OST-99-4979 / Eastwind / High Density Rule - LaGuardia, National / January 8, 1998

Application of

EASTWIND AIRLINES, INC. / DOCKET OST 99-4979

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

New York LaGuardia - Boston

New York LaGuardia - Ronald Reagan Washington National

Pursuant to 49 U.S.C. § 41714(c), Eastwind Airlines, Inc. respectfully requests that the Department grant an exemption from the requirements of Subparts K and S of Part 93 of Title 14, Code of Federal Regulations to permit Eastwind to operate the flights described herein between New York LaGuardia Airport and Ronald Reagan Washington National Airport, and between LaGuardia and Boston Logan International Airport during slot constrained hours.

Eastwind is a New entrant air carrier" as defined in 49 U.S.C. § 41714 (h)(3), and thus eligible for the relief requested herein pursuant to 49 U.S.C. § 41714(c). Until November 1998. Eastwind held no slots at either LaGuardia or Washington National. Eastwind subsequently obtained two slots during the shoulder period at LaGuardia (6:45 am and 9:30 pm) directly from the FAA. As it neither holds nor operates any other slots, Eastwind remains a new entrant air carrier for the purposes of"i9 U.S.C. §41714(c).

Eastwind has been in operation since 1995 and currently operates a fleet of 737 aircraft, including two new 737-700 aircraft, with substantial expansion planned for 1999. Eastwind currently provides service between a number of Northeast cities including New York, Boston, Philadelphia, Pittsburgh and Trenton and intends to increase its current service to these and other cities with the addition of the new aircraft. Eastwind's service is intended for the value minded business and tourist traveler desiring high quality, low cost service between major Northeastern cities.

Commencing within fifteen days of approval of its application, Eastwind proposes to offer new, low cost jet service between LaGuardia and Washington National and LaGuardia and Boston which would provide a critical low cost alternative to the existing high fare shuttles operated by US Airways and Delta which currently monopolize this market. Eastwind proposes to operate five round trip flights daily between LGA-DCA and LGA-BOS - two in the morning and three in the afternoon - which would provide highly discounted, peak hour shuttle service.

Passengers traveling between LaGuardia and National or Boston currently have no low cost alternative as the Delta and US Airways shuttles provide the only service between these city pairs with fares ranking among the highest in the nation on a per mile basis. Indeed, the Department of Transportation's Domestic Airline Fares Consumer Reports October 1998 Fare Information Report shows that the average fare on the LGA-Boston shuttle is the seventh highest and the LGA - Washington shuttle is the ninth highest fare in the U.S. in the 151-200 mile and 201 250 mile categories respectively). /1 When only high volume routes with over 1000 passengers per day are considered, the East Coast shuttle routes have the highest fares in the nation for their respective distances. Moreover, the Department's "average fare" statistics for the New York - Boston and New York - Washington routes understate the shuttle fares as more than 80% of shuttle passengers pay the much higher "walk-up fare" rather than the average fare and the Department's average fare includes lower fare flights from OK, making the shuttle routes the highest cost, high volume routes in the nation.

Eastwind proposes to break the Delta - US Airways duepoly in the shuttle market by offering a high quality, low cost alternative with five prime time shuttle flights operated six days a week - two flights in the morning and three in the afternoon. Eastwind's proposed unrestricted walk-up fare of $119 will be $78, or 40% lower than Delta's and US Airways' existing $197 fares. Eastwind's fare will result in a cost to the passenger per mile in line with the costs of other competitive, short haul markets in the East.

Section 206 of the Federal Aviation Administration Authorization Act of 1994 /2 authorizes the Secretary to grant an exemption from the High Density Rules "[i]f the Secretary

1/ Notably, the West Coast shuttle fares between Los Angeles and San Francisco, where slot restrictions do not apply and fierce price competition exists, average $84, or 38% lower than the $136 average LGA - DCA fare despite the fact that the West Coast shuttle route is nearly twice the distance of the East Coast shuttle. (Department of Transportation Domestic Airline Fare Consumer Reports October 1998.)

2/ Pub. L. 103-305, Title II. 206(a)(1), 108 Stat. 1584 (1994).

finds it to be in the public interest and the circumstances to be exceptional. . ." /3 In October 1997, the Department issued two orders concerning applications for exemptions from the High Density Rules which explicitly set forth the Framework for evaluating slot exemption requests by new entrant airlines." /4

In these Orders, concurring with concerns raised by Congress and the General Accounting Office, /5 the Department expanded the definition of "exceptional circumstances" by recognizing that the need for competitive service in a market, especially low-fare competitive service, constitutes an exceptional circumstance. We find that substantial benefits can be achieved through increasing competition at slot controlled airports in situations where consumers would be able to obtain significantly lower fares in noncompetitive or under served markets. Therefore, we find that applications proposing to introduce such service can meet the exceptional circumstances criterion. . . /6

The Department also clarified the other factors it would consider when deciding whether to grant or deny an exemption:

3/ 49 U.S.C. § 41714(c)

4/ Order OST-97-10-16, Order Granting and Denying Applications for Slot Exemptions at Chicago O Hare Airport. Docket Nos. OST 95-368, 97-2368. 97-2771 (October 24, 1997) ("O'Hare Order"); and Order OST-97-10-17, Order Granting and Denying Applications for Slot Exemptions at New York's LaGuardia Airport, Dockets OST 97-2230, 97-2442 and 97-2557 (October 24, 1997) ("LaGuardia Order").

5/ General Accounting Office., Airline Deregulation, Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets, October 1996.

6/ LaGuardia Order at 3-4.

Eastwind's proposed service satisfies all of the Department's requirements.

The Public interest" is defined in 49 U.S.C. § 40101 to include:

• "the availability of a variety of adequate, economic, efficient, and low-priced services without unreasonable discrimination or unfair or deceptive practices";
• "placing maximum reliance on competitive market forces and on actual and potential competition";
• "avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier unreasonably to increase prices, reduce services, or exclude competition in air transportation";
• "encouraging, developing, and maintaining an air transportation system relying on actual and potential competition ... to provide efficiency, innovation and low prices"; and
• "encouraging entry into air transportation markets by new and existing air carriers... to ensure a more effective and competitive airline industry".

There is no doubt that Eastwind's proposed service is in the public interest.

New York, the business capital of the world with more than twelve million residents in the metropolitan areas Washington, the political capital of the U.S. and Boston, the third largest metropolitan area

LaGuardia Order at 4.

on the East Coast, are connected by a shuttle system carrying more than 3.1 million passengers a year which, due to slot limitations, has seen no price competition for decades. As a result, passengers pay the highest cost per mile for travel between any major markets in the country.

There is no price competition on the shuttle routes. The large majority of shuttle passengers have no advance reservation and pay the standard "walk-up" fare when they arrive at either shuttle. The Delta and US Airways walk-up shuttle fares are, and traditionally have been, identical. Any passenger wishing to avoid the high shuttle fares has no alternative other than to avoid LaGuardia entirely and travel from JFK or Newark. The Department has long recognized, however, that these airports do not provide a viable alternative for the average shuttle passenger.

Indeed, the Department has determined that the shuttle routes from LaGuardia are unique and constitute a separate market from JFK or Newark service. /8

8/ The fact that neither JFK nor Newark are viable alternatives to LaGuardia is evident not only from the Department's findings but from various studies showing that Amtrak is a more significant competitor to the shuttles than are flights from JFK or Newark.

9/ Order 86-7-21. Order to Show Cause, Texas Air-Eastern Acquisition Case, Docket 43825 (July 9, 1986) at 9-10.

Not only is there no alternative service available on the shuttle routes, but the incumbent carriers also enjoy the little known but highly valuable and anti-competitive right to operate extra sections or "back-up" flights on the shuttle routes without restriction. These back-up flights do not require separate slots, are not subject to the "use it or lose its rules" /10 applicable to all other slots, and may be operated on a daily as needed basis as Delta or US Airways desires. Thus, any increased passenger load on these routes is absorbed by the existing shuttle carriers operating as many additional flights as they desire from both LaGuardia and Washington National without any restriction. This is not only anti-competitive and highly exclusionary, it also increases traffic congestion doing peak hours at LaGuardia and raises additional environmental concerns.

Eastwind's proposed service would, for the first time, introduce price competition into this key market with fares 40% lower then existing fares. The presence of Eastwind's high quality and low priced service at LaGuardia may well evoke a competitive response from the current shuttle carriers. If the existing shuttles choose to reduce their fares in response to Eastwind's new service, the public interests will be substantially furthered and, for the first time, there may be actual price competition on two of the highest volume, most important routes in the nation.

10/ 14 CFR 93.227 provides that "any slot not utilized 80 percent of the time over a 2-month period shall be recalled by the FAA." This provision is intended to ensure that valuable slots are used rather then simply hoarded and protected by incumbent carriers. The backup slots of the shuttle carriers are exempted from this requirement.

When the proposed service is initiated, Eastwind will have an all jet fleet wholly in compliance with Stage 3 noise requirements thereby fulfilling the policy objectives underlying this criterion for granting an extension. Moreover, Eastwind intends to utilize its new 737-700 aircraft for the new services which are among the quietest aircraft available.

The Department has repeatedly stated that it will favor those applicants which have a reasonably strong chance of providing an operationally and financially viable service. Eastwind has been in operation since 1995 offering discount fares in the markets it serves, and has had the benefit of strong financial support from its majority shareholder - UM Holdings Inc. As the Department is aware, Eastwind's key executives have extensive airline experience and expertise in successfully managing other shuttle operations.

With more than 3.1 million annual passengers, the shuttle routes can easily support another cattier -- particularly a low cost carrier providing heavily discounted service. Currently Delta carries approximately 60.49% of the passengers in these markets, while US Airways carries approximately 39.51%. Eastwind's low fare competitive service will stimulate substantial additional traffic particularly from value minded business travelers unwilling to pay the high current fares. Even assuming minimal traffic stimulation, however, and a conservative load factor of just 50%, Eastwind projects that it would provide service for over 34,000 passengers per month, over 1000 passengers per day. This would constitute 13.64% of the market, or, 9.7% of the ASM's on these routes. (See Exhibit 4 hereto.)

Eastwind's $119 unrestricted, walk-up fare, the fare paid by 80% of shuttle passengers, would be 40% below today s shuttle fares. Eastwind's average fares would be approximately 25-33% lower then the existing Delta and US Airways "average fares" (which are calculated including discounted system wide corporate fares and connecting fares not available to the typical shuttle traveler.) (See Exhibit 3 hereto.) Eastwind projects that even with a 40% lower fare and conservatively assuming just a 50% load factor, the proposed service will generate reasonable profits.

The Department has stated that it will favor applications for exemptions to allow new non-stop competitive service, especially low fare service. Eastwind is a new entrant; its proposed service will be non-stop and its fares will be at least 40% lower than those offered by the two other shuttle carriers. This is a clear case "where existing services do not provide meaningful price competition" which can only be corrected by allowing a new low fare carrier, such as Eastwind, to operate competitive service.

The Department has long expressed its sensitivity to environmental issues that could arise from granting exemption requests. In recognition thereof, in Order 98-10-29 the Department limited the numbers of exemption requests which would be granted stating "we have established limits for now - a total of thirty new operations, per day at LaGuardia - under the environmental assessment described in our previous orders, including 98-4-22."

In previous exemption applications, the issue of whether the Department would be required to prepare a new environmental impact statement before exceeding its self-imposed "thirty new operations" limitation, has been considered. This issue may be avoided, however, with respect to Eastwind's application which does not contemplate wholly new operations but rather the probable displacement of current shuttle Backup with Eastwind flights resulting in minimal net additional operations.

The number of extra sections or back-up flights operated by the shuttle carriers varies but is estimated to be approximately 10 flights per weekday. If, as expected, Eastwind's flights absorb sufficient market share so that these backup flights are eliminated, only a few net additional operations would be added with Eastwind's new service. Moreover, the Eastwind flights would be operated with more environmentally friendly Stage 3, two engine 737 aircraft (primarily new 737-700 aircraft), rather than the aging, three engine 727-200 aircraft now operated by both Delta and US Airways in their shuttle operations which have substantially higher emissions. Thus, neither traffic congestion, noise nor other environmental concerns would be exacerbated by Eastwind s proposal and the environmental impact would not be

significant.

The issue of whether an environmental impact statement is required in connection with granting slot exemptions was considered in City of New York v. Slater, 145 F.3d 568 571 (2d Cir. 1998) (holding that no environmental impact statement was required when DOT granted slot exemptions to Frontier, ValuJet and AirTran):

As the Eastwind proposal would result in a minimal number of net additional operations, and as the Department has previously determined that 46-68 additional daily operations would result in a minimal environmental impact /11, no new environmental impact statement would be required in connection with Eastwind's proposal.

Indeed, the Department would not be required to update its Environmental Assessment and Finding of No Significant Impact dated October 24, 1997. In that report, the Department stated that Proposed slot exemption applications . . . fall within recognized categorical exclusions . . ." and do not require any Environmental Assessment. /12 Even if the Department nevertheless determined that an updated Environmental Assessment was appropriate, the "primary environmental concern" previously identified by the Department - the "potential increase in aircraft noise" - would not require review as the Department has already determined that "at LaGuardia, the [Department's 1995] study estimated that an additional 46 or 68 daily

11/ Department of Transportation May 1995 Report to Congress. on the High Density Rules ( "DOT 1995 HDR Study")

12/ Department of Transportation, Environmental Assessment and Finding of No Significant Pact, October 24, 1997 at p. 3 ("DOT Environmental Assessment").

operations would result in a DNL increase of between 0.4 to 0.8 dB [and that] . . . no additional noise analysis is required for a federal action that would increase operations within these ranges." (DOT 1995 HDR Study quoted in DOT Environmental Assessment at 14.).

The proposed Eastwind operations would remain within the levels which the Department concluded would not require further noise analysis. Additionally, like the previously granted applications, Eastwind's proposed operations would have a "de minimus" impact on other environmental concerns including air quality. /13

Despite diligent efforts, Eastwind has been unable to locate existing slots at LGA for sale or lease. US Airways and Delta hold approximately 55.65% of all air carrier slots at LGA and 52.5% at DCA and are obviously disinclined to sell slots to a low cost competitor for use on the lucrative shuttle routes. Eastwind has also diligently, but unsuccessfully, attempted to purchase or lease slots from other carriers at LGA but has been unable to do so.

Eastwind's application meets every requirement established by law and every criterion established by the Department for the grant of an exemption from the High Density Rules. Accordingly. Eastwind respectfully requests slots to permit five round trip operations at LaGuardia, less than one percent of the take-off and landing slots available at that airport. If granted, the Department's provision of these rights would greatly enhance competition in one of

13/ DOT Environmental Assessment at p. I 5. Order OST 98- 10-29 Order Granting and Denying Applications for Slot exemptions at New York's LaGuardia Airport. Docket Nos. OST 98-4499. 97-2970, 98-4425, 98-3583 and 97-2932 (October 27, 1998) at p.12.

the highest volume, highest fare markets in the U.S where no price competition currently exists. Granting the exemption would have no adverse effect on LaGuardia -- the award would largely result in the substitution of Eastwind's operations for the already authorized backup operations of the existing shuttles - and no new environmental impact statement would be required. For these reasons, Eastwind respectfully requests that its exemption application be granted.

Respectfully submitted,

Patrick P. Salisbury, Esq.

Salisbury & Ryan LLP

1325 Avenue of the Americas

Seventh Floor

New York, New York 10019

(2 1 2) 977-4660

COUNSEL TO EASTWIND AIRLINES, INC.

DATED: January 8, 1999