account of the traffic diversion that will result from ACA's Springfield/Branson-O'Hare four times daily service commencing in September, 1998. Similarly, AMA's traffic and financial results were presented based on a request for 8 O'Hare slots in order to operate 4 daily round trip O'Hare flights. Application of AMA, March 26, 1998. Subsequently, AMA amended its application to request 5 slots with which it would add one non-controlled hour slot to construct a pattern of 3 daily round trip flights. AMA Amended Application, May 26, 1398. AMA did not revise its traffic and revenue forecast in its amended application. The DOT, therefore, cannot determine whether AMA's proposed service will be operationally and financially viable. See Orders 97-10-16, 97-10-17.

While eagle styled its pleading as an answer to ACA's application for relief from the High Density Rule so to serve the Savannah/Hilton Head-O'Hare market, the bulk of Eagle's answer is simply a rehash of its petition for reconsideration of Order 98-4-21 to which ACA has already responded by its answer dated May 21, 1998. Eagle argues in this Docket that ACA should not be given authority to serve Savannah/Hilton Head in lieu of Eagle's request for four additional slots with which to serve the communities for which it received exemption authority pursuant to Order 98-4-21. In its petition, Eagle claimed the Department unfairly awarded Eagle relatively fewer O'Hare slots by exemption than it awarded ACA in Docket OST-97-3259. Eagle fundamentally mischaracterizes the Department's award of relief from the High Density Rule to ACA and another United Express carrier, Trans States.

Eagle insists on referring to the grant of 32 slots to United Express while Eagle was only awarded 16 O'Hare slots. In fact, ACA and Tans States, two independently owned commuter air carriers, were each granted the right to conduct 16 daily operations at O'Hare. This is the same relief granted Simmons. By doubling the exemption awards to ACA and Trans States and treating the carriers as a combined entity, Eagle is distorting the DOT's decision in Order 98-4-21 in a not too successful attempt to claim the DOT was acting inequitably in not granting equal measures of relief from the High Density Rule to American Eagle and United Express.

Not only does Eagle misconstrue the DOT's decision in Order 98-4-21 as to the number of operations awarded to each carrier, Eagle complains that it must serve four cities with 16 slots while ACA and Trans States need only serve three cities with their sixteen exemption rights. As ACA noted in its response to Eagles' petition for reconsideration, Eagle has over 260 other O'Hare slots with which to construct a viable O'Hare schedule--a luxury not enjoyed by ACA. In addition to these slots, Eaglets parent holds or operates another 652 O'Hare slots. Rather than grouse about the situation and argue it is in need of yet an additional governmental dispensation, Eagle could, but apparently chose not to, exercise self-help, as did ACA, and round out its schedule by operating in non-controlled hours. 3/

Apart from rearguing its petition for reconsideration in Docket OST-97-2985, Eagle, the wholly-owned subsidiary of American Airlines, complains that ACA lacked candor in its application by not making repeated reference to itself as a United Express carrier. While it is perfectly appropriate for Eagle to file its answer jointly with it parent, American Airlines, there is no regulatory or corporate reason to repeatedly refer to ACA as United Express. ACA is not a subsidiary of United Airlines. ACA is a publicly-traded company which is not owned, in whole or in part, by United Airlines. The financial results of ACA are not consolidated with those of United, as is the case with American and Eagle. The management of ACA is independent of that of United and is not under the control of United.

3/ ACA has constructed its O'Hare schedule by operating 16 flights within the controlled hours utilizing its exemption authority and four flights outside the controlled hours at O'Hare in order to serve two city pair markets with three times daily round trip service and one city pair with four times daily round trip service. Eagle for reasons unstated by it has not chosen to make use of this viable form of self help.

Of course, ACA has a close working relationship with United under the terms of a code-share agreement with United. However, even under this agreement, the risk of failure falls squarely on ACA and its shareholders should the Savannah/Hilton Head service not be a financial success. ACA planned the route and made the determination to seek an exemption from the High Density Rule in order to bring nonstop service to the large Savannah/Hilton Head market. In accordance with the terms of its agreement with United, ACA consulted with its code share partner since ACA cannot operate as United Express on any particular route without the consent of United which logically controls its trade name and service marks through the contractual provisions of the code-share agreement. ACA's preeminent role in the route selection process, and its shouldering of the financial risk explains, if any explanation is truly necessary, why ACA applies for exemptions from the High Density Rule in its own name and argues the merits of its case with specific reference to ACA's operational capability and projected financial results.

Eagles' attack on ACA should be seen for exactly what it is and that is an attempt to confuse the issue of United and American slot holdings at O'Hare with the merits of ACA's application for the ability to serve the Savannah/Hilton Head-O'Hare market. /4 The numerous historic reasons why United may currently hold a greater number of O'Hare slots than does American is not relevant to the

4/ Eagle likes to claim that American and Eagle has 134 fever O'Hare slots than United and its independently owned code share partners. The more appropriate comparison as far as ACA is concerned is that Eagle has a total of over 260 slots compared to ACA's right to conduct by exemption 16 O'Hare operations.

DOT's decision in this Docket. Whatever the slot tally between these two carriers may be at any time, the restless of ACA should be judged on the merits of the facts as set forth in the ACA application and rot on the basis of factors not contained in or relied upon by ACA to justify its reasonable request for Savannah/Hilton Head exemption authority.

The joint answer of Eagle and American would deprive the 78,000 projected passengers that would benefit from ACA's Savannah/Hilton Head-O'Hare regional jet services. Undoubtedly, the communities Eagle seeks to serve with the four additional slots it requested will benefit from a more well-rounded pattern of service. However, this request for an additional four slots cannot be taken seriously coming from carriers with a combined total of 914 O'Hare slots. Eagle and its parent, American can make much better use of their multitudes of slots to achieve their service objectives. Alternatively, and like ACA, Eagle could operate in non-controlled hours -- a technique Eagle has thus far refused to consider.

Neither American, Eagle nor AMA has suggested any reason to reject ACA's request for relief from the High Density Rule with which to serve the Savannah/Hilton Head-O'Hare market. Therefore, the DOT should proceed to determine which request for a section 41714 exemption will generate more public interest benefits. ACA, along with the Savannah/Hilton Head communities have amply demonstrated the value to be derived by grant of the ACA application.

The benefits flowing from the requests of Eagle and AMA pale in comparison to that of ACA.

Respectfully submitted,

BAGILEO, SILVERBERG & GOLD

Attorneys for ATLANTIC COAST AIRLINES

Robert P. Silverberg

Dated: July 20, 1998