OST-00-7513 / US-Ecuador All-Cargo / Reply of Fine Air / June 30, 2000
Application of:
Fine Air Services, Inc. /
Docket OST-2000-7513For Allocation of Frequencies
(U.S. - Ecuador, All-Cargo)
CONSOLIDATED REPLY OF FINE AIR SERVICES, INC.
Pursuant to the Department's Notice in Docket OST-2000-731.5, U.S.-Ecuador All-Cargo Frequency Allocation served June 15, 2000 herein, Fine Air Services, Inc. ("Fine Air") respectfully submits this consolidated reply to the consolidated answers of Evergreen International Airlines, Inc. ("Evergreen"), Atlas Air, Inc. ("Atlas"), and Gemini Air Cargo, Inc. ("Gemini"). /1 Allocation to Fine Air of the three (3) available frequencies would make the best, fullest and most immediate use of this valuable asset and meets all of the Department's established criteria for a frequency allocation in this market. None of the other applicants herein has provided evidence that its service
1/ Fine Air, again, takes no position on the Consolidated Answer of Arrow Air, Inc. See Fine Air Consolidated Answer at 1, n.2. The fact that Fine Air and Arrow have competing applications in the instant proceeding should not deter the Department from allocating the three (3) frequencies to Fine Air. Q . Order 9-4-5 at 4 ("...requiring the postponement of market transactions until the regulatory process has been completed is not necessarily in the public interest and can be unjustly punitive.")
Consolidated Reply of Fine Air Services, Inc.
proposal is superior to that of Fine Air's.
1. Fine Air has the Experience, Presence, and Best Service Proposal
a. Experience
As Fine Air has amply demonstrated herein and as the existing and potential customers in the market have indicated, the U.S. -Ecuador all-cargo market requires more frequent, scheduled service as opposed to the once-per week ACMI/wet lease/charter service proposed by the wide-body carriers. As noted in its application, Fine Air's U.S.-Ecuador scheduled all-cargo operation has been operating successfully since 1995, thereby giving Fine Air the following advantages over the other applicants herein:
b. Presence
There would be no delay in Fine Air's implementing its proposed full use of the
Consolidated Reply of Fine Air Services, Inc.
three (3) frequencies currently available. Fine Air already has a successful U.S. -Ecuador all-cargo operation in place which is being fully utilized, and it would be able to expand its existing scheduled services without any delay in obtaining approvals from Ecuador. Fine Air's headquarters, aircraft, hangars, maintenance base, operations, and employees are all in Miami, the gateway to Ecuador and South America.
C. Best Service Proposal
Due to a typographical error, Fine Air omitted to state that its direct flights from Quito to Miami make a technical stop in Cali, Colombia. /2 See Application at 2. Fine Air respectfully requests that its service proposal herein be amended to reflect this. Fine Air apologizes for any confusion this omission may have caused the Department or the other applicants. Fine Air, therefore, will not be taking the "significant payload penalties" alleged by Atlas. See Atlas Consolidated Answer at 8.
Atlas contends that its service proposal is superior to that of Fine Air because Atlas's capacity for one northbound operation is greater than Fine Air's capacity with three northbound operations. See Atlas Consolidated Answer at 8. Fine Air does not
2/ This technical stop in Cali, Colombia is made if Fine Air does not make a traffic stop in Guayaquil northbound.
Consolidated Reply of Fine Air Services, Inc.
dispute this statistic, to the extent that it applies to the DC-8 aircraft. /3 Atlas boasts that its B-747F is capable of carrying up to 237,000 tbs. northbound in this market. See Atlas Supplement at 3. With the allocation of these three (3) additional frequencies, Fine Air would be able to carry a total of 3 10,000 tbs. northbound per week using DC-8 equipment and 422,000 lbs. /4 northbound per week using L-101 I equipment. Using either equipment, therefore, with these additional frequencies Fine Air's payload per week would exceed Atlas's payload per week. /5 Clearly, Fine Air's service proposal is competitive to that of Atlas, and even wins the competition.
The majority of the cargo to be carried in this market is time-4ensitive perishables that cannot be accommodated by the charter-type once-weekly B-747F or twice-weekly DC-10-30F service proposed by the other applicants. Although the other applicants discuss at length which of their wide-body aircraft has the greatest payload, /6 in the U.S.-
3/ The L-1011 aircraft has a payload of 120,000 tbs. northbound in this market. The equivalent of three (3) DC-8 operations (I frequency each) is two (2) L- 10 11 operations (1.5 frequencies each) for a total payload capacity of 240,000 tbs. northbound, or 3,000 tbs. more than Atlas is able to carry on one (1) northbound operation. See Atlas Supplement at 3.
4/ Operating three (3) L-1011 flights (4.5 frequencies) plus one (1) northbound DC-8 5 frequency).
5/ As Fine Air and other applicants herein have pointed out, Atlas may not be able to accrue the frequencies week over week, thereby permitting only once per week wide-body aircraft service. See Fine Air Consolidated Answer at 11.
6/ See Atlas Consolidated Answer at 4-5; Evergreen Consolidated Answer at 3-4; and Gemini Consolidated Answer at 3.
Consolidated Reply of Fine Air Services, Inc.
Ecuador market, the largest payload aircraft does not determine the best service proposal. As indicated herein, shippers and forwarders require frequent, reliable scheduled service with a narrow-body aircraft such as the five-days-per-week scheduled flights Fine Air would be able to provide. The award of these additional frequencies to Fine Air would also provide it with the flexibility to occasionally substitute wide-body L-101 I freighter equipment for the DC-8 as the market or season demands. The public interest therefore would be best served by allocating to Fine Air the three (3) frequencies, of which Fine Air would make maximum use.
2. All of the Applicants are Incumbents in this Market
Each of the applicants contends that the frequencies should not be allocated to Fine Air, an "incumbent" carrier, because to do so would reduce competition in the market. See Atlas Consolidated Answer at 7-8, 11; Gemini Consolidated Answer at 3, 47; Evergreen Consolidated Answer at 2. Fine Air submits that based upon the level of recent charter operations conducted by Atlas, Evergreen and Gemini, all of the applicants herein are incumbents. Atlas, Evergreen and Gemini boast that their charter operations have given them sufficient experience and contacts in the market to offer scheduled service. 5ee Atlas Supplement at 2-3, 5; Gemini Application at 3; Evergreen Application at 5. Indeed, Atlas states that it operates "4-5 cargo charters per week." See Atlas Answer at 2,-Docket OST-00-7343. This level of charter service with a B-747F is equivalent to six (6) to eight (8) flights with a DC-8 or triple Fine Air's existing
Consolidated Reply of Fine Air Services, Inc.
scheduled operations. /7 The applicants cannot therefore use these charter operations as both a sword to prove their experience in the market, and as a shield to allege that they are not incumbents.
3. An Allocation to Fine Air Would not Reduce Competition
Each of the applicants also contends that competition in the market would be reduced if Fine Air /8 were allocated these valuable frequencies. See Atlas Consolidated Answer at 11-12; Gemini Consolidated Answer at 5-7 /9; Evergreen Consolidated Answer at 2. Fine Air submits that an allocation of these frequencies to any of the other applicants would reduce rather than further competition in the market by concentrating
7/ Again, Fine Air must question why Atlas would want an allocation of a mere three (3) narrow-body frequencies when the charter services it is currently providing seem to accommodate its needs and its customers needs, and such an allocation would drastically reduce Atlas's existing operations.
8/ Atlas, Gemini and Evergreen respond to the applications of Fine Air and Arrow as if they comprised a joint application for allocation of frequencies. See Consolidated Answer of Atlas at 7-12; Consolidated Answer of Gemini at 5-6; and Consolidated Answer of Evergreen at 2. They do not. As stated in Fine Air's Consolidated Answer, the Department has yet to act on Fine Air and Arrow's application to merge Fine Air into Arrow. See Consolidated Answer at 1, n. 2. Pursuant to Order 99-4-5, Fine Air and Arrow are required to be run as two (2) separate companies and therefore are also both obliged to apply separately for the frequencies available herein.
9/ As Gemini points out, the instant proceeding is not the first one in which Gemini has expressed its concerns about competition as it relates to Fine Air's scheduled service to Ecuador. See Docket OST-99-5140 and Gemini Consolidated Answer at 5, n.2. In response to Gemini's stated concerns,- and in the interest of providing a full record of that proceeding herein, the Department held "Nothing in Gemini's arguments has convinced us that our grant of the instant exemption request [from the provisions of section 41105] would cause irreversible harm to Gemini or any other U.S. carrier." See Order 99-4-5 at 4.
Consolidated Reply of Fine Air Services, Inc.
"new" services in a once/twice weekly operation serving a very narrow segment of the market - foreign air carriers and large freight forwarders. Dedicating service to these kinds of operations does nothing to add or enhance competition, or other elements of service.
Atlas, Evergreen and Gemini do not currently maximize competition by offering their product to the smaller freight forwarders and shippers such as Fine Air's customer s because these customers are not the ones for whom these services (e.g., wide-body equipment and once/twice weekly schedules) are designed and for whom these services will work. See, e.g., Letters in support. Fine Air's expanded service would continue to benefit the general cargo shippers and freight forwarders, important customers whose needs would not be served by the other applicants' proposed operations.
Further, none of the other applicants would maximize competition if they were allocated these frequencies. Evergreen, Atlas and Gemini all allege that allocation of these frequencies to Fine Air would result in further concentration in the market. See Evergreen Consolidated Answer at 2; Gemini Consolidated Answer at 5-6; Atlas , Consolidated Answer at 11 - 12. Gemini characterizes such an allocation as a "duopoly" which would decrease rather than increase incentive to compete on price and other elements of service. See Gemini Consolidated Answer at 6. Because only one (1) widebody aircraft operator would be in the scheduled market, allocation to Gemini or Atlas or
Consolidated Reply of Fine Air Services, Inc.
Evergreen would not serve to enhance or increase competition, or increase incentives to compete on price and/or service. Fine Air submits that allocation of these frequencies to one of the other applicants would concentrate services in one (1) carrier who offers a very specific kind of service, a monopoly situation which is not in the public interest. These wide-body customers have been and should continue to be accommodated by the significant charter operations being conducted by Atlas, Evergreen and Gemini.
Moreover, these ACMI/wet lease services on behalf of other, usually foreign, air carriers and freight forwarders would monopolize use of the three (3) frequencies to benefit a foreign entity at the expense of and in competition with a U.S. carrier. Gemini alleges that allocation to Fine Air "would result in one less airline providing scheduled all-cargo service between the U.S. and Ecuador." See Consolidated Answer of Gemini at 7. This statement more accurately describes what would happen if Gemini, Atlas or Evergreen were allocated the three (3) frequencies: one less U.S. airline would be providing scheduled all-cargo service in the market. Clearly, public interest dictates that an allocation of frequencies in a limited-entry market should not be awarded to an air carrier who will then turn around and offer them to a foreign air carrier or freight forwarder who will ultimately compete with the U.S. carriers in the market. Public interest is therefore best served by allocating these frequencies to Fine Air, the only applicant in this proceeding who will make maximum use of the frequencies itself and serve the needs of the market.
Consolidated Reply of Fine Air Services, Inc.
Finally, an allocation to any of the other applicants herein would also reduce competition by decreasing the level of service currently provided via their existing charter operations. If any of the applicants were to be awarded the three (3) scheduled frequencies herein, their scheduled operations would be only a fraction of the charter operations currently being provided. Despite the other carriers' contentions that competition can only be increased by the selection of a "new" carrier, it I's clear that an allocation to one of these "new" carriers would enable them to offer less frequent service than their existing service in the market, which certainly would not maximize competition, benefit the shippers and forwarders in the market, or serve the public interest.
4. Fine Air is Financially Fit to Operate the Services Proposed Herein
Atlas exaggerates the effects of Fine Air's recently deferred debt payment, making such dire predictions as the frequencies and the futures of both companies are at risk. See Atlas Consolidated Answer at 10-11. As Atlas points out, citing Fine Air's own recent 8-K filing with the SEC, on June 2, 2000 Fine Air was in discussions to restructure its debt and, due to these discussions, had deferred the interest payment due on June 1, 2000, a deferral which Fine Air must emphasize did not constitute an event of default. See Atlas Consolidated Answer at 9. Fine Air has completed its restructuring and is in full compliance with its Restructure Agreement and First Supplemental Indenture. The bondholders have approved Fine Air's long-term hushkit financing, and 9
Consolidated Reply of Fine Air Services, Inc.
this financing will strengthen the financial position and cash flow of the company. Contrary to Atlas's allegation, Fine Air has adequate cash flow to expand its U.S.-Ecuador service, and none of its existing services is at risk. Atlas's arguments regarding Fine Air's inability to perform its existing and proposed services /10 are therefore rendered moot.
As Atlas has already pointed out, citing Fine Air's most recent form 10-Q, Fine Air's cash flow problems had stemmed from a number of normal business expenditure sources (apart from the-recent acquisition of Arrow) such as the increase in fuel costs and the costs of installing hush-kits on its DC-8 aircraft. See Atlas Consolidated Answer at 9, 10. Fine Air's greatest expense, however, is the substantial cost inherent in being required to operate two (2) separate carriers while awaiting the Department's action on the proposed merger. See Order 99-4-5. These "problems" therefore are not long-term and do not threaten Fine Air's existing or proposed scheduled and charter operations.
Further, unlike Atlas's ACMI/wet lease operations, Fine Air's operations are those of a true scheduled air carrier which operates, markets, and bears the risks and fluctuations associated with operating its own scheduled service. Unlike Atlas, Fine Air does not pass along the risks traditionally associated with this service to its customers
10/ See Atlas Consolidated Answer at 11.
Consolidated Reply of Fine Air Services, Inc.
(e.g., fuel price spikes, seasonal or market variations, competition with its customers, etc.) See, e.g., Atlas Air 10-K filing for fiscal year end December 31, 1999 at http://www.sec.v,ov - Search Edgar Database. Because of the very nature of Fine Air's business, as compared with Atlas's, cash flow will necessarily vary.
Most important, however, the Department, the final arbiter of fitness - not Atlas, finds Fine Air fit financially and otherwise to conduct its existing scheduled operations. /11 The Department issued new authority and renewals of exemption authority to Fine Air during calendar year 1999 and the first quarter of 2000, the periods of time which the 10-K and 10-Q cover, respectively, and for which Atlas details the "financial woes" of Fine Air. See Atlas Consolidated Answer at 10. The Department clearly disagrees with Atlas's contentions that there are questions about Fine Air's ability to expand service, that the frequencies are at risk, and that these SEC filings "[do] not instill confidence in (Fine Air's] ability to use additional U.S.-Ecuador frequencies effectively." See Atlas Consolidated Answer at 7, 9. The Department renewed and in some cases expanded
11/ See, e.g Order 99-12-7 at 6 amending and reissuing Certificate of Public Convenience and Necessity ("No information has come to our attention which leads us to question the fitness of the applicants to conduct the air transportation at issue here .... [W]e find each applicant fit, willing, and able to provide the services authorized"; Notice of Action Taken dated December 29, 1999 issuing Argentina authority, Docket OST-99-6637; Notice of Action Taken dated June 26, 2000 renewing and amending U.S.-Colombia authority, Docket OST-972162; and Notice of Action Taken dated March 24, 2000 renewing U.S.-Ecuador authority, Docket OST-96-1039.
Consolidated Reply of Fine Air Services, Inc.
these exemption authorities /12 on the basis of "data officially noticeable under Rule 24(g) of the Department's regulations, [and] found the applicant qualified to provide the service[s] authorized." See Order 99-12-7 at 6, Notices at 2. Such data includes, but is not limited to all Form 41 financial reports (See 14 C.F.R. §302.24(g)(ii), emphasis added); Reports of Traffic and Financial Data of all U.S. Carriers issued by the Department (Id. at (g)(iii)); international and domestic Airline Traffic Surveys compiled by the Department and made publicly available (Id. at (g)(iv)); freight data submitted to the Department such as T- 100 data that is not confidential (Id. at (g)(vi); Airport Activity Statistics of Certificated Air Carriers and Air Traffic Activity Data issued by the FAA; and the OAG and other reference editions. (Id. at (g)(vi). Clearly, if the Department were concerned about Fine Air's fitness (financial or otherwise) or ability to use these frequencies (currently or in the future), it would not have issued or renewed these exemption authorities, particularly in the restricted U.S.-Ecuador market. Therefore, despite Atlas's "Chicken Little" style of oratory, there is no reason to believe that the Department would not find Fine Air fit to expand its U.S.-Ecuador all-cargo scheduled services herein.
5. Fine Air's Service Proposal Meets Departmental Criteria for Selection
Gemini contends that Fine Air's application "contain[s] no compelling reasons"
12/ E.g., Colombia and Argentina.
Consolidated Reply of Fine Air Services, Inc.
why the Department should award these frequencies to Fine Air. See Gemini Consolidated Answer at 6. Fine Air submits that meeting Departmental criteria for selection is sufficiently compelling to warrant the allocation.
The Department has already determined that a U.S.-Ecuador all-cargo frequency allocation should be awarded to the air carrier who makes the best uses of the available frequencies by offering: 1) immediate and full use of all frequencies; 2) maximum capacity for U.S.-Ecuador traffic via its expanded turnaround service; and 3) a diverse fleet which will accommodate market and seasonal demands. See Order 97-7-14. The Department has determined that the greatest public benefits will be offered by a carrier who meets all three (3) criteria and in the instant proceeding, that carrier is Fine Air.
The Department has specifically determined that the proposal to make full use of all three (3) available frequencies with narrow-body aircraft, or use of an L-1011 when the market demands it, is superior to that of once-weekly wide body B-747) service. See Order 97-7-14 at 6. Fine Air offers the same full-use and full-service narrow-body proposal here, whereas Evergreen, Atlas, and Gemini propose to offer inferior and infrequent service.
Secondly, the Department prefers turnaround service in the U.S.-Ecuador market because it "maximize[s] the capacity available for Ecuador traffic." See Order 97-7-14 at
Consolidated Reply of Fine Air Services, Inc.
6. Fine Air has an existing and successful turnaround service in this market and proposes only to expand this turnaround service. As the wide-body operators and their customers know, there is not sufficient traffic southbound in the U.S.-Ecuador market to operate a wide-body aircraft on a turnaround basis. By economic necessity and in order to mount a viable U.S.-Ecuador operation, therefore, each of the wide-body operators will have to make intermediate stops southbound. The Department has determined that these regular intermediate stops are not desirable and "could be expected to preempt space on a regular basis that might otherwise [be] available for U.S.-Ecuador traffic." See Order 97-7-14 at 6. Fine Air's existing service and its service proposal herein do not include any regular intermediate southbound stops, thereby leaving the entire aircraft dedicated to U.S.-Ecuador traffic and thereby also offering the greatest public benefits.
Finally, the Department has determined that diversity of fleet is a "positive advantage" to the winning proposals for U.S.-Ecuador all-cargo service. See Order 97-714 at 6. The Department prefers to award the frequencies to a carrier with both widebody and narrow-body aircraft so as to accommodate market and seasonal fluctuations. See Order 97-7-14. As set out herein, Fine Air has a diverse fleet of both DC-8 and L1011 aircraft which enables Fine Air to allocate its resources to respond to the changing traffic flows in the market, without being obliged to make any intermediate stops, while still making full use of the three (3) available frequencies. Conversely, Atlas, Evergreen, and Gemini are restricted in their services and their ability to make full use of the
Consolidated Reply of Fine Air Services, Inc.
frequencies and at the same time accommodate the U.S.-Ecuador all-cargo market because of their devotion to a fleet of single aircraft type. As the Department has already determined, exclusive use of a wide-body aircraft not only limits the number of frequencies the wide-body could provide, but also increases the need for an intermediate southbound stop when U.S.-Ecuador traffic is not as heavy, neither of which is a public benefit. See Order 97-7-14 at 6. Fine Air, however, is not subject to the same limitations as the wide-body operators and therefore would not encounter the same problems the Department has determined the wide-body operators would have, and which have prevented them from being awarded the allocation of any frequencies in prior U.S.-Ecuador all-cargo allocation proceedings. See Order 97-7-14 and 94-.12-36. Fine Air's service proposal meets all three (3) of the Department's stated criteria for determining a frequency allocation in this market. Fine Air, therefore, should be allocated these three (3) frequencies.
Consolidated Reply of Fine Air Services, Inc.
WHEREFORE, Fine Airlines, Inc. respectfully requests that the Department of Transportation allocate 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, D.C. 20037.
Telephone: (202) 872-1679
Fax: (202) 872-1725
Email:
Attorneys for Fine Air Services, Inc.
June 30, 2000