OST-97-3237 / Undocketed / United and Mexicana / US-Mexico Codesharing / Chicago-Toronto Codeshare / Joint Motion of United and Mexicana for Immediate Action / May 6, 1999

Joint Application of

for an exemption under 49 U.S.C. §40109 and a statement of authorization under 14 C.F.R. §212

(U.S.-Mexico code sharing)

Application of

for a statement of authorization under 14 C.F.R. Part 212

(Chicago-Toronto code share with Mexicana)

United Air Lines, Inc. ("United") and Compania Mexicana de Aviacion, S.A. de C.V. ("Mexicana") hereby move for immediate action on (1) their joint application in Docket OST-97-3237, as amended February 12, 1999, and supplemented February 22, 1999, for expanded U.S.-Mexico code-share authority; and (2) United's application dated May 20, 1998, for a statement of authorization to code share for Mexicana on a blind sector basis on United's flights between

Joint Motion of United and Mexicana

For Immediate Action

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1. On May 3, 1999, the Department issued an Order on Review and Reconsideration (Order 99-5-2) addressing, the exclusivity provisions at issue in the United/All Nippon Airways, Delta/Air France, Continental/Air France and Northwest/Air China code-share partnerships. In its decision, the Department outlined a policy for reviewing the application of exclusivity provisions on a case-by-case basis. With respect to markets that are strongly competitive, such as Open Skies markets, carriers are entitled to a rebuttable presumption that exclusivity provisions are permissible. The presence of an Open Skies agreement was presumably the basis for the Department's May 4, 1999 approval of the United/Air Canada application to code share to Mexico via the U.S., notwithstanding the exclusivity provision in their agreement. In granting the approval, the Department noted that it "saw no need to preclude the effectiveness of [the

Joint Motion of United and Mexicana.

For Immediate Action

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exclusivity provision." /1 The state of competition in the U.S.-Mexico market warrants the same finding with respect to the United/Mexicana contractual exclusivity provision. /2

2. On January 26, 1999, the U.S. and Mexico concluded a Memorandum of Consultations ("MOC") and annex amending the U.S.-Mexico Air Transport Agreement, establishing an expansive new U.S.-Mexico code-share regime. United and Mexicana promptly amended and supplemented their pending joint application to conform with the terms of the new agreement. United also had previously filed an application for a statement of authorization to extend the United/Mexicana code share to Canada by United displaying Mexicana's designator code on United's flights between Chicago and Toronto. These applications are now ripe for decision. Based on the 1999 MOC, which establishes a framework for broad new network-to-network code-share competition, United and Mexicana urge the Department to immediately grant their pending applications and permit them to exercise these valuable new rights without conditioning their ability to enforce their contractual exclusivity provision.

3. The Department has repeatedly acknowledged the high level of competition in the U.S.-Mexico market. In highlighting the benefits from the January 1999 MOC, Secretary Slater commented that "[t]his agreement could lead to more U.S.-Mexican code-share arrangements

2/ The United/Mexicana. Code Share and Regulatory Cooperation Agreement, a copy of which was filed with the Department's Licensing Division on November 26, 1996, with confidential information redacted, contains an exclusivity provision with respect to code sharing in U.S.-Mexico and U.S.-Central America via Mexico markets, with limited exceptions. This exclusivity provision is comparable to that contained in the United/Air Canada code-share agreement.

Joint Motion of United and Mexicana

For Immediate Action

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than currently exist between the United States and the rest of the world combined." "U.S., Mexico Sign Agreement to Liberalize Aviation Services," February 15, 1999, at I (emphasis added). The press release further notes that "[m]ajor service improvements are anticipated as a result of this new agreement. Currently, applications for code sharing between some 10,000 U.S.-Mexican city-pair markets are pending before the DOT." Id. at 2. Clearly, the level of code-share competition in the U.S.-Mexico market will exceed the level of competition provided under most Open Skies agreements.

Even prior to the conclusion of the January MOC, the Department stated, "the U.S.-Mexico market is very competitive. No airlines or gateways have dominant positions in the market as is the case in Central America. Indeed, eleven U.S. carriers serve the market from numerous gateways and several U.S. carriers provide nonstop service from their hubs .... [G]iven the large number of carriers serving and the number of gateways served, alternative ... services are available for cities throughout the United States, resulting in a wide range of competitive services." Order 97-1-15 at 4-5 (Delta Air Lines, Inc./Aerovias de Mexico, S.A.). The U.S.-Mexico market is sufficiently competitive to support continued operation of the U.S.-Mexican carrier code-share partnerships under the exclusivity terms in the agreements governing them. /3

3/ Indeed, as the Department has decided to let stand certain Northwest/Air China exclusivity provisions in a market as highly restrictive as the U.S.-China market, there should be no issue with respect to the highly competitive U.S.-Mexico market. See Order 99-5-2 at 8. Similarly, there can be no question that the U.S.-Mexico market is far more competitive than the other two markets considered by the Department in that order (U.S.-France and U.S.-Japan). In those

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For Immediate Action

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4. The Department previously approved U.S.-Mexico code sharing notwithstanding the existence of exclusivity arrangements between code-share partners. Nothing has changed in the U. S.-Mexico market to justify a reversal of the Department's position on these code-share agreements and their exclusivity provisions. Indeed, all movement in the market in recent years has gone in one direction only - expansion of competition. All U.S. carriers interested in operating service to Mexico from their U.S. hub cities are currently doing so. Moreover, the bilateral agreement permits carriers to offer as much capacity as they see fit. The only constraint on competition has been the limits on code-share services imposed by city-pair designation limitations. With the January 26, 1999 MOC, these constraints too have fallen away, and all carriers seeking to expand their code-share authority can now have their pending requests fully accommodated. Moreover, as part of the MOC, the U.S. and Mexico committed to meet in July to continue talks on further liberalization. In summary, the U.S.-Mexico market was highly competitive even before conclusion of the 1999 MOC, and, with the new agreement in place, it is now poised to become one: of the most competitive international markets in the world thanks to the expansion of code-share networks.

5. Each of the U.S. carrier/Mexican carrier code-share partnerships involves an element of exclusivity. The carriers have all relied on these provisions in investing the substantial amounts of time and money required to develop a broad, well-operating code-share

3/ (... continued)

markets, unlike U.S.-Mexico, both frequencies and designations are limited. "Same country" code shares are heavily restricted by both the U.S.-France and U.S.-Japan agreements, whereas in the U.S.-Mexico agreement, "same country" and "bilateral" code shares are treated equally.

Joint Motion of United and Mexicana

For Immediate Action

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relationship that best serves each carriers' passengers. With full knowledge of these provisions, the Department has previously granted all of these carriers the requisite authority to implement U.S.-Mexico code-share operations. United and Mexicana seek nothing more than to continue developing their code-share relationship and expanding the number of markets and passengers they jointly serve. The premise of the new agreement on code-sharing was to enable U.S. and Mexican carriers to do just that. There is no reason for further delay in issuing the necessary authorizations and permitting U.S. and Mexican carriers to offer expanded service to the traveling and shipping public.

6. United's May 20, 1998 request to display Mexicana's code on a blind sector basis on United's Chicago-Toronto flights is not covered by the terms of the 1999 MOC but is fully supported by principles of comity and reciprocity. The Department has already allowed Mexicana and Air Canada to code share on each other's services between the U.S. and both Canada and Mexico. /4 As noted previously, United has been authorized to display Air Canada's code on United's U.S.-Mexico flights. These transborder "third-country" code shares are an integral part of the North American segment of United's global alliance. Other carriers have also been authorized to engage in similar transborder code shares with "third-country" partners as part of their global networks. /5

5/ For example, American and Canadian International also have been authorized to code share

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Joint Motion of United and Mexicana

For Immediate-Action

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The Department should consider the implications of deferring or conditioning the United/Mexicana agreement in light of its actions with respect to the code-share services of competing alliances operating between the U.S. and Mexico involving "third-country" as well as 11same-country" carriers. /6 The same principles of comity and reciprocity under which the Department expects Mexico to approve these "third-country" code shares that the U.S. has already sanctioned also warrant immediate and unconditional approval of the pending United/Mexicana code share in the Chicago-Toronto market. /7

With respect to code shares governed by the bilateral agreement, the U.S. should consider that it urged Mexico for nearly two years to agree to an expansion of transborder code-share services. So far as United and Mexicana are aware, never once during the several written and oral consultations between the two governments on this issue was the question of code-share exclusivity ever raised. In the final result, Mexico agreed to virtually everything the U.S. had requested. In these circumstances, for the U.S. to now raise the wholly extraneous issue of code-

6/ In the case of code shares between two U.S. carriers, the Department does not even require the partners to obtain prior DOT approval and has no occasion to review, let alone condition, any exclusivity provisions. Likewise, when two foreign carriers seek approval to code share, the Department does not review the contractual provisions governing their relationship. Such code shares are fairly widespread in transborder U.S.-Mexico markets.

7/ Notwithstanding the fact that third-country code shares are not covered by the MOC, Mexico has approved every third-country code share involving a U.S. carrier of which United and Mexicana are aware and has done so promptly. The Department's deferral of such code shares stands in sharp contrast to Mexico's actions.

Joint Motion of United and Mexicana

For Immediate Action

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share exclusivity as a basis for not approving code-share service under the MOC is inconsistent with the bilateral understandings and discussions which underlie that important agreement.

As noted below, there is a way of dealing with the exclusivity issue that would not preclude immediate approval of pending code-share applications. In offering this alternative, however, United and Mexicana do not wish to be understood as suggesting that any consideration of limiting code-share exclusivity is warranted in the context of the U.S.-Mexico bilateral relationship and especially in the context of the recent bilateral negotiations and agreement relating to transborder code sharing.

7. Even if the! Department decides that it should conduct a review of the effect of code-share exclusivity provisions on competition in the U.S.-Mexico market, it should immediately approve all pending applications that conform to the 1999 MOC as well as those to third-country points, and allow the parties to implement these valuable new services without conditions on exclusivity. Thereafter, the Department could, if it deemed necessary, conduct a review of what impact, if any, such contractual provisions may have on the state of competition in the market. If the Department wishes to consider changing its policy on code-share exclusivity as applied to U.S.-Mexico relationships on which carriers have relied for a number of years in developing their U.S.-Mexico code-share partnerships, the Department should conduct a systematic review of the issue, including an analysis of U.S. carrier "same-country" partnerships code sharing to Mexico. /8 Any policy the Department considers adopting must be applied

8/ Such "same-country" partnerships exist between and among Continental, Northwest, Alaska,

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Joint Motion of United and Mexicana

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uniformly and should be issued in a proceeding that includes all existing code-share partnerships carrying U.S.-Mexico traffic and allows for notice and the opportunity to comment. In the meantime, however, United/Mexicana and the other carriers poised to inject vigorous new competition into the market should be promptly allowed to do so without further delay.

WHEREFORE, United and Mexicana respectfully urge the Department to immediately grant their pending applications and permit the parties to expand their operations under the present terms of their code-share agreement.

Respectfully submitted,

Squire Sanders for Mexicana

Kirkland Ellis for United

DATED: May 6, 1999

8/ ( ... continued)

America West, and Mesa Air Group with respect to U. S.-Mexico code-share services.