OST-00-7513 / US-Ecuador All-Cargo / Answer of Fine Air / June 27, 2000

Pursuant to the Department's Notice /1 in Docket OST-2000-7513, U.S.-Ecuador All-Cargo Frequency Allocation served June 15, 2000 herein, Fine Air Services, Inc. ("Fine Air") respectfully submits this consolidated answer to the applications of Evergreen International Airlines, Inc. ("Evergreen"), Atlas Air, Inc. ("Atlas"), Gemini Air Cargo, Inc. ("Gemini") submitted herein. /2

1/ In addition to soliciting applications from U.S. carriers interested in operating the three (3) Ecuador all-cargo narrow-body frequencies available for reallocation, this Notice also consolidated into Docket OST-2000-7513 the pending applications of Evergreen International Airlines, Inc. (Docket OST-2000-7343), Atlas Air, Inc. (Docket OST-2000-7407), and Gemini Air Cargo, Inc. (OST-2000-7496).

2/ Fine Air has taken no position on the application of Arrow Air, Inc. ("Arrow"). As the Department and parties are aware, both Fine Air and Arrow are under the common ownership and control of Fine Air Services Corp. See DOT Order 99-4-5, Exemption approving acquisition of Arrow by Fine Air Services Corp. The application of Fine Air and Arrow Air for de facto route transfer dated February 23, 1999, subsequently amended to seek approval of a full merger of Fine Air, Inc. into Arrow Air, Inc. remains pending in Docket OST-99-5140. Pursuant to Order 99-4-5, Fine Air and Arrow are required to be run as two (2) separate air carriers, and Fine Air and Arrow are also both obliged to apply separately for the frequencies available herein.

(continued ... )

Consolidated Answer to Applications for Allocation of Frequencies

As stated below, Fine Air's proposal to expand its current, successful, truly scheduled U.S.-Ecuador all-cargo operations would provide the best and most immediate use of these valuable scheduled frequencies in this limited-entry market. The shipping customers in this market, major corporations (e.g., Sony) as well as the large freight forwarders (e.g., Airborne, Danzas, BAX Global, etc.) clearly desire the availability of frequent scheduled services in the market as opposed to once or twice-per-week widebody, charter-type service proposed by the other applicants. See Shippers' Letters, attached at Exhibit 1. No other service proposal affords shippers and forwarders the kind of service the market demands as well as gives the U.S. government such full and immediate use of these valuable frequencies.

1. Gemini

As a preliminary matter, Gemini's proposed schedule of service to be offered in the market is somewhat unclear. Gemini has applied for allocation of three (3) narrowbody frequencies, intending to use DC-10-30F equipment from its exclusively widebody fleet. See Application at 1, Docket OST-2000-7496 and Supplement at 2, Docket

2/ ( ... continued) In the event Fine Air were awarded any frequencies herein, those frequencies and all of Fine's other authorities would be transferred to the merged carrier, Arrow Air.

Consolidated Answer to Applications for Allocation of Frequencies

OST-2000-7513. /3 At most, therefore, Gemini could operate a maximum of two (2) DC10-30F flights per week. However, Gemini's illustrative schedule appears to show that it actually intends to operate three (3) DC-10-30F flights per week, proposing to operate on Tuesdays, Thursdays, and Saturdays, which would utilize the equivalent of 4 Ecuador frequencies per week. See Exhibit A to Application. Clearly, whereas Gemini might wish to operate its service at a weekly frequency more in line with true scheduled service and what the shippers desire, the level of service proposed by Gemini is not provided for under either the bilateral agreement or the Department's Notice.

Gemini proposes to serve the same markets as Fine Air currently serves, however, it proposes to use its aircraft less frequently and without any seasonal variation. See Supplement at 2. Gemini states that its twice-weekly round-t rip flights with the DC-1030F would offer an available payload capacity in the market of 360,000 lbs per week, more than is available per week with a single B-747. See Application at 5. However, if weekly payload capacity were the sole criterion of what determines the best service, then Fine Air's proposal is clearly superior: its weekly payload capacity in the market with the

3/ The U.S.-Ecuador Air Transport Agreement provides for frequency allocations using narrow-body aircraft DC-8, B-707, etc.). The conversion rate for a DC-10 is 1.5 narrow-body aircraft.

Consolidated Answer to Applications for Allocation of Frequencies

DC-8 with the addition of three (3) frequencies is 685,000 lbs /4, with a substantial increase in available capacity in the seasonal peak demand months when L-1011 equipment is used on the route. More importantly however, Fine Air's available payload would be spread over five (5) weekly scheduled flights which is far more attractive to the shippers in the market than the two (2) weekly flights proposed by Gemini. While some of Gemini's proposed southbound cargo (e.g., machine and automobile parts) may arguably be accommodated with a twice-weekly service, Gemini's proposed northbound cargo flowers and perishables) will not. See Application at 3. Flowers and perishables are time-sensitive and cannot wait days for scheduled service. They require the frequent almost daily) service that Fine Air proposes to provide, or the frequent northbound charter-type flights Atlas has been operating for the past couple of years. /5

Gemini states that it has experience in the U.S. -Ecuador all-cargo market and has established business relationships with the freight forwarders and shippers by virtue of the fourteen (14) all-cargo charter flights it has operated in the market in the past six (6) months. See Application at 3. Whereas Gemini's experience in the market may qualify it

4/ Fine Air's DC-8 has available payload of 75,000 lbs southbound and 62,000 lbs northbound. See Application at 2, note 2, Docket OST-2000-7315.

5/ Atlas states that in the past 17 months it has operated a total of 271 B-747 type charter flights northbound, which is equivalent to 3.8 B-747 flights per week, or the equivalent of almost eight (8) weekly Ecuador narrow-body frequencies. See Supplement at 5.

Consolidated Answer to Applications for Allocation of Frequencies

to operate a charter program to Ecuador, this hardly qualifies it to operate regularly-scheduled services with the requisite infrastructure requirement. Again, if experience in the market alone were to determine the best proposed service, then Fine Air's scheduled service experience is clearly superior: Fine Air has operated twice-weekly scheduled service in this market for the past five ~5) years.

Fine Air has substantial experience throughout South America and the Caribbean in both scheduled and charter all-cargo operations and its experience is clearly greater than Gemini's. Gemini has only become interested in providing its charter-type/ACMI/wet lease service to South America in the past few years, filing its first application to serve this market in December of 1998 when it filed an application for a long-term wet lease to Lineas Aereas Suramericanas ("LAS"), a Colombian all-cargo carrier, and an exemption for scheduled all-cargo authority to Colombia in December of 1999 when the previous long-standing all-cargo restrictions in that market were successfully lifted through negotiations. See Docket OST-99-6633. Gemini has historically concentrated its service to Asian countries with ACMI services, blocked space agreements or code-shares on behalf of Asian carriers. Fine Air, on the other hand, has always concentrated its operations on truly scheduled services to the Caribbean and South America and has operated the service in its own right. As result of this combination, Fine Air has longer-term, established business relationships with the

Consolidated Answer to Applications for Allocation of Frequencies

shippers in the market, and better knowledge of the needs and demands of the market(s).

By all of Gemini's criteria, therefore, Fine Air's truly scheduled service proposal is superior to that of Gemini's: Fine Air has an aircraft mix and proposed schedule better suited to the cargo needs of this market and its shippers; Fine Air will make better, full and immediate use of all three (3) valuable scheduled frequencies; and only Fine Air has long-term scheduled experience in this specific market.

2. Evergreen

Evergreen proposes to operate a once-weekly B-747 service, alternated with twice-weekly service every other week with the routing New York-Miami-Quito-Latacunga /6-Guayaquil-Miami-New York. See Attachment to Supplement. Evergreen would operate the flight (or flights, depending on the week) as a continuation of its existing service between Asia and New York. See Supplement at 3. However, at most Evergreen would be able to operate only six (6) "scheduled" flights per month as compared with Fine Air's proposed five (5) weekly scheduled flights to Ecuador.

6/ Evergreen's application states that it may substitute Latacunga for Quito "as cargo needs demand." See Application at 6, Docket OST-2000-7343. Evergreen's Consolidated Reply and Supplement state that it will operate to Latacunga, but Latacunga is not in the attached proposed service schedule. See Consolidated Reply at 1, Supplement at 3 and Attachment.

Consolidated Answer to Applications for Allocation of Frequencies

As an initial matter, this artificial twice-every-other-week scenario is clearly not what the shippers in the market need, and has the potential for confusion. More importantly, as Evergreen itself concedes in its Supplement and as it has already criticized Atlas for in its Consolidated Reply, the U.S. -Ecuador Air Transport Agreement does not allow for this accumulation of frequencies week over week. See Supplement at 2-3, Docket OST-2000-7513; and Consolidated Reply at 3, Docket OST-2000-7343. Indeed, if this were so, scheduled carriers would be free to "save up" weekly frequencies by not using them for weeks or months at a time, hoarding these unused frequencies for use on a daily basis during the seasonal traffic peaks. Not only would this clearly not constitute scheduled service, it is not contemplated by the Agreement. Even Evergreen is forced to concede that the U.S. Government must interpret whether this week-to-week accumulation is possible, but it does not explain what would happen if such accumulation is not permissible. See Supplement at 2.

Notwithstanding the fact that its proposed schedule may not be permitted and has the potential for confusion, Evergreen's proposed service, whether it is operated once-per-week or twice-per-week, is unsuitable for the market at hand and the cargo to be transported. Evergreen states that it has "begun to work with exporters of flowers and other perishables in Ecuador (among the major northbound cargoes)" on a charter basis and believes that there is sufficient southbound and northbound cargo for Ecuador alone

Consolidated Answer to Applications for Allocation of Frequencies

to support a weekly B-747 freighter operation. See Application at 5. While there may be sufficient northbound cargo in the aggregate to support such an operation, the very nature of the cargo flowers and perishables) demands frequent, regularly-scheduled service with smaller aircraft as would be provided by Fine Air. Evergreen states that market demands for more frequent service would be met by operating extra sections. See Application at 6. Just as the bilateral does not permit accruing the frequencies week over week, it also does not guarantee the availability or the award of extra sections, and extra sections should not be relied upon to complement the proposed scheduled service. See Annex 1, §3(5). Fine Air would not have to rely on extra sections if allocated these additional frequencies.

Evergreen's application is unique in that it proposes to operate over JFK in order to connect the traffic from its U.S.-Ecuador service with its existing Asia services and to provide the "under-served potential market" in New York with Ecuadoran produce and flowers. See Supplement at 4. Although Evergreen's proposal is laudable in theory, in practice it will not work. The acknowledged cargo northbound is flowers and other perishables. This proposed service is once or twice-weekly. By the time the flowers and produce arrive in New York, they will have no market because they will no longer be fresh. By the same token, if these flowers and produce were to be shipped to Asia, they would be even less desirable after flying from Ecuador to Miami, Miami to New York,

Consolidated Answer to Applications for Allocation of Frequencies

and finally New York to Asia, with various unrefrigerated traffic stops in between. Fine Air's proposal is superior to Evergreen's because it currently operates and would continue to operate the same turnaround service as Evergreen proposes five (5) times per week, but it unloads the fresh cargo in Miami for shippers and consignees to transport as necessary and as time permits to points beyond Miami.

Evergreen contends that an award to it of these frequencies "would represent the best and highest use of the valuable limited entry rights that are available." See Supplement at 5-6. Fine Air disputes this statement and states that its own service proposal would make the best, highest, and most immediate use of the rights available. Evergreen proposes to commence service by September 1, 2000, assuming all relevant governmental approvals have been obtained. Fine Air does not have to wait for any relevant governmental approvals as it has an ongoing U.S.-Ecuador all-cargo operation in place.

3. Atlas

(i) Atlas Proposes Infrequent Wide-body Service

Atlas also proposes the same type of supposedly "scheduled" service as Evergreen: once-weekly alternated with twice-weekly B-747-200/400 service. Atlas, however, does not propose to operate a turnaround service and instead intends to operate

Consolidated Answer to Applications for Allocation of Frequencies

over a Miami-Bogota-Quito-Guayaquil /7 -Miami routing. See Supplement at 2, Docket OST-2000-7513. Atlas contends that serving Bogota, Colombia southbound would provide "additional U.S. carrier service to Colombia." Id.

Apart from the fact that the restrictions on U.S. all-cargo carriers wishing to operate to Colombia no longer apply, /8 Fine Air submits that this proceeding should be about the allocation of valuable scheduled rights in the limited-entry Ecuador market, and not about giving Atlas another means to serve Colombia in a commercially viable manner. /9

Similar to Evergreen, Atlas proposes to alternate once and twice-weekly operations to Ecuador in order to eventually make full use of the three (3) frequencies

7/ Guayaquil would be a traffic and/or fuel stop as needs dictate. See Supplement at 2, Docket OST-2000-7513.

8/ See U.S.-Colombia MOC, March 15, 2000.

9/ In its most recent Supplement, Atlas now asserts that it might eliminate the Bogota stop "if necessary to meet southbound U.S.-Ecuador demand." See Supplement at 2. As Atlas and its customers, and all other carriers with experience in South America and particularly Ecuador are aware, the southbound traffic to Ecuador is lighter in relation to northbound traffic. Atlas and its charter customers are aware that when B-747 type aircraft are used, there is insufficient U.S.-Ecuador southbound traffic to eliminate the southbound stop in Bogota and make the operation commercially viable.

Consolidated Answer to Applications for Allocation of Frequencies

available. /10 See Supplement at 2 and Exhibit 1; Answer at 1, OST-2000-7343; and Application at 3, Docket OST-2000-7407. Similar to Evergreen, Atlas does not know if this will be permitted under the bilateral. Id. As previously stated, valuable U.S.-Ecuador frequencies should not be wasted on a service proposal which may or may not be bilaterally provided for, and which is not suited to the market anyway. By comparison, Fine Air's existing and proposed additional scheduled services fall within the four (4) comers of the bilateral agreement and have proven successful. Additional scheduled frequencies would serve to enhance Fine Air's service and to satisfy the needs of all of the shippers in this market.

(ii) The Needs of Atlas's Customers Are Being Met by Charter Service

Atlas also contends that its aircraft are well-suited to the market which it knows because it has been conducting a substantial U.S.-Ecuador charter operation for some time. See Supplement at 2-3. Atlas states that over the past 17 months, it has been operating the equivalent of 3.1 narrow-body weekly frequencies southbound and 7.3 weekly narrow-body frequencies northbound. See Supplement at 5. /11 Therefore, to the

10/ Atlas has stated that it will accept a reduced allocation of two (2) frequencies. See Supplement at 2, note 2.

11/ In the past 17 months, Atlas states it has operated 117 B-747 southbound flights to Ecuador (equivalent to 234 narrow-body frequencies or approximately 3.3 frequencies per week) and a total of 271 B-747 flights northbound (equivalent to 542 narrow-body frequencies or

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Consolidated Answer to Applications for Allocation of Frequencies

extent Atlas would "replace" its existing charter services in the market with the three (3) weekly narrow-body scheduled frequencies at issue herein, Atlas's existing services to Ecuador would either have to be drastically reduced to the equivalent of three (3) weekly narrow-body scheduled frequencies in each direction, or Atlas would have to "make up the difference" with additional charter flights to supplement its "scheduled" flights in order to maintain the same level of services Atlas has maintained for the past 17 months.

Further, Atlas's attempt to bolster the utility and strength of its charter operations to Ecuador by stating that until all necessary approvals are in place for scheduled service, "Atlas will continue to serve U.S.-Ecuador customers with its extensive charter operations," ( See Supplement at 3) simply begs the real question: why is there a need for a substantially reduced level of Atlas "scheduled" service when such a large charter operation apparently seems to work so well and will provide sufficient lift until such time as Atlas would be able to secure the necessary approvals for a much lower level of scheduled service?

Atlas goes on to assert that an award to it of the three (3) available scheduled frequencies would "stabilize the U.S. carrier presence in the market" (See Supplement at

11/ ( ... continued) approximately 7.5 frequencies per week). See Supplement at 5. 12

Consolidated Answer to Applications for Allocation of Frequencies

4), however one is at a loss to see how a partial conversion of an existing long-standing charter program to supposedly "scheduled" service will accomplish this goal. Clearly, as its own experience demonstrates, Atlas's customer needs are amply met by the charter service it operates and in fact will not be met by an allocation of scheduled rights.

(iii) Atlas Does Not Operate Any Scheduled Services

What Atlas fails to mention is that is has never operated scheduled service in any market, including Ecuador, and does not intend to conduct scheduled service to Ecuador because in fact it cannot. Atlas itself admits that it owns no ground-handling equipment or cargo containers and it operates no cargo terminal facilities. See Paul Proctor, Cargo Outsourcing Fuels Atlas Expansion, Aviation Week & Space Technology , June 26, 2000, at 76 (based on interview with Atlas's CEO and Executive V.P.) (copy attached at Exhibit 2). In fact Atlas's risk is "minimal," with the cargo space being contracted out to the shippers by Atlas's charterer, not Atlas. It is Atlas's "customer airlines" which pay all operating costs including fuel, airport fees and services, cargo insurance and ground handling. Id. Atlas's customary leases to its customers are long-term, typically running three (3) to five (5) years (Ld.) and 100% of Atlas's expected aircraft block hour production for the year is "under contract" (See Kauftnan, infra at 39). Atlas's ACMI/wet lease service is clearly not scheduled service since in the scheduled services business, a single airline or other customer does not take care of the fuel and other

Consolidated Answer to Applications for Allocation of Frequencies

operating costs. /12

Based upon its own history of charter operations in the U.S.-Ecuador market and the nature of Atlas's existing supposedly "scheduled" operations in the previously-restricted U.S.-Colombia market, Atlas has no intention of changing its successful business formula by operating scheduled service to Ecuador and in fact cannot because it does not have the necessary infrastructure to operate scheduled services.

In the 1998 Colombia reallocation case (Millon designation reallocation), in the face of criticism by competing applicants (Polar, etc.) that Atlas in fact intended to operate a ACMI/charter service to Colombia either on behalf of a single customer or on a wet lease basis on behalf of a single foreign airline, the Department nonetheless awarded Atlas Colombia scheduled service rights, but only because:

However, just as in all the markets Atlas Air operates, this is not in fact what

12/ Atlas is indeed very fortunate that its charter/ACMI/wet lease services are immune from the recent, well-publicized fuel price spikes, these operating risks instead being borne by Atlas's airline and other customers. The financial problems of all scheduled carriers, including Fine Air's as alluded to by Atlas (See Supplement at 4), are due in large part to this volatile fuel situation.

Consolidated Answer to Applications for Allocation of Frequencies

happened in Colombia, and is not what would happen in Ecuador. Atlas is very proud of the fact that it is its airline and other customers, not Atlas which pay for fuel and Atlas Air's own stated successful business model does not include the operation of scheduled service. Atlas does not build its own presence, move its own cargo, nor bear any of the risks of the market with its own scheduled service operated in its own right. Atlas does not understand the markets where it operates its ACMI services, its is Atlas's customers who understand the market, build the presence, market the service, buy the fuel and bear all of the risks. Atlas's "scheduled" service statistics and successes are the statistics and successes of its customers, the foreign air carriers and others for whom it provides very profitable ACMI services. Atlas relies exclusively on these foreign air carriers and other customers and has developed its business plan around this. However, this does not amount to Atlas scheduled service. Atlas's Executive Vice President recently reiterated this point stating:

In sum, Fine Air's proposal to expand its current, successful, truly scheduled U.S.-Ecuador all-cargo operations would provide the best and most immediate use of these valuable scheduled frequencies in this limited-entry market. No other service

Consolidated Answer to Applications for Allocation of Frequencies

proposal affords shippers and forwarders the kind of service the market demands as well as gives the U.S. government such full and immediate use of these valuable frequencies.

WHEREFORE, Fine Airlines, Inc. respectfully requests that the Department of Transportation award it three (3) frequencies. In the alternative, Fine Air requests such other, further or different relief as the Department may deem necessary and proper.

Respectfully submitted,

Pierre Murphy

Elizabeth C. Collins

Law Offices of Pierre Murphy

One Westin Center

2445 M Street, NW

Suite 260

Washington, DC 20037

Telephone: (202) 872-1679

Fax: (202) 872-1725

Attorneys for Fine Air Services, Inc.

June 27, 2000