OST-98-4647 / American Eagle / High Density Rule / Reply of American Eagle / November 19, 1998

Application of

AMERICAN EAGLE AIRLINES, INC. / OST-98-4647

under 49 USC 41714 for an exemption from the high density rule governing Chicago O'Hare slots (14 CFR Part 93)

(Greenville/Spartanburg, South Carolina)

REPLY OF AMERICAN EAGLE AIRLINES, INC.

American Eagle Airlines, Inc., under 14 CFR 302.407, hereby replies to the answers submitted on November 9, 1998 by Atlantic Coast Airlines d/b/a United Express and United Air Lines, Inc. to American Eagle's application for three Chicago O'Hare exemption slots to be used to operate nonstop service between O'Hare and Greenville/Spartanburg, South Carolina. As we show below, the Department should promptly grant American Eagle's application, notwithstanding the intemperate and contradictory opposition that United Express and United have mounted.

The public interest will best be served by awarding the three remaining unassigned O'Hare exemption slots to American Eagle to provide nonstop flights to Greenville/ Spartanburg, a Chicago market which presently suffers not only from inferior connecting service, but the highest average fare

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in its mileage block, as shown in the Department's most recent domestic air fare consumer report. American Eagle's service will represent South Carolina's only on-line access to American's worldwide network.

By contrast, the Chicago-Savannah/Hilton Head market -- for which United Express is seeking exemption slots in OST-98-3982 -- presently enjoys far better connections to Chicago, and one of the lowest average fares in its mileage block. In addition, Savannah is already well-connected to United's worldwide network, with regional jet service by United Express (Atlantic Coast) to United's Washington (Dulles) hub.

American's network at Chicago (American Airlines and American Eagle) is at a significant slot disadvantage compared to United's network at Chicago (United Air Lines and its United Express affiliates, including Air Wisconsin, Great Lakes Airlines, Atlantic Coast, and Trans States Airlines). United's network has a total of 1,049 O'Hare slots, while American's network has 916, resulting in a United network advantage of 133 daily slots. In the interest of fostering two-carrier hub competition at O'Hare, the Department should not grant any additional exemption slots to United-affiliated carriers until American and American Eagle have achieved slot parity.

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We disagree with the argument by United Express that the Department has no legal authority to grant American Eagle's application. The Department has been directed by Congress to use its exemption authority to provide needed Chicago O'Hare service to small and medium-sized communities. However, if the Department is without authority to assign O'Hare exemption slots for service by a non-new entrant such as American Eagle to a small hub such as Greenville/Spartanburg, then by the same token the Department has no authority to assign O'Hare exemption slots for service by a non-new entrant such as United Express (Atlantic Coast) to a small hub such as Savannah.

In its zeal to increase its already formidable slot advantage at O'Hare, United goes so far as to call for American Eagle to surrender two exemption slots that the Department recently awarded for nonstop service between O'Hare and Duluth. United contends that if American Eagle can provide three slots of its own to round out its proposed service pattern for Greenville/Spartanburg, then it did not need additional exemption slots for Duluth, and obtained them under "false pretenses." The Department should reject such a preposterous argument.

In Order 98-4-21, April 21, 1998, the Department granted 16 slots to American Eagle to serve four small cities, but granted 32 slots to two United Express carriers (Atlantic

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Coast and Trans States) to serve a total of six small cities. That not only had the highly inequitable result of awarding two-thirds of the slots to United Express, but enabled the United Express carriers to provide more frequencies to more of their cities. American Eagle petitioned for review, and by Order 98-9-24, September 24, 1998, the Department partially redressed this inequity by granting two additional exemption slots to American Eagle, which we are using at Duluth.

If the Department were to accept United's bizarre proposition that a carrier should surrender O'Hare exemption slots previously awarded to serve one city, because the carrier later proposes to use "self help" for future service at another city, then United Express (Atlantic Coast) should promptly turn back four of the exemption slots it was awarded. On December 15, 1998, United Express (Atlantic Coast) is starting two daily nonstop roundtrips between O'Hare and Peoria, requiring four slots. Since United Express (Atlantic Coast) has used "self help" to secure slots to serve Peoria, then under United's theory, the exemption slots awarded to United Express for service to Charleston, Springfield/Branson, and Wilkes-Barre were obtained under "false pretenses," and four of them should be forfeited.

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These and other matters are discussed in further detail below. The Department should promptly grant American Eagle's application, which has received substantial and enthusiastic civic support, so that we may finalize preparations for entering the Greenville/Spartanburg-O'Hare market in January 1999, and bring the competitive benefits of on-line access to American's worldwide network to consumers in South Carolina.

I. THE PUBLIC INTEREST WOULD BE BEST SERVED BY AWARDING THE REMAINING EXEMPTION SLOTS TO GREENVILLE/SPARTANBURG RATHER THAN TO SAVANNAH

Three exemption slots remain for allocation (Order 98-9-24, September 24, 1998, p. 6). The Department will provide the greatest public benefits by assigning these slots to American Eagle for service between O'Hare and Greenville/Spartanburg, rather than to United Express to serve Savannah.

Both Greenville/Spartanburg and Savannah are small hubs as defined by FAA enplanement statistics. /2 Both are

1/ While Aspen Mountain Air also has an application on file for O'Hare exemption slots (OST-98-3671), that application appears to be moot in view of Aspen Mountain's cessation of virtually all of its scheduled operations due to financial difficulties. See Order 98-11-8, November 10, 1998.

2/ The claim by United Express that Savannah/Hilton Head is the largest Chicago market without nonstop service to O'Hare is valid only by aggregating both the Savannah and Hilton Head airports, as United Express has done in Exhibit 2 to its answer. But as that exhibit also shows, Savannah itself ranks third, while Greenville/Spartanburg ranks seventh. In any event, the larger size of the Savannah/Hilton Head-Chicago

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served by six airlines (or their codeshare affiliates), but Savannah/Hilton Head enjoys service at two airports less than 30 miles apart. Moreover, Greenville/Spartanburg has a far larger population (896,679 v. 451,038), and far higher retail sales ($6.3 billion v. $3.4 billion), than Savannah/Hilton Head, and clearly has a greater need for additional air service. See Exhibit 1.

Nonetheless, Savannah/Hilton Head has far better access to Chicago on a connecting basis than Greenville/Spartanburg. Passengers can travel on-line to Chicago from Savannah via two connecting hubs with less than 25% circuity -Atlanta (6.3%) and Charlotte (5.0%). These gateways offer some 159 on-line connecting opportunities a day on three airlines -Delta, US Airways, and Airtran -- to two airports in Chicago, O'Hare and Midway. By contrast, the two on-line connecting hubs with less than 25% circuity between Greenville/Spartanburg and Chicago -- Cincinnati (.01%) and Charlotte (17.2%) -- offer 92 on-line connecting opportunities a day on two airlines -Delta and US Airways -- to O'Hare. See Exhibit 2.

market argues for United and United Express to fund service with their own slots, and not with exemption slots provided by the Department. Indeed, United provided nonstop service between Savannah and O'Hare as recently as 1995, using its own slots.

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Savannah also enjoys much lower fares than Greenville/Spartanburg to Chicago. In fact, the DOT domestic airline fare consumer report for the first quarter of 1998, released on October 20, 1998, lists Greenville/Spartanburg-Chicago as having the highest one-way average fare in its mileage block -- $307 -- while Savannah-Chicago is shown as having one of the lowest one-way average fares in its mileage block -- $143. See Exhibit 3. In its application, American Eagle has proposed a one-way average fare of $135, representing a major reduction in fares in the Greenville/Spartanburg-Chicago market, and promising significant benefits to the traveling public. /3

Neither American Eagle nor American Airlines presently serves any city in South Carolina. United Express, by contrast, already connects both Savannah and Greenville/Spartanburg to United's network with regional jet service to United's Washington (Dulles) hub. By entering the Greenville/ Spartanburg-O'Hare market, American Eagle will bring important new competition to South Carolina and to the southeastern

3/ United Express questions the credibility of American Eagle's fare proposal by arraying the average fares of American Airlines (not American Eagle) in markets between 450 and 850 miles (the stage length of the Greenville/Spartanburg market is 577 miles). This contrived exercise has no bearing on American Eagle's proposal, which is based on the use of new and highly efficient regional jet aircraft in a specific market.

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region of the United States, with significant benefits to the public in service, quality, and fare options.

For these reasons, the Department can obtain the greatest public benefits from the three remaining O'Hare exemption slots by awarding them to American Eagle to provide nonstop service in the Greenville/Spartanburg-Chicago market.

II. THE DEPARTMENT SHOULD NOT GRANT ANY FURTHER EXEMPTION SLOTS TO UNITED-AFFILIATED CARRIERS SUCH AS UNITED EXPRESS (ATLANTIC COAST)

As detailed in Exhibit 4, United's network (United Air Lines and its codesharing affiliates Air Wisconsin, Great Lakes, Atlantic Coast, and Trans States) presently commands a total of 1,049 O'Hare slots, while American's network (American Airlines and American Eagle) has 916, constituting an advantage for United's network of 133 slots, or 66-1/2 daily roundtrip services.

A decision by the Department to award additional exemption slots to United Express, when the United network already boasts the lion's share of slots at O'Hare, would be contrary to the public interest, and would threaten the continued viability of two-carrier hub competition at O'Hare, which is one of the very few hub airports in the United States not dominated by a single carrier.

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Indeed, United itself recently received additional frequencies between Chicago and London for the 1998/99 winter traffic season by arguing that such a decision "is consistent with Department precedents that favor achieving competitive parity" (Order 98-11-4, November 4, 1998, p. 4). Competitive parity at the O'Hare hub between the United and American networks is surely as important as competitive parity in a single international city-pair such as Chicago-London. The United network (including United Express) should not be awarded any additional O'Hare slots until the large slot gap between the American and United networks has been redressed.

Finally, because United and United Express (Atlantic Coast) have contended in prior pleadings that they are independent of one another, and that their slot holdings should not be aggregated, we wish to highlight several recent events that belie such a contention.

On July 6, 1998, the Department sent a letter to United Express concerning restoration of essential air service at Decatur, Illinois (Exhibit 5). The Department referenced meetings with "United's representatives," and directed that "United Express, in conjunction with United Airlines...report back to us with an earnest plan as to how these unused slot exemptions may be used to serve Decatur-O'Hare."

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By Order 98-10-28, October 30, 1998, the Department approved the transfer of 10 O'Hare exemption slots from Great Lakes Aviation d/b/a United Express to Atlantic Coast Airlines d/b/a United Express for service in the Sioux Falls-O'Hare and Fargo-O'Hare markets. This transfer was clearly orchestrated by United Air Lines, as shown by the fact that United itself issued two press releases, on October 23 and October 26, 1998 (Exhibits 6 and 7), announcing the new United Express service.

Similarly, on November 5, 1998, United Air Lines announced that United Express (Atlantic Coast) will begin new regional jet service between Peoria, Illinois and O'Hare, starting December 15, 1998 (Exhibit 8). This service will require four O'Hare slots, which are presumably being provided by United to United Express (Atlantic Coast) from the United network's slot holdings.

As reported by Aviation Daily on November 17, 1998 (p. 294), United Express (Atlantic Coast) is adopting United's revenue management system. ACA President and CEO Kerry Skeen said the system "will help manage the thousands of different passenger origins and destinations that flow over our combined systems every day." /4 United's Director-Interline Programs Tom

4/ ACA's entire scheduled route system is operated d/b/a United Express under the "UA*" code. ACA does not hold out any scheduled service under its assigned "DH" designator code.

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Hanley said customers have told the company they expect the United Express product to be seamless, and "[t]his transition is a major step in our combined efforts to make the United and United Express networks fully integrated."

In the November 1998 issue of United's in-flight magazine, Hemispheres, United portrays all of the O'Hare services which resulted from the Department's award of 32 slots to United Express (Atlantic Coast and Trans States) by Order 93-4-21 as "United Airlines routes" (Exhibit 9; see red lines from O'Hare to Charleston (WV), Chattanooga, Roanoke, Springfield/Branson, Tri-Cities, and Wilkes-Barre).

There is no question that United and United Express view their operations at O'Hare as part of United's integrated worldwide network, and work hand-in-glove in deciding which markets to serve and in coordinating their slots and schedules. /5 Indeed, United's press release on Peoria (Exhibit 8) states that "United Express carriers are not owned by United Airlines but have a close marketing relationship with United." In these circumstances, the Department should not be misled by arguments that United and United Express are independent, that United Express carriers are "new entrants" at O'Hare, or that

5/ With respect to FAA actions, a United Air Lines official, Michelle Okragley, serves as coordinator of O'Hare slots not only for United, but also for United Express (Air Wisconsin, Great Lakes, Atlantic Coast, and Trans States).

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their slot holdings should not be aggregated for purposes of competitive analysis of Chicago O'Hare hub services.

III. THE DEPARTMENT HAS SUFFICIENT LEGAL AUTHORITY TO GRANT AMERICAN EAGLE'S APPLICATION

United Express argues that the Department does not have legal authority under 49 USC 41714 to grant exemption slots to American Eagle to serve Greenville/Spartanburg, because the city is not an EAS point or a nonhub, and American Eagle is not a new entrant at O'Hare.

To the contrary, the grant of American Eagle's application would be consistent with explicit Congressional intent "that the Department enable increased access to O'Hare for small and medium-sized communities," Order 96-10-42, October 28, 1996, p. 1. As noted in Order 97-1-7, January 13, 1997, p. 1, Congress directed the Secretary "to make the fullest possible use of existing exemption powers under 49 USC 41714...'to improve service to nonhub airports where significant improvements can be achieved, "' citing the Conference Report to the DOT FY 1997 appropriations bill, Pub. L. 104-205. While Greenville/Spartanburg ranks as a small hub rather than a nonhub, it is clearly a "small" or "medium-sized" community, as referenced in Order 96-10-42, and merits an award of O'Hare exemption slots.

However, if the Department were to accept the argument by United Express that American Eagle's application should

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be denied as legally deficient, the Department would by the same token be required to deny United Express's application for slots to serve Savannah. United Express (Atlantic Coast) is not a new entrant, as it now has 30 O'Hare slots -- 16 awarded by Order 98-4-21, 10 transferred from Great Lakes by Order 9810-28, and four to be operated between O'Hare and Peoria beginning December 15, 1998 (Exhibit 8). While United Express has taken the contrived position that it does not "hold" slots and is therefore still a new entrant, such a contention is plainly without merit. As shown in Exhibit 10, the FAA slot report for November 1, 1998 lists the slot "holdings" of Atlantic Coast Airlines (United Express) as of that date. See also our answer of July 9, 1998 in OST-98-3982, which we incorporate herein by reference. /6

Moreover, Savannah, like Greenville/Spartanburg, is a small hub as measured by FAA enplanement statistics. If Greenville/Spartanburg, as a small hub, does not qualify for exemption slots, then neither does Savannah.

United Express also asserts that American Eagle's application fails to specify whether it has EAS slots that the

6/ In Order 98-9-24, the Department did not reach a conclusion "on whether ACA qualifies as a new entrant, i.e., whether it holds or operates fewer than twelve slots at O'Hare, as defined in 49 U.S.C. section 41714(h)" (p. 7). We have no doubt that when the Department reaches this issue, it will rule that ACA (United Express) is a slot holder, and is not a new entrant.

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Department could convert and replenish, as it did in Order 984-21. American Eagle continues to dispute the need for such an exercise, and again notes that the Department granted exemption slots to United Express (Great Lakes) to serve Sioux Falls by Order 97-1-7, January 16, 1997, without resorting to the device of reassigning slots used for unrelated EAS services. However, if the Department determines to use such a procedure in granting American Eagle's application for Greenville/Spartanburg slots, we note that American Eagle is providing EAS services at a number of points, including Bloomington, Champaign/Urbana, and Springfield in Illinois; Dubuque in Iowa; Kalamazoo and Traverse City in Michigan; and Green Bay, La Crosse, and Wassau in Wisconsin. /7

We also wish to address the baseless allegation by both United Express and United that American Eagle is somehow in default of its service proposal for Montgomery and Shreveport. While American Eagle offered in OST-97-2985 to operate three daily roundtrips each of its new O'Hare destinations, the Department did not award sufficient slots to enable American Eagle to do so (see Order 98-4-21, April 21, 1998; American Eagle's petition for reconsideration of May 11, 1998, in OST

7/ United Express (Atlantic Coast) does not have any slots that it is using for EAS services. Accordingly, the Department could not use such a procedure to grant United Express's application for exemption slots to serve Savannah.

2985, et al.; and Order 98-9-24, September 24, 1998). American Eagle presently operates two daily roundtrips in the Montgomery-O'Hare and Shreveport-O'Hare markets, and hopes to increase service in the future. But in circumstances where the Department granted 32 of the 50 slots assigned by Orders 98-4-21 and 98-9-24 to the United network, United and United Express should not be heard to charge that American Eagle -- which did not receive sufficient slots for its full service proposal because the Department granted applications by two United proxies -has not met its service commitment.

Finally, United Express complains that it would be unfair to consider American Eagle's Greenville/Spartanburg application submitted on October 23, 1998, some four months after United Express's Savannah/Hilton Head application was submitted on June 24, 1998. Apparently United Express has forgotten that in the round of applications leading up to the Department's award of 18 exemption slots to American Eagle and 32 to United Express, it was United Express (Atlantic Coast) which filed a late application (OST-97-3259, December 17, 1997), some two-and-a-half months after American Eagle had applied (OST-97-2985, October 9, 1997).

There is clearly no basis for the Department to adopt a different rule now with respect to the timeliness of applications. The Department should decide the two applications

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contemporaneously, and choose American Eagle's proposed service for Greenville/Spartanburg as providing superior public benefits .8

IV. THE DEPARTMENT SHOULD REJECT UNITED'S BIZARRE ARGUMENT ON "SELF HELP"

In one of the most outlandish arguments that we can recall in Departmental proceedings, United contends that American Eagle secured exemption slots to serve Duluth under "false pretenses" because American Eagle now proposes to use "self help" by providing its own slots to round out its proposed service pattern of three daily roundtrips between Greenville/Spartanburg and O'Hare. In its zeal to preserve and bolster its significant lead in O'Hare slots, United even urges that these slots should be forfeited. United is spouting utter nonsense.

As United knows, the Department has only three remaining exemption slots to assign for new O'Hare services. Clearly, any applicant proposing to operate more than a single

United Express also contends that its application should be favored because it has an existing station at the Savannah airport. As noted above, this is a reason not to favor United Express, since Savannah is already connected to United's worldwide network with United Express regional jet service to United's hub at Washington (Dulles). We also note that American has a leasehold on facilities at the Greenville/Spartanburg airport which continued after American and American Eagle suspended services there when the Raleigh/Durham and Nashville hubs were closed. Accordingly, American Eagle is well-positioned to enter the Greenville/Spartanburg market.

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daily roundtrip (requiring two slots) would have to secure its own slots to complete its proposed service pattern. Here, American Eagle has proposed three daily roundtrips, which will require six slots, and has stated that it will provide three slots of its own if the Department grants its application. Indeed, United Express (Atlantic Coast) has made the identical offer, stating that "it will accept an award in Docket OST-983982 of three exemption slots at O'Hare with which to serve the Savannah/Hilton Head-O'Hare market with the balance of the slots being obtained by self-help means" (p. 14 n. 11).

Moreover, if United's ridiculous statement about "false pretenses" had any validity, United Express (Atlantic Coast) should immediately forfeit at least four of the O'Hare exemption slots it received by Order 98-4-21 to serve Charleston, Springfield/Branson, and Wilkes-Barre. As shown in Exhibit 8, United Air Lines announced on November 5, 1998 that United Express (Atlantic Coast) will enter the Peoria-Chicago market on December 15, 1998 with two daily roundtrips. This service will require four O'Hare slots, which United Express (Atlantic Coast) is presumably acquiring from the United network. If United Express (Atlantic Coast) can begin service at Peoria using slots it is obtaining through "self help," then under United's "false pretenses" theory, United Express should surrender four of the slots it received by Order 98-4-21.

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We say this only to illustrate the absurdity of United's proposition. There is nothing in the least improper about a carrier's proposal to fund future O'Hare services with its own slots, even though it previously received exemption slots to serve another city. With only three slots remaining for allocation, it is self-evident that the successful applicant here will be required to use "self help" to complete a service pattern of three daily roundtrips, as American Eagle has proposed for Greenville/Spartanburg.

V. AMERICAN EAGLE'S APPLICATION TO SERVE GREENVILLE/ SPARTANBURG HAS RECEIVED SUBSTANTIAL AND ENTHUSIASTIC SUPPORT

American Eagle's application has received substantial and enthusiastic support from a number of civic and other interests, including the Greenville/Spartanburg Airport Commission, the Spartanburg Chamber of Commerce, the Greater Greer Chamber of Commerce, the Business Travel Coalition, and a number of area companies.

As BTC noted in its comments submitted on October 27, 1998, "[s]tudies by DOT and the General Accounting Office (GAO) have consistently identified the Southeast as a region of the country that has not fully shared in the benefits of airline deregulation.... Greenville/Spartanburg...is no exception to these findings.... [T]he average one-way fare in the market ($307) is higher than any other domestic market in the 551 to

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600 mileage block. * * * BTC believes that DOT's granting three slot exemption at O'Hare -- to be matched by three slots by American Eagle -- for nonstop jet service earmarked for Greenville/Spartanburg would constitute a sound investment of federal resources."

CONCLUSION

For the foregoing reasons, the Department should promptly grant three exemption slots to American Eagle for service between Greenville/Spartanburg and Chicago O'Hare.

Respectfully submitted,

CARL B. NELSON, JR.

Associate General Counsel American Airlines, Inc.

On behalf of American Eagle Airlines, Inc.

November 19, 1998