OST-98-4647 / American Eagle / High Density Rule – Chicago O’Hare / Motion and Response of Atlantic Coast Airlines / December 2, 1998

Application of :

under 49 U.S.C. 41714 for an exemption from the high density rule governing Chicago O'Hare slots: (14 CFR Part 93) (Greenville/Spartanburg, South Carolina)

On October 23, 1998, American Eagle, Inc. ("AA Eagle") applied for relief from the High Density Airport Rule to enable it to operate three times within the controlled hours at O'Hare International Airport with which it proposes to mount nonstop regional jet service between Greenville/Spartanburg and O'Hare.

Considerations of due process and fundamental fairness, as well as the Department's desire to ensure a full and complete record, warrant acceptance of ACA's response to the arguments of AA Eagle. Wherefore, for good cause shown, ACA respectfully urges the DOT to accept and consider its response as set forth below.

* * *

The AA Eagle reply incorrectly frames the issues raised by its late filed application for O'Hare slot exemption authority as, in part, a contest between American and United for control of O'Hare slots. It does so by suggesting ACA is affiliated with United in the same way AA Eagle is affiliated with American. In doing so, AA Eagle refuses to accept the fact that ACA is neither owned nor controlled by United. The consequences of ACA's business decisions to operate to O'Hare fall squarely on the shareholders of ACA and its management. ACA is a separate legal entity that is tied to United only by a code share agreement and not by stock holdings. AA Eagle, on the other hand, is wholly owned by American's parent and its financial results are consolidated with those of American. The AA Eagle relationship with American warrants an entirely different regulatory treatment as the DOT previously concluded. /1 Therefore, to attribute ACA's exemption slot holdings to United is fundamentally wrong. Of course, to amalgamate the slot holdings of AA Eagle with those held by American is fundamentally correct, since the air carriers are affiliates of one another under common ownership.

With this simple proposition in mind, the award of O'Hare exemption slots to ACA will not destabilize the balance between United and American at O'Hare, as AA Eagle argues. According to the AA Eagle reply, Exhibit 4, United and its corporate affiliate Air Wisconsin hold 943 slots compared to American's network holdings of- 916 slots. Rough parity exists and the award of three or five exemption slots to ACA will not alter this balance because, among other reasons, the financial consequences of ACA's service to Savannah/Hilton Head will be felt by ACA and its shareholders and not by United. Of course, United will benefit by the potential connecting traffic flows at O'Hare, but were AA Eagle to be awarded yet additional exemption slots, the benefit would be measured by

1/ [W]e disagree with American's contention that its corporate relationship with Simmons [now American Eagle] has no significance in terms of level of control by comparison to United's degree of control through its franchise arrangements over ACA or Trans States. . . . There are practical distinctions. Both ACA and Trans States are independent carriers who assume the full economic risk in their own operations. Their code-share arrangements with United are arms-length contracts that are subject to renegotiation. Indeed, Trans States has marketing arrangements with TWA as well as with United. In short, we do regard ACA and Trans States as independent entities and we find that they qualify for exemption eligibility under Section 41714(c) while, [American Eagle] does not.

both its profit on the regional jet operation and connecting traffic flows on American. This double benefit will not be enjoyed by ACA or United and, therefore, slot awards to ACA do not upset the balance of power at O'Hare.

AA Eagle also attempts to frame the issue raised by its application as one in which the DOT must weigh the relative benefits of nonstop service to O'Hare from either Savannah/Hilton Head or Greenville/Spartanburg. By so doing, AA Eagle assumes the legitimacy of DOT's simultaneous consideration of its application and ACA's earlier filed Savannah/Hilton Head request. AA Eagle has not effectively rebutted ACA's argument that DOT precedent supports its view that a four month later in time application should be deferred and not considered at the same time as ACA's earlier filed request.

For its part, AA Eagle should recognize that, in an almost identical situation as presented in this Docket, the DOT deferred a similar AA Eagle late filing. In Order 97-10-16, the DOT found that such a late filing, for which no excuse was offered, warranted deferral. For AA Eagle's request to be considered by the DOT along with that of ACA and the Savannah/Hilton Head communities, AA Eagle would have had to either timely answer ACA's application or move to consolidate its late filed request with the application of ACA. 2/ No such steps were taken by AA Eagle and the DOT must not reward the carrier for its [aches by contemporaneously considering both carrier requests.

However, were the two applications to be subject to a side-by-side review, the Savannah/Hilton Head service would easily be found to produce greater public benefits then would service between Greenville/Spartanburg and O'Hare for the numerous reasons set forth in ACA's Answer to the AA Eagle application.

AA Eagle argues in reply that Greenville/Spartanburg has a larger population then Savannah/Hilton Head which currently has better access to O'Hare than does Greenville/Spartanburg. AA Eagle has attempted to elevate insignificant facts to levels of importance that, in fact, carry no decisional weight. First, the fact that the population of the communities of Greenville/Spartanburg is

larger than Savannah/Hilton Head is of no relevance. Indeed, and as acknowledged by AA Eagle, Savannah/Hilton Head generates more air passengers from its smaller population base than does Greenville,/Spartanburg. This suggests that passengers originating from or destined to Greenville/Spartanburg are using the nearby and convenient Charlotte hub airport as a ready cross substitute for the Greenville/Spartanburg Airport. How else can one explain why Greenville/Spartanburg generates proportionally less air traffic than the smaller Savannah/Hilton Head? The convenience of Charlotte for Greenville/Spartanburg passengers argues strongly against awarding limited slot exemptions to AA Eagle to serve the community. /3

Second, the current number of on-line connecting opportunities (159 from Savannah/Hilton Head to O'Hare vs. 92 from Greenville/Spartanburq to O'Hare) is hardly determinative. Both communities have an abundance of connecting opportunities such that the numerical difference could never support a decision to grant AA Eagle yet additional O'Hare exemption slots. 4/

AA Eagle, in an unsuccessful attempt to denigrate ACA's application, notes Savannah/Hilton Head is already linked to United's network, through ACA's Savannah-Dulles service, but that

3/ While AA Eagle is clamoring for more exemption slots, it is interesting to note that neither American nor AA Eagle provide service between their O'Hare hub and Charlotte International Airport.

4/ It is significant that Greenville/Spartanburg has nonstop access to no less than 12 major air carrier hub airports, -including two in the Midwest, while Savannah/Hilton Head has nonstop service to only five hub airports, none of which is in the Midwest. See Answer of ACA, at 11.

Greenville/Spartanburg is not currently served by American or AA Eagle. Of course, historically, this was not so, because American and AA Eagle both served Greenville/Spartanburg and other points in South Carolina before abandoning the market in 1996. If American and its affiliate were truly interested in resuming service to South Carolina it could easily commence operations to DFW -another American hub airport that actually offers greater online connecting opportunities than does O'Hare. 5/ It is obvious that AA Eagle's application for O'Hare exemption slots was motivated by a desire to block ACA's application -- and not by a genuine desire to create new service opportunities for South Carolina.

Moreover, that fact that ACA connects Savannah/Hilton Head to United's Dulles operation is not valid decisional fact. 6/ But even if it were, the Department should note that United offers service to 54 more nonstop markets from O'Hare than it does from Dulles. Source; OAG Tapes December, 1998. Therefore, Savannah/Hilton Head's access to United's network will be greatly enhanced by ACA's offering nonstop regional jet service to O'Hare. In addition, by ACA's calculation, 43 Savannah/Hilton Head markets will gain single connecting service over O'Hare, which currently is only provided by double connecting service. Further, seven Savannah/Hilton Head

5/ American and AA Eagle serve 133 nonstop destinations from DEW and 10.2 such destinations from O'Hare.

6/ The DOT has consistently analyzed the service needs of communities seeking access to high density airports by reviewing the level of service in the subject market, and not service to other non-impacted airports. For example, by Order 96-5-33, Air South was granted relief from the High Density Airport Rule to serve the Savannah-JFK market, although Savannah enjoyed then, as it does now, service to and from other hub airports.

markets will see the quality of their connecting service over O'Hare to at least double. See Application of ACA, June 24, 1998, Exhibit 3. Therefore, apart from the fact that Savannah/Hilton Head is the largest Of Hare market without nonstop service (whereas Greenville/Spartanburg ranks 7th) a slot award to ACA will produce quantitatively and qualitatively greater public benefit than would an award of additional slots to AA Eagle. /7

AA Eagle tries to turn around the disadvantage of promoting service from the small Greenville/Spartanburg market, compared to Savannah/Hilton Head, but noting that, if the Savannah/Hilton Head market is so large, then United should make available to ACA the slots with which to serve it. Of course, the same can be said of American and AA Eagle. But, it is also true that, in the case of AA Eagle, if it is so intent on linking South Carolina to its vast route network but lacks the slots to do so, it could simply commence service to DEW and take the pressure off the Department to award yet additional slots to the single largest O'Hare commuter slot holder/operator.

Alternatively, AA Eagle could use any of its 916 network slots held by it and American for this purpose. AA Eagle argues that, by the same reasoning, United could make slots available to ACA citing ACA's use of the four slots to operate two round trip flights

7/ While AA Eagle complains that Savannah, without regard to Hilton Head, is only the third largest O'Hare market without nonstop service (whereas on a combined basis, Savannah/Hilton Head is the largest unserved market), AA Eagle concedes that Greenville/ Spartanburg only ranks seventh. ACA accepts this point and is fully willing to have the DOT consider these rankings in making its final determination.

between Peoria and O'Hare. However, the Peoria situation is legally and factually different and one which suggests no precedent.

First, ACA did not obtain slots to serve Peoria from United. Rather, AC'A obtained the slots with which to serve Peoria from UFS. /8 Because of aircraft maintenance considerations, UFS had difficulty in scheduling O'Hare-Peoria service during certain times of the day and ACA has simply substituted its aircraft for that of UFS to enable the full pattern of United Express service in the market to be provided. Such slot trades or exchanges are expressly contemplated by FAA's regulations. See 93.211(a). No additional O'Hare slots were requested or required for ACA to provide this service. Just because ACA is assisting in the operation of Peoria-O'Hare service, it does not mean that its Savannah/Hilton Head application should be rejected. Rather, ACA should be acknowledged for having allocated its regional jet assets to smaller communities to the benefit of the traveling public. ACA merely seeks to do the same for Savannah/Hilton Head and, but for AA Eagle's last minute, desperation attempt to block ACA, ACA would likely be serving the route today.

AA Eagle attempts to rebut ACA's argument and analysis that the proposed low fares of AA Eagle are not typical of actual experience in other similar O'Hare market. AA Eagle Reply, p.7. AA Eagle notes that the comparable fares displayed by Exhibit 1 of ACA's Answer to the AA Eagle Application are American Airlines

8/ UFS is an independently owned commuter carrier that operates as United Express at O'Hare.

fares, not those of AA Eagle. Tellingly, AA Eagle does not specify why the fare comparison made by ACA is unfair other than by making reference to differences in aircraft type.

In fact, the AA Eagle proposed "average fare" tells the DOT very little about what actual fare levels AA Eagle proposes to offer in the Greenville/Spartanburg-O'Hare market. The average fare of $135.00 cited by AA Eagle in its application is merely the product of the division of its total forecast passenger revenue by the number of forecast passengers ($9,872,197 + 73,127 = $135.00). AA Eagle does not commit to charge any specific fare upon grant of the exemption authority it seeks or, thereafter, and, therefore, the Department has no way of evaluating the weight to be placed on AA Eagle's argument that its forecast average fare will represent a significant benefit to those traveling in the Greenville/ Spartanburg-O' Hare market. The Department should be skeptical of the fare claims of AA Eagle since O'Hare fares in comparable markets are considerably higher than those being forecast by AA Eagle for case purposes.

A gaping hole in the AA Eagle application is its failure to set forth a legal basis by which the DOT could grant yet additional slot exemption authority to the single largest holder of O'Hare commuter slots. About all AA Eagle could muster on reply was reference to the Conference Report to the DOT FY 1997 appropriation bill which the DOT, at one time, had cited as justification for the award of limited slot exemption authority. See Order 97-1-7. In subsequent Orders, the DOT ruled that the Conference Report language cannot be relied upon to grant relief from the High Density Airport Rule to AA Eagle. See Order 98-4-41, Order 98-924.

Of course, ACA's application does not suffer from the same infirmity. ACA is a new entrant or limited incumbent air carrier within the meaning of § 41714(h)(2) and § 93.213(a)(5) of the Federal Aviation Regulations ("FAR's"). ACA has 26 slot exemptions as awarded by Orders 98-4-21 and 98-10-28. These Orders make crystal clear that ACA is not the holder or operator of 26 slots, but rather was legally exempted from the requirement to be a holder of slots so as to operate within the controlled hours at O'Hare. 9/ In addition, ACA has had transferred to it from UPS, four non-exemption slots with which it uses to serve the Peoria-O'Hare market. These four slots are the only O'Hare slots which count against the maximum of 12 slots which defines new entrant/limited incumbent air carriers under § 41714 of the Statute.

Try as it might, AA Eagle can offer no effective rebuttal to this ACA legal position. Indeed, if ACA's legal position were not in fact correct, there would have been no need for Congress to have recently considered to amend the statute to state that slot exemptions are the legal equivalent of slot holdings for purposes of

9/ Exhibit 10 to the AA Eagle Reply purports to support its claim that ACA is a holder of slots at O'Hare by reference to an FAA computer generated report showing the status of O'Hare slots. The FAA Slot Administration Office is capable of producing many different reports. In fact, the FAA separately tracks "exemption slots" (see Attachment hereto) although exemption and non exemption slots may be combined by the FAA for presentation purposes only.

Lions are the legal equivalent of slot holdings for purposes of defining new entrant/limited incumbent air carriers. /l0 This definitional change was not adopted and until the law is modified, or until AC2A obtains additional non-exemption slots, ACA is a new entrant/limited incumbent air carrier within the meaning of § 41714. On the other hand, AA Eagle with 299 commuter slots to its name, never has been or is now a new entrant/limited incumbent carrier at O'Hare.

Neither the Conference Report nor AA Eagle's legal status give support to its request for Greenville/Spartanburg exemption slots. This leaves, only AA Eagle's argument that it has sufficient EAS slots to transfer to use at Greenville/Spartanburg, which slots could be replenished by the Department as it did in Order 98-4-21. However, American Eagle continues to resist the convert and replenish theory of slot awards and, perhaps, for good reason. The DOT's prior use of this theory is on very shaky legal ground. The Congress never intended the DOT to exercise its § 41714(a) authority to enhance access to high density airports from non EAS points. If it did, it would not have had a need to adopt § 41714(c). This subprovision of the statute deals with improving access to controlled airports in non-EAS markets. While ACA would hope that all classes of air carriers and all communities could enjoy unfettered access to O'Hare, the statute makes clear that

10/ Proposed Section 606 of the Wendell H. Ford National Air Transportation System Improvement Act of 1998 would have granted priority for regional jet slots to new entrant and limited encumbent carriers that "operated or held fewer than 20 slots or slot exemptions. . . ." (emphasis supplied). This provision of the proposed legislation was not enacted.

only new entrant or limited incumbent carriers (as defined) are eligible for relief pursuant to § 41714, unless the point to be served is an EAS point. AA Eagle is not a new entrant/limited Incumbent carrier nor is it proposing to serve an EAS point. Therefore, the convert and replenish theory is not useful in this situation.

Finally, while AA eagle may try to claim it has a monopoly on community support, in fact, Savannah/Hilton Head have been much more energetic in seeking relief pursuant to § 41714 than any other community. Indeed, unlike Greenville/Spartanburg, the communities of Savannah/Hilton Head have attempted to forge their own link to O'Hare by being the first community to seek an exemption from the High Density Airport Rule. See Application of the Communities of Savannah/Hilton Head, Docket OST-98-3603, April 2, 1998. The willingnes, of the community to blaze its own trail impressed ACA and, subsequently, ACA filed for relief from the slot rules to permit it to operate to O'Hare from Savannah/Hilton Head. Both before and after the filing of ACA's application, there have been numerous expressions of community and Congressional support from both Georgia and South Carolina. ACA's operations to O'Hare, once approved, will have the overwhelming support of the Savannah/Hilton Head market so as to make ACA's service a solid success.

ACA's application for exemption slots with which to serve Savannah/Hilton Head has been pending for over eight months. ACA is ready, willing and able to assign a regional jet to the Savannah/Hilton Head market upon the award of either three or five O'Hare exemption slots. However, AA Eagle has intentionally sought to elongate the process by its late filing of a slot exemption application which it demands be given contemporaneous consideration with the ACA request. The Savannah/Hilton Head communities suffer by the uncertainty created by the inappropriate attempt of AA Eagle to turn ACA's straight forward request for relief from the High Density Airport Rule into a comparative proceeding pitting one community against another.

Consideration of the AA Eagle application, whatever its merits, should be deferred until the Department considers the ACA application for Savannah/Hilton Head exemption slots. If the DOT nonetheless, wishes to rule on both applications at the same time, the grant of the ACA application will, by every objective measure, produce the greatest public benefits and should be given primary consideration. Moreover, there is no legal basis available to the DOT to grant the relief requested by the largest O'Hare commuter slot holder and accordingly, the AA Eagle application should be denied.

Very truly yours,

BAGILEO, SILVERBERG & GOLDMAN, L.L.P.

Attorneys for

ATLANTIC COAST AIRLINES

Robert P. Silverberg

Dated: December 2, 1998