BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON DC

Transcription

1 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON DC ) ) PETITION FOR WAIVER OF THE TERMS ) OF THE ORDER LIMITING SCHEDULED ) Docket No. FAA OPERATIONS AT LA GUARDIA AIRPORT ) ) ) REPLY COMMENTS OF SOUTHWEST AIRLINES CO. Communications with respect to this document should be sent to: Ron Ricks Robert W. Kneisley Executive Vice President Corporate Associate General Counsel Services & Corporate Secretary Leslie C. Abbott Madeleine Johnson Attorney Vice President General Counsel SOUTHWEST AIRLINES CO. SOUTHWEST AIRLINES CO L Street, N.W Love Field Drive Suite 640 Dallas, TX Washington, D.C bob.kneisley@wnco.com (202) Roy Goldberg SHEPPARD MULLIN RICHTER & HAMPTON LLP 1300 Eye Street, N.W. 11th Floor East Washington, D.C rgoldberg@sheppardmullin.com Counsel for Southwest Airlines Co. April 5, 2010

2 TABLE OF CONTENTS I. The Six-Carrier Transaction Does Not Cure the Anticompetitive Problems of the Delta-US Airways Slot Swap and Should Be Rejected. II. The Splintered and Minimal Slot Transfers in the Six-Party Deal Will Have No Meaningful Impact on Competition or Concentration at LGA and DCA. III. If Southwest Acquired Carved-Out Slots It Would Generate More Public Benefits Than All Four Delta US Airways Partners Combined. IV. Divested Slots Should Be Allocated Via Cash-Only Multi-Bid Auctions To the Highest Bidders Without Interference from the Selling Carriers. V. Ensuring Adequate Airport Facilities are Available for the Recipients of Divested Slots is Critical. VI. LGA and DCA are Separate Markets that are Effectively Insulated from Competition at Surrounding Airports. VII. FAA Has Ample Legal Authority to Consider Competition Factors In Deciding Whether to Grant the Waiver Requested by Delta and US Airways. VIII. FAA s Imposition of Slot Carve-Outs as a Condition of Granting a Slot Transfer Waiver Would Not Be an Unconstitutional Taking of Property. Conclusion Attachment A Attachments: ECONOMIC ANALYSIS OF THE REVISED DELTA/US AIRWAY PROPOSED SIX- PARTY TRANSACTION AND PUBLIC INTEREST ALTERNATIVES Campbell Aviation Consultants LLC EXHIBITS to Reply Analysis of Campbell Aviation Consultants LLC i

3 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON DC ) ) PETITION FOR WAIVER OF THE TERMS ) OF THE ORDER LIMITING SCHEDULED ) Docket No. FAA OPERATIONS AT LAGUARDIA AIRPORT ) ) ) REPLY COMMENTS OF SOUTHWEST AIRLINES CO. In its Initial Comments filed March 22 Southwest Airlines demonstrated that the massive slot swap proposed by Delta Air Lines and US Airways at New York La Guardia Airport (LGA) and Washington Reagan National Airport (DCA) would be highly anticompetitive and adverse to the public interest in several ways. This unprecedented transaction would transform both of these critical, slot-constrained airports into dominated hubs with minimal competition; it would allow Delta and US Airways to divide the LGA and DCA markets between themselves to establish dominant positions at each respective airport; it would perpetuate the underutilization of slots at LGA and DCA that already costs consumers millions of dollars annually; and it would prevent any significant entry and competition from low-fare carriers at these airports for years to come, if not permanently. 1 For these reasons Southwest urged FAA either to deny the waiver requested by Delta and US Airways entirely, or to condition it on larger slot carve-outs at both LGA and DCA than FAA initially proposed in order to offset the 1 See Comments of Southwest Airlines Co., filed in the above captioned docket on March 22, 2010 (hereafter Southwest Initial Comments ).

4 severe loss of competition that would result from the transaction. 2 Late on March 22, the closing day for comments, Delta and US Airways announced that they had revised their proposed slot swap to transfer a small number of LGA and DCA slots to four selected air carriers, on the condition that FAA grant the waiver necessary to allow Delta and US Airways to consummate their underlying transaction. As shown below and in the attached economic analysis of Campbell Aviation Consultants (CAC), the revised slot transaction is a calculated effort by Delta and UA Airways to avoid even the modest carve-outs proposed by the FAA, yet it does not even remotely cure the anticompetitive problems on which the FAA carve-outs are based. Rather, the new deal is intended only to improve the optics of a highly anticompetitive transaction by giving a few slots to hand-picked carriers that will produce no meaningful competition to Delta or US Airways at either LGA or DCA. The new deal is not an adequate substitute for the FAA s proposed remedies and should be rejected for that reason. 3 I. The Six-Carrier Transaction Does Not Cure the Anticompetitive Problems of the Delta-US Airways Slot Swap and Should Be Rejected. Delta and US Airways are now proposing to transfer, through a private deal on undisclosed terms, five slots pairs each to WestJet, AirTran and Spirit at LGA and 4.5 slot pairs to JetBlue at DCA. Delta and US Airways would then trade all of their remaining slots with each other as originally envisioned. This revised deal falls far short 2 Id. at pp Delta and US Airways arguments that FAA lacks legal authority to consider the impact of the proposed transaction on airline competition, and that the imposition of slot carve-outs would constitute an unconstitutional taking of property, are totally without merit, as detailed in Sections VII and VIII below respectively. 2

5 of meeting the pro-consumer objectives outlined in the DOT/FAA s February 18 notice and is not in the public interest. The six-party deal now offered by Delta and US Airways suffers from numerous structural flaws that ensure the hand-selected partner carriers will not provide adequate offsetting competition to Delta and US Airways at either LGA or DCA. The deal was, in fact, specifically designed to ensure this outcome. In its Initial Comments Southwest urged FAA to preclude the applicants from deciding which carriers should receive divested slots, in order to prevent manipulation of the allocation process for anticompetitive purposes: If Delta and US Airways were given discretion to choose the buyers of divested slots, it would not be surprising for them to select the weakest competitors they would have to face in the future. Alternatively, Delta/US Airways might decide to distribute the slots among many different buyers to prevent any single carrier from gaining an effective competitive presence against them. In either circumstance, Southwest would likely be the sellers last choice as a buyer of carved-out slots 4 This prediction has now become fact. Delta and US Airways have divided a small number of slots among four hand-picked carriers so as to ensure that none of them will mount a competitive threat at either airport. This privately-negotiated deal will not cure the anticompetitive problems with the underlying Delta-US Airways transaction and is no substitute for the FAA s proposed divestitures. As stated in its Initial Comments, Southwest believes that the carve-outs proposed by FAA 20 slot pairs at LGA and 14 slot pairs at DCA are themselves too small to offset the problems of increased concentration by Delta and US Airways 4 Southwest Initial Comments at p. 12 (emphasis in original). 3

6 respectively. Therefore we urged more significant carve-outs, i.e., at least 40 slot pairs at LGA and 20 pairs at DCA. 5 Yet the meager slot transfers contained in the six-party deal are far below even the modest levels proposed by FAA - 25% lower at LGA and 68% lower at DCA. 6 These minimal slot transfers would have no meaningful impact on concentration or competition. They would reduce Delta s post-transaction share of LGA slots by only 3%, and US Airways share of DCA slots by only 2%. 7 At LGA, Delta s slot share would jump from 25% to 47%, and the airport would change from a market served principally by three similarly-sized carriers to a single-carrier dominated hub. Concentration at DCA would be even greater, as US Airways share of slots would rise to 55%, nearly four times greater than the second largest holder. 8 While the applicants claim that concentration levels of this magnitude are lower than many other hubs and should be ignored, the critical and unique difference with LGA and DCA is the presence of slot constraints that preclude new entry in response to anticompetitive conduct by the hub carriers. Only a few years ago Delta took a completely different position. When it was fighting off US Airways' hostile takeover attempt in 2006/2007, Delta voiced serious 5 Id. at p See Section 3.0 and Exhibit R-1 in the attached Economic Analysis of the Revised Delta/US Airways Proposed Six- Party Transaction and Public Interest Alternatives by Dr. Brian M. Campbell and Campbell Aviation Consultants (hereafter CAC Reply Analysis ). Southwest retained Dr. Campbell and CAC to evaluate the proposed six-party transaction. 7 CAC Reply Analysis Section 3.0 and Exhibits R-2 and R-3. 8 Id. The six-party deal would do little to mitigate the increase in HHI that will flow from the underlying transaction. The original deal, as proposed, would increase the HHI at LGA by 813 points in a market that is already highly concentrated today. The HHI increase in the revised DL/US proposal is 566, which is still well above the DOJ s threshold for concern. At DCA, the original DL/US proposal would increase the HHI by 717 points. The revised proposal would increase the HHI by 597 points, or 120 points less, which is not a meaningful difference in an already highly concentrated market (CAC Reply Analysis Section 3.3 and Exhibits R-19 and R-20). 4

7 concerns that such a combination would dominate slot holdings at LGA and DCA, even with divestiture of 48 slot pairs for the Shuttle. See Attachment A, an excerpt from a Delta presentation dated December 19, 2006, and supplied to the SEC. Nothing has changed in the marketplace since 2006 to warrant any different conclusions about the concentration and market power that would result today from a massive amalgamation of slot holdings at LGA and DCA by Delta and US Airways, whether achieved by merger or slot transfer. The only thing that has changed is that the two carriers are now working together to achieve the same outcome that Delta once opposed so vehemently. II. The Splintered and Minimal Slot Transfers in the Six-Party Deal Will Have No Meaningful Impact on Competition or Concentration at LGA and DCA. With only five slot pairs, the new carriers in the six-party deal will likely serve at most one or two routes each from LGA and DCA with the transferred slots. As CAC has pointed out, these small and splintered carve-outs will provide no meaningful competition to Delta or US Airways. 9 In fact, both Spirit and AirTran have a long history of abandoning service in LGA and DCA markets. Both carriers have been unable to succeed in at least six LGA/DCA routes over the last several years in competition with incumbent carriers 10 - a record that Delta and US Airways are undoubtedly well aware of. Further, CAC has concluded that the routes these carriers would likely serve are already well-served and not likely to produce significant new competition or consumer 9 CAC Reply Analysis Sections 3.3 and Exhibit R CAC Reply Analysis Section 3.3 and Exhibits R-5 and R-6. 5

8 benefits. 11 WestJet s inclusion in the six-party deal is an even more obvious ploy to ensure that Delta and US Airways face no new competition. Cabotage restrictions prevent WestJet from serving any domestic markets, and neither Delta nor US Airways compete in the U.S.-Canada transborder markets that WestJet would likely serve. 12 Hence, the transfer of slots to WestJet does nothing to offset the anticompetitive effects of the underlying DL-US transaction. In fact, WestJet has recently disclosed that it plans to enter into a codeshare agreement with Delta, and the two carriers have acknowledged that they are negotiating other commercial arrangements. 13 Under the FAA s February 18 notice, WestJet would not even be eligible to acquire divested slots if it were a codeshare partner with Delta. 14 JetBlue service at DCA with 4.5 slot pairs will similarly be ineffective in disciplining US Airways dominant position with slot pairs, or 55% of the airport total. Even if JetBlue obtains additional slots from American Airlines as was recently 11 CAC Reply Analysis Section 3.3. Ironically, Spirit Airlines is on record in this proceeding arguing strenuously against the slot exchange and voicing many of the same concerns that Southwest articulates in its comments. In the concluding paragraph of its in-depth letter to the Department of Justice, Spirit states: With 125 new pairs of operating authorizations, DL will be able to add flights in markets where Spirit and other low-fare carriers now operate and potentially stifle this competition. Accordingly, we believe the Department should require DL to relinquish 40 pairs of operating authorizations as discussed above, for reallocation by the FAA to limited incumbents. Letter to The Honorable Christine A. Varney, U.S. Department of Justice from Kirstein & Young on behalf of Spirit Airlines, August 25, 2009, in this docket. 12 CAC Reply Analysis Section 3.3 and Exhibit R See CAC Reply Exhibit R-18; and Joint Comments of AirTran Airways, Spirit Airlines, JetBlue Airways, WestJet, Delta Air Lines and US Airways in Support of Waiver Petition of Delta and US Airways (hereafter Joint Comments ) filed in this docket on March 22, 2010, at pp Fed. Reg. 7306, (February 18, 2010) (hereafter FAA Notice ). 6

9 announced, it would still have a miniscule share of the total airport slots, and would likely serve only two or three of the 72 nonstop routes at DCA. More significantly, JetBlue s evolving new commercial relationship with American 15 suggests that in the future JetBlue will serve more as the partner of a high-cost legacy airline than an independent low-cost competitor, and thus is unlikely to provide the aggressive low-fare competition that DCA so desperately needs. In additional to all of the above deficiencies, the six-party deal contains unusually long start-up periods that would allow Delta and US Airways to establish dominant market positions for extended periods with no new carrier service whatsoever. At LGA, the selected carriers would have up to 24 months (or in the case of WestJet, 28 months) to begin service, and at DCA, Delta will continue to use JetBlue s 4.5 slot pairs pursuant to a lease from JetBlue for an unspecified period. 16 These protracted startup times indicate that even the minimal public benefits from the slot transfers in the sixcarrier deal will not materialize for many months if not years. In sum, the six-party deal cures none of the problems of the original DL/US slot swap. Instead, it is designed solely to improve the appearance of an anticompetitive transaction that would allow Delta and US Airways to assume dominant positions, free from meaningful entry and low-fare competition, at two of the country s most critical and constrained airports. Accordingly, FAA should rejected this proposal and finalize the remedies outlined in its February 18 notice. 15 See JetBlue Press Release American Airlines and JetBlue Airways Sign Agreement to Collaborate at Key East Coast Gateways -- Relationship Includes Customer Connectivity and Slot Swap, located at 16 See Joint Comments at p. 3. 7

10 III. If Southwest Acquired Carved-Out Slots It Would Generate More Public Benefits Than All Four Delta US Airways Partners Combined. The exclusion of Southwest Airlines from the six-party transaction is no accident. As we stated in our Initial Comments, if Delta and US Airways were given discretion to select the buyers of divested slots, Southwest would be their last choice. The reason is obvious, but bears repeating: Southwest will provide the strongest competition at LGA and DCA; it will not deviate from its low-fare philosophy; it has the staying power to succeed against larger slot holders; and it will force incumbents to reduce fares and make better use of their slots in response. Delta and US Airways know this. Southwest can leverage even a small number of divested slots more effectively than any other eligible carrier because Southwest has a far larger domestic network that reaches markets across the country. In fact Southwest has more weekly departures, more seat departures, more operating revenues, and a larger fleet than the four small carriers involved in the six-party deal combined. 17 In Southwest s Initial Comments, the CAC Analysis showed that Southwest s service using just the slots that FAA has proposed to carve out would generate nearly $200 million in fare savings, and carry approximately 700,000 additional passengers, annually at LGA and DCA. In fact, these numbers are quite conservative, as they represent only the savings to existing passengers in the market and do not take into account the additional fare savings that would be produced when other carriers are forced to match Southwest s fares, as well as the traffic stimulation that would result from Southwest s and other carriers fare reductions. In the attached report, CAC has 17 CAC Reply Analysis Section 5.1 and Exhibits R-22 and R-23. 8

11 produced a more refined analysis of benefits that takes these additional factors into account. To do this, CAC forecasted results from a hypothetical Southwest schedule using the FAA-proposed carve-outs of 20 slot pairs at LGA and 14 pairs at DCA. The results, shown in Table 1 of the CAC Reply Analysis, page 19 are stunning: the annual consumer benefits from such service would range from $290 to $439 million. 18 These public benefits from Southwest s competition would not only far exceed the minimal benefits the four DL/US selected carriers would provide, they also would exceed the public benefits projected by Delta and US Airways for their entire deal using all 182 traded slot pairs. 19 This is because the applicants do not project any fare savings from their transaction. In fact, CAC has concluded that the likely effect of the transaction (either the original slot swap or the revised six-party deal) will be fare increases by Delta and US Airways due to their higher post-transaction hub costs as well as their increased market power. 20 IV. Divested Slots Should Be Allocated Via Cash-Only Multi-Bid Auctions To the Highest Bidders Without Interference from the Selling Carriers. Notwithstanding the analysis showing that Southwest would generate by far the greatest public benefits from carved-out slots, Southwest claims no entitlement to those slots and seeks no automatic allocation. Rather, we request only the opportunity to acquire divested slots in an open auction process where the slots are sold to the highest bidder(s) at the winning price(s). In our Initial Comments we explained why such a 18 CAC Reply Analysis Section CAC Reply Analysis Section 5.3 and Exhibit R CAC Reply Analysis Section 3.2 and Exhibits 14 thru 16. 9

12 cash-only auction process, without influence by the selling carriers, was the only way to ensure that divested slots would be put to their highest and best use for the benefit of the public. 21 The FAA s February 18 notice suggested cash-only bidding for carved-out slots as a possible allocation option, but did not make clear exactly how such a process would work. For reasons that were unexplained, the notice implied that FAA might allow only a single round of bidding. A single-bid process would be both inappropriate and unproductive for divested slots, however, particularly because there is no generally accepted value or market clearing price for these public assets. As a result, single bids are likely to vary widely and would undoubtedly lead to an inefficient outcome. A true, multi-bid auction, on the other hand, would ensure that the slots were acquired by the carrier(s) that value them most highly and will put them to the greatest competitive use. As we explained in our Initial Comments, the Department of Justice has advocated multi-bid auctions as the most efficient means of allocating scare public assets, and we urge that DOT/FAA adopt that process here. 22 In addition, the FAA s notice suggested that the selling carrier might have discretion to reject the highest bid, but did not specify permissible grounds for such a rejection. 23 As stated in its Initial Comments, Southwest believes that the selling carriers should have no discretion to reject the highest cash-only bid due to the identity of the bidder, as that would undermine the very reason for holding an auction in the first 21 Southwest Comments, Section V, pp CAC Reply Analysis Section 4.0 citing DOJ support for auctions to allocate scare public assets. 23 FAA Notice at

13 place. The only possible basis for allowing such a rejection would be that the bid does not meet a pre-established minimum or reserve price set by the sellers. 24 However, if FAA permits the use of reserve prices it should set strict limitations to prevent manipulation of the bidding process. First, any reserve price must be made public in advance of the auction rather than after the bidding has taken place, to ensure that it is uninfluenced by the identity of the winning bidder. 25 Second, if the sellers do reject a winning bid for failure to meet the reserve price, they should not then be permitted to sell the slots on any other basis. Rather, they should simply be free to walk away from the entire deal at that point. Alternatively, the seller should be free to waive the reserve price and sell the slots to the winning bidder at the winning price. V. Ensuring Adequate Airport Facilities are Available for the Recipients of Divested Slots is Critical As Southwest stated in its Initial Comments, slots will be of no value to a new entrant or limited incumbent carrier if sufficient ground facilities are not also made available. The Department of Justice and the Port Authority have similarly recognized that adequate facilities are essential to realizing the consumer benefits of additional lowfare competition at LGA and DCA. The Port Authority and the Metropolitan Washington Airport Authority, as proprietors of LGA and DCA respectively, are best suited to determine how, and under 24 See Comments of the Department of Justice (hereafter DOJ Comments ) filed in this docket on March 24, 2010, p We also suggest that FAA prohibit any reserve price higher than the average price-per-slot in the six-party deal. Southwest does not know what that price is, as the parties have not disclosed the financial terms of the transfers, but it reflects the value that Delta and US Airways themselves have placed on the transferred slots. 11

14 what terms, airport facilities are made available in response to requests for accommodation from recipients of divested slots, consistent with federal obligations to accommodate air carriers on reasonable terms and avoid unjust economic discrimination as to similarly situated airlines, as well as their current Use and Lease Agreement commitments. To assist the airports in exercising their proprietary rights and accommodating the slot recipients, DOT/FAA should condition its waiver approval on the parallel divestiture of adequate and viably located ground facilities by Delta and US Airways. VI. LGA and DCA are Separate Markets that are Effectively Insulated from Competition at Surrounding Airports The DOT/FAA s conclusion - supported by the DOJ 26 - that LGA and DCA are separate competitive markets from other New York and Washington area airports is both consistent with Southwest s experience and supported by objective data. The analysis in FAA s notice showing elevated DCA average fares matches Southwest s experience. We have long observed that DCA carriers have been able to maintain significant and persistent premiums above Southwest s fares on service to the same destinations from DCA that Southwest serves from BWI. The accompanying CAC report confirms this phenomenon more broadly, showing that average fares at DCA by DL, US and other legacy carriers are consistently higher than Southwest s average fares at BWI. 27 CAC has also shown that a similar phenomenon occurs among New 26 DOJ Comments, pp CAC Reply Analysis Section 7.0 and Exhibit R-32. CAC has also shown that US Airways fares at DCA are higher than its own system average fares, demonstrating that DCA is effectively insulated from competition due to its unique proximity to downtown Washington, D.C. combined with slot constraints that prevent new entry. CAC Reply Analysis Section 7.0 and Exhibit R-17 12

15 York airports, i.e., fares at LGA (and EWR) are largely unaffected by lower fares at JFK. 28 Additional evidence that the three New York and three Washington DC area airports are largely separate markets is the multiplicity of service by the same airlines at most of these airports. If, as Delta and US Airways contend for example, BWI, DCA, and IAD all served the same Washington/Baltimore market, it would be unnecessary for airlines to serve more than one of these airports. Yet the opposite is common - in fact, there are 35 destinations that a single carrier serves from either two or all three Washington/Baltimore airports. 29 A similar phenomenon occurs at the New York/Newark area airports, as there are 43 destinations to which a single carrier provides service from either two or all three of those airports. This multiplicity of service is not present in other multi-airport regions where each airport effectively serves the entire market, such as Chicago (served by both ORD and MDW) and Houston (served by both HOU and IAH). 30 Taken as a whole, these factors demonstrate convincingly that neither airlines nor passengers consider the three Washington/Baltimore area airports, or the three New York/Newark area airports, to be economic substitutes for one another. This is true not only for logistical reasons - such as each airport s unique geographic location, the distinct high-density pockets of population within the regions, and long travel times between airports due to gridlock but also (and more importantly for the present 28 CAC Reply Analysis Section 7.0 and Exhibit R CAC Reply Analysis Section 7.0 and Exhibits 26 and CAC Reply Exhibits 29 and

16 proceeding) due to the slot constraints that uniquely restrict service and competition at DCA and LGA. 31 Hence, as DOT/FAA have tentatively concluded, a lack of competition at DCA cannot be cured by expanding service at BWI or IAD, and the same is true for LGA vis-à-vis JFK and EWR. Rather, the anticompetitive effects of the slot swap that affect DCA must be addressed at DCA, and the anticompetitive problems at LGA must be addressed at LGA. VII. In Deciding Whether Proposed Slot Transfers Are in the Public Interest, The FAA May, and Should, Consider the Potential Impact on Competition in the Airline Industry. In its February 18 Notice, the FAA properly recognized that, in determining whether the proposed airport slot transfers were in the public interest, it should be guided by the policy goals set forth in the Federal Aviation Act, 49 U.S.C (a)(4), (6), (10-13), and the pro-competition policies followed by Congress in adopting legislation on matters such as slot exemptions and airport grant programs. Notice, at 5. Such policy goals include placing maximum reliance on airline competition and opportunities for new entrant airlines. Id. Specifically, the FAA acted within its discretion in determining that the public interest would best be served by creating new and additional competition at the airports to counterbalance the potential harm to consumers from allowing Delta and US Airways to swap their slots at LaGuardia and Reagan National Airports. Id. at 1. In their March 22, 2010 comments, Delta and US Airways assert that, in determining whether their proposed slot transfer is in the public interest, the FAA was 31 CAC Reply Analysis Section

17 barred from considering the possible harm to competition resulting from the slot exchange. Delta/US Airways Comments, at 7, This argument - essentially that FAA must make a decision in this proceeding with policy blinders on - is completely without merit. The Federal Aviation Act expresses a clear and unambiguous policy of placing maximum reliance on competitive market forces and on actual and potential competition. 49 U.S.C (a)(6). Among other things, it evinces Congress desire to avoid[] unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier... unreasonably to increase prices, reduce services, or exclude competition in air transportation, and its objective to encourage[e] entry into air transportation markets by new and existing air carriers U.S.C (a)(10), (13). Nothing in the Federal Aviation Act nor its legislative history requires the FAA to ignore these clear and unambiguous Congressional policy statements when the agency makes a determination whether a proposed slot transfer is in the public interest. The fact that the Act authorizes the FAA to assign the use of the navigable airspace... to ensure the safety of aircraft and the efficient use of airspace (49 U.S.C (b)(1)) does not mean that the FAA is to assign airspace with no regard for the significant injury to airline competition that may result from the FAA s decision. To the contrary, as set forth below, the FAA s determination of what the public interest requires should reflect, rather than ignore, Congress clearly stated policy objective of placing maximum reliance on airline competition and opportunities for new entrant airlines. A. For More than 70 Years, Congressional Policy Has Been to Maximize Competition and Deter Anticompetitive Actions in The U.S. Airline Industry. 15

18 A consistent thread through Congressional aviation policy for more than 70 years has been the clear and unambiguous legislative objective to promote free and open competition between, and deter monopoly power or other anticompetitive conduct by, airlines. Congress first established a comprehensive system for regulation of air transportation through the Civil Aeronautics Act of 1938, 52 Stat. 973 (1938). Continental Air Lines, Inc. v. CAB, 519 F.2d 944, 952 (D.C. Cir. 1975). In enacting that legislation, Congress made it clear that it was in favor of the competitive principle and opposed to a policy of monopoly. Id It is significant that Congress, addressing itself to the air transport industry, deliberately fashioned [the] 1938 law so as to identify competition in express language as a key element of the public interest. Id. During the Senate debate it was emphasized that both of the 1938 bills... altered the general declaration of policy contained in earlier bills to take explicit recognition of the importance of competition to the extent necessary to assure the sound development of air transport. Id. (citation and internal quotation marks omitted). Twenty years later, Congress passed the Federal Aviation Act of 1958, Pub. Law No , 72 Stat. 731, in which Section 102(a) (now 49 U.S.C (a)) was only one of five places in the pending bill where the question of monopoly [was] dealt with in one way or another with the view to its control and prevention. Continental Air Lines, at 953 (internal quotation marks omitted). As set forth in the FAA Notice and discussed above, Section 40101(a) contains numerous manifestations of Congress clear and unambiguous policy objective of maximizing airline competition and deterring anticompetitive practices by U.S. airlines. See 49 U.S.C (a)(4), (6), (9)-(13). 16

19 Following another 20 year interval, Congress enacted the Airline Deregulation Act of 1978, Pub. L. No , 92 Stat. 1705, based on its determination that maximum reliance on competitive market forces would best further efficiency, innovation, and low prices as well as variety [and] quality... of air transportation. Morales v. Trans World Airlines, Inc., 504 U.S. 374, 378 (1992). That the promotion of competition was a key objective behind the ADA is obvious from its preface, which described the new law as: An Act to amend the Federal Aviation Act of 1958, to encourage, develop, and attain an air transportation system which relies on competitive market forces to determine the quality, variety, and price of air services, and for other purposes. (Emphasis added). B. In Determining Whether a Slot Transfer is in the Public Interest, the FAA Need Not and Should Not Ignore Clear and Unambiguous Congressional Policy to Maximize Competition and Deter Anticompetitive Conduct by Airlines. In conditioning its approval of the proposed Delta/US Airways slot exchange on the creation of new and additional competition at the airports to counterbalance the potential harm to consumers (Order, at 1), the FAA has not, as Delta and US Airways contend, used its authority to regulate in the public interest as an an open-ended delegation to an agency to define what it deems to be in the public interest. Delta/US Airways Comments, at 7. Instead, the FAA has appropriately sought to ensure that its consideration of the public interest is consistent with the Congressional purposes underlying the Federal Aviation Act, which indisputably include maximizing airline competition and the deterrence of anticompetitive conduct by airlines. The Supreme Court has consistently held that the use of the words public interest in a regulatory statute... take meaning from the purposes of the regulatory 17

20 legislation. NAACP v. Federal Power Comm n, 425 U.S. 662, 669 (1976) (emphasis added); see also Sprint Communications Co. v. Federal Communications Comm n, 274 F.3d 549, 554 (D.C. Cir. 2001) (same). For example, in NAACP, the Supreme Court stated that, in order to give content and meaning to the words public interest as used in the Power and Gas Acts, it [was] necessary to look to the purposes for which the Acts were adopted. 425 U.S. at 669 (emphasis added). Because the principal purpose of the Power and Gas Acts was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices, the term public interest in those Acts was a charge to promote the orderly production of plentiful supplies of electric energy and natural gas at just and reasonable rates. Id. at Similarly here, in order to give content and meaning to the words public interest as used in the Federal Aviation Act, it is necessary for the FAA to look to the purposes for which the [Federal Aviation Act was] adopted. The fact that the FAA, in considering a proposed slot transfer, is utilizing authority provided in specific sections of the Federal Aviation Act which focus on the safety of aircraft and the efficient use of airspace (49 U.S.C (b)(1) and 40109(b)) does not mean that the FAA must to ignore the clearly stated Congressional purpose of maximizing airline competition and deterring anticompetitive conduct by airlines. In Sprint Communications, supra, 274 F.3d 549, providers of long-distance telecommunications services challenged the decision of the Federal Communications Commission to permit SBC Corporation to provide in-region long distance service in Kansas and Oklahoma. The providers asserted that, in ruling that it was in the public interest to grant the SBC application, the FCC failed to consider the price squeeze 18

21 that would befall the providers. The FCC had reasoned that consideration of the pricesqueeze claims would have exceeded the Commission s authority under the Act, because it would have required the FCC to invade state commissions exclusive jurisdiction over retail rates. Id. at 554. The providers conceded that Congress did not expressly consider whether a price squeeze reflecting low call volumes and potential profitability could prevent a public interest finding or even require further inquiries by the Commission. Id. at 554. However, the providers argued that the only reasonable construction of the [public interest] requirement call[ed] at lease for such an inquiry. Id. In agreeing that the FCC should have considered the potential prize squeeze as part of its public interest determination, the D.C. Circuit pointed to the fact that the Telecommunications Act proclaims competition as the congressional purpose. Id. The court stated (id. at 555): [A]s the Act aims directly at stimulating competition, the public interest criterion may weigh more heaving towards addressing potential price squeeze. The same holds true here. Even if the Federal Aviation Act does not expressly authorize the FAA to consider the competitive impact of a slot transfer, the FAA should consider such evidence as part of its public interest determination because the Act unquestionably proclaims competition as a fundamental congressional purpose. See also American Postal Workers Union, AFL-CIO v. United States Postal Service, 891 F.2d 304, 313 (D.C. Cir. 1989) (agency s narrow interpretation of the public interest should not frustrate[] the core purpose of the underlying statute ) (rev d on other grounds, 498 U.S. 517 (1991)). 19

22 The argument by Delta and US Airways that the FAA should determine the public interest in connection with slot transfers without regard for the policy statements set forth in 49 U.S.C (a) also ignores the D.C. Circuit s pronouncement that [a] regulatory agency may, should, and in some instances must, give consideration to objectives expressed by Congress in other legislation, assuming they can be related to the objectives of the statute administered by the agency. City of Chicago v. Federal Power Comm n, 385 F.2d 629, 635 (D.C. Cir. 1967). In City of Chicago, the court stated that the fact that the Internal Revenue Service Code was not controlling authority for the Federal Power Commission does not necessarily end the matter of whether the Commission should consider the stimulating-investment objectives of the IRS Code in making a decision regarding rates charged by a natural gas pipeline. Id. Similarly here, even if Section 40101(a) was determined not to be controlling authority for the FAA in deciding whether to approve slot transfers, that would not necessarily end the matter of whether the FAA should consider the pro-competitive objectives of Section 40101(a) in deciding whether the slot transfers are in the public interest. Rather, the FAA may (and indeed should) consider the congressional policy to foster airline competition as bearing on the question of whether a proposed slot transfer is in the public interest. In City of Pittsburgh v. Federal Power Comm n, 237 F.2d 741 (D.C. Cir 1956), the Federal Power Commission was asked to approve the conversion of a pipeline from natural gas to petroleum. The D.C. Circuit reversed the FPC s decision that it could not consider the anticompetitive impact resulting from the conversion. The court stated: The Commission, while it has no power to enforce the Sherman Act (15 U.S.C.A. 1-7, 15 note) as such * * * (and) cannot decide definitely whether the 20

23 transaction contemplated constitutes * * * an attempt to monopolize which is forbidden by that Act * * *, nevertheless cannot without more ignore the [Sherman] (Act). Thus, if it appears that [the conversion] would tend to produce monopolization of a petroleum products market, the Commission cannot ignore that fact merely because it is an antitrust factor and such factors have been placed within the ken of the Attorney General. That he is specially competent as to the antitrust laws does not make all other officers or agencies of the Government incompetent. Even private citizens play a role in the effectuation of our national antitrust policy. It would seem odd if circumstances upon which private citizens may found legal and equitable remedies and defenses should be wholly beyond the reliance of the Government. Although the Commission has no power to enjoin conduct as illegal under the Sherman Act or even to declare such illegality, it certainly has the right to consider a congressional expression of fundamental national policy as bearing upon the question whether a particular certificate is required by the public convenience and necessity. Id. at 754 (internal quotation marks omitted) (emphasis added). Similarly here, even assuming, arguendo, that the public interest factors enumerated in 49 U.S.C (a) do not explicitly apply to FAA decisions under Subpart I of the Federal Aviation Act (including Sections and 40109), the FAA is unquestionably authorized to consider the Congressional policy promoting airline competition and deterring anticompetitive practices as bearing on whether a proposed transfer of slots is in the public interest. C. There is Ample Precedent for FAA to Consider the Competitive Impact of Slot Transfers at LGA and DCA. Contrary to the implication of the comments of Delta/US Airways and other airlines the FAA s consideration of competitive factors in connection with slot transfers and allocations at LGA and DCA is hardly unprecedented. In fact, the FAA has consistently considered the competitive impact of such matters. 21

24 For example, the FAA s adoption in 1986 of a Special Federal Aviation Regulation (SFAR) for the reallocation of slots at LGA, DCA and O Hare specifically provided for the transfer of additional slots to new entrant carriers in order to enhance competition at those airports. 51 Fed. Reg (March 12, 1986), available at 1986 WL (F.R.). The FAA established a lottery system in which, among other things, new entrant carriers will be given preference, consisting of the opportunity to select four instead of two slots and guaranteeing new entrants 15 percent of the available slots in the first selection sequence in each lottery. Id. In support of its decision, the agency stated: [T]here has been very little opportunity for new entry by air carriers during the past 2 years at O Hare, Washington National, or LaGuardia. There have been a number of carriers which have tried to utilize the scheduling committee process during that period of time but have not been able to obtain entry at these airports. Western Airlines, for example, has tried unsuccessfully to obtain four slots at LaGuardia for the past 12 months. Id. at The agency added that [p]roviding a solid opportunity for carriers such as Western, Presidential and Braniff to gain immediate access at the high density airports is the primary purpose of this SFAR and would serve the pro-competitive principles of the Airline Deregulation Act. Id. at 8635 (emphasis added). See also id. ( Enabling some or all of these carriers and other similar ones to establish an immediate base at the three airports covered by this SFAR, while at the same time, providing them and others a market opportunity to improve their position, is the most effective approach to increase competition by existing air carriers and strengthen the competitiveness of small air carriers ). 22

25 More recently, the FAA expressly considered the competitive impact of slot allocations in connection with its Final Rule on slot auctions at LGA. In a portion of its Final Rule entitled Impact of Auctions on Competition, the FAA stated: The Port Authority commented that auctions may exacerbate anticompetitive conditions, which would lead to reduced opportunities for new entrant and limited incumbent airlines to enter the airport. They claimed that the large incumbent carriers with the majority of slots at LaGuardia could use their relatively stronger balance sheets to outbid the smaller, non-legacy airlines that help stimulate competition.... The result could be a significant increase in airfares and a decrease in the number of destinations served.... Offering a different view, US Airways commented that there is already significant competition at LaGuardia, and new entrants have more than 50 daily roundtrips from this airport.... "Congestion Management Rule for LaGuardia Airport," 73 Fed. Reg , (Oct. 10, 2008) (Final Rule). Ultimately, the FAA disagree[d]... that the limited number of auctions contemplated in [its] rule [would] reduce competition at the airport. Id. at Nevertheless, the FAA stated that [t]o encourage greater competition and expand opportunities for entry at the airport, the FAA intends to reallocate by auction a portion of existing slots from those carriers who held the majority of slots under the HDR. Id. Furthermore, Delta s current position that the FAA may not consider the goals of promoting new airline entry and enhancing competition at slot-controlled airports is apparently a new-found belief. Last year, in connection with FAA s rescission of the final rule for LGA slot auctions, Delta specifically acknowledged FAA s authority to consider competitive impact when dealing with LGA slots: 23

26 The FAA can and should reinstate the buy-sell rule for operating authorizations at the New York Airports. The FAA s buy-sell rule is a proven and effective market-based mechanism that has worked to promote new entry and enhance competition at capped airports for more than two decades. The FAA previously adopted the buy-sell rule because it offered an effective mechanism for allocating costs in a secondary market and providing new entrants and incumbent carriers with opportunities for additional services. Comments of Delta Air Lines, Inc., June 15, 2009, at 2-3 (Docket FAA ) (emphasis added). While Delta appears to be taking a different position in the current proceeding, that does not change the fact that FAA has considered competition issues in connection with the transfer of slots for years. D. Congress Has Not Precluded the FAA From Considering The Potential Impact of a Slot Transfer on Airline Competition. Nothing in the Federal Aviation Act, its legislative history, nor any other provision in the law prohibits the FAA from considering the harm to competition that may result from a transfer of airport slots. Notably, although Delta and US Airways argue that Congress has barred the FAA from considering the anticompetitive effects of a slot transfer (see Comments, at 10-12), they do not cite a single statute or piece of legislative history that establishes such a prohibition. In support of their contention that Congress... withheld... from the FAA the authority to consider the pro-competition factors set forth in Section 40101(a), Delta and US Airways cite 49 U.S.C (d). Comments, at 11. However, that provision clearly does not prohibit the FAA from considering the Section 40101(a) factors in determining whether a proposed slot transfer is in the public interest. In fact, Section 40101(d) is irrelevant to the airlines argument because it does not relate to Subpart I or 24

27 II of the Federal Aviation Act. Rather, it deals with Subpart III. Section 40101(d) states that in carrying out subpart III of this part and those provisions of subpart IV applicable in carrying out subpart III, the Administrator shall consider the following matters, among others, as being in the public interest. (Emphasis added). As Delta and US Airways acknowledge, the FAA s authority in assigning the use of airspace and approving exemptions from airspace plans... [is] located in Subpart I (not Subpart III). Further, as the bolded language demonstrates, the public interest factors listed in section 40101(d) were not intended to be exclusive. Delta and US Airways also assert that the legislative history of the Department of Transportation Act, Pub. L. No (1966), which created the FAA and the Department of Transportation, confirms that Congress allocated safety authority, and not authority to consider the effects of competition, to the FAA. Comments, at 15. They contend that Congress wanted the FAA to receive duties... pertaining to aviation safety and that [n]othing in the legislative history suggests that the FAA would receive authority consider effects on competition. Comments, at 15. However, there is equally nothing in the legislative history that precludes the FAA from considering the clear and unambiguous policy of the Federal Aviation Act to maximize competition and deter airline anticompetitive conduct. Finally, the argument of Delta and US Airways that Congress desires that the FAA concern itself solely with safety and efficiency and have nothing to do with competition at airports is contradicted by the fact that the FAA is expressly authorized to consider matters of airline competition in carrying out other responsibilities. For example, FAA must determine whether airports that receive federal grants are acting 25

28 consistently with the federal policy of ensuring maximum competition at airports. The same section of the Federal Aviation Act that relates to assignment of airspace also provides that [a] person does not have an exclusive right to use an air navigation facility on which Government has been expended. 49 U.S.C (e). In addition, pursuant to the Airport and Airway Improvement Act of 1982, airports that receive federal grant assistance are required to provide a written assurance that, among other things, providers of aeronautical services to the public will not be given an exclusive right to use the airport U.S.C (a)(4). Federal grant assurance 23, Exclusive Rights, (Assurance 23) implements the provisions 49 U.S.C (e) and 47107(a)(4), and requires, in pertinent part, that the owner or sponsor of a federally obligated airport:... will permit no exclusive right for the use of the airport by any persons providing, or intending to provide, aeronautical services to the public.... will not, either directly or indirectly, grant or permit any person, firm, or corporation, the exclusive right at the airport to conduct any aeronautical activities......will terminate any exclusive right to conduct an aeronautical activity now existing at such an airport before the grant of any assistance under Title 49 United States Code. The FAA enforces both Sections 40103(e) and 47107(a)(4) though its authority under 14 C.F.R. Part 16 to conduct investigations into an airport s compliance with such provisions. 14 C.F.R. 16.1(a)(5). See, e.g., See, e.g., Jetaway Aviation, Inc. v. Montrose County, Docket No , 2009 WL (F.A.A.) (July 2, 2009) (FAA investigation into whether the Montrose County Colorado Regional Airport improperly 26

29 granted an exclusive right to an established full-service FBO); FAA Order A (discussing the FAA s exclusive rights policy). The prohibition on an airport s grant of exclusive rights to an aeronautical service providers relates directly to the congressional policy objective of fostering competition in the airline industry. It is not tied to FAA s role in connection with maintaining aviation safety or efficiency, and contradicts the claim of Delta and US Airways that Congress has forbidden the FAA from considering the congressional policy favoring competition at airports. The FAA also considers airline competition at airports when reviewing an application to impose an airport passenger facility charge ( PFC ), a duty which FAA has been delegated by the Secretary of Transportation under 49 U.S.C Southeast Queens Concerned Neighbors, Inc. v. FAA, 229 F.3d 387, 389 (2d Cir. 2000). The FAA may not approve a PFC application unless the airport has submitted a written competition plan detailing the airport s plans to enhance airline competition at that airport, 49 U.S.C (k), yet another case where, contrary to the Delta/US Airways contentions, the FAA goes beyond its responsibilities relating to aviation security and efficiency to consider airport competition issues. E. The FAA May Consider Airline Competition as Part of its Public Interest Analysis without Interfering with the Responsibilities of the Department of Justice. Delta and US Airways also contend that by considering the impact on competition of the proposed slot exchange, the FAA s proposed order directly and impermissibly interferes with DOJ s exclusive authority to conduct a review of the exchange under Section 7 of the Clayton Act. Delta/US Airways Comments, at

30 The airlines assert that only the Department of Justice retains authority to determine whether a particular transaction that falls within Section 7 substantially lessens competition.... Id. at 13. Not only is this assertion contradicted by the foregoing discussion, but a similar argument was rejected in City of Pittsburgh, supra, 237 F.2d 741, where the D.C. Circuit held that the Federal Power Commission improperly failed to consider the anticompetitive effects of converting a gas pipeline to petroleum. As set forth above, the D.C. Circuit emphasized that, even if the FPC lacked power to enforce the Sherman Act, if it appears that [the conversion] would tend to produce monopolization of a petroleum products market, the Commission cannot ignore that fact merely because it is an antitrust factor and such factors have been placed within the ken of the Attorney General. Id. at 754 (emphasis added). Similarly here, where the proposed slot exchange would create excessive market dominance to the detriment of the public, the FAA cannot ignore that fact merely because it is an antitrust factor and such factors have been placed within the ken of the Department of Justice. In fact, the DOJ s comments in this proceeding support the FAA s findings that the proposed transfer is anticompetitive and should be subjected to slot divestitures. VIII. FAA s Imposition of Slot Carve-Outs as a Condition of Granting a Slot Transfer Waiver Would Not Be an Unconstitutional Taking of Property. Delta and US Airways assert that FAA s requirement that the airlines divest themselves of some slots as a condition of approving the slot exchange would 28

31 confiscate Delta s and US Airways property without just compensation in violation of the Fifth Amendment of the Constitution. Comments, at 19. This argument should be rejected for several reasons. First, although Delta and US Airways maintain that [c]ourts have long held that slots are the property of carriers (Comments, at 19), they cite only three bankruptcy cases, each of which was decided more than 20 years ago. The airlines also disregard the opinion of the Government Accountability Office in 2008 that airport slots are not property.... Nor are they the mere product of FAA regulation; they are FAA regulation. GAO Letter to Congress, September 30, 2008, regarding Federal Aviation Administration Authority to Auction Airport Arrival and Departure Slots and to Retain and Use Auction Proceeds, at 8 (emphasis in original). And, as the February 18 Notice points out, the FAA s High Density Rule notes that slots do not represent a property right but represent an operating privilege. Thus the issue of whether an airport slot constitutes property protected by the Fifth Amendment is, from Delta s and US Airways perspective, at best unsettled. Second, regardless of whether an airport slot is a protected property right, it is clear that the FAA s requirement that the airlines divest themselves of some of the slots in order to obtain approval of the transfer of other slots is not an unlawful taking of any such property right. Delta and US Airways rely on Nollan v. California Coastal Comm n, 483 U.S. 825 (1987), in which the state coastal commission refused to issue a building permit for the conversion of a beach bungalow into a larger home unless the owners granted an easement for the public to walk across their land in order to visit the public beach. The Supreme Court held that the imposition of such a condition constituted an 29

32 unlawful taking unless the government provided just compensation for the granting of the easement. However, the Court made it clear that the condition attached to issuance of the building permit would not have constituted a taking if the government could have prohibited the construction of the new house altogether and the condition substituted for the prohibition... [would] further the end advanced as the justification for the prohibition. Id. at The Court explained that if there was no essential nexus between the condition attached to the issuance of the permit and a legitimate justification for prohibiting the new construction altogether it would be the same as if California forbade shouting in a crowed theater, but granted dispensations to those willing to contribute $100 to the state treasury. While a ban on shouting fire can be a core exercise of the State s police power to protect the public safety, and thus can meet even our stringent standards for regulation of speech, adding the unrelated condition alters the purpose to one which, while it may be legitimate, is inadequate to sustain the ban. Id. at 837. The Court added that unless the permit condition serves the same governmental purpose as the development ban, the building restriction is not a valid regulation of land use but an out-and-out plan of extortion. Id. In the case before it, the essential nexus did not exist because the government justification for refusing to issue the permit (to preserve views of the ocean) was not related to the justification for requiring the easement (to allow the public to reach the beach). 30

33 The result in Nollan is inapposite here because in conditioning its approval of the proposed slot exchange on the divestiture of some of the slots, the FAA is furthering the exact same end as it would if it were to prohibit the slot exchange altogether. FAA s justification for requiring the divestiture of 20 pairs of slots at LGA and 14 pairs of slots at DCA is to create new and additional competition at the airports to counterbalance the potential harm to consumers from otherwise enabling Delta and US Airways to use their new slot acquisitions to entrench themselves further at those respective airports. FAA Notice, at 1. In some situations, the FAA might determine that a proposed slot transfer would impermissibly enable an airline at an airport to possess market or monopoly power at that airport, and in those circumstances might refuse to allow any of the slots to be transferred. In other situations like those present here the FAA is willing to allow most of the slots to be transferred, but that decision is conditioned on the airlines agreeing to relinquish some of their slots. Thus, Nollan is satisfied because the condition substituted for the prohibition on any slot transfer is predicated on the same governmental justification would apply in the case of a complete ban. Delta and US Airways contend that the Nollan test is not met here because, according to them, the FAA may only prohibit slot transfers to prevent severe congestion-related delays and to ensure efficient use of airspace. Comments, at 21. However, this argument entirely ignores the FAA s ability to consider the anticompetitive effects of a proposed slot transfer in determining whether the transfer is in the public interest. See Section VI, supra. Third, an unlawful taking only occurs if the property owner does not receive just compensation for the property. In its Notice, the FAA proposes that the divested slot 31

34 interests be sold by the carriers and that the proceeds of the sales be collected and retained by the carriers. Notice, at 18. FAA explained that by proposing to allow divestitures of the slot interests through sales, we are permitting the carriers to monetize their interests. Id. at 19. Although the airlines would need to transfer the slots to airlines that are eligible under the terms of the final action taken by the FAA in this proceeding (id.), there is no record evidence before the FAA which establishes that the pool of eligible carriers is so small that they will not be motivated to offer fair market value for the slots. For these reasons, the argument of Delta and US Airways that the conditional divestiture of slots constitutes an unlawful taking has no merit. CONCLUSION For the reasons given in our Initial Comments and these Reply Comments, Southwest urges the FAA and DOT to reject Delta/US Airways six-party slot transfer proposal entirely, and to either reject the original Delta/US Airways slot transfer proposal entirely or to impose adequate divestitures of slots on the terms described in our comments. Respectfully submitted, April 5, 2010 Washington DC Robert W. Kneisley Associate General Counsel Southwest Airlines Co. 32

35 ATTACHMENT A

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37

38 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION Docket No. FAA ECONOMIC ANALYSIS OF THE REVISED DELTA/ US AIRWAYS PROPOSED SIX-PARTY TRANSACTION AND PUBLIC INTEREST ALTERNATIVES Reply Analysis Prepared by: Dr. Brian M. Campbell Charlottesville, VA President April 5, 2010

39 TABLE OF CONTENTS Section Title Page 1.0 Introduction Summary of Conclusions The DL/US Six-Carrier Transaction is Anti-Competitive Allowing Delta and US Airways to Hand Select Their Buyers Is Anti-Competitive Hubbing at Slot Controlled Airports Forecloses Effective Competition in Local High Yield O&D Markets DL/US Have Constructed an Outcome That Has Little Competitive Benefit To Minimize Anti-Competitive Outcomes and Inject Maximum Competition the DOJ Has Consistently Advocated Market-Based Auctions for Divestiture of Slots and Other Scarce Public Assets A Pro-Competitive Outcome Would be Achieved With a Free-Market Auction Acquisition of the Carved-Out Slots by Southwest Airlines is a Better Solution for Competition and the Consumer The Consumer Benefits if Southwest Operates the Carved-Out Slots are Significant A More Robust Method for Estimating Consumer Benefits From Southwest Services at LGA and DCA Shows Even Greater Results There Are More Pro-Competitive Methods for Solving US Airways Financial Problems at LGA The Three Airports in New York and Washington Each Serve Separate and Distinct Markets...21 i

40 TABLE OF CONTENTS EXHIBITS: Exhibit R-1 Exhibit R-2 Exhibit R-3 Exhibit R-4 Exhibit R-5 Exhibit R-6 Exhibit R-7 Exhibit R-8 Exhibit R-9 Delta/US Airways Six-Carrier Deal Reduces the FAA s Proposed Carve-Outs by 68% at DCA and 25% at LGA The Six-Carrier Deal Would Not Reduce Delta s Dominant Slot Position at LGA The Six-Carrier Deal Would Not Reduce US Airways Dominance at DCA The Splintered Carve-Outs That DL/US Have Proposed Will Have No Meaningful Competitive Impacts AirTran Has A History of Abandoning Routes At LGA and DCA Spirit Has A History of Abandoning Routes At LGA and DCA WestJet Has A History of Abandoning Routes At LGA Hubs at Slot Controlled Airports Waste Scarce Public Resources Percentage of Domestic Departures Operated by Regional Jets and Turboprops at Delta and US Airways Hubs Exhibit R-10 Delta s Current Hubs Have Smaller Average Aircraft Sizes than Delta at LGA Exhibit R-11 The Benefits Claimed By DL/US at LGA Are Entirely Related to US Airways Current Inefficient Use of Its Slots Exhibit R-12 US Airways Average Aircraft Size at LGA is 45 Seats Smaller than Delta and Lower than Most Other Hubs Exhibit R-13 Southwest Efficiently Serves its Airports via the Use of B737 Aircraft Exhibit R-14 Hub and Spoke Systems Present A Paradox: They Are The Most Effective Way To Fill An Airplane But The Most Expensive Way To Carry A Passenger From Origin To Destination Exhibit R-15 Exhibit R-16 A Simple Diagram Illustrates the Cost Problem with Hubs Delta and US Airways Operate Almost Entirely Hub and Spoke Systems So They Cannot Price LGA and DCA As If All Passengers Move Nonstop ii

41 TABLE OF CONTENTS Exhibit R-17 Exhibit R-18 Exhibit R-19 Exhibit R-20 Exhibit R-21 Exhibit R-22 Exhibit R-23 Exhibit R-24 Exhibit R-25 Exhibit R-26 Exhibit R-27 Exhibit R-28 Exhibit R-29 Exhibit R-30 Exhibit R-31 US Airways Dominant Share at DCA Allows it to Charge A Price Premium Above Its Domestic Fare Structure The FAA s Slot Divestiture Restrictions Would Preclude A Sale to WestJet if it Concludes a Codesharing Deal with Delta The Original Transaction Will Increase the LGA HHI By 813 Points and the Six-Way Deal Would Not Alleviate Concerns The Original Transaction Will Increase the DCA HHI By 717 Points and the Six-Way Deal Would Not Alleviate Concerns WestJet Cannot Compete in Domestic Markets, and DL and US Do Not Compete In WestJet s Transborder Markets The Most Pro-Competitive Outcome Would Be Southwest Obtaining All Slots if The Carve-Outs Are Limited To The 20 LGA and 14 DCA Pairs Proposed By FAA Southwest Airlines Has Greater Resources and Financial Stability than All of the Partners Selected by DL/US Combined The DL/US Claimed Benefits Result In Either Illogical or Highly Unprofitable Results With the FAA s Carve-Outs Southwest Would Create Greater Annual Fare Savings Than All of the Consumer Benefits Claimed by DL/US Many Airlines Use Multiple Airports in the New York and Washington Areas to Serve the Same Destination Because They Regard Each Airport as a Separate Market Destinations Served by the Same Carrier Via Multiple New York Area Airports Destinations Served by the Same Carrier Via Multiple Washington Area Airports Only Three Destinations Are Served by the Same Carrier from Both Chicago Airports Only Two Destinations Are Served by the Same Carrier from Both Houston Airports JetBlue s Fares at JFK Have Not Disciplined Continental s Fares at EWR or Delta s Fares at LGA in Domestic Markets iii

42 TABLE OF CONTENTS Exhibit R-32 Southwest s Fares at BWI Have Not Disciplined Domestic Legacy Carrier Fares at DCA or IAD APPENDICES: Appendix R-1 Appendix R-2 Appendix R-3 Appendix R-4 Summary of Consumer Surplus Benefits from Southwest Illustrative Service in 7 Slot-Restricted Markets Lower Fares Would Increase Passenger Volume Summary of Consumer Surplus Benefits from Southwest Illustrative Service in 7 Slot-Restricted Markets Consumer Surplus Illustration Appendix R-5 CO at EWR Yield Curve for the Year Ended September 2009 Appendix R-6 B6 at JFK Yield Curve for the Year Ended September 2009 Appendix R-7 DL at LGA Yield Curve for the Year Ended September 2009 Appendix R-8 UA at IAD Yield Curve for the Year Ended September 2009 Appendix R-9 WN at BWI Yield Curve for the Year Ended September 2009 Appendix R-10 US at DCA Yield Curve for the Year Ended September 2009 Appendix R-11 US System Yield Curve for the Year Ended September 2009 iv

43 ECONOMIC ANALYSIS OF THE REVISED DELTA/ US AIRWAYS PROPOSED SIX-PARTY TRANSACTION AND PUBLIC INTEREST ALTERNATIVES 1.0 Introduction On March 22, 2010, Southwest Airlines Co. ( Southwest ) appended an analysis prepared by Campbell Aviation Consultants ( CAC ) to its comments filed in FAA Docket No that examined the economic consequences of the Delta/US Airways proposed transaction and the DOT/FAA s tentative findings ( CAC Analysis ). In preparing its Analysis, CAC did not have access to the DL/US Compass Lexecon studies or the DOT/DOJ presentation materials that the parties placed into the docket on March 22. CAC has now reviewed heavily redacted versions of these materials, as well as the DOJ Comments that were filed in this docket on March 24. CAC s reply analysis presents the findings of its updated and expanded economic analysis, with particular focus on the potential anti-competitive effects of the new six-carrier deal created by DL and US since their original filing. CAC addresses herein a number of underlying problems with the DL/US proposals and offers a suggested direction toward a more procompetitive solution. 2.0 Summary of Conclusions CAC has examined the redacted documents provided by DL/US and the filings of other relevant parties. This review supports the findings, conclusions, and recommendations presented in our report dated March 22, Analysis of the additional March 22, 2010 DL/US documents leads to the following conclusions: 1

44 The DL/US revised six-carrier proposal is anti-competitive in several respects. The proposed slot sales to the four partner carriers are insufficient to alleviate concerns over dominance and the potential for anti-competitive behavior at LGA and DCA. The number of proposed carve-outs is far fewer than FAA has recommended. The DL/US revised proposal would allow Delta to increase its share of LGA slots from 25% to 47%, only 3% less than the carriers original proposal; and US Airways to increase its share of DCA slots from 47% to 55%, just 2% less than the original proposal. Both carriers would enjoy dominant positions in slot controlled airports - Delta at LGA would be more than twice as large as the next largest operator of slots, and US Airways would be nearly four times larger than the next largest operator (American in both cases). If a proposal with carve-outs is ultimately approved, then DL/US should not be allowed to hand pick their competitors (buyers), nor should they be able to influence the outcome of an FAA-managed free-market auction. The DL/US revised proposal does not measurably reduce slot control or dominance at either airport, and would only marginally lessen the increase in HHI values. Hubbing at LGA and DCA will foreclose competition while dramatically underutilizing slot capacity, disadvantaging millions of local passengers, and denying the airport authorities of much-needed revenue streams. In slot constrained airports, hubs are especially wasteful of scarce capacity. By their structural nature, hubs (a) operate very small aircraft, on average, (b) produce high network and seat-mile costs which require high compensatory fares, (c) facilitate control of the local passenger market through frequent flyer and corporate loyalty programs, and 2

45 (d) protect the hub carrier by virtue of the slot control system s barriers against new entry and competition. There are more pro-competitive ways to achieve financial relief for US Airways from its unprofitable operation at LGA without creating dominance and market power at two of the country s major airports. Southwest Airlines could play a significant role in the solution for US Airways, while at the same time bringing enormous benefits to the traveling public and the local economies of New York and Washington. If Southwest were to acquire 20 LGA slot pairs and 14 (or more) pairs at DCA, consumer benefits as a direct result of Southwest s fares, and the well recognized Southwest Effect, would exceed $400 million annually, or almost three times the benefits claimed by DL/US for their original proposal with no carve-outs. A pro-competitive outcome requires a free-market slot and facilities auction as the DOJ has consistently recommended in slot divestiture matters and the sale of other scarce public assets. The evidence is clear that the three airports in the New York/Newark and Washington/Baltimore regions are not economic substitutes for each other. 3

46 3.0 The DL/US Six-Carrier Transaction is Anti-Competitive CAC agrees with both the DOT/FAA and DOJ findings regarding the anti-competitive outcomes of the original DL/US proposal. As CAC stated in its March 22 Analysis, [t]he slot swap as proposed, or as modified by the FAA, would fundamentally alter the competitive dynamics of LGA and DCA by creating one dominant carrier at each airport and effectively locking out future competition. 1 On March 22, Delta and US Airways announced a revised transaction that includes the sale of five slot pairs each to AirTran, Spirit and WestJet at LGA with a grace period of 24 to 28 months before transfer. This tentative carve-out contains 25% fewer divestitures than FAA s proposal (20 slot pairs). At DCA the applicant s proposal to divest only 4.5 slot pairs is 68% smaller than DOT/FAA s proposal (Exhibit R-1). As shown in Exhibits R-2 and R-3 the proposed six-carrier deal would have little or no effect in reducing Delta s dominance at LGA, or US Airways extraordinary market power at DCA. 3.1 Allowing Delta and US Airways to Hand Select Their Buyers Is Anti-Competitive In its Solicitation of Comments, the FAA proposed three alternative methods for disposing of carved-out slots. All three fall short of allowing a free market auction process to select the ultimate winner. However, method 2 can be modified to create a satisfactory outcome if DOT/FAA ensure that DL and US cannot pick the winning bidders, or reject any qualified bidder simply because they do not want to compete with that airline in the future CAC Analysis, p. 1. Ibid, pp

47 Instead of following an auction method, however, DL and US hand selected four buyers among whom they would spread five slot pairs each. For all of the reasons stated in the CAC Analysis it is clear that DL and US do not want to compete at LGA with Southwest, 3 and they do not want Southwest to gain entry to DCA. This makes strategic sense because Southwest would be a much more formidable competitor than any, or all, of their four partner airlines. Moreover, the division of 20 slot pairings into 5-pair clusters, each sold to a different carrier, is a device to minimize other carrier competition (Exhibit R-4). As stated in the CAC Analysis, 20 or more slot pairs in the hands of a single low-fare carrier would provide a more robust and effective competitive outcome than a few slots sprinkled across multiple buyers. The six-party agreement is a preemptive move and its purpose is not to maximize the returns from selling slots, but to minimize the future competition that the carriers will face. In contrast, CAC has recommended a 40 to 50 pair slot carve-out at LGA and a 20 slot pair carve-out at DCA to inject meaningful multiple carrier/multiple market low-fare competition. 4 DL/US selected three smaller carriers who have all failed in their previous attempts to become established at LGA (Exhibits R-5, R-6 and R-7) and one carrier without existing service to provide five round trips per day at DCA which would give it a small presence at the airport Hubbing at Slot Controlled Airports Forecloses Effective Competition in Local High Yield O&D Markets Delta has stated repeatedly that its objective in acquiring a large number of US slots is to build a New York hub at LGA. The CAC Analysis demonstrates the necessity of using small aircraft to feed hubs and the inefficiency in slot utilization that necessarily results. By their very Beyond the eight daily round trips Southwest currently operates. CAC Analysis, pp If JetBlue obtains five slot pairs in a transaction with Delta and another eight from American, it would still have only 3% of DCA s 417 slot pairs. 5

48 nature, hubs process large volumes of connecting passengers who have no reason to be at that airport except to change planes. Typically at U.S. hubs, connecting passengers are at least equal to the volume of local O&D passengers. Hubs can produce significant public benefits, but at slot controlled airports they waste scarce public resources on a massive scale (Exhibit R-8). The average aircraft size 6 at Delta s seven hubs ranges from 69 (CVG) to 107 (ATL). 7 This is because at the carrier s seven hubs regional jets and turboprops account for between 53% (ATL) and 85% (CVG) of its total departures (Exhibit R-9). 8 Currently, Delta s LGA schedule shows 107 seats per departure (Exhibit R-10). If Delta doubles its LGA operation as it proposed originally, or by 47% under the six-party deal, 9 it is likely that Delta s average departure will decline from 107 seats (Exhibit R-11). This would increase the inefficient utilization of LGA slots, and it would foreclose expansion and entry by others. 10 The exact same phenomenon exists at the hubs of US Airways and other legacy carriers (Exhibit R-12). In contrast, Southwest does not operate hubs and its average seats per departure ranks among the very highest in large domestic airport operations (Exhibit R-13). Southwest does not operate regional jets or turboprops, nor does it have contracts with commuter carriers to provide regional aircraft services. By their very nature hub operations are high cost. They may be an effective method to fill an airplane at the hub, but they are the most expensive way to carry a passenger from his/her point of origin to destination. This is because the trip involves two take-offs and landings plus circuitous flying miles (Exhibits R-14 and R-15). And the additional costs cannot be ignored by Seats per domestic departure. See Exhibit R-10. At US Airways hubs the percent of its total departures operated with RJ s and turboprop ranges from 31% at PHX to 78% at PHL and 88% at LGA (Exhibit R-9). After AirTran, Spirit and WestJet are provided five slot pairs each. The term fortress hub has real market significance in the context of anti-competitive behavior. 6

49 the hub carrier if it hopes to be profitable across its system (Exhibit R-16). This raises the costs for everyone traveling in hub and spoke networks. At hub locations the market tends to become captive to the hub carrier. Because it offers the most service to the most places, and its frequent flyer program participation and corporate loyalty programs are of major significance to local travelers, it can usually command premium local prices (fares) to offset the extraordinarily high costs of the hub network. For through market (connecting) traffic, the hub carrier competes with many other available connecting options. But the local traveler has few, if any, non-stop alternatives. If it is a hub-to-hub market, typically both hub carriers maintain relatively high fares. If Delta is able to establish the size and structure of a hub system at LGA that it seeks from this transaction, CAC would expect LGA fares to rise, and not fall or remain as they are today. Delta s average yield at LGA (adjusted for stage length differences) should increase by virtue of its conversion to a hub and spoke operation. This will be true whether Delta obtains 140 slot pairs from US Airways, 120 slot pairs as proposed by the DOT/FAA and DOJ, slot pairs as recommended by Southwest, or 125 slot pairs as laid out by DL/US in their latest six-carrier transaction. The mere creation of a Delta hub by almost a doubling of slots to a share of 46% to 50% (CAC Analysis, Exhibit 1), or 47% under the DL/US proposal, would restrict competition significantly; it would exacerbate the already inefficient use of slots at LGA; and it would likely cause fares to rise. 11 The best option for the traveling public is to see the DL/US transaction denied, or to ensure sufficient slot carve-outs are imposed to inject effective new low-fare competition into LGA. Instead, Delta and US Airways have sought to avoid effective 11 It is instructive to note that none of the Compass Lexecon traffic simulation comes from lowering fares. Instead, it is all related to claims about service improvements. 7

50 competition by structuring a revised proposal wherein they have already determined the outcome will not be robust offsetting competition. As one of the justifications for their deal, DL/US claim that Delta would add a net addition of 4.4 million annual seats to its LGA schedule with its original swap proposal. 12 This is of little consequence or public benefit. As DOJ stated in its comments [t]he appropriate baseline for measuring increased capacity and traffic is not US Airways present inefficient use of LGA slots In fact, if Delta does increase its annual seats by the amount it has stated, it its average seats per departure would actually decline from its current level (Exhibit R-11). In their comments filed on March 22, DL/US stated the capacity problem quite succinctly, [b]ecause all of New York s three airports are slot constrained, up gauging aircraft is the only way to significantly expand output and increase efficiency 14 (Emphasis supplied). However, if the transaction goes through Delta s utilization of LGA slots would actually be lower than what is achieved by its current scheduling practices. Delta and US Airways have correctly identified the problem: a gross underutilization of scarce slot resources at both LGA and DCA. However, allowing the two carriers to create hubs and even more dominant positions at these two airports will likely exacerbate the problem instead of providing a solution. The potential marginal changes at DCA are less, only because US already has a dominant 47% share of the total airport slots. However, it seeks to increase its slot share to 55% after a transfer of 4.5 slot pairs to JetBlue. 15 US Airway s fares are already extremely high at DCA (Exhibit R-17) and its average aircraft size is 92 seats (CAC Analysis, Exhibit 15). 16 Regardless See DL/US Comments, March 22, 2010 (hereafter DL/US Comments ), p. 25. See DOJ Comments, March 24, 2010 (hereafter DOJ Comments ), p. 18. DL/US Comments, Appendix B, p. 14. It should be noted that the DOT/FAA recommended a 14 slot-pair carve-out at DCA and DL/US came back with a proposal to transfer just 4.5 pairs (32% of DOT/FAA s number). 16 This includes approximately 27% of US slots that are restricted to a maximum of 76 seats (commuter slots). In its March 24 Comments the DOJ estimated US Airways average seats per departure at DCA using only air carrier 8

51 of which carve-out solution is ultimately selected, US Airways hub operation at DCA will be expanded to the detriment of competition and consumers. The DL/US proposal to sell 4.5 slot pairs to JetBlue will not lessen the anti-competitive outcome of the transaction to any meaningful degree. If the recently announced slot swap between JetBlue and American is consummated, JetBlue would still have only 3% of DCA s slots, compared to 55% for US Airways (Exhibit R-3). CAC has already concluded that a single low-fare carrier obtaining 14 to 20 DCA slot pairs in a free-market cash auction will provide a reasonable beginning for real competition. With adequate slots, Southwest would bring significant fare reductions to DCA passengers and utilize its slots very efficiently. The current anti-competitive conditions will only worsen unless a material number of slots are made available to low-fare carriers at DCA from US Airway s portfolio. CAC has recommended 20 slot pairs as a reasonable carve-out. 3.3 DL/US Have Constructed an Outcome That Has Little Competitive Benefit DL/US propose to sell a total of 15 slot pairs at LGA; five each to AirTran, Spirit and WestJet. 17 A fractured solution such as this will have little competitive effect because no one carrier can compete in more than one or two markets (Exhibit R-4). DOJ has raised concerns about market (airport) concentration as demonstrated by the changes in HHI values resulting from the DL/US proposed transaction. 18 Exhibit R-19 shows slots at 98 seats. Sixty-three percent (63%) of US s departures at DCA are performed with RJ s and turboprops. It was not possible for CAC to determine which of these flights use commuter slots and which ones use air carrier slots. If CAC had this information it would have allocated those air carrier slots with the smallest US aircraft to the carve-out pool. This would have been well below 92 seats on average. Moreover, CAC assumed the same 75% load factor for both US and Southwest even though US s average load factor at DCA was only 67% for the 12 months ended November, Consequently, CAC s estimate of the annual fare savings that Southwest would produce for DCA passengers ($109 million) is conservative (CAC Analysis, Exhibit 10). 17 WestJet will no longer qualify as an eligible carrier under DOT/FAA s Solicitation of Comments if it enters into a code-sharing relationship with Delta, as reported in the Press (Exhibit R-18). 9

52 that the original deal, as proposed, would increase the HHI at LGA by 813 points in a market that is already highly concentrated today. 19 The HHI increase in the revised DL/US proposal is 566, which is still well above the DOJ s threshold for concern. The proposed DL/US six-carrier transaction would do almost nothing to lessen this concentration or alleviate concern over enhanced market power (Exhibit R-2, R-3, and R-1). The same potential increase in concentration and enhanced market power is evident at DCA by comparing the before and after HHI values. Currently the HHI at DCA is 2873 and the original DL/US proposal would increase it by 717 points (Exhibit R-20). The revised proposal would increase the HHI by 597 points, or 120 points less, which is not a meaningful difference in an already highly concentrated market. In the case of both LGA and DCA, the DOT/FAA s suggested carve-out solution would do more to lessen the increase in HHI values than the revised proposal of DL/US (Exhibits R-19 and R-20). This is especially true at DCA where DL/US propose to divest only 4.5 pairs of slots which is 68% fewer than the FAA has recommended (14 pairs). There is reason to expect that all three carriers could fail at LGA just as they have in the past (Exhibits R-5, R-6 and R-7). Between May 1998 and February 2009, AirTran withdrew from LGA-PIT, LGA-ROC, LGA-SRQ, and LGA-TYS (Exhibit R-5). 20 Today, AirTran operates 19 daily departures from LGA to six destinations. As a party to the latest six-carrier slot agreement, AirTran would receive five slot-pairs from US Airways that it can begin using within two years after the transaction is concluded. Similarly, Spirit has previously failed in LGA-MLB, LGA-PBI, LGA-RSW, LGA-TPA and three DCA markets. It abandoned these markets between January 2001 and January DOJ Comments, p. 5. Current HHI = 2173 (Exhibit R-19). In addition, AirTran has failed in slot controlled DCA markets (e.g., DCA-FLL and DCA-PBI). 10

53 (Exhibit R-6). Currently, Spirit operates 11 daily departures at LGA to three destinations. Like AirTran, Spirit has a 24-month grace period to acquire its slots from US. WestJet served New York-Toronto (LGA-YYZ) for a brief period between September 2004 and July 2005, and then it left the market (Exhibit R-7). If WestJet is provided slots, it would not compete with DL or US because it would likely serve LGA-YYZ, or possibly split its frequencies between Toronto and either Montreal or Ottawa. Neither DL nor US compete on these routes, and as a foreign carrier WestJet is precluded from competing in U.S. domestic markets (Exhibit R-21). By the terms of the deal, WestJet would have an even longer 28-month grace period to conclude its transaction with US. The grace periods are excessive for only five slot pairs. They have the effect of preserving Delta s dominance for up to two years, just as if there were no carve-outs at all. Under these terms Delta would have time to complete its hub development, strengthen its New York based customer loyalty, and solidify the barriers to future entry or expansion by low-fare carriers. In the DL/US Comments, the carriers argued that the FAA s proposed alternative methods for slot divestitures would be a taking of property because they would not be able to obtain fair market value for their slots. 21 However, DL/US offered no public evidence of what they, or an independent appraiser, would estimate the slots are worth. Nor have they disclosed the prices to be paid, if anything, by AirTran, Spirit, WestJet and JetBlue pursuant to the sixcarrier deal. In all likelihood DL and US have been willing to sell 15 LGA slot-pairs and 4.5 DCA slot-pairs to the four partners at prices below current market value. The DL/US proposal for slot divestiture and new competition at DCA is even less robust than their proposed LGA solution. There are presently 417 total slot-pairs at DCA, and 21 See DL/US Comments, pp

54 US Airways currently has 194. Approximately 73% of US s slots, or 142 pairs, are air carrier slots. If DL gives up 42 pairs, 4.5 to JetBlue and 37.5 to US, then US would have pairs instead of 184 pairs under the carriers original proposal. This is 97.6% of the original deal with no practical dilution to US s potential dominance at DCA. Moreover, JetBlue is under no time commitment to begin service at DCA. 22 As a practical matter, there is no reduction in the anti-competitive outcomes that are foreseen by DOT/FAA, DOJ and Southwest. If the recently announced slot swap between JetBlue and American is consummated, it will not reduce US Airways dominant position at all because JetBlue would receive slots from American, not US Airways. In this way, it will actually reduce the size of the second largest carrier at DCA (American) which would already be four times smaller than US Airways. It could also weaken competition between JetBlue and American at DCA and in New York as their commercial relationship evolves. In the six-way deal, the proponents, DL and US, have essentially rejected DOT/FAA s proposed remedy at DCA. The six-page Joint Comments filed on March 22 by the six participating airlines are silent with respect to what happens if the slots are never transferred to one or more of the four acquiring carriers. Do they revert back to US in the case of LGA, and to DL in the case of DCA; must they be acquired and then resold to other carriers; do US and DL have options to re-acquire them at any time? An affirmative answer to any of these questions would render the proposed six-carrier transaction even more anti-competitive. The six-carrier transaction would restrict competition to a much greater degree than the solution proposed by FAA. The New York and Washington markets would suffer less choice, higher fares, and very little competition to Delta or US Airways from low-fare carriers. In the 22 See Comments filed by the six carriers, March 22, 2010, in this docket. 12

55 revised DL/US proposal the carriers have attempted to circumvent the DOT/FAA s proposed solution and have fashioned a transaction to exclude Southwest, and to diminish any hope of real competition in the LGA and DCA markets. 4.0 To Minimize Anti-Competitive Outcomes and Inject Maximum Competition the DOJ Has Consistently Advocated Market-Based Auctions for Divestiture of Slots and Other Scarce Public Assets For many years the Department of Justice has been steadfast in its support of free-market auctions of scarce public resources. CAC agrees with DOJ s reasoning. It is only in this manner that assets like airport slots can find their way to the operator who will put them to the highest and best use for the public. As stated in the March 22 CAC Analysis, in order to maximize consumer benefits, the auction process must award the slots to the highest cash-only bidder, and the seller(s) must have no ability to reject a higher bid of one carrier in favor of a lower bid from another carrier. The process should be managed by the FAA, and once the ground rules are agreed upon there should be no interference with the free market by the sellers. CAC believes that DOJ agrees with these principles in the present case. To support this belief, CAC offers a few quotations from prior DOJ papers and filings: This paper advocates the use of market mechanisms, specifically slot auctions, to promote efficient usage of airport capacity, reduce airport delays, and more generally promote competition. And,... Key to this process is the reliance on competitive market mechanisms to efficiently allocate airport resources. DOJ paper, Proposal For a Market-Based Solution to Airport Delays, October,

56 DOJ generally favors a market-based allocation system that would allow entrants to purchase divested slots with few strings attached. DOJ Comments in the U.S. U.K. Alliance Case, Docket OST , December 17, 2001 To this end, DOJ urges the FAA to rely to the maximum extent possible on marketbased solutions and support the adoption of an auction mechanism for allocating capacity at LGA. And, Market-based mechanisms (like creating a recurring auction market for slots) may increase the ability of new entrants to gain access to LGA. An administrative system, on the other hand, would not assure that the slots a scarce resource are put to their highest valued use. It would also be less effective at permitting greater competition at LGA. DOJ Comments in Notice of Alternative Policy Options for Managing Capacity at LaGuardia Airport and Proposed Extension of Lottery Allocation, Docket No. FAA , pages 1-2. The goal in assigning licenses to any such new spectrum [broadband] designated for commercial services should be to ensure that it generates the greatest ultimate benefits to the consumers of those services. When market power is not an issue, the best way to pursue this goal in allocating new resources is typically to auction them off, on the theory that the highest bidder, i.e., the one with the highest private value, will also generate the greatest benefit to consumers. DOJ, Ex Parte Submission to the FCC, Economic Issues in Broadband Competition, A National Broadband Plan For The Future, GN Docket No , January 4, 2010, page 23. The FAA should modify its proposed method of slot sale to use of a multi-bid auction to ensure it maximizes the public good that results from the slot divestitures. 5.0 A Pro-Competitive Outcome Would be Achieved With a Free-Market Auction The possibility that Southwest could win the bidding for most or all of the carve-out slots would produce a highly desirable outcome for the public. Southwest has expressed a strong 14

57 interest in acquiring most or all of these slots. As the world s premier low-fare carrier the airline will bring the Southwest Effect to New York s LGA market and to the Washington market through DCA. Southwest has the resources and staying power to survive and hopefully expand its presence at both airports in the future. 5.1 Acquisition of the Carved-Out Slots By Southwest Airlines is a Better Solution for Competition and the Consumer As shown in the accompanying exhibits, and in the CAC Analysis of March 22, entry by Southwest with significant slots at LGA and DCA (e.g., 20 pairs at LGA and 14 at DCA) will provide the public with a substantially more pro-competitive solution: Southwest s on-line network incorporating LGA and DCA is far more extensive, and the benefits to flow traffic much greater, than any of the four DL/US partners, either individually or combined (Exhibit R-22). Southwest generates many times more revenue than any of the four DL/US partners. Southwest s fleet is also 3.6 to 18.8 times larger than each of the four partners (Exhibit R-23). 5.2 The Consumer Benefits if Southwest Operates the Carved-Out Slots are Significant CAC estimates that over the long run, Southwest will achieve load factors of approximately 75% in these new markets. 23 This is the assumption used for all carriers in CAC s fare savings analysis (CAC Analysis, Exhibits 7-10). However, since the Compass Lexecon studies on the original slot swap proposal were received on March 22, it is now evident that the incremental seats and passengers estimated for DL and US produce load factors of only 23 Southwest s system load factor for calendar year 2009 was 72% and at LGA its fourth quarter 2009 load factor was 77%. 15

58 29.5% at LGA and 13.2% at DCA (Exhibit R-24). Load factors of this magnitude will dictate the use of smaller planes and corresponding higher fares. In the CAC Analysis submitted with Southwest s Initial Comments, we estimated the fare savings that the LGA and DCA markets will receive based on certain analytical assumptions. Specifically CAC compared Southwest s yield per RPM at Delta s average passenger trip length at LGA for all non-stop markets over 250 miles. The estimated fare savings is $84 million. 24 At DCA the same procedure was followed and the estimated annual fare savings is $109 million. 25 Correspondingly, the consumer benefits from the entire original DL/US proposal, as estimated by Compass Lexecon on behalf of the carriers, are only $153 million for both LGA and DCA combined. If the FAA s recommended slot carve-outs are divested from Delta and US Airways slot holdings, the residual benefits from the remaining slots that would be exchanged in the DL/US transaction would be $126 million based upon Compass Lexecon s model (Exhibit R-25). If the Southwest annual benefits of $193 million are added to the residual DL/US benefits, the combined total consumer benefits would be $319 million. Clearly, this outcome is far superior to the DL/US transaction without Southwest Airlines. It is important to note that Compass Lexecon s estimate of benefits derives solely from an estimate of service stimulation; that is, increased passengers traveling on DL and US due only to factors considered to represent service improvements, such as increased frequency or aircraft upgrades from turboprop to larger jets. Then Compass Lexecon monetizes this traffic increase by relating it to an equivalent amount of traffic stimulation that would result from price reductions using an assumed price elasticity function. However, DL/US do not propose any fare CAC Analysis, Exhibit 8. CAC Analysis, Exhibit

59 reductions. By the very nature of a hub system design, 26 the carriers are permanently locked into a high cost structure compared to point-to-point carriers like Southwest. Southwest operates a single aircraft type with high rates of daily utilization. It does not operate hub schedules, nor does it interline connecting traffic. If Southwest acquires slots at LGA and DCA it will improve services for travelers at both airports. CAC has not estimated Southwest s service stimulation. Rather, CAC has estimated the consumer benefits resulting from Southwest s lower fares. DL/US claim no benefits from lower fares. In fact, CAC believes the creation of a new Delta hub at LGA, and the expansion of US Airways hub at DCA, will require both carriers to raise fares to recoup their higher network (hub) costs. Such an action would create consumer disbenefits that could easily eliminate any benefits from service improvements. 5.3 A More Robust Method for Estimating Consumer Benefits From Southwest Services at LGA and DCA Show Even Greater Results An even more complete and accurate method for estimating consumer benefits from Southwest s low-fare service is to prepare the analysis on a route-specific basis and include the value of traffic stimulation. To do this, CAC selected four hypothetical markets at LGA and three at DCA, assuming Southwest obtains 20 slot pairs at LGA and 14 pairs at DCA. 27 All seven routes make strong intuitive sense to CAC, but many other combinations of routes to Southwest cities could logically be selected. The analysis presented in Appendix R-1 compares Southwest s expected average fare by market, with the average fare reported by the incumbent carriers for the 12 months ended Exhibit R-15. It should be noted that these routes were selected by CAC solely for the purpose of this analysis. They do not represent any route selection or decisions by Southwest. 17

60 September 30, Stimulation is derived by applying a coefficient of elasticity with respect to price of 1.2. This coefficient has been estimated in previous FAA research (Appendix R-2), and in many previous analyses of the Southwest Effect. CAC has found markets to be elastic in their response to Southwest s pricing. A value of 1.2 is a reasonable average over a wide range of markets and studies. For example, during the 2006 debates and U.S. Senate hearing regarding repeal of the Wright Amendment, the firm SH&E utilized a coefficient of price elasticity of 1.2 when estimating Southwest s traffic at Dallas Love Field, assuming repeal. SH&E provided its study for DFW airport which was opposing repeal at that time. CAC also used 1.2 in the analysis it prepared for Southwest in this matter. The CAC model (Appendix R-1) estimates (a) the dollar value of lower fares to existing passengers in a market, (b) the additional passengers who would fly at Southwest s fares, and (c) the consumer surplus obtained by the additional passengers. In Appendix R-3 CAC has re-run its model adding an average checked baggage fee of $25 to each O&D passenger carried by airlines other than Southwest. The consumer benefits from this model are considerably greater than the basic model which excludes the baggage charge. Checked bag fees are directly related to the passenger s trip cost and they must be accounted for in any econometric analysis of differential pricing and prospective price changes. Baggage fees represent a significant percentage of the passenger s total flight cost. The results of both runs of the CAC model are summarized in Table 1 below. 18

61 Table 1 Annual Consumer Benefits From Additional Southwest Services at LGA and DCA 28 Excluding Other Carriers $25 Bag Fee Including Other Carriers $25 Bag Fee LGA Total Market Stimulation pax 1.7 pax Fare savings to existing passengers in the markets Consumer surplus value to new passengers (stimulation) $ 143 $ Total Consumer Benefits $ 187 $ 284 DCA Total Market Stimulation pax 1.0 pax Fare savings to existing passengers in the markets Consumer surplus value to new passengers (stimulation) $ 78 $ Total Consumer Benefits $ 103 $ 155 Grand Total Consumer Surplus (LGA + DCA) $ 290 $ 439 * Amounts in Millions Source: Appendices R-1 and R-3. Table 1 shows that total annual consumer benefits from additional Southwest services would be $439 million if Southwest acquires 20 slot pairs at LGA and 14 pairs at DCA. As a Assuming Southwest acquires 20 slot pairs at LGA and 14 pairs at DCA. The CAC model assumes other carriers match Southwest Airlines fares. 19

62 corroboration of the model, CAC re-ran it using Compass Lexecon s elasticity function 30 and CAC s input data. The model was re-run for each of the seven hypothetical Southwest O&D markets individually and the predicted total consumer benefits is projected to be almost exactly the same at $436 million. At the individual market level all seven results show variances of less than 6% between the two elasticity functions (CAC vs. Compass Lexecon). Delta and US Airways have shown annual consumer benefits from their original deal $126 million at LGA and $27 million at DCA for a total of $153 million. If 140 slot pairs at LGA and 42 pairs at DCA are supposed to be put to a better use (i.e., larger aircraft), the DL/US claimed benefits are extremely low (less than one million dollars per year per slot pair 32 ). The reason for this outcome is that neither DL nor US will reduce fares. In fact, as previously discussed, CAC believes that with dominant market power and higher hub network costs to recover, both Delta and US Airways will have overwhelming economic incentives to raise fares after their slot exchange. 31 of 6.0 There Are More Pro-Competitive Methods for Solving US Airways Financial Problems at LGA According to DL/US documents, a primary motivation for the slot swap is to alleviate the large financial losses US Airways is suffering at LGA. However, there are more pro-competitive ways to assist the carrier than the proposed slot swap See DL/US Comments, Appendix C, p. 14. Derived for the carriers by Compass Lexecon. $153 million = $841,000 per pair slot pairs 20

63 Premise of the Proposed Transaction In New York, the transaction allows US Airways to reduce its crippling losses from its unprofitable flying and expensive facilities obligations (emphasis supplied). 33 At DCA Delta had no plans to dispose of its slots, and is only doing so now because of the opportunity to transfer its DCA slots for the ability to grow its New York operations. 34 US s unilateral decision to reduce unprofitable LGA services is the driving cause of the transaction (emphasis supplied). 35 Better Methods For Disposing of Scarce Public Resources at LGA CAC believes that there are much more pro-competitive alternatives to solve US Airways financial problem at LGA. These include: Free-market auction, initially to qualifying airlines, subject to a reasonable minimum price; any residual slots not purchased by qualifying carriers would be made available by auction to all other carriers; gates and terminal facilities would be auctioned coincidentally with slots; assets must be sold to the highest cash-only bidders. All slots, gates and facilities excess to USAirways needs could be returned to the FAA and Port Authority for re-sale to the highest bidders. The free market auction system is the most efficient method for divesting unneeded slots and facilities with the proceeds going to the seller. Low-fare carriers should be granted preferential treatment due to their small presence at slot controlled airports and the public benefits they provide DL/US Comments, Joint Appendix, Appendix B, p. 2. Ibid, p. 12. DL/US Comments, Joint Appendix, Appendix III-A of Appendix B, October 15,

64 7.0 The Three Airports in New York and Washington Each Serve Separate and Distinct Markets In both the New York and Washington regions there are numerous examples of individual carriers serving the same destination city from two or three of the region s three airports. Specifically, there are 43 carrier-destination combinations (e.g., Delta to Atlanta) where the carrier serves a destination from multiple New York/Newark airports (Exhibit R-26). In the New York region there are 14 destinations served from all three airports by the same airline, and 29 destinations served from two airports by the same carrier (Exhibit R-27). At the three Washington/Baltimore airports there are 35 such carrier-destination combinations where an airline serves the same destination from multiple regional airports. As shown in Exhibit R-28, there are 17 destinations served by the same carrier from all three Washington/Baltimore airports, and 18 destinations served by the same carrier from two airports. However, in other multiple airport cities like Chicago and Houston there are very few destinations served by the same carrier from both airports only three markets in the case of Chicago and two in Houston (Exhibits R-29 and R-30). In both cities the two airports compete directly with each other for a common pool of traffic. In addition, CAC has examined differences in fares (yield curves) across the three airports in the New York and Washington regions. Exhibit R-31 and Appendices R-5, R-6, and R-7 show there are significant differences between the fare structures at all three airports. Comparing the low-fare carrier JetBlue at JFK to Delta at LGA and Continental at Newark shows that JetBlue s service has not reduced fares at LGA or EWR (Exhibit R-31). The same findings are evident from a similar analysis of fares in the Washington region. Fares are significantly higher at the legacy carrier dominated DCA and IAD than they are at BWI where Southwest provides 56% of all seat-departures (Exhibit R-32). The fare structure at BWI 22

65 has not had much impact on the fares of Delta, US Airways and American at DCA, or on United s fares at IAD. It is also instructive to note that notwithstanding the extensive low-fare service at BWI, the dominant position of US Airways has permitted it to charge fares at DCA that are well above even its own system average fares (Exhibit R-17). Compass Lexecon s notion that the competition between airports can be measured by a comparison of off-peak access times from a single point of origin is misplaced. From CAC s experience, passengers consider many time components in their consideration of airports, in addition to fares and schedule convenience. Those time elements include comparative access time, parking and walk to terminal time, terminal (internal) facilitation time, and expected delay time (risk assessment). Compass Lexecon has not conducted a credible assessment of comparative airport desirability based on trip time considerations. For a variety of reasons, there is always some cross-over in passenger patronage between the different airports within a region. However, the empirical evidence is clear that in the New York and Washington regions the airports are not economic substitutes. Any significant increase in the dominant market position of the leading legacy carrier at LGA or DCA will significantly increase the barriers to competitive entry, without effective discipline by the fares and services at the other two area airports. 23

66 Exhibits

67 Source: Joint Comments of Air Tran Airways, Inc., Spirit Airlines, Inc., Jetblue Airways Corporation, Westjet, an Alberta Partnership, Delta Air Lines, Inc., and US Airways, Inc. in Support of Wavier Petition of Delta and US Airways. Delta/US Airways Six-Carrier Deal Reduces the FAA s Proposed Carve-Outs by 68% at DCA and 25% at LGA Exhibit R-1 DCA LGA Slot Pair Carve-Outs Slot Pair Carve-Outs % 10-68% FAA Carve-Out Six-Carrier Deal Carve-Out 0 FAA Carve-Out Six-Carrier Deal Carve-Out The DL/US Proposed Carve-Outs May Not Occur for up to months, if Ever

68 The Six-Carrier Deal Would Not Reduce Delta s Dominant Slot Position at LGA Exhibit R-2 Others 14% US Airways 33% Others 14% US Airways 8% Partners/1 8% Others 8% US Airways 8% Air Canada 4% Air Canada 4% Air Canada 4% United 5% United 5% United 5% American 19% American 19% Delta 50% American 19% Delta 47% Delta 25% Share of LGA Slots Before Slot Swap Share of LGA Slots After Slot Swap/2 Share of LGA Slots After Six-Carrier Deal/3 The Six-Carrier Deal Would Reduce Delta s Slot Share by Only 3% 1/ Includes all slots that would be operated by Westjet, AirTran, and Spirit (60 current slots plus 30 carve-outs). 2/ Assumes 280 operating slots are transferred from US Airways to Delta. 3/ Assumes that 250 operating slots are transferred from US Airways to Delta and 30 total slots are sold to Westjet, AirTran and Spirit. Note: Includes slots to operate 5 or more days a week. Allocates regional carrier partners based on the Official Airline Guide (OAG). Source: FAA Slot Reports as of January 1, 2010 (Current and Future). OAG, schedules for the week of February 15, 2010 (February Max Edition).

69 1/ Assumes 84 operating slots are transferred from Delta to US Airways. 2/ Assumes that 75 operating slots are transferred from Delta to US Airways and 9 are transferred to JetBlue. Note: Includes slots to operate 5 or more days per week. Allocates regional carrier partners based on the Official Airline Guide (OAG). Source: FAA Slot Reports As of January 1, 2010 (Current and Future). OAG, schedules for the week of February 15, 2010 (February Max Edition). Exhibit R-3 The Six-Carrier Deal Would Not Reduce US Airways Dominance at DCA Continental 5% United 4% Others 8% US Airways 47% Continental 5% Others 9% United 4% US Airways 57% Continental 5% United 4% Others JetBlue 9% 1% US Airways 55% American 15% American 15% American 15% Delta 21% Delta 11% Delta 11% Share of DCA Slots Before Slot Swap Share of DCA Slots After Slot Swap/1 Share of DCA Slots After Six-Carrier Deal/2 The Six-Carrier Deal Would Reduce US Airways Slot Share by Only 2%

70 The Splintered Carve-Outs That DL/US Have Proposed Will Have No Meaningful Competitive Impacts Exhibit R-4 A. At LGA DL/US Selected Competitor Slot Pairs Carved-Out Likely Schedule Key Competitor Total Daily Deps. (2/17/10) AirTran* 5 3 ATL DL Yes 50 2 MKE DL No 16 Spirit 5 2 FLL DL No 38 3 DTW DL Yes 28 WestJet** 5 5 YYZ DL No 23 Total Current Daily Departures All Carriers = 155 Total Carve-Outs = 15 B. At DCA JetBlue* JFK US No *** 24 3 FLL US Yes 12 Total Current Daily Departures All Carriers = 36 Total Carve-Outs = 4.5 * Operate commuter aircraft directly or through commuter affiliates. ** May code share with Delta, according to recent news reports (Exhibit R-18) *** Operates only through code-share with United

71 Exhibit R-5 AirTran Has A History of Abandoning Routes At LGA and DCA Market Began Service Abandoned the Market Comments LGA PIT December 2000 August 2001 AirTran said the route did not develop the way we thought it would 1 LGA RIC August 2008 January 2009 AirTran was losing money on route 2 LGA SRQ November 2005 February 2006 Discontinued LGA TYS December 1997 May 1998 AirTran s LGA TYS slots were the first awarded to it after the FAA Authorization Act of 1994 set criteria for slot exemptions. 3 Service was discontinued. DCA FLL October 2003 December 2003 AirTran s DCA FLL slots were among the first DCA slots awarded to it. 4 During the first month of FLL service AirTran announced it would shift DCA FLL to DCA PBI. DCA PBI December 2003 June 2004 AirTran sought permission to temporarily suspend DCA PBI service 5, a motion the DOT denied, and DOT stripped AirTran of the slots 6. Note: PIT = Pittsburgh, RIC= Richmond, SRQ = Sarasota, TYS =Knoxville, FLL = Ft. Lauderdale, PBI = West Palm Beach 1/ AirTran to Stop Flights From Pittsburgh to New York s LaGuardia Airport, Knight Ridder/Tribune Business News, August 11, / AirTran Will End RIC-NYC Flights in Jan., Richmond Times Dispatch, November 26, / DOT, Order Granting And Denying Applications For Slot Exemptions At New York's Laguardia And John F. Kennedy International Airports, April 21, 1998, page 3. 4/ AirTran Airways Awarded Slots at Ronald Reagan Washington National Airport; Nonstop Service to Three Markets to Begin in October, Business Wire, August 14, / Airtran Airways Motion To Temporarily Suspend One Roundtrip And To Modify Markets Served At Ronald Reagan Washington National Airport, Docket OST , June 4, / DOT, Order Withdrawing Two Within-perimeter Slot Exemptions At Ronald Reagan Washington National Airport And Requesting Proposals For Their Reallocation, Docket OST , August 27, 2004.

72 Exhibit R-6 Spirit Has A History of Abandoning Routes At LGA and DCA Market Began Service Abandoned the Market Comments LGA PBI LGA TPA September 2000 September 2000 January 2001 January 2001 PBI and TPA: Spirit cited runway congestion after Spirit passengers were stranded at LGA for four days over New Year s 2000 weekend and the Port Authority threatened to revoke the carrier s liscense. 1 However, Spirit announced increased service between LGA and MYR four days later. 2 LGA MLB September 1998 September 2001 Indefinitely suspended after 9/11. 3 In Nov/Dec 2001 Spirit increased LGA FLL and LGA MCO service rather than reinstate MLB. LGA RSW September 2000 May 2002 Discontinued; Spirit increased LGA MYR service in May DCA DTW June 2004 January 2007 Spirit said it was unable to "match its competitors' capacity offerings and schedules" because of "access constraints at DCA and returned the slots to the DOT. 4 DCA MLB October 2000 September 2001 Spirit said Despite being awarded slots to operate two round trip flights each day, we were not awarded sufficient slots to permit an efficient flight frequency schedule. 5 DCA MYR October 2004 November 2005 Note: PBI = West Palm Beach, TPA= Tampa, MLB = Melbourne, FL, RSW = Ft. Myers, DTW= Detroit, MYR= Myrtle Beach Cited fuel costs: "the foreseeable losses are simply unsustainable for this developmental route as the off-season approaches. Spirit returned the slots rather than apply to fly the route seasonally due to the DOT s "precedent in regards to seasonal suspensions of [slot restricted] service. 6 1/ Spirit's Flight Cutbacks Don't Affect Melbourne, Vero Beach Press Journal, January 21, / Spirit Airlines Launches Additional Service To Myrtle Beach, S.C. From New York/LaGuardia and Detroit Metro, Business Wire, January 25, / Spirit Airlines Realigns Service Effective September 18, Business Wire, September 17, / Spirit To End DCA-DTW Service In January, Aviation Daily, December 22, / Ned Homfeld, chairman of the Spirit Airlines board, USA Today Talk Today, September 22, / Spirit To Return DCA Slots As It Drops Myrtle Beach Service, Aviation Daily, October 17, 2005.

73 Exhibit R-7 WestJet Has A History of Abandoning Routes At LGA Market Began Service Abandoned the Market Comments LGA YYZ September 2004 July 2005 inability to secure gates at LaGuardia has prevented us from growing the market into a viable route WestJet says it plans to resume service if it is awarded LGA slots through the proposed DL/US slot swap. Note: YYZ = Toronto Source: WestJet Discontinues Service to LaGuardia, WestJet press release, May 4, Also Exhibit R-18.

74 Hubs at Slot Controlled Airports Waste Scarce Public Resources Exhibit R-8 Hubs require feed traffic from all markets (large and small) within the catchment region There are more small markets than large markets Average aircraft size is small at hubs Delta s average aircraft size in domestic markets at its seven hubs ranges from 69 to 107 seats (Exhibit R-10) Other airline hubs have a small average number of seats per departure (Exhibit R-12) The RJ and turboprop share of total domestic departures at Delta s hubs ranges from 53% to 85% (Exhibit R-9) The RJ and turboprop share of total domestic departures at US Airways hubs ranges from 31% to 88% (Exhibit R-9) Southwest Airlines does not operate hubs and its average seats per departure in major airport markets ranks among the highest (Exhibit R-13)

75 Percentage of Domestic Departures Operated by Regional Jets and Turboprops at Delta and US Airways Hubs Exhibit R-9 Delta Hub % Domestic Departures Operated by Regional Jets and Turboprops US Airways Hub % Domestic Departures Operated by Regional Jets and Turboprops ATL 53% CLT 59% CVG 85% DCA 63% DTW 66% LGA 88% JFK 59% PHL 78% MEM 79% PHX 31% MSP 55% SLC 75% Average 63% Average 63% Note: Includes flights from U.S. Airports to U.S. Airports and Canada. Source: OAG Schedules for February 17, 2010 (February 2010 Max edition).

76 Delta s Current Hubs Have Smaller Average Aircraft Sizes than Delta at LGA Exhibit R-10 Carrier/Departure Airport Delta LGA/1 Delta ATL Delta -JFK Delta -MSP Delta -SLC Delta -DTW Delta -MEM Delta -CVG Average Seats Per Domestic Departure / In order to be comparable for this exhibit, includes markets less than 250 miles. Note: Includes flights from U.S. Airports to U.S. Airports and Canada. Excludes carrier-airport combinations where the carrier has fewer than 50 daily departures. Source: OAG Schedules for February 17, 2010 (February 2010 Max edition).

77 The Benefits Claimed By DL/US at LGA Are Entirely Related to US Airways Current Inefficient Use of Its Slots Exhibit R-11 Current Average Seats per LGA Departure - US - DL - Difference Difference in Annual One-Way Seats Due to A/C Size: 140 slot pairs x 2 directions x 365 days x 45 seats = 4,600,000 Additional Seats Claimed by DL/US = 4,400,000 Net Difference 200,000 Delta s Average Seats per Departure Post -Transaction = <107 DL/US claim of 4.4 million additional seats at LGA is entirely attributable to US use of very small aircraft today and not from any increase in DL s use of large aircraft itself. Source: Exhibit R-12 and DL/US Comments, Appendix C of Appendix A: Consumer Benefits From The Proposed US Airways Delta Slot Transaction, p. 9.

78 US Airways Average Aircraft Size at LGA is 45 Seats Smaller than Delta and Lower than Most Other Hubs Exhibit R-12 U.S. Airport/ Carrier Combinations with the Smallest Average Aircraft Size Carrier/Departure Airport Delta -LGA Average Seats Per Domestic Departure 107 US Airways -LGA American -RDU Midwest -MKE Continental -CLE Delta -CVG Delta -MEM US Airways -PHL United -IAD Delta -DTW Delta -SLC Continental -IAH US Airways -DCA American -STL United -ORD United -LAX Note: Includes flights from U.S. Airports to U.S. Airports and Canada. Excludes carrier-airport combinations where the carrier has fewer than 50 daily departures. Source: OAG Schedules for February 17, 2010 (February 2010 Max edition).

79 Southwest Efficiently Serves its Airports via the Use of B737 Aircraft Exhibit R-13 U.S. Airport/ Carrier Combinations with the Largest Average Aircraft Size Carrier/Departure Airport Delta -MCO Delta -LAX American MIA Southwest -BUR Southwest -MCI Southwest -PHL Southwest -LAS Southwest -OAK Southwest -BWI Southwest -TPA Southwest -PHX Southwest-SAN Southwest -DEN Southwest -SMF Southwest -SJC Southwest -BNA Southwest -STL Southwest -DAL Southwest -LAX Southwest -MCO Southwest -HOU Southwest -MDW Southwest -ABQ JetBlue -JFK Average Seats Per Domestic Departure Note: Includes flights from U.S. Airports to U.S. Airports and Canada. Excludes carrier-airport combinations where the carrier has fewer than 50 daily departures. Source: OAG Schedules for February 17, 2010 (February 2010 Max edition).

80 Exhibit R-14 Hub and Spoke Systems Present A Paradox: They Are The Most Effective Way To Fill An Airplane But The Most Expensive Way To Carry A Passenger From Origin To Destination Hub C 780 Miles (Origin) A B (Destination) A To B via C Two landings and takeoffs Circuitous travel (+220 miles, or + 22%)

81 A Simple Diagram Illustrates the Cost Problem with Hubs Exhibit R-15 Cost/Fare ($) Total Cost (b) Variable (a) Fixed Nonstop Distance (miles) (a) Fixed cost per departure (terminal cost) Landing fees Terminal rentals Labor ramp, gate, baggage, counter, office, supervisory (b) Line haul cost per mile (tapers with distance) Direct operating costs It costs much more to carry the passenger over two segments than one segment: Fixed cost x 2 plus line-haul cost per mile (1,000 miles) vs. Fixed cost x 1 plus line-haul cost per mile (780 miles)

82 Exhibit R-16 Delta and US Airways Operate Almost Entirely Hub and Spoke Systems So They Cannot Price LGA and DCA As If All Passengers Move Nonstop Domestic Operations To/From Hubs (Percent of System) Delta US Airways Departures 93% 97% Seat departures 93% 99% ASM s 90% 99% Delta and US Airways Will Not and Cannot Profitably Reduce Fares At Their New LGA and DCA Hubs; The Economic Pressure is Likely to Require Them to Raise Fares Note: The DL/US Comments do not claim any fare reductions Note: Includes domestic and international flights Source: OAG Schedules for February 17, 2010 (February 2010 Max edition). DL hubs are ATL, CVG, DTW, JFK, MEM, MSP, and SLC. US hubs are CLT, DCA, LGA, PHL, PHX.

83 US Airways Dominant Share at DCA Allows it to Charge A Price Premium Above Its Domestic Fare Structure Exhibit R-17 Fare Per Mile (YE Sep 2009) US Airways at DCA Current US Airways DCA Share = 47% Second Largest Carrier DCA Share = 21% US Airways System Average ,000 1,250 Nonstop Distance (miles) 1/ Excludes checked baggage fees Note: Average fare paid per mile excludes taxes. Source: U.S. DOT, Origin-Destination Passenger Survey, YE September 2009, via Data Base Products, Inc. See Appendices R-10 and R-11.

84 The FAA s Slot Divestiture Restrictions Would Preclude A Sale to WestJet if it Concludes a Codesharing Deal with Delta Exhibit R-18 Page 1 of 2