OST-00-6970 / Midway Airlines / High Density Rule - New York LaGuardia / Reply of Midway / March 17, 2000

Application of

For an exemption from Subparts K and S of 14 CFR 93

(Raleigh/Durham - LaGuardia Service)

By this pleading Midway Airlines Corporation (Midway) responds to the Answer filed by the Office of the Queens Borough President (Queens) in opposition to Midway's application for slot exemptions at New York's LaGuardia Airport. Midway's application for an emergency exemption stands unopposed, but for the lone dissent of the Queens Borough President. Queens' comments, however, are filled with factual mistakes that reflect a fundamental misunderstanding of Midway's unique request. Queens ignores the following facts:

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The grounds for Queens' opposition are not compelling and they ignore the truly exceptional circumstances underlying Midway's application. Indeed, denial of Midway's application will have serious anti-competitive consequences. According to Queens, it "works closely with the aviation industry to balance the economic and transportation benefits of that industry with its negative impacts on residents." (Answer at 2). While Midway acknowledges that Queens fulfills an important role on behalf of the residents it represents, Midway disagrees with Queen's assertion that a close working arrangement exists between Queens and airlines seeking to serve LaGuardia and John F. Kennedy International Airport (JFK). Queens has routinely opposed virtually every slot exemption request involving LaGuardia and JFK, regardless of the nature of the operations being proposed or the magnitude of

1/ Contrary to Queens' Answer (at pp. 7-8, 14 and 16), the recently enacted aviation legislation does not require any delay in the Department's expedited handling of Midway's emergency request for replacement slots on leases set to expire June 1, 2000. To the contrary, Congress determined that the granting of slot exemptions is necessary for the promotion of the public interest and will not constitute a Federal action significantly affecting the environment.

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public benefits at stake. Here, what is at stake for LaGuardia-Raleigh/Durham travelers is the maintenance -- not the addition -- of vital competition in a major market: competition that will disappear without prompt favorable action by the Department. /2

To ensure continuation of those services, Midway requires two slot exemptions promptly and as many as seven more over the coming months. Specifically, Midway has requested two exemptions on an emergency basis to replace slots that its major-airline lessee has unilaterally terminated as of June 1, 2000; two additional slot exemptions promptly thereafter to enable it to offer truly competitive service (adding a sixth daily round trip), to match the service pattern of the major (and only other) airline which serves LaGuardia-Raleigh/Durham; and five slot exemptions prior to April 1, 2001, when the remaining LaGuardia leases are scheduled to terminate.

Midway cannot overstate the uniqueness of its request, which, Queens has ignored. The circumstances here are in marked contrast to the normal slot exemption application, where denial will merely perpetuate the status quo. Denial of Midway's proposal will undoubtedly lead to the elimination of two-carrier, price-

2/ See Answer of Raleigh-Durham Airport Authority in Support of Application, filed March 6, 2000.

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competitive scheduled service in a vibrant market of over 327,000 Origin and Destination passengers and will leave this growing, new economy community with the monopoly services of a single airline, that has, historically, been one of the highest-priced airlines in the industry.

A. MIDWAY HAS DEMONSTRATED THAT ITS APPLICATION IS IN THE PUBLIC INTEREST.

Queens argues that Midway's "proposed route" will not offer benefits sufficiently in excess of any adverse ramifications and therefore is not in the public interest. (Answer at 3). Queens also argues that Midway has failed to provide any "quantitative analysis by which to gauge even roughly the potential benefits ... and that Midway provides no concrete information about its ability to offer its proposed expanded service at competitive fares . . ." (1d.). The concerns that Queens cites in support of its contention include aircraft noise, air pollution, safety risks, increased ground traffic congestion, and increased flight delays. (Answer at 2, 4, 8). First, Queens misunderstands or has not even read Midway's application: Raleigh-Durham/LaGuardia is not a "proposed route." Rather it is an important route currently being served with five (5) round-trips daily.

Second, the public benefits at stake in this proceeding are clearly established in Midway's application and exhibits. Midway's presence in the Raleigh/Durham-LaGuardia market is the impetus for competitive fares that benefit a substantial pool of traffic, most recently (calendar year 1998) measured at some

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900 passengers a day. Midway has shown that it is also providing convenient connecting service to under served communities of North Carolina and South Carolina as well as several markets in Florida, with fares that are significantly lower than the average fare in many of these markets. In the LaGuardia-Raleigh/Durham market itself, Midway was the lowest fare carrier in the market for the 12 months ended May 31, 1999.

The utility and viability of Midway's operations are not speculative, as Queens argues: they are a past and present reality. The Department is not being asked to speculate as to the possible benefits of Midway's service: it is being asked to decide, very simply, whether the public interest requires the preservation of Midway's well-established competitive presence at a time when Congress is expressly urging the protection of new entrants and limited incumbent carriers. Without Midway's service, there can be little doubt that monopoly fares will result in the LaGuardia-Raleigh/Durham market.

On the other hand, Queens has failed to supply for this record any quantification of the negative concerns that it raises and alleges to be serious. It is Midway's position that those effects either are not valid or are minor. For example, increased safety risk is absolutely not an issue. The Department has previously stated unequivocally that safety would not be compromised by its grant of slot exemptions, and the basis for that commitment is fully applicable here. The Department has stated: "[w]ith regard to safety, the sophisticated traffic

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management system that is in place today limits demand to operationally safe levels through a variety of air traffic control programs and procedures that are implemented independently of the limits imposed by the High Density Rule. FAA's Air Traffic Control will continue to apply these programs and procedures for ensuring safety regardless of any changes to the HDR or any slot exemptions that the Department may grant." (See Order 97-10-17 at 14).

In expressing its concerns about noise, air pollution, ground traffic congestion and flight delays, Queens relies upon the Department's observations in a 1995 order involving denial of a Spirit Airlines slot exemption application. (Order 95-8-38). Those references are dated and have been superseded by later DOT decisions. More pertinent are the Department's subsequent conclusions in Order 97-10-17 where the Department made critical distinctions from Spirit in granting certain slot exemption applications. The Department there noted that, "in reaching our public interest findings, we are guided by the critical and growing need to seek and implement ways to improve the status of airline competition, and. . . [will]. . . balance that mandate against any potential offsetting considerations, including the extent to which expanded operations may cause flight delays and/or congestion." (Order at 14). In addition, the Department noted that it had further consulted with senior officials of the FAA -- which Queens now urges and, indeed, we would endorse, with respect to Midway's pending application -- and concluded that the exemptions under consideration in that case would entail "an increment of only 21

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operations, an increase over current operations of less than three percent, which the FAA does not anticipate will cause significant delay problems." (1d.). Here, any increase in operations at LaGuardia will entail an immediate increase of less than one-tenth of one percent (two operations a day added to an existing base of approximately 1,200 operations a day), and ultimately an increase of only one-half of one percent. Like the conclusion reached in Order 97-10-17, it is inconceivable that such small increments could be construed as causing congestion or significant delay problems at LaGuardia.

In addition to promoting the public interest, Midway's application fully satisfies the exceptional circumstances requirement. Midway's use of Stage 3 jet aircraft, its provision of competitive low-fare service in an otherwise under served market, and the operational and financial viability of its service are precisely consistent with the guidelines the Department has established for showing exceptional circumstances. These are established, unrebutted facts, not a matter of speculation as Queens asserts.

Queens, however, has argued that Midway is obligated to address other issues in order to satisfy the statutorily imposed exceptional-circumstances test. The following are Midway's responses to those issues:

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Queens asserts that all New York airports -- LaGuardia, JFK and Newark-serve the same primary business market, Manhattan, and urges Midway to explore 61options at the region's other airports." (Answer at 11). First, Midway already serves Newark five times per day. Second, Midway has explored alternatives, but has determined on the basis of its own substantial research that LaGuardia is a separate market and the Department has reached the same conclusion, primarily because LaGuardia is a more convenient airport than other metropolitan-area airports for most of New York City, including Manhattan.

In awarding LaGuardia slot exemptions to Frontier for service to Denver and to ValuJet for service to Atlanta, the Department found that:

(Order 97-10-17 at 10). These observations apply fully to the Raleigh/Durham- LaGuardia market as well, and thus render far less viable the option of serving the market through an alternative New York airport.

Moreover, Midway's LaGuardia operations are the result of a very substantial investment at that location, and have been demonstrably successful and responsive to the demands of the Raleigh/Durham-LaGuardia market. It defies

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business sense for Queens to suggest that Midway's operations could be equally responsive and successful if it were forced to forfeit its investment and position at LaGuardia for an alternative New York airport.

On this issue, Queens asserts that Midway has failed to demonstrate that it cannot simply purchase or lease slots using the "buy-sell" mechanism. As a preliminary matter, it is increasingly apparent that the buy-sell mechanism is decidedly not the reliable tool for assuring competitive balance in domestic air transportation that prompted its creation. The Department has so recognized in a number of its decisions on slot exemptions. It stated in Order 97-10-17, for example, that:

(Order at 11-12).

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It is precisely in that context that Midway now has no recourse but to come to the Department, following the unilateral decision of Midway's LaGuardia slot lessor to withdraw two slots effective June 1, 2000. Contrary to Queens' protestations, Midway has detailed its exhaustive efforts to secure slots through the marketplace. Given the substantial investment that Midway has made (including the payment of nearly $5.0 million in slot rentals) and the success that Midway has already experienced in the Raleigh/Durham-LaGuardia market, Midway did all it could to obtain slots in the market notwithstanding the exorbitant price tags it would expect to face if any slots were offered. Midway will continue its search but, as virtually all other low-fare, new-entrant carriers have experienced, slots simply are not being made available.

While this alternative is acceptable, Midway lacks the power to effect such reallocation. Of course, Queens has included this suggestion in each of its answers in opposition to previous LaGuardia slot-exemption applications on which the Department has acted. (See Orders 97-10-17 (Applications of Frontier, ValuJet and AirTran), 98-10-29 (Applications of AccessAir, America West, Chautauqua, Pro Air, and Spirit), and 99-9-11 (Application of JetBlue)). The Department's response -- for example in Order 97-10-17 -- has been that it is "assessing this course, as well as other slot-related options, as a means of

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stimulating new price competition." (Order at 5, n. 12). If the Department were to undertake a redistribution of slots, Midway would pledge its full cooperation. However, in view of the urgency of the instant request, neither the public nor Midway can await implementation of that uncertain alternative at the cost of decreasing competition and losing a hard-earned position in, and valuable public contribution to, the Raleigh/Durham-LaGuardia market.

Queens asserts that Midway has no reasonable expectation that the proposed service is operationally and financially viable and that Midway will not introduce new nonstop service or low-fare competition in an area where only one carrier is providing service or where existing services do not produce meaningful price competition.

Midway has been providing financially sound service in the Raleigh/Durham-LaGuardia market since 1995 and has been profitable for 13 consecutive quarters. Its load factors in that market averaged 62.3 % in 1999. Obviously, Midway's service is operationally and financially viable. Second, the fact that Midway's proposal does not contemplate entry into a new city-pair market, but is necessary in order to enable the preservation of existing competition, serves to heighten the exceptional and urgent nature of its request, not to render it outside the guidelines the Department has carefully developed. The subject market is served by only two

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carriers -- one a low-fare airline (Midway), and the other a major carrier with a singularly high-fare tradition. If, over time, Midway is forced out of the market by the loss of slots completely outside its control, it takes little imagination to forecast what the remaining monopolist carrier will do with its fares. Queens attaches no value to that eventuality on behalf of the residents it represents.

C. MIDWAY'S APPLICATION RAISES NO ASHBACKER CONCERNS.

Midway fully recognizes that other applicants have pending requests for LaGuardia slot exemptions. Queens argues that all such applications must be heard simultaneously with Midway's, pursuant to Ashbacker Radio Co. v. FCC , 326 U.S. 327 (1945). Midway disagrees. The emergency nature of Midway's application clearly sets its circumstances apart from those of other applicants, who are seeking to enter new markets. Midway casts no shadow on the merits of any of those proposals individually. Rather, we emphasize again that Midway is already in the city-pair market at stake in its request and, absent corrective action by the federal government, enormous public benefits that already exist will be lost. It is fully appropriate that the Department act expeditiously on Midway's application to prevent this major loss of competition.

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Midway's application promotes the public interest and satisfies the Department's exceptional circumstances requirements. It is disappointing that Queens has again adopted an unwavering stance against any New York airport slot assistance for any new entrant airline. It has placed no value whatsoever on the demonstrated benefits that the residents of New York and Raleigh/Durham would lose. Rather, by its position, Queens is fully willing to allow a major step backward, sacrificing in their entirety the substantial air transportation benefits, fare savings, jobs, and economic gain that have already been achieved.

For all of the reasons set forth in Midway's application and in this Reply, Midway urges the Department to recognize that the benefits at stake in this case are overwhelmingly greater than the alleged negatives raised by the Borough of Queens, and accordingly to grant Midway's modest slot-exemption request.

Respectfully submitted,

Stephen H. Lachter

LAW OFFICES OF STEPHEN H. LACHTER