OST-99-6680 / United and Air New Zealand / Antitrust Immunity / December 17, 1999

Joint Application of

UNITED AIR LINES, INC. and AIR NEW ZEALAND LIMITED / Docket OST-99-6680

under 49 U.S.C. §§ 41308 and 41309 for approval of and antitrust immunity for alliance agreements

United Air Lines, Inc. ("United") and Air New Zealand Limited ("Air New Zealand") (collectively, the "Joint Applicants") hereby apply, under 49 U.S.C. §§ 41308 and 41309, for approval of and antitrust immunity for the agreement between the Joint Applicants referred to herein as the "Alliance Expansion Agreement" or "Agreement" (Exhibit JA-1, attached hereto) /1 United and Air New Zealand request that antitrust

1/ For purposes of this application, the terms "Alliance Expansion Agreement" and "Agreement" shall include the following agreements executed or anticipated by the Joint Applicants: (1) the Alliance Expansion Agreement entered into on December 1, 1999, attached as Exhibit JA-1; (2) the Air New Zealand/United Airlines Alliance Agreement effective December 2, 1996, attached as Exhibit JA-2; (3) the Code Share and Regulatory Cooperation Agreement effective December 2, 1996, as amended, previously filed with the Department on December 19, 1996 (undocketed) and

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immunity for the Alliance Expansion Agreement be made effective immediately and remain in effect for a period of not less than five years. In support of this request, the Joint Applicants submit the following: I. INTRODUCTION

United and Air New Zealand are partners in a code-share alliance that has operated since May of 1997, between the U.S., on the one hand, and New Zealand, Australia, and several islands in the South Pacific, on the other. This alliance has enabled the carriers to extend the reach of their global networks, increase the number of itinerary options each offers the public, and compete more effectively against the code-sharing alliance between Qantas and American, the leading competitors in the market for air travel between the U.S. and Australia/New Zealand. /2

1/ (...continued)

attached as Exhibit JA-3; (4) the International Passenger Special Prorate Agreement effective May 15, 1997, attached as Exhibit JA4; (5) the International Bilateral Cargo Prorate Agreement effective July 1, 1998, filed separately as Exhibit UA-1 under Rule 39 confidentiality procedures; (6) the United Mileage Plus* and Air New Zealand Air Points" International Carrier Participation Agreements effective April 15, 1997, filed separately as Exhibit UA-2 under Rule 39 confidentiality procedures; and (7) any implementing agreements in furtherance of the foregoing agreements.

2/ In large measure, United's and Air New Zealand's ability to

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Having successfully initiated a code-sharing alliance on their trans-Pacific services, United and Air New Zealand now desire to broaden and deepen their alliance to achieve fuller operational efficiencies and continue the expansion of their networks on a more integrated and coordinated basis. To accomplish this end, the Joint Applicants have executed the Alliance Expansion Agreement.

Through an enhanced alliance, United and Air New Zealand intend to coordinate their services, improve the efficiency of their operations, enhance their ability to compete in the global marketplace, and expand the benefits available to the traveling and shipping public. Although United and Air New Zealand will continue to be independent companies, the underlying objective of their Alliance Expansion Agreement is to enable the companies to plan and coordinate services over their respective route networks as if there had been an operational merger between them.

Approval of, and antitrust immunity for, the Alliance Expansion Agreement are supported by the many commercial advantages and efficiencies that will flow from the Agreement's

2/ ( . . . continued)

provide these consumer and competition benefits is the direct result of the United States having concluded an open skies Air Transport Agreement with New Zealand in June of 1997.

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implementation and redound to the benefit of consumers. Approval and immunity are also fully consistent with the Transportation Code and Department precedents in other alliance cases.

Through the broadening and deepening of their alliance, United and Air New Zealand will be able to offer an enhanced product to consumers while increasing competition in the global marketplace. The Agreement will permit the carriers to increase significantly the integration of their route networks, thereby generating many efficiencies and service enhancements that would not otherwise be attainable. The carriers anticipate that substantial economies can be achieved through closer coordination of their operations, marketing, planning, purchasing, support services, and the like.

These efficiencies will, in turn, benefit air travelers because they will translate directly into more competitive fare offerings and innovative new service options. Closer integration of operations, planning and marketing will better enable United and Air New Zealand to develop fully an integrated network of seamless transportation services, thereby enhancing customer convenience and satisfaction. Finally, an expanded alliance will position the Joint Applicants to compete more aggressively with Qantas, the other principal competitor in the region, and its

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partners in the oneworld alliance, American, British Airways, Cathay Pacific, Canadian International, Finnair, Iberia, and Lan Chile, resulting in increased price and service competition among all market participants.

In summary, a grant of antitrust immunity will enable the Joint Applicants to generate substantially greater benefits for consumers through increased commercial cooperation on their South Pacific services than they would be able to achieve without a grant of immunity.

United is a U.S. certificated air carrier holding authority to operate domestic and international scheduled air transportation of persons, property and mail. Among this authority is a certificate of public convenience and necessity for Route 130, which authorizes United to provide scheduled service to all points in New Zealand and Australia.

Air New Zealand is a flag carrier of New Zealand, a country with which the U.S. shares an open skies agreement. Air New Zealand operates international and domestic passenger and cargo services to, from and within the South Pacific region. Air

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New Zealand holds broad U.S. exemption authority authorizing it to engage in scheduled and charter foreign air transportation of persons, property and mail from points behind New Zealand via New Zealand and intermediate points in the South Pacific to points in the United States and beyond. /3

Air New Zealand owns a 50% interest in a holding company, Ansett Australia Holdings Limited ("Ansett Holdings"), which wholly owns Ansett Australia Limited ("Ansett"), /4 a domestic airline in Australia, which has been authorized by the Department to display United's two-letter designator code on its intra-Australia services. /5

Ansett Holdings also holds a 490 ownership interest in Ansett International Limited ("AIL"). /6 See, Exhibit JA-2. AIL is an Australian flag carrier that has operated scheduled

3/ Order 98-7-13.

4/ The remaining 50% interest in Ansett Holdings is he-d by News Limited. See, Exhibit JA J. Ansett Holdings also ans 1000 of Kendall Airlines (Aust) Pty. Ltd. ("Kendall"), a carrier separately authorized to display United's designator code on its intra-Australia services. See Notice of Action Taken dated June 7, 1999 (Docket OST-96-1144).

5/ See Order 95-1-15 (Docket OST-95-407, 1994). A timely renewal application was filed August 16, 1995, maintaining the code-share authority in effect under the terms of the Administrative Procedure Act.

6/ The remaining 51% interest is held by Australian institutional investors.

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international passenger services to and from Australia and points in Asia and the South Pacific since 1993. /7 United and Air New Zealand recently obtained separate authority from the Department to display AIL's two-letter designator code on their trans-Pacific services, and, in the case of United, on flights it operates beyond San Francisco and Los Angeles to Atlanta, Boston, Chicago, Dallas/Ft. Worth, Las Vegas, Miami, New York, Portland, Seattle, San Diego, and Washington, D.C. /8 Neither AIL nor Ansett currently operates trans-Pacific services with its own aircraft.

Air New Zealand and Ansett engage in the joint distribution of their services in the United States. Their networks are essentially complementary; Ansett primarily operates domestic service within Australia, linking most population centers in Australia to Air New Zealand's trans-Tasman and long haul, intercontinental services through extensive code sharing on these services. The joint distribution Ansett and Air New Zealand undertake 1 the U.S. is deigned to enhance the sale of their joint network of integrated services while avoiding the

7/ None of Ansett Holdings Ltd., Ansett, or AIL is a party to the Alliance Expansion Agreement.

8/ See Notices of Action Taken dated October 21 and 29, 1999 (Docket OST-99-6088); Department Action on Application dated October 21, 1999 (Docket OST-99-6262) and Department Action on Application dated October 29, 1999 (Docket OST-99-6261).

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duplication and added cost that would be involved if they maintained separate sales, planning and marketing staffs in the United States.

United has in place separate agreements to code share with each of Air New Zealand, Ansett, and AIL. Nonetheless, because those carriers coordinate their networks within Australia and New Zealand, United gains many of the benefits of that coordination, even though it maintains independent bilateral relationships with each carrier. As Air New Zealand and Ansett expand their joint services within Australia and between New Zealand and Australia, the number of points United can link to its own network beyond Auckland, Sydney and Melbourne by code sharing on Air New Zealand and Ansett increases, improving United's ability to compete with Qantas and its alliance partners for passengers traveling between the U.S. and Australia and New Zealand and points beyond. With its expanding commercial and equity ties with Briti: Airways and code-share arrangement with American Airlines, Qantas enjoys substantial traffic feed from formidable global partners from both the United States and Europe.

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As of December 15, 1999, United operated daily non-stop services on the following four U.S.-Australia/New Zealand routes:

As of December 15, 1999, Air New Zealand operated nonstop services on the following three Australia/New Zealand -U.S. routes:

In addition, Air New Zealand operates non-stop service beyond the U.S. between Los Angeles and London (Heathrow) and Los Angeles and Frankfurt. /10 Air New Zealand also operates service from Los Angeles and Honolulu to Papeete, French Polynesia and Rarotonga, Cook Islands over Los Angeles-Papeete-Auckland, Los Angeles-

9/ Air New Zealand supplements its nonstop Auckland-Honolulu services with service over a Los Angeles-Honolulu-Auckland routing.

10/ Air New Zealand's non-stop Los Angeles-Frankfurt service operates only two days per week. On the remaining five days per week, Air New Zealand code shares on Lufthansa's Los Angeles-Frankfurt flights, and beyond to Berlin, Dusseldorf, Hamburg, Munich, Brussels and Vienna. United operates no non-stop service on this route, but places its code on Lufthansa's non-stops. (Lufthansa places its code on Air New Zealand's Los Angeles-Auckland flights for passengers traveling between Germany and New Zealand.)

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Papeete-Rarotonga-Auckland, Los Angeles-Honolulu-Rarotonga- Auckland, and Los Angeles-Papeete-Rarotonga-Nadi-Auckland routings; from Los Angeles and Honolulu to Nadi, Fiji over Los Angeles-Nadi-Auckland, Los Angeles-Honolulu-Nadi-Auckland, and Los Angeles-Papeete-Rarotonga-Nadi-Auckland routings; and from Los Angeles and Honolulu to Apia, Samoa and Tongatapu, Tonga over Los Angeles-Honolulu-Apia-Auckland, Los Angeles-Honolulu- Tongatapu-Auckland, and Los Angeles-Honolulu-Apia-Tongapatu- Auckland routings. /11

United and Air New Zealand each hold broad authority from the Department to code share on the other's services. /12

11/ Air New Zealand's Winter 1999 schedules are included in Exhibit JA-7.

12/ On August 6, 1999, the Department granted United a blanket statement of authorization permitting it to display Air New Zealand's code on United's flights (i) between any point(s) in the U.S. and any point(s) in New Zealand, either nonstop or via intermediate point(s); (ii) between any point(s) in the U.S., in conjunction with code-share services held out by Air New Zealand between New Zealand and the U.S.; iii) between any point(s) in New Zealand and any point(s) in any third country; and (iv) between any point(s) in the U.S. and any point(s) in any third country. At the same time, the Department granted Air New Zealand a blanket statement of authorization permitting it to display United's code on Air New Zealand's flights (i) between any point(s) in New Zealand and any point (s) in the U.S., either nonstop or via intermediate point(s); (ii) between any point(s) in New Zealand, in conjunction with code-share services held out by United between the U.S. and New Zealand; (iii) between any point(s) in the U.S. and any point(s) in any third country; and (iv) between any point(s) in New Zealand and any point(s) in any

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United currently code shares on Air New Zealand's flights on the Auckland-Honolulu, Auckland-Los Angeles and Sydney-Los Angeles routes. United also code shares on Air New Zealand's flights between Auckland and Brisbane, Cairns, Melbourne, Perth and Sydney, Australia; and between Sydney and Christchurch, Wellington and Queenstown in New Zealand.

With respect to intermediate island points in the South Pacific, United currently serves Nadi and Rarotonga from both Honolulu and Auckland by code sharing on Air New Zealand's services, and United recently began code sharing on Air New Zealand's flights between Los Angeles and Nadi and Papeete. Finally, United also code shares with Air New Zealand's affiliate and alliance partner, Ansett, and Ansett's affiliate, Kendell, to interior points in Australia in support of United's U.S.-Australia services. /13

Air New Zealand code shares on United's Los Angeles-Sydney, San Francisco-Sydney and Los Angeles-Auckland flints. United also displays Air New Zealand's code between the San

12/ (...continued)

third country. (Docket OST-99-6013). United and Air New Zealand previously held more limited authority to code share on each other's services.

13/ See Order 95-1-15 (Docket OST-95-407) and Notice of Action Taken dated July 7, 1999 (Docket OST-96-1144).

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Francisco gateway and Honolulu, and between the Los Angeles gateway and Boston, Chicago (O'Hare), Denver, Honolulu, Las Vegas, Miami, New York (JFK), Phoenix, Portland, San Francisco, Seattle, and Washington (Dulles) for passengers traveling between these U.S. points and Australia, New Zealand and the South Pacific islands.

United and Air New Zealand are both members of the Star Alliance, discussed infra at p. 59. A summary of Air New Zealand's and United's third-party code-share relationships is attached as Exhibit JA-6.

United and Air New Zealand signed an Alliance Expansion Agreement dated as of December 1, 1999, aimed at integrating their independent service offerings to improve the efficiency of those services and to create an integrated global air transport network. (Exhibit JA-1, Article 2.1). Although Air New Zealand's investment in Ansett Holdings and its alliance with Ansett, AIL and Singapore /14 are intended to reduce its substantial competitive disadvantage vis-a-vis Qantas and its alliance partners, a broadening and deepening of its alliance with United is essential to its ability to achieve the scope and

14/ See Exhibit JA-3.

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scale of South Pacific services necessary for it to compete over the long term with Qantas and its partners. /15

By means of the Alliance Expansion Agreement, United and Air New Zealand intend to expand their cooperative activities in each of the following principal areas:

a) Route and schedule coordination. The Joint Applicants will coordinate their route and schedule planning to the maximum feasible extent, with the goals of (i) offering the maximum number of traveling and shipping options of optimal quality and efficiency to the public; (ii) allocating resources such as fleets, airport slots and gates most efficiently; and (iii) enhancing profitability through coordinated route, schedule and operations planning. (Exhibit JA-1, Article 4.1.)

b) Marketing, advertising and distribution. The Joint Applicants intend to establish closer cooperation and integration of their mar'3ting, advertising and distribution networks, programs and systems, including (i) joint marketing, with a focus on specific customer groups, (ii) coordinated sales

15/ Even though the code sharing in place today between United and Air New Zealand enables Air New Zealand to hold out what amounts to an online product to points in the U.S. it could not serve efficiently with its own aircraft, it still cannot match the efficiency of Qantas' more extensive airline network of South Pacific services. Only by full co-ordination with United can a carrier the size of Air New Zealand achieve the level of efficiency already enjoyed by its larger rivals.

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forces, and (iii) unified commission schedules and override agreements. (Exhibit JA-1, Article 4.2.)

c) Co-branding and joint product development. The Joint Applicants may seek to co-brand existing products, possibly through the use of a joint logo and/or corporate markings. They also plan to consider developing co-branded products, including such things as interior design, cabin layout, in-flight entertainment amenities, and passenger ground services. (Exhibit JA-1, Article 4.3.)

d) Code sharing. In order to expand the parties' global networks, United and Air New Zealand intend to extend code sharing to as much of their U.S.-Australia/New Zealand route network as possible, and to such other of their services as is feasible, subject to applicable air service agreements. (Exhibit JA-1, Article 4.4.), In the case of Air New Zealand, such code sharing will enable the carrier to extend its online network into most of the major population centers in the United State , an extension of its network that is critical to its-ability to compete with Qantas and its partners -- American, British Airways and Air Pacific -- in the global marketplace. Without code sharing, it is economically impossible for a small carrier like

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Air New Zealand to develop an online network comparable to those of its larger competitors.

In United's case, code sharing with Air New Zealand (and its affiliate, Ansett) is essential to its ability to extend its network into behind-gateway points in New Zealand and Australia, and to gain online access to the island nations Air New Zealand serves in the South Pacific. With this access, United can offer consumers throughout the U.S., Australia and New Zealand an attractive online alternative to the network of services that Qantas, American, and their partners, Air Pacific /16 and Polynesian Airlines, offer.

e) Pricing, inventory and yield management coordination. The Joint Applicants will coordinate pricing, inventory and yield management with respect to all services included in their respective networks, including the development of corporate fares, net fares, retail and promotional fares, bids for government business, uniform auxiliary service charges and collection policies, revenue management and inventory management. (Exhibit JA-1, Article 4.5.)

16/ Air Pacific is 460 owned and managed under contract by Qantas.

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f) Revenue sharing. The Joint Applicants intend to share net revenues (less certain operating costs) on routes they will later identify. (Exhibit JA-1, Article 4.6.)

g) Joint procurement. The Joint Applicants will seek to expand their joint procurement opportunities in an effort to reduce costs, including volume purchases, the establishment of common specifications, streamlining purchasing, and establishing a joint purchasing group. Joint procurement efforts may include such things as ground handling services, general goods and services, field and station supplies, catering, crew uniforms, information technology, aircraft and equipment, fuel and maintenance. (Exhibit JA-1, Article 4.7.)

h) Support services. The Joint Applicants plan to extend their cooperative efforts with respect to air and ground side passenger and aircraft handling services at all the airports they serve in common. In third countries, the Joint Applicants will determine the most post-effective means of meeting their combined needs. They also will look to implement joint crew and personnel training and investigate joint purchasing for catering operations and other services. (Exhibit JA-1, Article 4.8.)

i) Cargo services. The Joint Applicants contemplate integrating their cargo services to the maximum extent feasible,

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including the development of express cargo products, joint usage of cargo facilities, coordinated trucking, and harmonized cargo standards. (Exhibit JA-1, Article 4.9.)

j) Information services. The Joint Applicants plan to coordinate their information systems, including inventory, yield management, reservations, ticketing, distribution and other operational systems, with the goal of integrating to the fullest extent possible all of their information technology. The Joint Applicants also will work to jointly utilize new technologies such as electronic ticketing, on-line distribution networks, flight planning, accounting, maintenance and other technology systems. (Exhibit JA-1, Article 4.10.)

k) Frequent flyer programs. The Joint Applicants intend to integrate further their frequent flyer programs to enhance program administration, reduce costs and improve efficiency. (Exhibit JA-1, Article 4.11.)

1) Financial reporting. To facilitate revenue sharing and promote easier coordination of yield management, the Joint Applicants will consider harmonizing their financial reporting practices, including revenue and cost accounting practices. (Exhibit JA-1, Article 4.12.)

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m) Harmonization of standards/quality assurance. The Joint Applicants intend to harmonize their product and service standards and inflight amenities. (Exhibit JA-1, Article 4.13.)

n) Technical services/maintenance. The Joint Applicants will explore the possibility of each providing the other aircraft and ground equipment, as well as technical and maintenance services at appropriate locations. (Exhibit JA-1, Article 4.14.)

o) Facilities. The Joint Applicants will seek to share facilities and services at commonly served airports, to the extent feasible. (Exhibit JA-1, Article 4.15.)

The Joint Applicants plan to implement their Alliance Expansion Agreement upon receipt of all necessary government approvals, but they will not proceed without first receiving a grant of antitrust immunity from the Department as requested herein.

III. THE ALLIANCE EXPANSION AGREEMFIT SHOULD BE APPROVED UNDER 49 U.S.C. § 41309 AND ANTITRUST IMMUNITY SHOULD BE GRANTED UNDER 49 U.S.C. § 41308.

A. EXTENDING ANTITRUST IMMUNITY TO THE UNITED/AIR NEW ZEALAND ALLIANCE IS CONSISTENT WITH U.S. COMPETITION AND AVIATION POLICIES AND WILL PROVIDE CONSUMERS IMPORTANT BENEFITS THAT WOULD NOT OTHERWISE BE OBTAINABLE.

The extension of antitrust immunity to the United/Air New Zealand code-share alliance is fully consistent with U.S.

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competition and international aviation policies, which encourage such global arrangements between U.S. and foreign carriers in order to facilitate the expansion of airline networks and increase carrier efficiency, thereby benefitting consumers and enhancing competition. Indeed, in the case of a small carrier such as Air New Zealand, participation in an integrated global alliance with a U.S. airline is essential to allow the carrier to realize the full potential of the new opportunities available under the U.S.-New Zealand open skies agreement and to remain a vibrant, economically secure participant in the increasingly open and competitive global marketplace that is the principal objective of U.S. international aviation policy. /17

The air transport industry is virtually alone among global industries in being unable to utilize the normal commercial tools of mergers and acquisitions to increase the scope and scale of a firm's operations, due to the nationality limitations in virtually all bilateral air service agreements and

17/ Indeed, at the time the open skies Air Transport Agreement between the U.S. and New Zealand was concluded in June of 1997, the governments signed a Memorandum of Consultations in which it was formally acknowledged that, in agreeing to open skies, the "New Zealand Ministers made it clear that it is in their expectation that favorable consideration will be given to applications for antitrust immunity for commercial arrangements between the United States airlines and New Zealand airlines, as such arrangements would give practical effect to the [Open Skies] Agreement."

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the legal restrictions on foreign ownership and control of airlines in force in most of the world's leading industrial countries. In these unique circumstances, the Department's statutory authority to exempt inter-carrier alliance agreements from U.S. antitrust laws serves as a critical tool to assist U.S. and foreign airlines to work within the parameters of these governmental constraints to achieve the most efficient organizational structures possible, while maximizing network-to-network competition and helping carriers to respond better to consumers' increasing need for a truly global air transport product.

The Department has already approved and immunized seven alliances between U.S. and foreign airlines, including American's alliances with Lan Chile and Canadian, Northwest's alliances with KLM and Alitalia, Delta's alliance with Austrian, Sabena and Swissair, /18 United's alliance with Air Canada, and United's alliance with Lufthansa and SAS. In each case, the Department has found that with such approval these alliances would provide

18/ Effective August 5, 2000, the "Atlantic Excellence" alliance will disband. Delta intends to develop a separate alliance with Air France; Austrian plans to join the Star Alliance; Swissair and Sabena currently code share with American Airlines, and the carriers have applied for antitrust immunity for their alliance.

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consumers with important new price, service and product options in the global marketplace.

The Department's expectations have been fully borne out in the marketplace as network-to-network competition has increased substantially, producing significant consumer welfare gains. /19 As detailed in a Department report released this month, immunized alliances are providing "improved, more competitive services in literally thousands of markets. /20 "As a consequence, they are stimulating demand and are leading to procompetitive changes in the industry structure. /21

As former Assistant Secretary for Aviation and International Affairs Charles Hunnicutt explained earlier this

19/ In the case of American/Lan Chile, however, United opposed the grant of antitrust immunity (Docket OST-97-3285). Although United wholly endorses the use of antitrust immunity as a means to achieve greater network - competition, expanded efficiencies and increased service options for consumers, in the case of American/Lan Chile, United believes antitrust immunity will serve the opposite ends, i.e., it will inhibit the development of network competition and risk elimination of all nonstop competition between Miami and Santiago, Chile, a route where American is an entrenched, dominant incumbent.

20/ International Aviation Developments: Global Deregulation Takes Off (First Report), U.S. Department of Transportation, Office of the Secretary (Dec. 1999) at 2.

21/ DOT press release, DOT Report on Eve of Aviation Conference: Open Skies Agreements Have Resulted in Major Benefits for Consumers (Dec. 3, 1999) at 1.

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year, detailed studies by the Department confirm that "alliances holding antitrust immunity ... are growing and are now ... offering single-system service to millions of passengers annually[,] ... providing improved service in a large number of markets that have historically suffered from poor service and no competitive benefits." /22 Assistant Secretary Hunnicutt further pointed out that "consumers have responded favorably to the improved service being offered by the alliances, as ... traffic in connecting markets is growing at 2.5 times the rate of growth in the so called gateway-to-gateway markets." The Department's studies also showed that "alliances have increased international aviation competition[, with] [t]wo or more alliances ... now competing in nearly 2500 city pair markets." As a result of "the improved service and ... competition offered by the alliances[,] ... millions of consumers and thousands of communities ... [now have] improved air service and ewer fares." /23 /24

22/ Remarks of Assistant Secretary Hunnicutt before the World Travel and Tourism Annual Conference, March 8, 1999, at 4.

23/ Id.

24/ Deputy Secretary of Transportation Mortimer Downey recently stated that the Department's studies "confirm that the existing airline alliances are competing and that this competition is producing substantial public benefits," including a "decline in average fares in U.S.-Europe markets." Mortimer L. Downey, Deputy Secretary of Transportation, "Our Strategic Goals:

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A study on international code sharing commissioned by the Department explains that carriers in an immunized alliance can "discuss and jointly decide on fare levels and the capacity deployed .... The result is that both airlines can aggressively market service in every city-pair market they serve ...." /25 The study further noted that antitrust immunity "allows alliance partners to share revenue equally, assuring that both carriers can capture the benefits of the alliance." /26

The fact that alliances lower fares is further demonstrated in an independent empirical analysis conducted by economists Brueckner and Whalen at the University of Illinois, entitled "The Price Effects of International Airline Alliances." Specifically, the Brueckner and Whalen econometric study, based on DOT airline fare data, found that international alliance carriers charge "fares that are approximately 25 percent below those charged by non-allied carriers" on interline (connecting)

24/ ( . . . continued)

Open and Safe Skies," Remarks before the Global Air & Space `99 Conference, Crystal City, Virginia (May 3, 1999) at 2.

25/ A Study of International Airline Code Sharing, Gellman Research Associates, Inc. (Dec. 1994) at 9.

26/ Id.

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routes. /27 At the same time, the authors' "results do not show clear evidence of any losses to gateway-to-gateway passengers from overlapping alliance service." /28 Similarly, the report on airline alliances the Department issued this month showed significant fare reductions in gateway-to-gateway city pairs where immunized alliances were operating transatlantic service. /29

The United/Air New Zealand alliance will offer consumers the same service and competition benefits as the other immunized alliances. With antitrust immunity, United and Air New Zealand will be able to achieve operating efficiencies that will create greater value for passengers and shippers, and generate economic benefits for communities throughout the carriers' regional route networks.

The past several years have witnessed a major expansion of airline services to and from the United States. Much of this growth has been the direct result of the Administration's strong

27/ Jan K. Brueckner & W. Tom Whalen, The Price Effects of International Airline Alliances, University of Illinois at Urbana-Champaign (Dec. 1998, revised Sept. 1999), p. 30.

28/ Jan K. Brueckner & W. Tom Whalen, Consumer Welfare Gains from United's Alliances with Lufthansa and SAS, University of Illinois at Urbana-Champaign (Dec. 1998), p. 6 (emphasis in original).

29/ International Aviation Developments: Global Deregulation Takes Off, supra, at 14-15.

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support for liberalized aviation agreements with key trading partners around the world and reliance on antitrust-immunized alliances to promote expansion of carrier networks and increase network-to-network competition, especially in behind- and beyond-gateway markets, which historically have been heavily dependent upon interline connections. As the Department has confirmed, "[m]ultinational alliances have fueled enormous increases in connecting traffic, both in markets that have historically suffered from poor quality interline service and virtually no competitive benefits, but also by providing service alternatives in markets that already have the benefit of seamless service by other individual airlines .... They are also the only practical way to provide better service to thousands of passengers in long distance, low-density international markets .... This explains the growth in transnational alliances, as airlines around the world link their networks to capture the enormous efficiencies of larger networks and produce an-- market improved service to an ever-wider array of city-pairs." /30

In his speech to the World Travel and Tourism Conference, Assistant Secretary Hunnicutt described the

30/ International Aviation Developments: Global Deregulation Takes Off, supra, at 2 and 5.

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Administration's motivation in seeking greater aviation liberalization: "To increase competition in the aviation industry, the U.S. has worked with other countries to eliminate thousands of restrictions that had been placed on airline operations by our bilateral aviation agreements." /31 The Department has strongly supported liberalization of aviation bilaterals because "[e]nhanced competition ... [makes] air travel affordable and accessible to many millions of new passengers." As Assistant Secretary Hunnicutt pointed out, "[s]ince 1992 traffic between the U.S. and foreign destinations has increased by 30 million passengers, service by U.S. airlines in those markets has increased by 70,000 departures and consumers are now paying 17 percent less for commercial air [service] than in 1992." /32

A key element of aviation liberalization is the ability afforded airlines to innovate and to develop new initiatives for serving new markets. According to assistant Secretary Hunnicutt:

31/ Remarks of Assistant Secretary Hunnicutt before the World Travel and Tourism Annual Conference, March 8, 1999, at 2.

32/ Id.

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Id. at 2-3.

Up to now, however, the service and competition benefits generated by fully coordinated alliances have largely been confined to the transatlantic and U.S.-Canada transborder markets, even though New Zealand, Singapore, Korea and other key trading partners in Asia have signed open skies agreements with the United States, and Japan and the U.S. have agreed to a substantial liberalization of the air travel market between and beyond the two countries. With these market openings, U.S. carriers have entered into a number of code-sharing alliances with airlines throughout Asia and the South Pacific.

The United/Air New Zealand alliance will be the first fully integrated alliance involving a U.S. carrier in the Asia-Pacific region. As economies throughout the region improve and economic growth resumes, the open skies agreement with New Zealand and the grant of antitrust immunity to the United/Air New Zealand alliance can serve as the same type of catalyst for

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improved service and increased network-to-network competition in the region that the open skies agreement with the Netherlands and the antitrust immunity granted the Northwest/KLM alliance did for the trans-Atlantic market. Most notably, as United and Air New Zealand take advantage of such immunity to improve service across their regional networks, increase their efficiency, and provide a better integrated product to passengers and shippers, the need for further liberalization of the U.S.-Australia air travel market, the largest in the South Pacific, will grow, leading, ultimately, to more competition and better service throughout the South Pacific.

B. A GRANT OF ANTITRUST IMMUNITY WILL ADVANCE U.S. FOREIGN POLICY OBJECTIVES.

The grant of antitrust immunity to the United/Air New Zealand Alliance Expansion Agreement would be fully consistent with the Department's policy of encouraging and facilitating the globalization and cross-networking of air transportation. As former Secretary Pena stated when he presented the current U.S. International Aviation Policy Statement, "the United States believes that globalization will bring vast benefits for all nations and air carriers that embrace and adapt to it .... [We are] firmly behind the movement to ... increased international traffic and the growth of global networks." Remarks of Secretary

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Pena at the 50th Anniversary Commemoration of the Chicago Convention, at 3, 6 (November 1, 1994). /33

Secretary Pena correctly observed that globalization necessarily involves the transcontinental linkage of hub networks, and noted that the "ability to effectively flow passenger traffic between [U.S. carriers'] own and others' networks ... enable[s] carriers to provide much improved, more competitive services to millions more travelers and shippers every year." Remarks of Secretary Pena at 50' Anniversary Commemoration of Chicago Convention, at 4; see also DOT Policy Statement, 60 Fed. Reg. 21841, 21842-43 (May 3, 1995) (recognizing airlines' need for "broad, flexible authority to operate beyond and behind hub points, in addition to the hub-to-hub markets between ... two countries").

The Department also has recognized the essential role of airline alliances in achieving globalization. See Statement of Secretary Pena (introducing the DOT Policy Statement) (April 25, 1995)("Airlines are becoming increasingly global. Route networks are now being linked in alliances consisting of carriers

33/ See also Statement of Secretary Pena before the Senate Commerce Committee (July 11, 1995) ("the trend towards globalization of air services through efficiency-enhancing networks and alliances is here to stay, ... offer[ing] great public benefits for all nations").

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from different nations, with international hub-and-spoke networks that offer passengers on-line service to cities around the world"); see also Order 96-5-12 (May 9, 1996), at 17-18; Order 96-5-2 (May 21, 1996), at 2. In its recent report on multinational airline alliances, the Department pointed out that "the airline industry, by its very nature, is a network industry and ... network competition produces far better service at lower prices ... particularly [in] longer-distance, less dense markets .... Airline alliances, therefore, are the only practical way to provide improved, more competitive service to such markets." /34

In granting antitrust immunity to the alliance among Delta, Austrian, Sabena and Swissair, the Department stated:

34/ International Aviation Developments: Global Deregulation Takes Off, supra, at 5.

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Order 96-5-26 (May 21, 1996), at 27. A fully integrated United/Air New Zealand alliance will generate all of these public benefits and provide the framework necessary for the expansion of network competition in the Pacific region.

C. APPROVING AND EXTENDING ANTITRUST IMMUNITY TO THE UNITED/AIR NEW ZEALAND ALLIANCE EXPANSION AGREEMENT IS CONSISTENT WITH THE TERMS OF THE TRANSPORTATION CODE.

In relevant part, the recodified Federal Aviation Act instructs the Department to "approve an agreement ... when the Secretary finds it is not adverse to the public interest and is not in violation of this part." 49 U.S.C. § 41309(b). The United/Air New Zealand Alliance Expansion Agreement is fully consistent with this statutory standard. The Agreement will promote, rather than reduce, competition and is consistent with the public interest. The Agreement is, moreover, consistent with, and will help o advance, U.S. international aviation and competition policy objectives. For these reasons, the Agreement should be approved by the Department.

1. Implementation of the Alliance Expansion Agreement With Antitrust Immunity Will Not Substantially Reduce or Eliminate Competition.

In prior orders where the Department has extended antitrust immunity to alliance agreements, it has relied upon the

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type of merger analysis undertaken by the Department of Justice and Federal Trade Commission under Section 7 of the Clayton Act in deciding whether a proposed alliance is likely substantially to reduce or eliminate competition in any relevant market. In these alliance cases, the Department has examined competition in a series of relevant markets, including a worldwide market, U.S.-regional and country-pair markets, and individual city pairs where the alliance partners operate overlapping non-stop service, in determining the effect of the alliance. See, e.g., American/Lan Chile, Order 99-4-17 at 15-22; Delta/Austrian/Sabena/Swissair, Order 96-5-26 at 22.

In so doing, the Department has consistently pointed out that concentration figures in individual city pairs are not the best evidence of an alliance's impact on competition. As the Department has explained, "[i]ndividual airline nonstop city-pair markets usually have high levels of concentration, since only a few airlines serve most non-stop markets. A key consideration for determining whether ... any ... airline merger or joint venture ... is likely to reduce competition is potential competition, i.e., whether other airlines can enter the relevant markets in response to inadequate service or supra-competitive prices." American/Lan Chile, Order 99-4-17 at 16. See also

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Delta/Austrian/Sabena/Swissair, Order 96-5-12 at 18, and American/Canadian, Order 96-5-38 at 17.

In this case, in addition to the worldwide aviation market, the relevant markets to be considered under applicable DOT precedent are a South Pacific regional market involving services between the U.S. and points in Oceania, a regional market involving services between the U.S. and Australia/New Zealand, and the two trans-Pacific non-stop city pairs in which United and Air New Zealand operate overlapping non-stop services -- Los Angeles-Auckland and Los Angeles-Sydney.

a. Approval of the Alliance Expansion Agreement Will Promote, Not Reduce, Competition in the Global Marketplace.

Although recognizing that city-pair routes traditionally have been the focus for analyzing airline mergers, in granting immunity to airline alliances, the Department has emphasized that:

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American/Lan Chile, Order 99-4-17 at 15. Thus, the Department has concluded that "a significant element in [its] antitrust analysis ... [must be] the extent to which facilitating airline integration (through antitrust immunity or otherwise) can enhance overall competitive conditions" in the global marketplace. Id. See also Delta/Austrian/Sabena/Swissair, Order 96-5-26 at 19.

In the recent American/Lan Chile case, the Department went on to point out that:

Order 99-4-17 at 16.

Extending antitrust immunity to the United/Air New Zealand alliance will enhance global airline competition. In the thousands of individual city pairs United and Air New Zealand will serve jointly, antitrust immunity will enable them to provide fully coordinated connections, marketing and services that will offer competition to other carriers and alliances that goes well beyond what they could offer through mere interlining or simple code sharing. These benefits should be most noticeable

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to the ten million passengers who travel annually in the approximately 9,500 behind- and beyond-gateway city pairs where neither carrier would be able to hold out an online product in the absence of their alliance.

Today, the largest carrier in South Pacific markets is Qantas, together with its partners in the oneworld alliance, American, British Airways, Cathay Pacific and Canadian International. Qantas serves more points in Australia, New Zealand, and Fiji combined than any other carrier and has been able to extend its online network to key population centers in the U.S. and Canada through its code-sharing and frequent-flyer alliance with American and Canadian International. Qantas also benefits on its U.S. routes from traffic feed from its partner, British Airways.

American has recently extended its online network into the South Pacific, including Australia and New Zealand, trough an expanded code-sharing alliance with Qantas. /35 Both American and Qantas also have code-sharing alliances with Air Pacific,

35/ See Notice of Action Taken dated February 10, 1999 (OST-99-5007), which granted American an exemption to provide service between points in the U.S., via points in Fiji and New Zealand, and Sydney, Melbourne, Brisbane, Cairns, and Perth, Australia, and beyond to Adelaide, Australia and to points in New Zealand, and to integrate this authority with its existing U.S.-Australia/New Zealand/Fiji certificate and exemption authority.

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which enable the carriers to link their networks to major tourist destinations Air Pacific serves in the South Pacific. Most recently, Air Pacific received authority to display both Qantas's and American's code on flights between Honolulu and Auckland. /36

The alliance of United, Air New Zealand and the Ansett group of carriers is today the principal competitive alternative in the South Pacific to the oneworld alliance. The strength of the oneworld alliance network in the South Pacific stems from the fact that Qantas, the largest carrier in the region, obtains traffic support for its network from both American and British Airways, which holds a 25% ownership interest in Qantas. British Airways, the largest carrier in Europe, and Qantas offer a coordinated network of services linking Australia and New Zealand with Europe, the Middle East and Southeast Asia. This network provides traffic feed for Qantas' services from Australia and New Zealand through Asia and the Middle East to Europe and across the Atlantic. American (and to a lesser extent Canadian International) provide traffic feed for Qantas's trans-Pacific services to North America from their extensive U.S., Canada and trans-Atlantic networks.

36/ Air Pacific, based in Fiji, has code-sharing relationships with American, Qantas, and Canadian International, as well as several regional carriers in the Pacific.

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With antitrust immunity, United and Air New Zealand will be able to broaden and deepen their alliance, enabling them to expand and enhance the efficiency of the services they offer in competition with the oneworld alliance carriers. Once their networks are fully integrated, United and Air New Zealand will serve some 10,000 online city pairs, offering consumers ready access to more foreign destinations with new and improved routing alternatives. This increased competition will, in turn, compel Qantas and its partners to improve and expand their own services, offering the public more and better service alternatives. Ultimately, the need for Qantas and its partners to meet the increased competition from the United/Air New Zealand alliance will drive the complete liberalization of the U.S.-Australia air services agreement in order to facilitate the growth and expansion of U.S.-Australia air services. This, in turn, will help open the way for otr3r U.S. carriers and their global alliance partners to extend their networks into Australia and New Zealand, which will further improve the service alternatives available to consumers and increase network-to-network competition.

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b. The United/Air New Zealand Alliance Will Not Reduce Competition On United States-South Pacific Routes.

The air travel market from the U.S. to the islands scattered throughout the South Pacific is almost exclusively a leisure travel market, with at least seven carriers currently operating service from a gateway in the U.S. to one or more of these islands. These carriers are Air Pacific, /37 Air France, Air New Zealand, AOM, Continental Micronesia, Hawaiian, and Air Tahiti Nui.

Historically, United has not offered online service with its own aircraft to any of the South Pacific islands, except Guam. As a result of its code-sharing alliance with Air New Zealand, United is now able to offer online service from Honolulu to Nadi, Fiji, /38 between Honolulu and Rarotonga, Cook Islands, /39

37/ American holds out online services to several points in the region by code sharing on flights operated by Qantas and Air Pacific.

38/ Passengers returning to Honolulu or the U.S. mainland from Nadi travel via Auckland.

39/ Air New Zealand also operates services from Los Angeles and Honolulu to Papeete, French Polynesia and Rarotonga, Cook Islands over Los Angeles-Papeete-Auckland, Los Angeles-Papeete-Rarotonga-Auckland, Los Angeles-Honolulu-Rarotonga-Auckland, and Los Angeles-Papeete-Rarotonga-Nadi-Auckland routings; from Los Angeles and Honolulu to Nadi, Fiji over Los Angeles-NadiAuckland, Los Angeles-Honolulu-Nadi-Auckland, and Los Angeles-

(continued...)

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and from Los Angeles to Papeete, French Polynesia. Because United and Air New Zealand have never been competitors on these routes, extending antitrust immunity to their Alliance Expansion Agreement cannot lead to any lessening of competition at these points. The effect of such immunity on service to Australia and New Zealand is discussed below.

c. The United/Air New Zealand Alliance Will Not Lead to a Substantial Reduction in Competition in Air Service Between the U.S. and Australia and New Zealand.

Approving the United/Air New Zealand Alliance Expansion Agreement, and granting the carriers immunity from U.S. antitrust laws to implement the agreement, will not lead to a substantial lessening of competition in the U.S.-Australia/New Zealand air travel market.

Qantas is currently the leading carrier in the market for air travel between Australia/New Zealand and the U.S., operating nonstop services to both Honolulu and Los Angeles from both Auckland and Sydney, with behind-gateway support from its own network of domestic and trans-Tasman services, and from

39/ ( . . . continued)

Papeete-Rarotonga-Nadi-Auckland routings; and from Los Angeles and Honolulu to Apia, Samoa and Tongatapu, Tonga over Los Angeles-Honolulu-Apia-Auckland, Los Angeles-Honolulu-Tongapatu-Auckland, and Los Angeles-Honolulu-Apia-Tongapatu-Auckland routings.

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services operated under its code by regional affiliates. In addition, Qantas recently expanded its network of U.S.-Australia/New Zealand services by adding five weekly nonstop frequencies between Melbourne and Los Angeles, two weekly frequencies on a Melbourne-Auckland-Los Angeles routing, and five weekly frequencies on a Brisbane-Auckland-Los Angeles routing. On October 31, 1999, Qantas also began operating its Sydney-Los Angeles services beyond Los Angeles to New York three times per week. /40

Qantas also has unrestricted access to the New Zealand domestic market and to the trans-Tasman market between Australia and New Zealand as a result of the Single Aviation Market agreement between Australia and New Zealand. /41 Qantas also gains traffic support for its network of U.S.-Australia/New Zealand services from its code-sharing and frequent-flyer alliances with American, British Airways. Canadian, and Air Pacific. Backed by this network, Qantas today operates 70% more weekly frequencies between Australia and New Zealand and the U.S. than Air New

40/ On December 9, 1999, Qantas announced that it will increase to five the number of weekly frequencies it offers between Australia and New York starting in June 2000.

41/ The Single Aviation Market Agreement contemplates that the Australia and New Zealand aviation markets constitute one single market.

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Zealand and 20% more than United. Since United and Air New Zealand announced their code-sharing alliance in 1997, Qantas has increased its U.S.-Australia/New Zealand service by 35%.

With Qantas holding such a substantial market position, there is no risk that the proposed integration of operations United and Air New Zealand contemplate would enable them to reduce service below competitive levels or to charge supracompetitive prices. Any effort on their part to do so would provide an immediate opening for Qantas to gain market share at United's and Air New Zealand's expense. /42

Moreover, because the air travel market from the U.S. to Australia and New Zealand is predominantly a leisure travel market, any effort by United and Air New Zealand to raise prices above competitive levels would lead quickly to a rapid decline in demand for their services as discretionary passengers shifted their business either to Qantas, or to more attractively priced leisure destinations. Such a d-cline in residual demand would reduce load factors on the carriers' trans-Pacific services, which would threaten the carriers' ability to operate profitably on the routes. If, in response, the carriers sought to reduce

42/ Furthermore, as explained infra at 49-50, there is no risk of any loss of competition between Qantas and United/Air New Zealand on these routes.

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frequencies, they could be forced to operate a less than daily service pattern, substantially reducing the attractiveness of their services to business passengers and lessening further their ability to compete with Qantas.

Even though, based on current schedules, United and Air New Zealand combined operate about 56% of total weekly frequencies between the U.S. and Australia and New Zealand, this does not mean that the partners would be able to engage in anticompetitive behavior. The Department has consistently found in other alliance cases that an alliance's holding of a leading market position does not by itself lead to a conclusion that the alliance's members could reduce competition. See Orders 99-4-17 at 16, 96-5-26 at 23, 96-5-12 at 22, and 92-11-27 at 15.

As the Department explained in approving the alliance between American and Lan Chile, "concentration figures are not conclusive .... A key consideration for determining whether ... [an] alliance ... is likely to reduce competition is potential competition, i.e., whether other airlines have the opportunity to enter the relevant markets in response to inadequate service or supra-competitive prices." Order 99-4-1 at 16. Similarly, in approving the alliance between Northwest and KLM, the Department emphasized that "[e]ven if a merger creates a firm with a

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dominant market share, the merger would not substantially reduce competition if other firms have the ability to enter the market within a reasonable time if the merged firms charge supracompetitive prices." Order 92-11-27 at 15.

As was true in the case of the Netherlands, the open skies agreement with New Zealand ensures that any U.S. carrier may serve New Zealand from any point in the United States. American, Northwest and Continental have all operated in the U.S.-Australia/New Zealand market in the past. All of them could re-enter the market at any time should a profit opportunity arise. American, for example, could quickly enter with its own equipment if the incumbent nonstop operators sought to raise prices above competitive levels. Because it already code shares to both Australia and New Zealand, American would have access to behind-gateway traffic support from the extensive network of services Qantas operates within Australia.

Northwest, Continental and Delta are also free to resume or initiate Australia/New Zealand service should a profit opportunity arise due to efforts by incumbents to raise prices or restrict output on these routes. All of these carriers participate in alliances with a number of foreign partners and have been actively working to extend the geographic scope of

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their systems into truly global online networks. /43 The open skies agreement between the U.S. and New Zealand ensures these carriers (and all other U.S. airlines) the ability to extend their global networks into New Zealand whenever they desire.

Although the U.S. does not yet have an open skies agreement with Australia, the U.S. is entitled to designate an additional carrier to serve Australia under the terms of the current agreement. /44 Under these circumstances, any effort by incumbent carriers to raise prices above competitive levels or restrict output is sure to meet with a new market entrant.

43/ As the Department pointed out in its recent report on multinational airline alliances, "[a]irlines, like other global network industries[,] ... to compete profitably ... must offer passengers as many destinations around the globe as possible." As the Department a )lamed, "airline globalization ... is being driven by economic demand and airlines' desire to enhance their competitive positions through better access to as many markets and passengers as possible ...." International Aviation Developments: Global Deregulation Takes Off, supra, at 4.

44/ Moreover, Australia recently announced its intention to pursue open skies aviation agreements with like-minded countries. Bilateral negotiations held this month between the U.S. and Australia produced an open skies agreement for all-cargo service, and the two countries plan to meet early next year to discuss removing all restrictions on passenger service. DOT Press Release, United States, Australia Agree to Open Skies for Cargo (Dec. 14, 1999).

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d. There Will Not Be a Substantial Reduction in Competition in Any City Pair.

Approving the United/Air New Zealand alliance will not lead to a substantial reduction in competition in any city pair. United and Air New Zealand today operate nonstop service in competition with each other on only two U.S.-Australia/New Zealand routes: Los Angeles-Auckland and Los Angeles-Sydney. /45 Both of these are leisure-oriented routes, and none of the endpoints is a hub dominated by United or Air New Zealand. Moreover, both routes are served by an established, vigorous nonstop competitor, Qantas Airlines, whose market position and

45/ United and Air New Zealand also both operate nonstop services on one additional route: Los Angeles-London. United/Air New Zealand operational coordination on this route, however, will enhance rather than reduce competition for at least the following reasons: four nonstop competitors will remain on the Los Angeles-London Heathrow route after United and Air New Zealand are granted anti-rust immunity, ensuring continued vigorous competition; United's and Air New Zealand's relatively small combined presence in the route itself precludes any possibility of a unilateral exercise of market power by United/Air New Zealand; and coordination of schedules and other commercial variables between United and Air New Zealand on this route will actually improve Los Angeles-London competition by creating a more attractive combined product for the parties to offer corporations in competition with British Airways, American Airlines, and Virgin Atlantic. Moreover, Air New Zealand's Fifth-Freedom service on this route serves primarily U.K.-New Zealand, rather than local Los Angeles-London, traffic, and thus even its modest share of Los Angeles-London frequencies and seats overstates its current competitive significance with respect to local passengers.

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competitiveness is enhanced by its alliance with American Airlines and its membership in the oneworld global alliance.

In prior cases, the Department has granted immunity to alliances even though the applicants operated the only nonstop service on hub-to-hub routes linking their networks. For example, the Department immunized the Northwest/KLM alliance even though the Detroit-Amsterdam and Minneapolis-Amsterdam hub-to-hub routes would be served only by Northwest/KLM, with arguably no likelihood of additional nonstop entry because of the carriers' extreme dominance of the respective end points of the routes. Order 92-11-27 at 16. Similarly, the Department immunized Delta's alliance with Austrian, Sabena and Swissair, even though no other carrier operated nonstop service on the New York-Geneva and New York-Vienna routes. Order 96-6-33 at 10.

Here, by contrast, not only is there a strong second competitor already operating non-stop services on the only two routes United and Air New Zealand both serve with their o~_ equipment, but none of the end points of the routes is a hub the applicants dominate. With respect to LAX, the Department has previously found that "neither United nor Air New Zealand is dominant at the Los Angeles gateway." Order 97-5-7 at 4. Indeed, United operates just 27.20 of the departing and arriving

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seats at LAX. /46 These figures are well below Northwest's comparable shares at Minneapolis and Detroit when the Department immunized its alliance with KLM.

Moreover, while United refers to LAX as a "hub" for marketing purposes, carriers such as American and Delta have significant local enplanement shares at Los Angeles and are well-positioned to enter either the Los Angeles-Auckland or Los Angeles-Sydney route if incumbents sought to reduce output or raise prices above competitive levels. /47 Indeed, entry on these trunk routes by other U.S. carriers, such as Northwest/Continental or Delta, to support their developing global networks must be viewed as inevitable, and any exercise of market power by incumbents on those routes would only serve to hasten that entry. In fact, as noted above, Northwest, American and Continental have all served U.S.-South Pacific routes in the recent past, and there is no reason to believe that they would not reenter the South Pacific in response to a profit opportunity. Thus, even though United is today the leading

46/ This figure includes the 4% departing and arriving seats attributable to United Express carriers. (November 1999 OAG.)

47/ The carriers currently operating international service at LAX and United's other domestic marketing hubs are listed in Exhibit JA-8.

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carrier at LAX, it has no ability to exclude competitors from the Los Angeles-Auckland or Los Angeles-Sydney routes.

With respect to Auckland, while Air New Zealand, as the major airline of New Zealand, naturally is the leading carrier there in terms of daily departures, fifteen other international carriers also serve that point, and Air New Zealand does not have any ability to exclude competitors from the Los Angeles-Auckland route. This is primarily because demand for travel at the U.S. end of the route is substantially greater than the demand for travel on the New Zealand end.

Simply put, an airline attempting to enter the Los Angeles-Auckland route would not need traffic feed at the Auckland end to support its operation; the inbound market to New Zealand from the U.S. is significantly larger than the outbound, so that the majority of the traffic on this route is U.S.-originating roundtrip passengers. A U.S. carrier, such as American or Northwest, thus would have to concern itself very little, or not at all, with ticket sales in New Zealand in order to enter the Los Angeles-Auckland route. Hence, while the Los Angeles-Auckland route serves to connect the United and Air New Zealand networks, for purposes of assessing ease of entry, Los

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Angeles-Auckland should be analyzed as if it were a point-to-point route.

Likewise, Los Angeles-Sydney should be viewed as a point-to-point route for purposes of entry analysis. Neither United nor Air New Zealand maintains a hub at Sydney. Qantas is the leading carrier at Sydney and is the only airline operating a major international hub there. And Qantas operates more nonstop service between Sydney and Los Angeles than United and Air New Zealand combined.

Entry on either of these routes in response to any attempted exercise of market power by incumbents is even more likely given that traffic on both routes is heavily leisure-oriented. In the year ending June 1999, only 11.6% of short-term visitors arriving into New Zealand from the United States were traveling for a business purpose; 78% of such travelers were on vacation or visiting friends and relatives. Similarly, in the year ending June 1999, only 18% of U.S. resident arrivals in Sydney were for business purposes, while 63.5% were for the purposes of vacation or visiting friends and relatives. As the Department of Justice has stated, "the origin point presence effect that normally favors hub carriers is not as strong among travelers in leisure-oriented markets as in business-oriented

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markets." Comments of the Department of Justice, Docket OST-97-2058, at 29 (May 21, 1998).

Even apart from the likelihood of new entry on the Los Angeles-Auckland and Los Angeles-Sydney routes, however, market conditions on those routes are such that United and Air New Zealand could not unilaterally exercise market power. Qantas is an aggressive competitor, entrenched on these routes because of their importance to Qantas's entire South Pacific network. Indeed, since Air New Zealand and United first began code sharing on their South Pacific services to and from Australia and New Zealand, Qantas has increased its nonstop service to the U.S. by 35%.

The likelihood of Qantas departing either of these two routes in response to increased competition from United/Air New Zealand after antitrust immunity is granted is negligible, particularly given the relative parity of frequencies operated by the carriers on these routes. On Los Angeles-Sydney, Qantas currently operates more weekly nonstop frequencies than United and Air New Zealand combined, and on Los Angeles-Auckland, Qantas offers the same level of service that United currently offers. The durability of Qantas's services is further strengthened by American code sharing on the flights that Qantas operates.

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In addition, network-to-network competition between United/Air New Zealand and Qantas, supported by its participation in the oneworld alliance, is certain to increase as a result of the greater integration achieved between United and Air New Zealand after antitrust immunity is granted. The network-driven competition on these routes will serve to deter or destabilize any hypothetical attempt by incumbents to coordinate their competitive behavior.

For example, decisions regarding capacity and scheduling on the Los Angeles-Auckland/Sydney routes -- which connect the United and Air New Zealand (including its affiliate Ansett) networks -- will depend upon network-wide considerations, rather than factors peculiar to local passengers traveling on these two routes; these decisions, in turn, will affect pricing even for those local passengers. Indeed, this increase in network-based competition will inure to the benefit of lc-al Los Angeles-Auckland and Los Angeles-Sydney passengers, who will reap the benefits of improved schedules, increased service (with attendant downward pressure on pricing), and other product quality enhancements serving to counterbalance any theoretical reduction in competition supposed to result from a change from three to two current nonstop carriers on the routes.

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In sum, the Department should conclude that the United/ Air New Zealand alliance is not likely to result in a substantial loss of competition in any city pair. New entry is likely should the incumbent carriers on the Los Angeles-Auckland or Los Angeles-Sydney routes ever attempt to exercise market power. And, because the routes will continue to be served by two vigorous, independent network competitors, competitive pricing and service levels are guaranteed even without regard to the prospect of new entry.

2. A Decision By the Department Approving the Alliance Expansion Agreement and Granting United and Air New Zealand Antitrust Immunity Is Supported By the Department's Actions in Other Cases.

The Department has the discretion to grant antitrust immunity to agreements approved under 49 U.S.C. § 41309 if it finds that immunity is required by the public interest. The Department's established policy is to grant antitrust immunity with respect to agreements that will not substantially reduce or eliminate competition if antitrust immunity is required in the public interest and the parties will not proceed with the transaction absent antitrust immunity. See Order 92-11-27 (November 16, 1992) at 18; Order 93-1-11 (January 15, 1993) at

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11; Order 96-5-12(May 9, 1996) at 15-16; Order 96-5-26 (May 21, 1996) at 17.

a. A Grant of Antitrust Immunity To United and Air New Zealand Would Be in the Public Interest.

The Alliance Expansion Agreement between United and Air New Zealand will allow the carriers to operate their route networks efficiently, establish a more integrated air transport system through better network coordination, achieve economies of scope arid scale, and enhance competition with other alliances. These benefits will result in lower costs, enabling United and Air New Zealand to offer the traveling public a broader network of integrated services at a lower price. United and Air New Zealand also will be able to increase efficiencies, reduce costs, and provide better service to the traveling and shipping public in the following ways:

1. Expanded Online Networks. With antitrust immunity, United and Air New Zealand will be better able to plan for the full coordination of services across their networks, linking the 256 cities United serves worldwide with the 48 cities Air New Zealand serves, a global network of about 9500 city pairs. Such an expanded network of online service options can only be accomplished on an efficient basis if the carriers

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are free to coordinate their schedules, integrate network planning, and coordinate pricing, inventory and yield management without antitrust risk.

2. Improved Service in Behind- and Beyond-Gateway City Pairs. To achieve the maximum integration of their networks, especially in behind- and beyond-gateway city pairs, United and Air New Zealand must have the ability to operate as if there were a single firm with a common financial objective. To achieve such financial integration, United and Air New Zealand must have the ability to engage in joint or coordinated marketing, sales, pricing, yield management, and the allocation of revenues and earnings. This cannot be accomplished without antitrust immunity.

The April 1995 GAO Report on airline alliances concluded that "[w]ith immunity, Northwest and KLM can develop formulas to set fares in all markets and, according to Northwest and KLM representatives, quickly enact fare reductions to attract traffic." GAO Report, at 29. The GAO further observed that `[w]ithout immunity, airlines that are . . . competitors cannot discuss pricing issues and must develop prorate agreements in `arm's length' negotiations to divide revenues, a cumbersome process when thousands of city-pairs are involved." Id.

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Antitrust immunity will make it easier for United and Air New Zealand to engage in coordinated pricing and divide revenues on terms that make it more economically beneficial for the carriers to integrate their networks and extend online service into more behind- and beyond-gateway city-pairs.

3. Coordinated Networks. With immunity, United and Air New Zealand will be better able to coordinate their respective networks to achieve more efficient services and maximize service options. Without immunity, each carrier will schedule its trans-Pacific services independently to maximize its own individual economic gain without regard to whether a coordinated network of services would increase consumer choice and position the carriers to compete better with other alliances.

With immunity, however, the carriers will be able to coordinate their schedules to achieve a broader range of arrival and departure times, thereby giving passengers a broader choice of service alternatives, and better connections to behind- and beyond-gateway points. Without immunity, the coordination necessary to achieve such service improvements would expose United and Air New Zealand to unacceptable antitrust risks.

4. Wider Availability of Discount Fares. Currently, United and Air New Zealand price their services

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independently in an effort to maximize the carriers' individual revenues. With immunity, the carriers could jointly price service over their combined networks with the objective of maximizing total network revenues. This will lead the carriers to expand the availability of discount fares, as they will have more seats to sell over a broader network, and consequently a greater need to utilize promotional pricing to fill seats that would otherwise go unsold.

5. Inventory Control. With antitrust immunity, United and Air New Zealand will be able to coordinate their seat inventory, and thereby achieve better capacity utilization, reducing costs for the benefit of the traveling and shipping public. Also, by coordinating yield management, United and Air New Zealand should achieve an optimum mix of revenue, facilitating their ability to offer a larger number of marginally priced deep discount seat while having to leave fewer seats unsold to ensure that space is available at the last minute for higher yielding passengers.

6. Reduced Sales, and Marketing Costs. With immunity, United and Air New Zealand will be able to integrate their sales forces and coordinate marketing strategies, reducing

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costs and increasing the efficiency of their sales and marketing efforts.

b. United and Air New Zealand Will Not Implement Their Alliance Expansion Agreement Without Antitrust Immunity.

Because of the antitrust risks involved in coordinated planning, pricing, inventory and yield management, among other cooperative efforts, United and Air New Zealand will not proceed with implementation of their Alliance Expansion Agreement without antitrust immunity.

United and Air New Zealand firmly believe that the cooperative arrangements contemplated by their Agreement will benefit consumers and generate efficiencies that could not be achieved in the absence of the Agreement. The comprehensive cooperation envisioned, however, would certainly expose the carriers to possible antitrust challenges, with the attendant expense associated with protracted antitrust litigation.

The Department has agreed that, absent antitrust immunity, carriers may be unwilling to form alliances that can offer significant competitive and efficiency benefits. See Order 96-5-26 at 28 (Delta/Swissair/Sabena/Austrian) ("the potential antitrust liability for an agreement of this volume may deter the applicants from integrating their services as intended by the

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Alliance Agreements unless they have antitrust immunity"); Order 96-5-12 at 26 (United/Lufthansa) ("since the applicants will be ending their competitive service in some markets, they could be exposed to liability under the antitrust laws if we did not grant immunity"); GAO Report, at 30 (`the key benefit of immunity . . . is the protection from legal challenge by other airlines," thereby allowing the participants "to more closely integrate their operations and marketing thin they otherwise would for fear of legal reprisal").

In sum, the extensive integration and coordination essential for United and Air New Zealand to implement their Alliance Expansion Agreement can only be undertaken by the carriers with antitrust immunity. The implementation of the Agreement is expressly contingent on the Department granting antitrust immunity, and United and Air New Zealand will not proceed with the implementation of the Agreement without such immunity.

United and Air New Zealand provide the following additional information typically requested by the Department when analyzing applications for antitrust immunity. /48

48/ See, e.g., May 11, 1999 Joint Application of Alitalia-Linee

(continued...)

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1. International Routes. United's and Air New Zealand's schedules identifying the international routes they currently operate are attached as Exhibit JA-4. United and Air New Zealand anticipate that they will continue serving these routes after their Alliance Expansion Agreement is approved, and have no plans to change their services contingent upon approval being obtained. United and Air New Zealand will continue to adjust their schedules depending on market conditions and competitive opportunities.

2. Code-Share Alliances. Exhibit JA-3 details Air New Zealand's and United's current worldwide code-share arrangements.

3. The Star Alliance. The Joint Applicants are both members of the Star Alliance, a cooperative marketing alliance whose member carriers currently serve 760 destinations in 112 countries. The Star Alliance was formed on May 14, 1997, and now includes United, Air Canada, Air New Zealand, Ansett International Limited, Ansett Australia, All Nippon Airways Co., Ltd., Lufthansa German Airlines, Scandinavian Airlines System, Thai Airways International and Varig Brazilian Airlines. In

48/ ( . . . continued)

Aeree Italiane-S.P.A., KLM Royal Dutch Airlines and Northwest Airlines, Inc. (Docket OST-99-5674); Order 99-5-10 requesting additional information; June 22, 1999 Notice Requiring Supplemental Information; and July 19, 1999 Scheduling Notice finding the record substantially complete.

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addition, Austrian Airlines, Compania Mexicana de Aviacion, S.A. de C.V., and Singapore Airlines have announced plans to become full Star Alliance members next year. /49

Through the Star Alliance and related code sharing, the partners seek to expand their route networks and obtain other benefits such as frequent-flyer program enhancements, reciprocal lounge access, purchasing efficiencies, reduced global distribution costs, and, where appropriate, shared airport facilities /50 The Star Alliance members work cooperatively to improve interline connections between the members' networks, primarily by improving the connections between their services at principal hubs, and to utilize better the members' networks, offering passengers improved service to more destinations worldwide.

The Star Alliance partners also seek to coordinate operations, to the extent permissible, in order to provide

49/ British Midland also recently announced its intention to join the Star Alliance.

50/ The Star. Alliance does not include the coordination of pricing of members' individual or code-shared services, or the coordination of yield or capacity management, or other competitively sensitive activities. Where individual members are parties to alliance agreements that have been approved by the Department and immunized from the antitrust laws, they coordinate their activities with each other directly, not as part of the Star Alliance.

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passengers a better, more seamless, and lower cost travel product. The members also use the "Star Alliance" mark as a means to distinguish their services in the marketplace and to enhance consumer loyalty. /51 Both United and Air New Zealand plan to continue developing their code-share relationships with their partners in the Star Alliance.

4. United's U.S. Marketing Hub Airports. The U.S. and foreign airline services at each of the U.S. airports where United markets its services on the basis that the airport is a hub for United are detailed in Exhibit JA-7.

5. Significant Service and Equipment Chances. Upon approval of the Alliance Expansion Agreement, United and Air New Zealand intend to broaden and deepen their cooperation in the city pairs where they now offer online service through code sharing and to expand the number of such city pairs. They anticipate that this, in turn, will stimulate demand over their integrated networks, which will increase load factors and eventually lead to the acquisition of more aircraft than would be required without such integration. The timing of such

5l/ Individual Star Alliance members retain their separate corporate entities and maintain their own bilateral alliance agreements.

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acquisitions, however, cannot be presently anticipated and will depend on commercial and economic considerations at that time.

6. New Entry at New Zealand and Australian Airports. Airport facilities are generally available at all of the international airports in New Zealand and Australia to support new or increased service by U.S. carriers. The Sydney International Airport is relatively congested when compared with other airports in Australia and New Zealand, but facilities are available for new entry. Due to the high incidence of Qantas service at peak travel times, there are certain periods of the day when gates at the international terminal may not be available. Nonetheless, the airport's facilities are adequate to support new competitive entry by interested carriers. Moreover, in the past, U.S. carriers that have served Sydney have been able to obtain the gates and other facilities that they need to commence service. Slots are allocated on a non-discriminatory basis under IATA's standard slot allocation procedures, wiuh a preference for new entrants (defined as carriers not operating more than four movements at the airport on the day in question). When the Australian Competition and Consumer Commission ("ACCC") reviewed and approved an alliance between Air New Zealand, Ansett, AIL and Singapore Airlines in 1998, it concluded that

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airport access is not constrained at any of the airports where any of the three carriers have significant operations, including Sydney. /52

7. Impact on United's Revenue. The United/Air New Zealand alliance is an integral element in United's global network structure. United anticipates that expansion and development of its alliance with Air New Zealand will generate additional traffic and revenue, enhance United's operating efficiencies, and have a positive impact on United's system profitability.

8. Labor Issues. A grant of immunity for the Alliance Expansion Agreement will have a positive effect on job security, growth, and opportunity for employees of both United and Air New Zealand, as it will support the carriers' ability to extend their respective networks and offer efficient, competitive services.

9. Computer Reservations Systems. Consistent with Department precedent United and Air New Zealand request that the grant of antitrust immunity encompass the presentation and sale of their services in computer reservations systems and the operations of their internal reservations systems.

52/ Ansett, Air New Zealand, Singapore Airlines alliance agreement, ACCC final determination (July 22, 1998) at 61.

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10. Civil Reserve Air Fleet. Grant of this application will have no effect on United's commitments to the Civil Reserve Air Fleet.

11. Air New Zealand O&D Data. Air New Zealand's internal origin and destination data for its top 50 city pairs involving a U.S. point for the twelve months ended April 1999 is being filed separately as Exhibit NZ-1 under Rule 39 confidentiality procedures.

12. Document Production. United and Air New Zealand are submitting separately, under motions for confidential treatment, documents comparable to those submitted in recent antitrust immunity proceedings as detailed in Exhibit JA-9.

V. CONCLUSION

WHEREFORE, for the foregoing reasons, United and Air New Zealand respectfully request that the Department approve, on an expedited basis, their Alliance Expansion Agreement under 49 U.S.C. § 41309, and grant antitrust immunity under 49 U.S.C. § 41308, for a period of at least five years, enabling United and Air New Zealand to broaden their cooperation, enhance the efficiency of their joint services, and expand the competitive

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network benefits they may provide to the traveling and shipping public.

Respectfully submitted,

BRUCE H. BINOVITZ

CATHLEEN P. PETERSON

KIRKLAND & ELLIS

655 Fifteenth Street, N.W.

Washington, D.C. 20005

DATED: December 17, 1999