OST-00-7181 / Wendell Ford / Answer of American Airlines / May 22, 2000

In the matter of

for exemptions from 14 CFR Part 93, under 49 USC 41718(a) (beyond-perimeter slot exemptions for Ronald Reagan Washington National Airport)

ANSWER OF AMERICAN AIRLINES, INC.

1/ By Notice served April 14, 2000, the Department consolidated American's application into this docket (p. 2).

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Three other applicants are seeking slot exemptions for DCA-LAX service: United, two daily roundtrips; American Trans Air (ATA), one; and TWA, three. As we show below, American should be selected to operate nonstop service between DCA and Los Angeles.

Applications to serve other beyond-perimeter cities from DCA have been submitted by America West, three daily roundtrips to Phoenix and two to Las Vegas; ATA, one to San Francisco (in addition to one to Los Angeles); Delta, two to Salt Lake City; Frontier, two to Denver; National, two to Las Vegas; and Northwest, one to Seattle.

Los Angeles is by far the largest city in the United States without nonstop service to DCA, and should be the beneficiary of slot exemptions sufficient for at least two daily roundtrips. Among the four applicants for DCA-LAX slots, American should be ranked first. United is already the dominant carrier in the Washington-Los Angeles market, as well as at both Los Angeles and Washington (IAD and DCA) generally. In the interest of competitive balance, United should not be favored. ATA has proposed only one daily flight with a highly cramped seating configuration, and would not provide any network benefits beyond Los Angeles. TWA is a weak carrier unlikely to prevail against United's dominant position, and its claimed network benefits are entirely speculative.

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Los Angeles is the largest city in the United States without nonstop access to DCA. Based on U.S. Census estimates as of December 1999 (www.census.gov), Los Angeles is more than three times larger than any other beyond-perimeter city in this proceeding:

Population

Moreover, the Los Angeles-Washington (DCA and IAD) market, as measured by the O&D Survey (as compiled by Data Base Products) for the year ended September 30, 1999, is far larger than any other beyond-perimeter market at issue:

Annual Pax Daily Pax

LAX-WAS 842,550 2,308

SFO-WAS 601,340 1,648

DEN-WAS 527,480 1,446

SEA-WAS 271,670 744

SLC-WAS 192,330 526

PHX-WAS 170,300 466

LAS-WAS 141,680 388

The preeminence of Los Angeles for a beyond-perimeter award is shown by the fact that four of the nine applicants in this proceeding are seeking to operate DCA-LAX nonstop service. By contrast, Las Vegas has two applicants, and Phoenix, Salt Lake City, San Francisco, and Seattle each has one applicant.

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The Washington-Los Angeles market is a time-sensitive business market, as evidenced by the bookings data presented in Exhibit AA-1. This shows that, in contrast to passengers in leisure markets such as Los Angeles-Honolulu, passengers in the Washington-Los Angeles market tend to book much closer to their desired departure day. Time-sensitive business travelers seek nonstop service whenever it is available, while leisure travelers, being more price-sensitive, are more tolerant of one-stop routings. Among the cities in issue in this proceeding for beyond-perimeter slots, Los Angeles is one of Washington's top business markets as measured by premium passengers, as shown in Exhibit AA-2. In a situation marked by limited availability of slots, and by the flexibility of leisure passengers to travel on one-stop services, it is important that the Department award slots in this proceeding to carriers proposing to use them in business markets.

In the legislative history of Air 21, Congress clearly contemplated that Los Angeles should be considered for an award of DCA beyond-perimeter slots. During the debate, Senator Feinstein and Senator Boxer of California asked Senator McCain, Chairman of the Committee on Commerce, Science and Transportation, about the DCA beyond-perimeter slot provision. See 145 Cong. Rec. (daily ed.), S10945, September 25, 1998. Senator Boxer said that this is a matter "which affects the

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people of our state and many of the other western states," and asked whether carriers would be prevented from competing on routes from DCA to Los Angeles or San Jose or other California airports under the bill. Senator McCain responded that "[a]s long as carriers can demonstrate that their routes provide domestic network benefits and increase competition in multiple markets, they may compete for these nonstop routes, including select routes to California airports" (emphasis added).

American will provide domestic network benefits and increase competition in multiple markets, including the large Los Angeles-Washington market itself, and a number of other markets that will enjoy first or competitive one-stop access via Los Angeles to DCA. American will also challenge United's dominant position in the Washington-Los Angeles market, and at Los Angeles and Washington generally. No other applicant for beyond-perimeter DCA exemption slots would provide greater competitive benefits.

American proposes to operate twice-daily nonstop roundtrip service between Los Angeles and Ronald Reagan Washington National Airport, using B757 Stage 3 aircraft with 176 seats under American's "More Room in Coach" initiative (Exhibit AA-3). The B751 is the largest aircraft authorized at DCA.

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At Los Angeles, American and American Eagle provide 169 daily departures, and serve 32 U.S. points and 15 foreign points (including codeshare destinations). See Exhibit AA-4. Four cities in California -- Bakersfield, Monterey, San Luis Obispo, and Santa Barbara will receive their first on-line, one-stop access to DCA under American's proposal. These four cities accounted for a total of 47,960 O&D passengers to and from Washington (DCA and IAD) for the year ended September 30, 1999. See Exhibit AA-5.

American and American Eagle will provide competitive one-stop service to DCA via Los Angeles to a number of other cities, including Fresno, San Francisco, San Jose, Palm Springs, San Diego, Reno, Las Vegas, Honolulu, and Kahului. American will also offer new one-stop access between DCA and international cities served by American's codeshare partners at the Los Angeles gateway, including Beijing, Seoul, Nagoya, Taipei, Fiji, Sydney, Melbourne, and Auckland. See Exhibit AA-6.

In addition to the benefits that American will provide in the large local Los Angeles-Washington market and in connecting markets receiving first or competitive one-stop access to DCA, an award of beyond:-perimeter DCA exemption slots to American will help redress the competitive imbalance at Los Angeles International Airport and at Washington, D.C. (IAD and

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DCA), where United is the largest carrier. This important issue is discussed in detail in Section III, below.

American's DCA-LAX nonstop service will also offer passengers roomier seating in economy class. With American's bold "More Room in Coach" initiative, American has demonstrated industry leadership, willingness to innovate, and dedication to customer service. More room in coach is of particular importance in long-haul markets such as Washington to Los Angeles, and will allow each and every customer to travel in greater comfort. Eliminating seats also frees up additional overhead bin space, which maximizes carry-on baggage and enhances customer convenience. See Exhibit AA-3.

Public supporters of American's proposed service include Senator Boxer; members of the California Congressional delegation; the Los Angeles World Airports; the California Travel and Tourism Commission; and a number of businesses requiring travel between Washington and Los Angeles. See Exhibit AA-17.

o Senator Boxer's letter of March 27, 2000 to Secretary Slater urges the "strongest consideration" of American's proposal. She stated that "the introduction of new nonstop service from National Airport to LAX would clearly increase competition for the most nonstop air travelers possible," and that American's proposal "will not only benefit

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consumers and business travelers in the Los Angeles metro area but scores of air travelers on the west coast as well."

o In their joint letter of April 2, 2000 to Secretary Slater, 16 members of the California Congressional delegation noted that "Los Angeles is currently the largest U.S. city without nonstop service to National Airport," and that "awarding two roundtrips to American Airlines will help strengthen competition along the West Coast as American continues to aggressively expand its coastal network."

o The March 12, 1999 letter of the Executive Director of Los Angeles World Airports stated that American's entry in the DCA-LAX nonstop market "will help meet the continued passenger demand to the Washington, D.C. area," and that American "qualifies as an airline we would like to help because the addition of these flights to LAX works to keep a healthy balance between the major carriers at LAX."

o On March 23, 2000, the California Travel and Tourism Commission wrote to Secretary Slater "to express strong support" for American's request, stating that "far more consumers would benefit from a nonstop route between Washington National and Los Angeles than between National and noncoastal cities, such as Phoenix or Salt Lake City."

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o A number of businesses that require air service between Washington and Los Angeles have written to the Secretary to express their "strongest possible support for American Airlines, application," stressing that the introduction of American's proposed service "would clearly provide convenient nonstop service to the largest number of air travelers possible, and would stimulate competition between carriers serving the West Coast."

American's proposed service will provide Los Angeles with its first nonstop access to DCA, and will also offer substantial network benefits for cities in California, Nevada, and Hawaii which will receive first or competitive one-stop service to DCA. American will not reduce travel options to any other community, either inside or outside the DCA perimeter. And American will provide competitive balance at both Los Angeles and Washington, challenging the dominant position enjoyed by United at both points. /2

2/ American's proposed DCA-LAX schedules are set forth in its application, pp. 5-6. As is presumably the case with all applicants, American's proposed departure and arrival times at DCA would be subject to adjustment to comply with 49 USC 41718, requiring that no more than two additional beyond-perimeter DCA exemption slots be allocated in any one-hour period.

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In the best of worlds, all of the applicants for DCALAX beyond-perimeter slots would be able to provide the services they have proposed, and the marketplace would be the judge of their value. Regrettably, however, the Department must choose from among multiple proposals. As further described below, we believe that the United, ATA, and TWA proposals each suffers from significant deficiencies which make selection of American's proposal at Los Angeles all the more compelling.

United's application for two slot exemptions for DCALAX nonstop service should be denied. United is the largest carrier in the Los Angeles-Washington market, and the largest carrier at Los Angeles International Airport and at Washington, D.C. (IAD and DCA). The Department should not grant further authority to United that would only serve to enhance its dominant position, contrary to the public interest in having multiple strong competitors at major airports such as LAX.

United presently operates nine daily roundtrips between Washington (Dulles) and Los Angeles, while American operates four. See OAG., July 2000. United's share of nonstop frequencies and nonstop seats between Washington and Los Angeles has grown steadily, and now stands at almost 70%

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(Exhibit AA-7). For the year ended September 30, 1999, United carried 434,040 passengers in the Los Angeles-Washington market (DCA and IAD), a 51.5% share, followed by American with 2S6,770, a 30.5% share (Exhibit AA-7). If United were to prevail in this proceeding, its daily nonstop flights from Washington to Los Angeles would increase to 11, giving it almost a three-to-one advantage over American, its only nonstop competitor.

United is also the dominant carrier at LAX, with a market share of enplanements nearly double that of its nearest competitor. For the year ended September 30, 1999, United accounted for 30.6% of all passenger enplanements at LAX, followed by Southwest with 16.9%, and American with 13.9%. ATA's share was 1.6%, and TWA's share was 2.6%. See Exhibit AA-8.

Moreover, United's dominance at LAX has grown steadily over the past 10 years, as shown by Exhibit AA-10. In 1991, United's domestic frequency share at Los Angeles was 19.9%, while American's share was 18.4%, Delta's was 25.3%, and US Airways' was 13.6%. Now, United's share is 42.5%, compared to 19.6% for American, 5.3% for Delta, and 3.7% for US Airways. Both Delta and US Airways, which 10 years ago had large shares of the Los Angeles market, have cut service in the face of strong competitive pressure by United. American is the only

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remaining network carrier willing and able to challenge United's dominant position, and provide competitive services from Los Angeles to a broad range of destinations, not just Washington. Indeed, American is continuing to expand its Los Angeles presence, including adding flights to United's own strongholds at Denver and San Francisco. See Exhibit AA-12.

United is also the dominant carrier at Washington (IAD and DCA). For the year ended September 30, 1999, United accounted for 31.5% of all passengers enplanements at IAD and DCA, followed by US Airways with 24.8%, Delta with 15.4%, and American with 11.0%. See Exhibit AA-9.

Among the applicants for DCA-LAX exemption slots, only American is in a position to mount a significant challenge to United's dominance. American recently announced a series of schedule changes aimed at strengthening its route network on the West Coast. At Los Angeles, American commenced new daily nonstop service to Dallas Love Field on May 1, 2000, and is adding new service to St. Louis and Hartford on June 1, 2000, and to Phoenix, Denver, and Oakland on July 2, 2000. American is also adding flights to and from Boston, Las Vegas, San Francisco, and San Jose. See Exhibit AA-12.

In addition, American has embarked on a $260 million improvement program at Terminal 4 at Los Angeles, where American is enlarging ticket counter and baggage facilities, expand-

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ing the security check-point area, redesigning the departure and arrival concourse, and building a new international arrivals facility. The project is scheduled for completion by August 2001.

ATA averages just 6.5 daily departures at Los Angeles, and TWA averages 11.5. See OAG, July 2000. In order to improve competitive balance at LAX, the Department should select American, the only applicant with enough presence to provide a real measure of regional competition against United' LAX stronghold.

As shown in Exhibit AA-17, a number of parties supporting American's selection have voiced the need for increased competition on the West Coast and at Los Angeles in particular. In their letter of April 6, 2000, 16 members of the California Congressional delegation stated that awarding DCA-LAX exemption slots to American "will help strengthen competition along the West Coast as American continues to aggressively expand its coastal network." In his letter of March 12, 1999, the Executive Director of Los Angeles World Airports said that the addition of American's proposed flights "works to keep a healthy balance between the major carriers at LAX." And the letter of March 23, 2000 from the California

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Travel and Tourism Commission also stated that American's flights "will help strengthen competition along the West Coast."

United's claim of network benefits beyond Los Angeles is not a significant basis for its selection. American will offer first one-stop access to DCA via Los Angeles for four cities in California (Bakersfield, Monterey, San Luis Obispo, and Santa Barbara) accounting for 47,960 annual Washington passengers (Exhibit AA-5). While United would offer such access for these four cities plus 12 more in California, Hawaii, Utah, and Arizona, United's additional points in the aggregate account for only 31,030 annual Washington passengers (Exhibit AA-5). Such a small advantage should not outweigh the benefits that the selection of American will bring to balanced competition in the Washington-Los Angeles market, at Los Angeles-and Washington generally, and on the West Coast.

Finally, American offers a superior product, with more legroom for all of its coach customers. United, by contrast, would provide more legroom in only a portion of its coach cabin and only for its elite customers, to the detriment of a large number of its regular coach passengers on each flight.

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ATA should not be selected for an award of DCA-LAX exemption slots. ATA has proposed to operate only one daily roundtrip, which is clearly insufficient in a predominantly business market such as Washington-Los Angeles, and in light of the fact that Los Angeles is the largest city in the United States without nonstop access to DCA. Los Angeles should without question receive at least two of the six daily roundtrips that are available for beyond-perimeter DCA service.

ATA would provide no network benefits at Los Angeles. While it claims service from Los Angeles to Hawaii, its DCA-LAX and LAX-Hawaii schedules do not provide any same-day connections. See Exhibit AA-13. Accordingly, ATA completely fails to satisfy one of the key statutory tests for an award of beyond-perimeter slot exemptions.

ATA's one-class aircraft configuration, 216 seats on a B757, is hardly a point in its favor, particularly in a business market such as Washington-Los Angeles. Such cramped quarters on a transcontinental flight would ill-serve the public. American, by contrast, will operate B7S7 aircraft with a total of 176 seats (22 first-class and 154 economy) under its "More Room in Coach" initiative. See Exhibit AA-3.

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The issue of economy class legroom is not a trivial matter on flights of this length, approximately 5.5 hours westbound and 5.0 hours eastbound. As shown in Exhibit AA-14, American will offer 34 inches of pitch in coach v. just 29.5 inches on ATA. The industry standard, which would include both United (for its regular coach customers) and TWA, is 32 inches (Exhibit AA-15). The comfort of passengers will be far greater under American's new policy of providing more legroom in coach, and this is another selection factor weighing heavily in American's favor.

A very important measure of a carrier's ability to compete in a city-pair market, and the public demand for the services a carrier provides, is the strength of its frequent flyer program at each point. As shown by Exhibit AA-11, some 49.50-. of passengers at Los Angeles, and 47.8% of passengers at Washington, are members of United's Mileage Plus program. American follows closely, with 44.06 of passengers at Los Angeles, and 41.4% of passengers at Washington, who are members of American's AAdvantage program. /3 In contrast, TWA's frequent flyer program has only a 15.111 penetration at Los Angeles and 17.1% at Washington, while ATA does not offer a frequent flyer program at all.

3/ Cumulative percentages by city exceed 100%, as respondents are often members in more than one frequent flyer program.

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Having little else to say, most of ATA's application is devoted to its self-characterization as a low-fare carrier. American also provides a full range of low fares, subject to standard industry restrictions, as ATA itself demonstrates (p. 13). But the selection decision in this proceeding should not be based on which applicant might offer the lowest one-way walk-up fare, which is the standard that ATA apparently urges (p. 13). The benefits that American will offer -- two daily nonstop roundtrips v. ATA's one; domestic network beyond Los Angeles; more legroom in coach; valuable frequent flyer miles; and balanced competition against United at Los Angeles, on the West Coast, and at Washington -- far outweigh any comparative claims that ATA has made about carrier fare categories.

Finally, ATA's application includes extravagant rhetoric on consumer savings, economic benefits, and other matters which are all predicated on unsubstantiated or irrelevant claims. For example, ATA asserts that its DCA service would result in annual savings of $34 million to $64 million for 500,000 to 700,000 passengers (p. 42). But ATA provides no forecast for any of its three proposed DCA routes, nor the fare breakdown of any of its passenger groupings on any of these routes. Even if such figures could be credited, ATA does not break out the portion of the alleged savings that would relate to its Los Angeles service, thereby making unusable any of its

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"analysis" in the beyond-perimeter route case as distinct from the within-perimeter route case in which it is also participating.

Similarly, ATA's claim that its DCA proposal would benefit the U.S. economy by adding 150 jobs and $2 billion in aircraft sales (p. 20) may well be true, but is irrelevant because any winning applicant will similarly need to supplement its staff and fleet in roughly equal measures. The Department should disregard these and other unsubstantiated and irrelevant claims that pepper ATA's application, and focus instead on the well-recognized criteria enumerated by Senator McCain: expansion of network benefits and stimulation of competition. By those measures, American's application clearly ranks far ahead of ATA's.

TWA is not in a strong position to be seeking exemption slots at DCA to compete with United in the Washington-Los Angeles market. TWA is desperately weak financially. See Exhibit AA-16. In the last few years, while every other major U.S. carrier has posted record financial performance, TWA has incurred growing losses. TWA's recent decision to terminate JFK-Rome and JFK-Madrid service, routes that were once considered part of its backbone, suggests that TWA is not in a position today that would allow it to compete effectively

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against United at Los Angeles, as American is attempting to do now. In fact, TWA's route terminations are particularly telling in the face of recent additions of Rome service by American, Delta, and Northwest.

As noted above, TWA has a very small presence in the Washington-Los Angeles market, and at Los Angeles and Washington generally. TWA also has an insignificant frequent flyer program penetration among passengers at Los Angeles and Washington. Unlike American, TWA would not help balance competition against United's dominance on the Washington-Los Angeles route, or at the either of the end points.

Moreover, TWA fails to meet the statutory requirement of providing network benefits. TWA's only claim in that regard is a letter of intent with Chautauqua Airlines that Chautauqua might begin service from Los Angeles to Bakersfield, Monterey, San Luis Obispo, Santa Barbara, and Palm Springs on which TWA could codeshare. But such service is entirely speculative. Chautauqua Airlines presently has no operations at LAX. By contrast, American's regional partner, American Eagle, is well-established at Los Angeles. Unlike TWA, American is certain to provide substantial network benefits following the award of DCA beyond-perimeter slot exemptions.

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Congress has mandated that the Department improve access to Ronald Reagan Washington National Airport from points in the western United States. Los Angeles is by far the largest U.S. city without nonstop access to DCA, and Los Angeles-Washington is by far the largest O&D market without nonstop access to DCA. American's proposed service will provide Los Angeles with its first nonstop service to DCA, and will also provide cities in California, Nevada, and Hawaii with first or competitive one-stop service to DCA. The Department should promptly grant four beyond-perimeter DCA exemption slots to American for twice-daily nonstop service between Los Angeles and DCA.

Respectfully submitted,

CARL B. NELSON, JR.

Associate General Counsel

American Airlines, Inc.

May 22, 2000