OST-98-4292 / OST-98-4291 / OST-98-4351 / OST-98-4352 / Aero Continente / Alas del Pacifico / Reply of Fine Air / September 21, 1998

In the matter of the applications of

for a foreign air carrier permit and exemptions

In the matter of the applications of

for a foreign air carrier permit and exemptions

SORREPLY OF FINE AIR SERVICES, INC.

Fine Air Services ("Fine Air") moves for leave to file the instant Surreply to the Replies submitted by Aero Continente, S.A.C. ("Aero Continente") and Alas del Pacifico, S.A.C. ("Alas") in the above-captioned dockets. Aero Continente's and Alas's Replies raise several critical issues bearing on whether the Department should defer action on Peruvian carrier applications pending a resolution of Peru's extraordinary, unreasonable and unjustified ban of Fine Air. /1 Aero Continente's Reply also

1/ Given that these same issues are raised in the replies

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discloses new facts regarding drug trafficking allegations concerning Aero Continente and its former Chairman. To ensure that the Department's decisions in these proceedings are based on a complete and accurate record, Fine Air, a U.S. air carrier clearly affected by the outcome of these proceedings, deserves the opportunity to comment on Aero Continente's and Alas's assertions.

Two issues confront the Department in the above captioned proceedings: (1) whether the Peruvian Government has acted unreasonably and unjustifiably in precluding Fine Air from operating to/from Peru for over 3~ years, while proffering ever changing reasons for doing so and refusing to negotiate a resolution to the situation; and (2) what action the Department should take on a Peruvian carrier's application for a public license where that carrier and/or an individual who has controlled (and may continue to influence) that carrier have been indicted on charges of trafficking in illegal drugs. 2/ Fine Air addresses each in turn.

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of both Aero Continente and Alas, Fine Air has, for the sake of administrative convenience, prepared a single Surreply which it has filed in all four dockets.

2/ The first issue is relevant to the applications of both Aero Continente and Alas; the second issue is applicable only to the applications of Aero Continente.

I. The Imposition and Maintenance of a Ban on a U.S. Air Carrier for 3 1/2 Years Is Inherently Unreasonable and Requires the Department to Defer Action on the Applications of All Peruvian Carriers.

Leaving aside their shrill rhetoric and the more self-evidently nonsensical of their arguments, 3/ Aero Continente's and Alas' Replies appear to make two "legal" arguments with respect to Peru's 3 1/2-year-old ban of Fine Air: (i) Fine Air's "problems in Peru" are outside the Department's province and that it is "up to Fine Air" to demonstrate new evidence or changed circumstances to persuade Peru to lift the band /4 and (ii) in any event, the Peruvian Government's actions have not been unjustifiable or unreasonable. /5 Both contentions are plainly wrong.

4/ See Aero Continente Reply at 3; Alas Reply at 3 (incorporating Aero Continente's Reply).

5/ See Aero Continente Reply at 4-5; Alas Reply at 3 (incorporating Aero Continente's Reply).

A. Peru's treatment of Fine Air is not beyond the scope of the instant proceeding.

The suggestion that the Peruvian Government's perpetual ban of Fine Air is beyond the scope of this proceeding and the Department should leave it "to Fine Air to demonstrate to the Government of Peru new evidence or . . . changed circumstances" is a transparent invitation to the Department to abandon Fine Air -- an invitation that Fine Air is confident the Department will reject and rebuke. While the Department has to date been unsuccessful in negotiating a resolution to the Peruvian Government's ban, it has repeatedly recognized that the ban in a bilateral issue, as it precludes a U.S. carrier from exercising traffic rights in the U.S.-Peru market that it would be otherwise eligible to exercise. Accordingly, it is a wholly appropriate subject to be raised in the course of this proceeding -- in which a Peruvian carrier seeks to exercise traffic rights precisely equivalent to those the Peruvian Government is denying Fine Air (i.e., third and fourth freedom rights).

Indeed, the glib suggestion that the dispute could be resolved outside the bilateral context -- by Fine Air bringing "new evidence" or making "representations of changed circumstances" to Peru's attention -- only serves to highlight how unreasonable the Peruvian Government's conduct has been. From the outset, when it imposed the ban on Fine Air without notice or an opportunity to be heard, the Peruvian Government has demonstrated absolutely no interest in an objective inquiry into Fine Air's evidence or representations. Indeed, to the contrary, when presented with overwhelming evidence supporting Fine Air's steadfast claims that it had no knowledge of the nature transported on the flights, 6/ the Peruvian Government has simply disregarded it or changed the rationale for the ban.

B. Peru Has Acted Unreasonably and Unjustifiably. The Peruvian carriers' argue that the Peruvian Government's actions -- maintaining the ban indefinitely, preferring ever-changing reasons for doing so, and refusing to negotiate its resolution -- are not unreasonable or unjustifiable. In support of their contention, the Peruvian carriers cite Order 96-7-5, which ruled on the IATFCPA complaint that Fine Air filed against Peru soon after the imposition of the ban. The Peruvian carriers completely misconstrue the order and its implications for Peru's recent actions.

6/ Contrary to Aero Continente's assertions, for example, the FAA's conclusion that it found no evidence of any violation by Fine Air of any FAA hazardous material regulations means that there is no evidence of knowing wrongdoing by Peru. The Government of Peru charged Fine Air with transporting inter alia ammunition, cannon projectiles, grenades and explosives (see Order 96-7-5 at App., n.21) -- all of which clearly constitute hazardous materials. FAA hazardous materials regulations prohibit the intentional, knowing or reckless transportation of hazardous materials without having undertaken certain safety precautions (which precautions were not taken on the flights in question). Accordingly, Administrator Hinson's conclusion that no evidence of any violations of hazardous materials regulations must mean equally that no evidence has been found that Fine Air had knowledge of the nature of the cargo transported.

In Order 96-7-5, the Department ruled solely on whether the imposition of the ban in 1995 was unreasonable. Noting that Peru was in a state of war at the time the ban was imposed, that Peru's decision to close its airspace to Fine Air ''reflected its judgment that national defense and security concerns required that measure," and that under international law bilateral rights may be suspended for reasons of national security and defense, it concluded that the record did not support a finding that "Peru's action at the time was unjustifiable or unreasonable under the circumstances presented." Order 96-7-5 at 4 (emphasis added). It explicitly emphasized, however, that its decision "should not be interpreted as a finding that Peru would be reasonable in maintaining the ban on Fine's operations indefinitely," i., and indicated it hoped to reach a diplomatic resolution to the problem.

It is beyond dispute that the circumstances present at the time when Peru imposed the ban are no longer present. The armed conflict with Ecuador ongoing when Peru first imposed the ban abated more than three years ago -- even Ecuadorian carriers have long since been readmitted to Peru. Peru's concern for its national security can no longer justify Fine Air's continued exclusion. Indeed, even the Peruvian Government appears to concede as much; although advancing "national security" as its explanation for the ban during the IATFCPA proceeding, it has since advanced a number of other explanations for perpetuating the ban -- including most recently, the pendency of a penal proceeding against Fine Air in Peru's courts.

The maintenance of the ban under these changed circumstances is plainly unjustifiable and unreasonable. First, the ban is now clearly an indefinite ban, which in and of itself is unreasonable and unjustifiable. The Department has made clear in this case that it would not consider an indefinite ban to be reasonable. International law does not contemplate "death penalties" against carriers under any circumstances (let alone where, like here, the carrier has never been shown to have done anything illegal).

Second, Peru's pattern of dealing with Fine Air since the imposition of the ban has been extraordinarily unreasonable. Fine Air has been subjected by the Peruvian Government to a Kafkaesque administrative and judicial nightmare in which the Government continually moves the goalposts to prevent Fine Air's reintroduction to the market. To recap briefly:

• Fine Air was summarily suspended by the Peruvian Government based on a newspaper report. Fine Air was given no notice or opportunity to be heard. Peru sought no consultations with the U.S. Government.

• Fine Air was subsequently informed that it would not be permitted to reenter the market until the FAA had completed its investigation of the incident. When the FAA publicly concluded that there was no evidence supporting any charges against Fine Air, the Peruvian Government complained that the FAA's conclusions had not been communicated directly to it.

• When the FAA Administrator subsequently sent a letter personally informing the Peruvian Minister of Transportation, Communications, Housing and Construction of the FAA's conclusions, Peru changed its explanation: it now took the position that maintenance of the ban was necessary to protect Peruvian national security.

• When Peruvian-Ecuadorian hostilities ended and the national security excuse was no longer viable, the Peruvian Government changed its explanation again: extension of the ban was now required pending the outcome of a Peruvian judicial investigation of the incident.

• The judicial investigation examined whether Fine Air and its principals on charges of treason. When the prosecutor was forced to conclude that there was simply no basis under Peruvian law for charging Fine Air or its principals with treason, the prosecution was dismissed.

• The Peruvian Government then appointed a second prosecutor to examine again whether Fine Air or its principals committed treason. The investigation of this second prosecutor has now been pending for over 18 months. No charges have been brought, and the proceeding remains in limbo. The Peruvian Government continues to take the position that, as long as the judicial proceeding remains pending, it will not lift the ban.

Third, the Peruvian Government's pattern of dealing with the United States Government has been unreasonable and unjustifiable. As argued above, the ban clearly is a bilateral issue, as it affects rights that may be exercised by carriers under the U.S.-Peru Air Transport Agreement. Specifically, it precludes a U.S. air carrier from exercising third/fourth freedom charter rights which that carrier currently possesses 3/ and

7/ Fine Air holds global charter authority (see Order 94-4-32, reissued in Order 97-7-30) and prior to imposition of the ban in February 1995 exercised such authority in the U.S.-Peru

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scheduled traffic rights for which it is eligible. Peru's steadfast refusal to discuss termination of the ban, as well as its constantly changing explanations for the ban's perpetuation, is unreasonable and unjustifiable, given the United States' long-standing practice of dealing fairly and constructively with the Peruvian Government.

Peru's unreasonable and unfair actions demand that the United States Government respond reciprocally -- i.e., by deferring action on the Peruvian carriers' applications until such time as Peru agrees to permit Fine Air to enter the market. Federal aviation law recognizes that unreasonable and unfair actions by a foreign government may justify denying, deferring or taking other similar action with respect to foreign carrier applications for U.S. authority. See, e.g., 49 U.S.C. §§ 41304, 41310.

II. The Indictments Against Aero Continente and Fernando Zevallos for Illegal Narcotics Trafficking Dictate that No Action Be Taken on Aero Continente's Applications

Whatever doubt might once have existed regarding whether the Department must conduct a complete and thorough investigation of the carrier's fitness, is put to rest by Aero Continente's own Reply.

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market.

Aero Continente's Reply confirms: that from 1993 to date, the carrier has been owned and/or controlled by the Zevallos family; that Mr. Fernando Zevallos appears to have played a leading role in the carrier, serving inter alia as Chairman of the Board, a director and majority shareholder (see Aero Continente Reply at 8); that the Company's aircraft have been acquired from a leasing company owned by Mr. Fernando Zevallos (see id. at Attachment A, p.5); that Mr. Fernando Zevallos has been indicted by the Peruvian Government for "illegal trafficking of drugs" (id. at Attachment A, p.1); and that those charges remain pending (id. at 7). These facts alone would merit extremely close, skeptical scrutiny of the carrier, its operations, its contractual relationships (including with companies owned and controlled by Mr. Zevallos), and its claims of total independence from Mr. Zevallos since August 1997, when he allegedly resigned from Aero Continente's board and control was transferred to his sister. As the Department is well aware, individuals who are unfit to control carriers have often sought to avoid Departmental scrutiny by transferring nominal ownership to close trustworthy friends or family members. See, e.g., Order 71-10-114 (foreign citizen attempts to control U.S. carrier through interpersonal relationship).

However, the accountants' Report appended to the application indicates that not only is Mr. Zevallos under indictment in Peru, but that at least as of August 1997 Aero Continente -- the applicant itself -- was too. See Aero Continente Reply, Attachment A, p.1 (referring to "the indictment of the Company and Fernando Zevallos for illegal trafficking of drugs in Peru" (emphasis added)). If true, of course, the carrier's own fitness to hold a U.S. Government license would be seriously compromised regardless of the present details of its relationship with Mr. Zevallos.

Leaving aside the issues of its fitness, however, the very pendency of the Peruvian proceeding against Aero Continente and/or Mr. Zevallos clearly dictates that Aero Continente be prohibited from entering the U.S.-Peru market at least until Fine Air is permitted to do so. Aero Continente's argument that "there is a significant difference between the matters which resulted in the ban imposed on Fine Air and Aero Continente" fails to hold water. To be sure, there are enormous differences between Fine Air and Aero Continente -- differences that cut wholly in favor of Fine Air: (1) no one has ever alleged that Fine Air, unlike Aero Continente and Mr. Zevallos, has committed any action endangering the welfare of the United States and its citizens;-' (2) Peru's charges against Fine Air -- that Fine Air committed "treason" against Peru when it operated cargo flights that never entered Peru's airspace -- are self-evidently bogus,

8/ It goes without saying that, if Aero Continente and Mr. Zevallos have trafficked in illegal narcotics as alleged, their actions strike at the heart of the United States' national security.

whereas there is no basis for knowing the merits of Peru's charges against Aero Continente and Mr. Zevallos; and ( 3) Fine Air, unlike Aero Continente, has already been unfairly penalized for 3 1/2 years. The conclusion must be that, if the mere pendency of a Peruvian judicial proceeding is the basis for precluding one carrier from participating in the U.S.-Peru market, it must operate to preclude all similarly situated carriers from doing so .

WHEREFORE, Fine Air again respectfully urges the Department to defer all action on the applications of Aero Continente and Alas del Pacifico until such time as the Peruvian Government permits Fine Air to operate services in the U.S.-Peru market.

Respectfully submitted,

Jeffrey Shane

Karan K. Bhatia

WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, D.C. 20037-1420

Tel. (202) 663-6000

Fax. ( 202) 663 - 6363

Counsel to FINE AIR SERVICES, INC.

September 21, 1998