OST-98-4291 / OST-98-4292 / Aero Continente / Foreign Air Carrier Permit and Exemption / Peru-US / Answer of Aero Continente / September 2, 1998

Application of

for a Foreign Air Carrier Permit pursuant to 49 U.S.C. section 41302

(Peru-U.S.)

Application of

for an exemption pursuant to 49 U.S.C. section 40109 from the provisions of 49 U.S.C section 41301.

(Peru-U.S.)

Aero Continente, S.A. ("Aero Continente" or "Applicant") hereby replies to the answer of Fine Air Services, Inc. ("Fine Air") and respectfully represents and alleges as follows:

1. The answer of Fine Air is wholly without merit and must be rejected by the Department of Transportation (the "Department"). Fine Air makes two arguments -

1. First, it claims that because the Government of Peru has placed a ban on Fine Air's service to/from Peru the Department should not take action on Aero Continente's applications until the ban is lifted. This argument is simply a rehash of the allegations Fine Air made in its complaint against the Government of Peru filed September 27, 1995 in Docket OST-95-691, in which it sought the same kind of relief - denial of authorization of Peru flag airline service to the U.S. until the ban on Fine is lifted, and setting out all of the same arguments, all of which the Department fully evaluated and rejected in its Order Terminating Proceeding, Order 96-7-5. Fine presents no new information or rationale for the Department to change its position now and to act adversely in the case of Aero Continente.

(b) Second, that there are reports that the "Head" of Aero Continente is under investigation and facing charges for drug trafficking which must be investigated by the Department. The second argument is equally fallacious. The complete reply to Fine Air is that the ownership and control of Aero Continente is as stated in its application, Exhibit AER-1 at page 4. Mr. Fernando Zevallos, the person identified by Fine Air as the "head" of Aero Continente owns no stock of and is neither an officer nor director of the company. He is the brother of Lupe and Ricardo Zevallos who own the controlling interest in the carrier and who are officers and/or directors of Aero Continente. The facts demonstrate no basis on which to deny or delay action on the applications of Aero Continente.

Both of Fine Air's arguments are patently unsound and present no reasonable basis on which to deny or to defer action on the applications of Aero Continente. On the basis of the facts in this case, the law and sound administrative policy, the applications of Aero Continente should be approved.

2. Aero Continente does not have any quarrel with Fine Air and the representations herein are specifically directed at putting Fine Air's arguments as they relate to Aero Continente into proper focus. Fine Air has a dispute with the Government of Peru. It is a dispute that is unique to Fine Air and does not involve any other airline. It would seem reasonable to conclude that it is up to Fine Air to demonstrate to the Government of Peru new evidence or representations of changed circumstances that would persuade Peru to lift the ban on Fine Air. But it is not reasonable, at least to Aero Continente, to conclude that by preventing Aero Continente from operating to the United States Fine Air would cause Peru to view Fine Air more favorably or to rethink the basis of its decision to ban Fine Air from operating to/from Peru.

3. The Department's Order 96-7-5, Order Terminating Proceeding, served July 10, 1996, in the matter of the Complaint of Fine Airlines, Inc. against the Government of the Republic of Peru, Docket OST-95-691, effectively and reasonably disposed of the issues Fine Air raised at that time. /1 In Order 96-7-5, at page 4, the Department determined that "Fine has not demonstrated, and the record does not support a finding, that Peru's action at the time was unjustifiable or unreasonable under the circumstances presented." Fine Air in its answer to Aero Continente does not present any new facts or changed circumstances which would warrant a different conclusion. Aero Continente does not object if Fine Air can present new facts or show changed circumstances; it objects only to Fine Air's position that Aero Continente's applications should be held hostage to Fine Air's wish to operate charter service to Peru.

4. The service Aero Continente proposes to operate as a scheduled combination carrier falls within the provisions of the Air Transport Agreement Between the Government of the United States of America and the Government of the Republic of Peru signed June 10, 1998. Aero Continente has been properly

1/ Fine Air's claims that it has been exonerated of any wrongdoing are verbatim to the claims it made on its own behalf in OST 95-691, which the Department did not find persuasive. For example, contrary to Fine Air's representations in the instant Answer and in its original Complaint against the Government of Peru (See OST 95-691 dated 27 Sep 95), the FAA letters do not exonerate Fine Air for any intentional wrongdoing. In fact, the FAA in letters signed by Clarence Shaffer on Aug. 11, 1995 and by David Hinson on Aug. 29, 1995, states with specificity that "The investigation did not uncover evidence supporting a conclusion that Fine Airlines, Inc. violated regulations governing the transportation of hazardous materials by air". Nowhere do these letters contain references to the transport of arms nor do they indicate that hazardous materials regulations would have been violated had Fine Air knowingly transported arms. See Answer of Fine Air Services, Inc. at 3.

designated by Peru to operate combination scheduled service to the United States as required by the Agreement. Fine Air has asked the Department to ignore the terms of the new Agreement and not to act favorably in the case of applicant Aero Continente, despite the evidence demonstrating that it is fully qualified and has a proper compliance disposition. The Department should not act in derogation of the Air Transport Agreement and it should promptly approve Aero Continente's applications.

5. Fine Air disputes the evidence submitted by Aero Continente that it is owned and controlled by Lupe Zevallos and her brother Ricardo Zevallos by referring to articles published in the Miami Herald in April and May, 1997. These articles make reference to Fernando Zevallos, who is the brother of Lupe and Ricardo Zevallos. Fine Air relies upon these reports to "question the accuracy of Aero Continente's application with respect to ownership and control of the carrier." Aero Continente's application was carefully prepared and the information as to ownership and control is true-and correct. The accuracy of the information was verified by the Chairperson of the Board, Ms. Lupe Zevallos, and sworn to before the Consul General of the United States in Peru. The conflicting hearsay report in the Miami Herald, the accuracy of which Fine Air says it "has no knowledge of" should be given no evidentiary weight whatsoever.

6. As a matter of law, the evidence submitted by Aero Continente must be given full weight. The arguments and hearsay reports presented by Fine should be dismissed. In this connection, Aero Continente notes that section 7(c) of the Administrative Procedure Act (5 U.S.C. section 556(d)), allows an administrative agency to receive any documentary evidence and to reach a decision on the basis of the whole record, supported by and in accordance with the reliable, probative, and substantial evidence. Substantial evidence means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938). Aero Continente, through official business records and sworn testimony supports the fact that Mr. Fernando Zevallos, despite reported allegations of wrongdoing and subsequent acquittals, was not part of Aero Continente at the time of its application.

7. Fine Air would have the Department undertake an investigation based upon newspaper articles published in the Miami Herald from November 1996 to May 1997, articles which would be inadmissible hearsay in a court of law. On pages 2 and 5 of its Answer, Fine Air states that it has no knowledge and takes no position on the accuracy of these reports. Although administrative agencies are free from the constraints of technical evidentiary rules,

Consolidated Edison, 305 U.S. at 230.

Fine Air attempts to persuade the Department that Aero Continente's applications for a foreign air carrier permit and for an exemption should be denied based on "news reports [which] suggest that [Fernando Zevallos] is in fact the "founder" and "head" of Aero Continente. Fine Answer at 2. While these articles report that Mr. Zevallos has been accused of criminal offenses involving drug trafficking, they also report that he has been acquitted by the official Peru courts on all but one matter which is still pending. Mr. Zevallos's history with Aero Continente is hereinafter set forth. Mr. Zevallos's name does not appear in the Aero Continente applications filed with the Department because he was not with the company when the applications were filed. Ownership and control of the company is vested in Lupe Zevallos. Fine Air attempts to have the Department make a determination to defer action on Aero Continente's applications based on an investigation of Mr. Zevallos's relationship with the company in thee light of nothing more than the Miami Herald newspaper articles. The newspaper articles are uncorroborated hearsay or rumor, which does not constitute substantial evidence. Consolidated Edison, 305 U.S. at 230. And, although heresay is admissible up to the point of relevancy (see Richardson v. Perales, 402 U.S. 389, 410 (1971)), the matters Fine Air urges the Department to consider are irrelevant.

8. Fine Air argues that Fernando Zevallos is "an alleged drug trafficker" and that "if there is any possibility of Fernando Zevallos having any direct or indirect relationship with the carrier" then the Department must investigate the allegations. In reply to this contention Aero Continente reiterates and states unequivocally that Fernando Zevallos has no ownership interest, direct or indirect, with Aero Continente and is not an officer or director of the company. An independent investigation into the development of Aero Continente shows that the source of funds and their financial application has been consistent and reasonable and properly evidenced in the company's financial records. See Attachment A. This Attachment further shows that Fernando Zevallos was not a founding shareholder of Aero Continente. He was a shareholder during the period January 1993 until January 1995. Aero Continente further states that Fernando Zevallos was Chairman of the Board from June 10, 1992 until January 15, 1995. He was again elected as Chairman of the Board February 15, 1996 until he resigned effective April 24, 1997. He was a Member of the Board of Directors from May 9, 1997 until August 4, 1997. See Attachment B. He has not been involved with the company as an owner, officer or director after August 4, 1997, a full year having elapsed before the applications were filed.

9. Fine Air further claims that if there is a relationship between Fernando Zevallos and Aero Continente and if Mr. Zevallos is being investigated "regardless of whether the investigation/prosecution is merited" then "reciprocity clearly dictates" that the Department must not take action on Aero Continente's applications until the investigation is concluded. In other words, so long as Fine Air is banned from serving Peru and there are proceedings pending in Peru involving the ban on Fine Air then the Department must do the same thing vis-a-vis Aero Continente and not act on its applications under the hypothesis of Fine Air. That view is wholly incorrect. In the first place, as has been demonstrated, there is no ownership interest, direct or indirect, or management involvement as an officer or director existing between Fernando Zevallos and Aero Continente. But secondly, even if there were a relationship, direct or indirect, there is a significant difference between the matters which resulted in the ban imposed on Fine Air and Aero Continente, which has not violated any law or regulation or jeopardized the national security of the United States. The concept of reciprocity cannot be applied since the facts surrounding the ban on Fine Air do not correspond even remotely to the facts involving Aero Continente's application.

10. Aero Continente has contacted counsel for Fernando Zevallos, attorney David Rothman, who has provided information on the status of the investigation of Mr. Zevallos. (See Attachment C, Letter from attorney Rothman to Special Agent Irizarry, Drug Enforcement Administration, dated August 17, 1997.) The U.S. Drug Enforcement Administration ("DEA") has investigated Fernando Zevallos, and in two separate reports dated September 26, 1995 and May 10, 1997, determined that no evidence of drug trafficking had been found. The DEA has closed the investigations in both the U.S. and Peru DEA offices. (See Attachment D.) Attorney Rothman has advised that no evidence has been offered which ties Fernando Zevallos to the drug trafficking organization which is being tried in the case. Thus, even if Mr. Zevallos had a relationship with Aero Continente, there are major factual differences between the case of Fine Air and that of Aero Continente. Unlike Fine Air, Aero Continente itself has not violated any law or regulation or jeopardized the national security of the country to which it seeks to operate.

In summary, the self-serving arguments of Fine Air must be rejected. Denial of Aero Continente's application to serve the United States will not gain access to Peru for Fine Air. Fine Air's private dispute with the Government of Peru, a situation of its own making, must be resolved in some other way. The "drug trafficking" references are just red herrings which Fine Air uses to bolster its attempt to tarnish Aero Continente and make it appear as if Aero Continente were in the same category as Fine Air. But the materials of record, including documents supplied with this reply and the information contained in the applications and exhibits of Aero Continente, S.A. and other information that the Department can officially notice, establish that Aero Continente, S.A. is fully qualified to operate the services for which it has applied and that it has been properly designated by the Government of Peru under the new bilateral.

WHEREFORE, Aero Continente, S.A. respectfully requests that the Department of Transportation, without further delay, grant its Application for an Exemption, Docket OST-98-4292, authorizing it to engage in the scheduled foreign air transportation, as described, pending action of its Application for a Foreign Air Carrier Permit in Docket OST-98-4291, and that it take such other or further action, consistent with the premises herein, as may be in the public interest.

Respectfully submitted,

Aero Continente, S.A.

Lawrence D. Wasko

Jaquelyn Cluck

1150 Connecticut Avenue, N.W.

Suite 900

Washington, D.C. 20036

(202) 862 4370

Its Attorneys

September 2, 1998