OST-99-5674 / Alitalia / KLM / Northwest / Joint Response to Order 99-5-10 / Antitrust Immunity / July 15, 1999

Joint Application of

In response to items A, B, and C of the Department's information request contained in Order 99-5-10, the Joint Applicants are separately submitting certain proprietary and sensitive corporate documents and information to the Department accompanied by a Motion for Confidential Treatment of those documents pursuant to Rule 39 of the Department's Rules of Practice. The Joint Applicants have prepared indices relating to their respective confidential documents, which are attached hereto.

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A. The requested documents are being submitted separately with a Motion for Confidential Treatment.

B. The requested documents are being submitted separately with a Motion for Confidential Treatment.

C. The requested Alitalia traffic data are being submitted separately with a Motion for Confidential Treatment.

D. Approval of the Northwest/KLM/Alitalia alliance will produce important procompetitive effects on international aviation in several ways. The most direct effect on international competition will be a major expansion of services between the U.S. and Italy by U.S. carriers and their third-country alliance partners because approval of the alliance will "trigger" the open skies agreement between the U.S. and Italy. Open skies to Italy will bring new competitive services by the major U.S. international carriers from their established hubs in the U.S. These new services will include additional frequencies on routes already served on a restricted basis and first nonstop service in other significant markets.

American Airlines has demonstrated strong interest in introducing Chicago-Rome service and is likely to expand the frequency of its Chicago-Milan service. American has previously stated to the Department its interest in providing service to Italy from its hubs at Dallas/Ft. Worth and Miami. Delta Air Lines has stated its interest in expanding its Atlanta-Italy service to Milan as soon as possible. In addition, it will have the potential to expand its Cincinnati-Europe services to include Milan and/or Rome. United Air Lines has demonstrated its interest in adding Washington-Rome service to its current Washington-Milan service and is expected to introduce services to Milan and Rome from its principal hub at Chicago. Also, United will have the strong

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potential to introduce direct flights to Milan and/or Rome from its major hubs at Denver and San Francisco. US Airways has demonstrated immediate interest in adding Milan to its growing list of Philadelphia-Europe services and has the potential to serve Italy from its other hubs at Charlotte and Pittsburgh. TWA will gain the opportunity to serve Italy from its St. Louis hub.

In addition to this impressive list of new nonstop services to Italy, Delta and United will provide new competitive services through the hubs of their European alliance partners. This will introduce new competition not only to Milan and Rome but also to the other significant traffic points in Italy. Delta will serve Italy on joint services with Air France and Austrian. Likewise, United will offer on-line services to all significant traffic points in Italy through its alliances with Lufthansa and SAS. The joint applicants anticipate also that American and British Airways will obtain and implement codesharing authority to provide joint on-line services between the U.S. and Italy. Simply by linking existing services, AA/BA could provide one-stop service via London between some 25 U.S. gateway cities and over a dozen cities in Italy.

Besides all the new competition due to the advent of open skies, grant of the application will enable the alliance itself to strengthen competition in the U.S.-Italy market and in transatlantic markets generally. Through this alliance, Northwest will be able to enter the U.S.-Italy market. Likewise, only through this alliance will Alitalia be able to remain fully effective as a competitor in the market. Only by joining an alliance with a U.S. carrier can Alitalia obtain efficient and effective access to U.S. traffic at points other than the seven gateways that it now serves. Moreover, in view of the immediate and major expansion of new U.S. carrier services resulting from open skies, joining this alliance is the only way Alitalia can meet the increased level of competition.

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Aside from the effect on services in the U.S.-Italy market, approval of the alliance will enable Northwest/KLM/Alitalia together to become a stronger competitor in the overall transatlantic market. The existing Northwest/KLM alliance is smaller than the STAR alliance and the forthcoming alliance having Air France/Delta as its core. And, of course, it is much smaller than the "oneworld" alliance, which includes American, British Airways, Iberia, and Finnair, among others. Even with the addition of Alitalia, the Northwest/KLM/Alitalia alliance will remain significantly smaller than these other global alliances, but it will be strengthened so that it can compete effectively with them.

The larger size will produce economies of scale for more efficient operations. The larger scope of operations will produce broader geographic coverage and access to more potential traffic. By integrating route systems, the alliance will be able to offer more alternative routings and more frequency choices for passengers between the U.S. and points beyond Italy in Europe, the Middle East, and Africa. In short, the alliance carriers will be able to offer coordinated single-carrier" services on a much broader and stronger basis than they could possibly do alone. Together they can compete with the other alliances in thousands of transatlantic city-pair markets and continue to grow. The benefits to competition of this approach are already demonstrated with the success of the existing Northwest/KLM alliance. Alone, neither provided any Detroit-Amsterdam service. Together, this summer they operate four daily wide-body roundtrip flights on the sector, serving passengers in thousands of city-pairs between points in the U.S. and points beyond Amsterdam.

Addressing the competitive effects in specific city-pairs of the expansion of the current alliance to include Alitalia, the absence of any negative effects is readily apparent. This alliance has no significant existing overlap. Northwest does not serve Italy, either directly or on a

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codeshare basis. Therefore, the combination of Alitalia with Northwest does not have the potential to eliminate any competition. Likewise, Northwest does not compete with Continental in any U.S.-Italy city-pair market. Instead, the Northwest/Alitalia alliance introduces Northwest into the market as a positive competitive force. The effects are all pro-competitive, especially because the accompanying advent of open skies will dramatically and suddenly introduce other services, as described above.

KLM serves the U.S.-Italy market on a connecting basis via its hub in Amsterdam. KLM codeshares on Northwest's transatlantic flights and on domestic flights beyond the U.S. gateways. KLM's share of the U.S.-Italy market is small, approximately four percent. In the expanded alliance, Alitalia and KLM will cooperate in developing these services via Amsterdam. At the same time, however, the other alliances will use new rights under the open skies agreement to introduce similar U.S.-Italy services via their European hubs as well as direct U.S.-Italy flights.

Northwest and Continental have a Master Alliance Agreement that provides that Continental ultimately will join the transatlantic joint venture between Northwest and KLM (and, if this Joint Application is approved, between Northwest, KLM, and Alitalia). The Joint Applicants have not yet agreed upon the terms under which Continental would coordinate its commercial operations with those of the Joint Applicants. When such agreement is reached, the four carriers will present a new application to the Department for approval as necessary. Accordingly, the present application does not request authority to integrate Continental's transatlantic operations with those of the Joint Applicants.

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Pending an agreement between the Joint Applicants and Continental to include Continental in the transatlantic joint venture, and provided that such agreement is approved and granted antitrust immunity by the Department, it is anticipated that the current arrangements between Alitalia and Continental, as twice approved and authorized by the Department, will continue. Alitalia and Continental will continue outside the transatlantic joint venture to codeshare under block-space arrangements and individually sell their respective seat capacity as competitors of one another.

Thus, approval of this application will have no adverse competitive effect in city-pair markets where Continental competes or has cooperative arrangements with Alitalia. The only effects will be positive in that approval will enable Alitalia to remain a viable competitor in transatlantic markets and enable U.S. carriers to enter and serve those markets under the open skies agreement.

E. At each of the Italian cities served by Alitalia, airport facilities, including gates and slots, are available without constraints to U.S. carriers who want to begin or increase services.

F. The primary service and equipment changes in U.S.-Italy markets anticipated by the joint applicants involve the establishment of new services connecting the route systems of Northwest and Alitalia. Because Northwest is the only major U.S. carrier that is not now authorized to serve Italy, no direct service is provided currently between Northwest's principal hubs, Detroit, Minneapolis/St. Paul and Memphis and Italy. The alliance will enable the joint development of new nonstop services between Northwest's hubs and Alitalia's transatlantic gateways, Milan and Rome. In the first year of operations, the Joint Applicants plan to introduce daily nonstop flights between Detroit and both Milan and Rome. The optimal timing of

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introduction of flights between Northwest's other domestic hubs and Milan and Rome is being evaluated.

These new transatlantic services between the U.S. and Italian gateways will enable the alliance to develop seamless connecting services for traffic between points throughout Northwest's domestic route system, on the one side, and, on the other side, Milan, Rome, and beyond to points served by Alitalia in Italy and other countries. The Joint Applicants will integrate their systems following the successful approach developed by the Northwest/KLM alliance. Coordination of schedules, passenger and baggage handling, and other service features will enable the alliance to provide the equivalent of new single-carrier services in thousands of connecting markets.

G. Approval of the joint application will have no effect on the Civil Reserve Air Fleet commitments of Northwest.

H. The labor effects of the proposed alliance will be positive, creating growth and expansion opportunities for each of the alliance partners, which will in turn create enhanced job opportunities and job security for Northwest employees. The parties anticipate having discussions regarding the provision by Northwest to Alitalia in the U.S. of certain ground handling, reservations and sales services.

In recently concluded labor negotiations, Northwest and its unions reached agreements which include comprehensive job security provisions for employees, including no-layoff protection for employees in job classifications covered by the ratified agreements.

As mentioned above, employees covered by ratified agreements have job security covenants that would prohibit layoff subject to specified exceptions. Notwithstanding the protection afforded by the job security covenants, in the event any employee is adversely

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affected by alliance activities, their entitlement to compensation will be governed by the respective collective bargaining agreement, or if a management employee, company policy.

1. The labor dispute between Alitalia and the IAM stems from the collective bargaining process originating in 1990 when the parties exchanged proposals, including Alitalia's proposal to utilize a third-party handler for its airport operations. After years of good faith negotiations and following exhaustion of the procedures designated by the Railway Labor Act, the parties were released to engage in self-help in September 1993. At that time, Alitalia implemented its proposal and the IAM chose to strike. No lockout occurred. In subsequent negotiations the IAM refused to accept Alitalia's right to subcontract, although it has reached such agreements with other airlines.

In 1997 the parties resumed negotiations in the interest of finding a solution and providing a measure of compensation for those employees whose jobs were lost as a result of the subcontracting and the strike. Alitalia presented proposals for severance pay and substantial pension enhancements for the affected former employees but these proposals were rejected. At no time has Alitalia violated the spirit or intent of the Railway Labor Act. Rather, Alitalia continues to seek a fair solution including provision of compensation benefits for the affected employees.

In May, 1999, Alitalia proposed to the IAM that the parties resume once again efforts to resolve their labor dispute. Since then Alitalia and the IAM have entered into formal discussions to negotiate a mutually satisfactory resolution and these discussions are ongoing. The next meeting is scheduled for August 5 and 6, 1999.

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Alitalia has been and remains committed to resolving this matter on fair terms to the affected employees through good faith negotiations directly between the two parties, Alitalia and the IAM.

Respectfully submitted,

Elliott M. Seiden for Northwest

Richard Mathias of Zuckert Scoutt for Alitalia

Paul Mifsud for KLM

July 15, 1999