OST-00-7513 / US-Ecuador All-Cargo / Reply of Evergreen International / June 30, 2000

EVERGREEN INTERNATIONAL AIRLINES, INC.

Evergreen International Airlines, Inc. ("Evergreen") hereby submits its consolidated reply to the answers filed herein on June 27, 2000 by Arrow/Fine, Atlas and Gemini. /1 These carriers have failed to overcome Evergreen's showing /2 that it's proposal is superior to the others and that selection of Evergreen would promote the highest and best use of the limited number of all-cargo frequencies available. Evergreen will promote this market in its own right and not (as is likely the case with Atlas or Gemini) on behalf of foreign carrier ACMI customers. It will bring new U.S. carrier competition to the Ecuador all-cargo market consistent with the goal the Department announced in 1997 in connection with these same frequencies. It will also provide the only U.S. carrier

1/ Evergreen also submitted its own answer on the same date. Evergreen was the-first to apply (on May 8, 2000) for these frequencies. Evergreen filed a supplement to its application (on June 22) pursuant to The Department's notice of June 15th.

2/ In its application (as supplemented) and in its consolidated answer.

competition for Ecuatoriana by offering service between Ecuador and New York, while also providing improved service for Asia-Ecuador traffic. And it will provide the only U.S. carrier service to Latacunga, a growing Ecuadorian market4 Further, Evergreen's B-747 freighters will provide a valuable new addition to the existing narrow body scheduled services in the market. None of the other applicants can match these and other benefits Evergreen will provide, as will be shown below.

We discuss these two applicants at the same time for evident reasons. Arrow and Fine are not only incumbents seeking additional frequencies, but are in effect a single carrier unit by virtue of their common ownership. An award to these carriers will not best serve the public interest.

1. The Department Should Enhance, Not Reduce Competitive Options by Awarding the Frequencies to other Than an Incumbent

The applications of Arrow and Fine confront a high initial hurdle.. An award to either would contravene the policy goal the Department announced when it allocated the very same frequencies to AIA/Kitty Hawk, namely, to bring new U.S. carrier competition to the Ecuador all-cargo market. /3 There is nothing in

3/ The Department's 1997 show cause order proposed to reallocate these frequencies to AIA/Kitty Hawk based on a finding that "our overall goals in the U.S.-Ecuador all-cargo market would be best

(Continued...

either proposal that overcomes this problem or which would warrant a retreat from the Department's well-advised policy.

If anything, the current situation warrants firmer adherence to this pro-competitive policy because an award to either carrier would result in a significantly greater concentration of limited frequencies in the hands of a single entity than before. That is because Arrow and Fine have been operating (albeit separately) under the common control of Fine Air Services Corp. since April, 1999. In April of this year, they applied to merge their authorities and operations into one surviving carrier. Together, they now hold a total of five frequencies-between them and an award to either would result in Arrow/Fine increasing that total to eight. This level of concentration (the only other scheduled U.S. carrier in the market is Challenge) is not what the Department had in mind when it last allocated these frequencies less than three years ago. /4

2. Arrow/Fine Suffers From Poor Financial Condition which would Impair the Ability of This Carrier Unit to Maintain or Enhance Service

The financial difficulties of the Arrow/Fine carrier unit have already been documented in this proceeding. According to

served by adding new competition rather than authorizing incumbent carriers to increase their services." order 97-7-14 at 5.

4 Pursuant to Order 97-8-20.

attached recent press reports, their common parent, Fine Air Services, announced earlier this month (on June 2) that it had been forced to defer interest payments on unsecured senior notes and was seeking to restructure its long term debt. See Attachment 1. The announcement followed a recent SEC filing /5 in which the company reported that it was experiencing cash flow difficulties which it attributed in part to growth and the acquisition and integration of Arrow. These financial difficulties make it unlikely that Arrow/Fine will be in a position to provide or maintain quality service in the market.

The Arrow/Fine proposal thus would appear to contemplate the substitution of one financially weak carrier unit for a carrier whose financial problems ultimately drove it from this market, Kitty Hawk. For this additional reason, selection of Arrow/Fine clearly would be the wrong choice and contrary to the public interest.

3. The Arrow/Fine Service Proposal is Inferior

The Arrow/Fine proposals suffer from other serious defects. Both operate DC-8s and L-1011s, with a capacity of between 75,000 and 120,000 pounds, in comparison to the 220,000

5/ See Form 10-Q for the quarter ended March 31, 2000, an excerpt of which is set forth in Attachment 2.

pound capacity of Evergreen's B-747's. /6 As a result, these carriers would be unable to handle larger freight volumes that might be available for transportation at any one time.

Further - and Fine seems to miss this point entirely -when either Fine or Arrow use an L-1011 aircraft (as they propose to do in the high season), they would only be able to operate two flights per week since (as Arrow acknowledges) the bilateral provides that an L-1011 flight counts as 1 and 1/2 frequencies. Thus, over a two week high-season period, these carriers would offer total capacity of no more than 480,000 pounds with the three frequencies at issue here, in contrast to the 660,000 pounds of capacity offered by Evergreen during that same two week period. When their DC-8 aircraft are in use for these frequencies, the capacity disadvantage of Arrow/Fine is even greater - 248,000 pounds versus 660,000 pounds. /7

Attempting to make a virtue out of necessity, Arrow/Fine denigrate Evergreen's proposal to serve the market with B-747100/200 aircraft, arguing that frequency should count more heavily than capacity. In essence, they contend that wide-bodied freighter

6/ 100 metric tons gross is equivalent to approximately 220,000 pounds, Evergreen's B-747-200 capacity from Guayaquil to Miami.

7/ This comparison utilizes the northbound capacity limit described by Fine of 62,000 pounds. Arrow claims that its DC-8 can accommodate 72,000 pounds on northbound flights from Quito with an intermediate stop and 56,000 pounds without an intermediate stop.

service will always lose out to more frequent service with aircraft having significantly less capacity. Quite to the contrary, addition of a B-747 operator such as Evergreen will add a new level of flexibility to the market and provide a mix of options that will benefit shippers. In addition, as Fine should be aware, Ecuador has liberally allowed the operation of extra sections, by scheduled carriers, and Evergreen will take full advantage of this opportunity on an as-needed basis should it be awarded the, scheduled frequencies.

Further, the unit costs of operating smaller aircraft are higher than those of the B-747 aircraft. Thus, Evergreen can bring yet another advantage to the market in the form of aircraft with lower unit costs.

Evergreen is an established scheduled carrier with long experience in providing scheduled all-cargo service with B-747 freighters. It would not be so vigorously pursuing scheduled turnaround service to Ecuador if it had any doubt that the market would support such service.

4. Evergreen Has Proposed More Expansive Service

Contrary to Arrow/Fine's contentions, Evergreen's proposal to serve-the largest consumer market in the U.S., New York, is sound. The Department can take notice of the fact that there are customers for flowers in New York and the northeast (and the infrastructure to handle them), and that the flowers and other cargo transported by Arrow/Fine to Miami is, more often than not, transshipped from Miami to New York and other U.S. points. Their contention that the flowers won't be fresh if they are transported by Evergreen's continuing air service via Miami versus the connecting air or surface transportation now in use is absurd on its face. In addition, Evergreen's connecting service from Asia will improve routing options for existing traffic flows from Asia to both Miami and Ecuador. /8

Notably, neither Arrow/Fine, nor the other applicants, propose to serve Latacunga, as does Evergreen. This is a developing market for air cargo south of Quito and Evergreen believes that offering air service there, as an occasional alternative to Quito, will help promote its further development and offer new opportunities for U.S. and Ecuadorian shippers and importers.

Finally, Fine argues that it can start expanded service immediately, whereas Evergreen (and other non-incumbents) will have to await Ecuadorian approval. This is true, but hardly a point that should be dispositive here. Evergreen does not anticipate that it will take very long to receive Ecuadorian approval and it

8/ Evergreen further addresses these points in its reply to Atlas, below.

is prepared to initiate service promptly after such approval is received, as stated in its Supplemental Application.

Atlas makes several claims with respect to its proposal and Evergreen's. None of its claims can withstand close examination.

1. Atlas' Claim of Experience is Deceptive; If it Continues to Operate Under its Current ACMI Status it Should Not Receive This Award

Atlas argues that it, and not Evergreen, offers a significant presence in the U.S.-Ecuador market, a contention that is based on the charter flights that Atlas has operated. While it is true that Atlas has provided more charters in that market, what Atlas chooses not to explain is that it is "operating" these charters merely as an ACMI wet lessor to an entity (possibly a foreign airline) that markets these services, utilizing the aircraft and crew provided by Atlas. This kind of ACMI service hardly gives Atlas the "experience" in the market that it touts as an advantage. Atlas' aircraft may travel back and forth between the U.S. and Ecuador more often than Evergreen's have in the past, but since those aircraft are merely operated on behalf of others, it is disingenuous for Atlas to claim the advantage of experience.

The question that the Department should consider in this setting is which airline offers an experienced sales force that will best make the proposed service a benefit for U.S. carriers and shippers. On this score, Evergreen is by far the superior candidate. Evergreen has an extensive U.S. and worldwide sales force that markets the airline's scheduled cargo services on a worldwide basis to shippers. By contrast, it is not at all clear that Atlas has a sales force that markets anything other than the ACMI (i.e. aircraft leasing, including crew, maintenance and insurance) services around which its business plan is based. The absence of any Atlas claims about its sales force is striking in this regard, and underscores that Atlas is more a "virtual" airline than not, operating aircraft on behalf of other carriers that market cargo services.

The flight statistics that Atlas cites to show that it operates more flights out of Miami than Evergreen must be viewed in this context. Flights that are operated with aircraft wet-leased to other carriers should hardly be credited as an advantage to the lessor airline, when it is the lessee airline (generally a foreign carrier) that markets the flight to its own customers and assumes the economic risk.

Moreover, that the number of the virtual "Atlas" charters in the Ecuador market is larger than the number of real charters marketed and operated by Evergreen is hardly a basis on which the Department should grant Atlas the right to transform its virtual charter service into virtual scheduled service. In contrast to charters, the number of permissible scheduled frequencies available in this market is very limited. Those frequencies should be assigned to a U.S. carrier that is prepared to commit that it will market and operate the scheduled services in its own name, rather than merely lease aircraft to another entity, or to a foreign carrier. Evergreen makes that commitment; Atlas notably does not (and neither does Gemini). /9

Further, that Evergreen operates fewer charters in the market is hardly a basis on which to deny it the right to operate the scheduled services it proposes. Evergreen intends to broaden its current services to Ecuador and to become a larger competitive factor in that market. The logical consequence of Atlas' argument would be that a carrier that wishes to expand competitive scheduled operations to another market is disabled if it has not operated a larger number of charters in that market than some other carrier. To state this proposition is to show that it makes no sense, and would in fact reduce the opportunity for a new competitor to enter a: limited entry market. Evergreen does, in any event, know the Ecuador market, having appointed a knowledgeable general sales

9/ Responding to Evergreen's point that it has extensive authority to provide service to points around the world, Atlas claims that it and other carriers also have such authority. The difference, however, is that Evergreen operates scheduled services in its own name to various points it is authorized to serve, while Atlas merely wet leases to other carriers.

agent and having operated an increasing number of charters in recent months.

Of course, nothing that the Department does here will impair Atlas, ability to continue to lease aircraft to other carriers for charter flights in this market. If such charter services are attractive to shippers, Atlas will be called upon to continue, as it has in the past, to provide aircraft and related services for these charters and thereby to offer a continuing "presence" in the market, even if it is only a virtual one.

Remarkably, Atlas tries to defend its own ACMI approach to providing services by claiming that Evergreen gains most of its revenues from wet leasing aircraft - thereby suggesting that Evergreen would, like Atlas, provide service in the Ecuador market by wet leasing to some other carrier. For this claim, Atlas relies on a February 16, 2000 article reprinted in Air Transport Intelligence and on the statement on Evergreen's Internet site that states that the carrier wet leases aircraft. Evergreen does of course wet lease aircraft, but the quoted article inaccurately misrepresents the extent of this wet leasing. The article reports, on the basis of a presentation by Evergreen's David Johnson, Vice President of Sales for the South Pacific, that 95% of Evergreen's revenue is derived from "wet lease deals lasting a year or more." In fact, the information actually provided by Mr. Johnson was that 95% of its 1998 "air freight transportation service revenues" were derived from "contracts with initial terms of one year or greater." See Attachment 3, which is the part of Mr. Johnson's slide presentation on which the article was based. Such contracts include block space arrangements on scheduled flights operated by Evergreen, among other types of cargo contracts, and in fact only a fraction of Evergreen's revenues are derived from ACMI services.

Atlas, by contrast, bills itself on its Website as a carrier that "specializes in the long-term outsourcing of Boeing 747-400 and 747-200 aircraft" and offers "scheduled flights on behalf of its customer airlines to 101 cities in 46 countries." See Attachment 4. As that Attachment also shows, Atlas touts itself as providing aircraft and crews to airlines that seek to expand their cargo carrying capacity, placing itself in a position such that it "acts as if it were part of [its customer] airlines, fleet." Atlas further proclaims on its Website that it

• Providing a reliable, flexible and less costly outsourcing alternative to major international airlines.

• Focusing on securing long-term ACMI contracts with new customers and expanding its long-term ACMI relationships with existing customers.

Further, Atlas also acknowledges that it "generally does not agree to acquire aircraft unless they can be dedicated to servicing the known needs of existing customers or the Company anticipates that it will be able to enter into a contractual agreement with a new or existing customer upon delivery."

It is apparently because Atlas is faithful to its business plan that there are no Atlas flights -- not one -- listed in the most recent editions of the OAG Air Cargo Guide. As stated above, Evergreen commits to using the frequencies to provide U.S.-Ecuador service that it will market directly in its own name and not on behalf of another carrier, including a foreign carrier. Atlas has made no such commitment. Evergreen further commits that it will not be disabled from competing against any U.S. or foreign carrier in handling Ecuador traffic; Atlas on the other hand has made the commitment that it will "not compete directly or indirectly with its customers . . ." See Attachment 4.

Atlas claims that its wet lease operations "did not prevent the Department from awarding it U.S.-Colombia scheduled authority.." There, however, Atlas committed to operating the scheduled service at issue in a manner such that it would not be limited "to any single consolidator, air freight forwarder or other customer," and the Department relied on that representation in awarding the frequencies to Atlas. See order 98-3543, citing Atlas' answer.

Here, again by stark contrast, Atlas has made no such commitment and has not disputed the contention that it intends to wet lease to a foreign carrier were it granted the valuable rights at issue. Moreover, the fact that Atlas is not even listed in the OAG Air Cargo Guide as providing any scheduled flights between the U.S. and Colombian points it was authorized to serve raises the question of whether Atlas has carried through on its commitment to offer real scheduled service in its own name in that market. See Attachment 5, listing carriers serving the Miami-Bogota market with scheduled service and showing that Atlas is not among them.

To reiterate what Evergreen has previously stated, in a market in which scheduled frequencies are limited, the Department should have no doubt that the carrier awarded the frequencies will operate the flights in its own name and not merely as the lessor to some other carrier. ACMI carriers such as Atlas and Gemini are disabled from competing against their lessee customer airlines -they make no effort to dispute this point. In Atlas, case, these customers (as evidenced by wet leases approved by the Department) include major Ecuadorian and South American carriers, such as AECA (Ecuador), Aserca (Venezuela), Ladeco (Chile), Lan Chile (Chile) and LAS (Colombia). This factor militates strongly against an award in this case to Atlas, or to Gemini, since doing so could effectively waste competitive options, reserved for U.S. carriers, that should be available to all shippers.

2. Evergreen will Offer More Capacity in the Market

Atlas argues that its B-747-200 aircraft have a greater cargo carrying capacity than the B-747-100 or B-747-200 aircraft that Evergreen would use (248,000 pounds versus 220,000 pounds). While Evergreen concedes that somewhat more cargo can be lifted in the Atlas aircraft, the crucial point Atlas ignores is that it intends to split its capacity between Colombia and Ecuador, with southbound stops in Bogota on flights between the U.S. and Ecuador. Thus, there is no question that Evergreen -- with flights dedicated exclusively to the Ecuador market -- will offer more capacity in the Ecuador market than will Atlas. On this basis Alone, Evergreen's service proposal should be judged to be far superior.

Atlas argues that Evergreen will not be able to carry 100 tons of cargo from Quito due to its altitude. This is correct, just as Atlas will not be able to carry its full capacity from that point either. Evergreen never claimed otherwise. The fact is, however, that it will be able to carry the full capacity of its aircraft from Guayaquil, the jump-off point for return flights to the U.S. Thus, the full capacity of Evergreen's aircraft will be available to Ecuadorian shippers.

3. Evergreen's New York and Asia Proposal Offers an Advantage for Shippers

Atlas claims that Evergreen's proposal to serve New York, in addition to Miami, would be a "further waste of U.S.-Ecuador rights." This is a ridiculous contention. As Atlas may know, New York is not only the largest consumer market in the United States and the Northeast's largest air cargo service point, but it is also a bigger air cargo market than Miami. In 1999, for example, New York's Kennedy International Airport handled 1.75 million tons of freight, compared to Miami's 1.73 million tons. See Airports Council International report, set forth as Attachment 6.

To be sure, while more South American cargo is handled through Miami, which Evergreen would also serve, New York is hardly an inconsequential player for South American traffic, as Atlas suggests. New York, in fact, was the origin of dozens of flights to South American points during the week of June 19 to June 25, 2000. /10 These included six weekly flights operated between New York and Quito/Guayaquil by Ecuador's national airline (Ecuatoriana de Aviacion S.A.), which obviously believes that there is a New York/Ecuador market to be served since it is currently serving that market.

Evergreen, in fact, proposes to be the only U.S. carrier that would compete with Ecuatoriana in this important cargo market. That competition, and the obvious service benefits that such

10/ See OAG Air Cargo Guide, June 2000, showing a total of 185 scheduled flights operated between New York and ten South American points. While that number may be overstated by some degree since the same flight may serve more than one point, the fact is that there are a significant number of such flights by any measure.

service will bring to shippers in the largest U.S. market, cannot be matched by any other applicant.

Further, Atlas, seeming assumption that most Miami-bound cargo comes to rest in Miami is obviously incorrect. In fact, most of that cargo is transshipped by truck or air to points such as New York. Evergreen's service proposal will facilitate such transshipment by allowing New York bound cargo (including perishable flowers) to get there much faster - in 2h hours rather than the 2 days it might take by truck. In contrast to Atlas, dedication of a portion of its capacity to a different market altogether (Colombia), this extra benefit to Ecuadorian freight can hardly be viewed as a waste of U.S./Ecuador capacity.

Atlas also characterizes Evergreen's ability to carry freight from Asia to Ecuador as a detriment to the market. Most of the traffic that Evergreen proposes to carry to Ecuador from Asian points is already moving between those points. Evergreen will provide a better level of service than the connecting service that is now available. If this is a detriment to the market, then so is any continuing service that offers a more efficient link between different points.

Gemini's proposal suffers the same fundamental flaw as that of Atlas - granting these limited frequencies to Gemini would not ensure that they would in fact be operated and marketed by a U.S. carrier.

1. Gemini's Proposal Suffers from the Same Disability as Atlas because Gemini is an ACMI Carrier Constrained in its Ability to Compete Against Lessee Customers

Much of what has been said above about Atlas applies with equal force to Gemini, another ACMI specialist. According to its own press releases, Gemini "specializes in providing contract cargo services for other airlines based on Aircraft, Crew, Maintenance and Insurance" and it claims that it is the "largest ACMI operator of DC-10-30F aircraft worldwide." /11 Like Atlas, Gemini has not committed to operate scheduled service to Ecuador in its own right. Indeed, such scheduled service would be inconsistent with Gemini's own business plan, as described by the airline itself. And, like Atlas, Gemini does not contend that it has a sales force that sells air cargo services, as opposed to one that sells the ACMI services that Gemini specializes in offering.

Gemini contends that "it operates extensive scheduled and charter flights in its own right." It offers no proof of such extensive service. With some limited exceptions to accommodate markets in which it cannot wet lease, Gemini does not offer

11/ See Attachment 7, a December 13, 1999 press release, "Gemini Air Cargo, Inc. First MD-11 Lands at Boeing Wichita for Conversion.,, Also see other Gemini press releases set forth at Attachment 7 that describe the carrier as an ACMI operator.

scheduled services except in the same "virtual" sense as Atlas. Gemini's hollow claim that it is "fully prepared to operate scheduled all-cargo service to Ecuador" must be viewed in this context - Gemini may be prepared to offer the service, but it fails to identify the lessee carrier that would, as a practical matter, control and market the service. It also fails to acknowledge that it would be constrained to compete against the carriers to which it leases aircraft, which include carriers that are based in, or serve, South America.

In the absence of clear assurances that the available frequencies will be marketed by the carrier that receives the frequencies in that carrier's own right, and not handed off to some other carrier, the Department should not risk (a) wasting these U.S.-allocated frequencies, (b) limiting the competitive opportunities offered by the frequencies or (c) effectively turning them over to a foreign entity. An award to Evergreen will raise none of these concerns.

2. Gemini's Other Claims are Without Merit

Gemini does not seriously criticize Evergreen's service proposal, other than to claim that the bilateral agreement does not allow for the alternating one flight/two flight proposal. Gemini, of course, is not the arbiter of what the bilateral contemplates. Evergreen submits that the bilateral can be read to allow this kind of service as a means of utilizing the available frequencies, and that it should be so interpreted in the interest of the shipping public.

Finally, even accepting Gemini's questionable claim that its DC-10 aircraft are able to carry up to 180,000 pounds of freight, that payload is still less than can be handled in Evergreen's larger B-747 aircraft. Thus, on a per-flight basis, Evergreen can transport larger payloads than Gemini, thus allowing it to offer a new dimension to air cargo service in this market.

In short, the record shows that Evergreen's proposal is superior for numerous reasons:

• Evergreen is the only non-incumbent applicant that does not hold itself out to be an ACMI specialist, and that will unquestionably provide scheduled service in its own name, without any limitation on its willingness or ability to compete with any other carrier. Further, Evergreen is the only non-incumbent applicant that will unquestionably operate and market the frequencies allocated here without risk that those flights will in fact be marketed by a foreign carrier.

• Evergreen is the only non-incumbent carrier with a large sales force that is focused on selling air cargo services, rather than exclusively marketing ACMI services.

• Evergreen will devote all of the available frequencies to U.S.-Ecuador service, in contrast to Atlas.

• Evergreen is the only applicant that will provide service both at Miami and at New York, the largest consumer market in the country. Evergreen is also the only applicant that will provide service in competition with Ecuatoriana's New York/Ecuador service, and that will tie its Asia service to Ecuador, offering shippers an opportunity to more efficiently transport cargo between Asia and Ecuador.

• Evergreen is the only carrier that proposed service at Latacunqa, a developing cargo market south of Quito.

• Evergreen will provide a new competitive option for the incumbent applicant carriers, which are essentially a single carrier unit under common ownership. Evergreen will also provide a financially secure alternative to the incumbent applicants, which (like Kitty Hawk before them) are under severe financial strain.

• Evergreen's B-747 aircraft will offer shipper ' s a wide-body, lower unit cost alternative than offered by the incumbent applicant carriers or Gemini, and will offer more capacity in the market than the incumbent applicant carriers with respect to the frequencies at issue. Evergreen, which has appointed a general sales agent in Ecuador and operated charters in that market, is committed to devoting the resources needed to providing a highly competitive and efficient service.

For all of these reasons, the Department should award the available frequencies to Evergreen.

Respectfully submitted,

EVERGREEN INTERNATIONAL AIRLINES, INC.

By:

Richard P. Taylor

David H. Coburn

Benjamin R. Achenbach

STEPTOE & JOHNSON LLP

Its Attorneys

June 30, 2000