BEFORE THE OFFICE OF THE SECRETARY DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.

Transcription

1 BEFORE THE OFFICE OF THE SECRETARY DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. Application of AIRTRAN AIRWAYS, INC. Docket No. DOT-OST for an exemption under 49 U.S.C 419 (Chicago (Midway, Illinois - Cancun, Mexico Application of FRONTIER AIRLINES, INC. Docket No. DOT-OST for an exemption under 49 U.S.C. 419 (Chicago (O Hare, Illinois - Cancun, Mexico REPLY OF AIRTRAN AIRWAYS, INC. Communications with respect to this document should be sent to: Bob Jordan Robert W. Kneisley President Associate General Counsel AIRTRAN AIRWAYS, INC. Leslie C. Abbott 9955 AirTran Boulevard Senior Attorney Orlando, FL SOUTHWEST AIRLINES CO. 191 L Street, N.W., Suite 64 Washington, D.C. 236 bob.kneisley@wnco.com ( December 22, 211

2 BEFORE THE OFFICE OF THE SECRETARY DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. Application of AIRTRAN AIRWAYS, INC. Docket No. DOT-OST for an exemption under 49 U.S.C 419 (Chicago (Midway, Illinois - Cancun, Mexico Application of FRONTIER AIRLINES, INC. Docket No. DOT-OST for an exemption under 49 U.S.C. 419 (Chicago (O Hare, Illinois - Cancun, Mexico REPLY OF AIRTRAN AIRWAYS, INC. AirTran Airways, Inc. (AirTran files this Reply in response to the December 15, 211 Answer filed by Frontier Airlines (Frontier to AirTran s Application for exemption authority to serve the Chicago (Midway Cancun, Mexico market. 1 BACKGROUND Spurred by the recent announcement of USA3 that it intends to terminate service in the Chicago Cancun market at the end of January 212, AirTran and Frontier have both filed applications to assume the one U.S. carrier designation that will become available in that market by virtue of USA3 s withdrawal. AirTran s 1 Common names of airlines are used herein. 2

3 application seeks authority to serve Cancun from Chicago Midway Airport ( while Frontier proposes to fly from Chicago O Hare Airport (. Frontier s December 15 answer to AirTran s application contains numerous misleading and inaccurate statements, and AirTran files this Reply in order to correct the record and provide a more accurate basis for the Department s decision on the competing applications. Notwithstanding the predictable hyperbole in Frontier s answer, the facts show overwhelmingly that AirTran would provide far greater public benefits than Frontier in the Chicago Cancun market: AirTran and Southwest Airlines combined have a huge 22-flight-per-day network at Midway to support Cancun service, while Frontier has zero flights at O-Hare to support its Cancun proposal. AirTran would provide the first competitive Cancun service at, which serves the entire Chicago region but is particularly convenient to South Side residents. Frontier would provide redundant service at on top of the many Cancun flights operated at by both U.S. and foreign carriers. AirTran would provide year-round daily service between Chicago and Cancun. Frontier would offer daily service only 19 weeks of the year. AirTran/Southwest s massive presence in the Chicago market ensures that its Cancun service will be stable, competitive, and successful. Frontier would be dependent on a single customer (Apple Vacations, with significant seasonality variations and contractual risks that threaten its viability. There is no need to waste a valuable U.S. designation on Frontier s proposal since Frontier can serve Apple via charter authority that is fully available under U.S. Mexico bilateral agreement. Awarding Frontier the single available U.S. carrier scheduled designation would block AirTran/Southwest, and Midway Airport, from the Chicago Cancun market. Frontier s answer contains numerous exaggerations, distractions, and distortions, but does not overcome any of these basic facts. 3

4 I. FRONTIER S DESCRIPTION OF THE CHICAGO CANCUN MARKET IS MISLEADING AND DISPROVEN BY THE FACTS. Frontier s Answer claims that O Hare-Cancun demand is 3 times larger than that in the tiny Midway-Cancun market, 2 implying that only can support nonstop service to Cancun. However, the recorded Chicago Cancun O&D is much greater at simply because has far better service to Cancun today than does. As attached Exhibit FL- R-11 demonstrates, has six nonstop flights per day while has none, and has 35 daily connecting flights compared to only seven at. In fact, the best roundtrip (nonstop service to Cancun offered at has an elapsed time under 7.5 hours, compared to more than 12 hours for the best (connecting service at. Therefore it is not at all surprising that the O&D traffic to Cancun at is much greater than that at. Frontier s claim therefore proves nothing about consumer preference for vs.. It simply reflects the reality that passengers prefer nonstop service over connections, and all nonstop Chicago Cancun service today is provided at while offers only inconvenient connections. 3 Moreover, far from demonstrating s superiority in serving Cancun, as Frontier would have the Department believe, the current O&D data illustrate an urgent need for establishing competitive Cancun service at and restoring a balance of service within the Chicago region. In fact, is the airport preferred by a large segment of Chicago passengers. As shown in Exhibit FL-R-12, in large domestic markets with comparable nonstop 2 Frontier Answer at 2. 3 As Frontier itself notes, all U.S. flag service to the Mexican beach destinations is operated from O Hare (Answer at 5. In fact, the concentration of Mexico service at will be even greater once Aeromexico launches its recentlyannounced -CUN service. See Notice of Action Taken in Docket DOT-OST , December 2,211 (counsel for Aeromexico has confirmed the carrier s intent to serve. 4

5 service, and originate virtually identical volumes of passengers. In addition, as shown in Exhibit FL-R-111, the population within a 6-minute drive of is 94% of the population within a 6-minute drive of. Thus, is unquestionably a convenient airport for the vast majority of Chicago-area passengers. Yet Frontier would have the Department believe that all demand is for service, and that an award to AirTran/Southwest for its service proposal would be wasted. The history of competition between air services provided at vs. also illustrates the fallacy of Frontier s argument. For example, before Southwest entered the IAD market, O&D passengers in the -IAD market were 41 times greater than -IAD O&D passengers (Exh. FL-R-14. Currently, however, -IAD passenger volume is 22% greater than -IAD - notwithstanding the fact that United has major hubs at both and IAD. Similarly, prior to Southwest s entry into the Chicago Buffalo market, the -BUF O&D volume was 34 times greater than that of -BUF (Exh. FL-R-15. Today, the -BUF passenger volume is 73% the size of the -BUF (Id.. In addition, Frontier s claim that only its proposed CUN service will provide head to head competition (Answer at 2 with the network carriers currently serving demonstrates a profound lack of understanding of the Chicago aviation market. Southwest s entry into numerous Chicago markets over the years has vividly demonstrated the strong competitive inter-relationship between and within the Chicago region. For example, Southwest s low-fare entry into the -MSP market in March 29 reduced fares over 4% at both and, while stimulating total CHI-MSP traffic by 18% (Exh. FL-R-16. Similarly, Southwest s entry 5

6 into the -LGA market in June 29 reduced fares at both and by approximately 2%, and stimulated new traffic at both and (Exh. FL-R-17. These are just two examples of a pattern that has been repeated many times, as Southwest s expansion into numerous markets forced fares to decline, and traffic to expand, at both and. This pattern demonstrates convincingly that is not a market unto itself, as Frontier argues, but is part of a broader Chicago market in which the air services at both and compete strongly and continuously with one another for passengers. The fact that the U.S. Mexico bilateral designates Chicago as a single market encompassing both and underscores this point. AirTran/Southwest s service in -Cancun service will compete vigorously with - Cancun services, and will force competitive responses from the carriers as a result. Daily year-round service by AirTran/Southwest will also redress the current imbalance of Cancun traffic between Chicago s two airports and will generate a distribution similar to that experienced in competitive domestic markets served by both and. II. AIRTRAN WOULD BE A TRUE NEW ENTRANT IN THE MARKET AND PROVIDE MUCH MORE EFFECTIVE COMPETITION THAN FRONTIER. Frontier s application is replete with statements that it would be a new entrant in the CHI-CUN market and as such would provide a low-fare alternative at. Upon scrutiny, however, these claims have no merit. To begin with, Frontier does not disclose its proposed fares, nor does it compare its fares to those of United and American in the -CUN market. In actuality, Frontier s fares would be a bulk contract price negotiated with Apple Vacations; Frontier would not determine the seat 6

7 price to the passengers for most if not all of its passengers. There is no evidence whatever that Frontier would provide price competition with the -CUN incumbents. Beyond this, while Frontier attempts to promote itself as a new entrant, it also makes clear that it will step into the shoes of the current service provider for Apple Vacations, USA3. 4 Thus, by its own admission, Frontier s service would be a continuation of existing vacation package contract lift at, which has not provided vigorous low-fare competition with incumbent -CUN carriers in the past. In contrast, AirTran would be a true new entrant in the Chicago CUN market providing service from the Chicago airport currently without any nonstop Cancun flights. In recent proceedings, the Department has recognized that low fare carriers need a critical mass of service to provide effective competition, particularly when competing against with dominant legacy carriers. 5 With its extensive network of connections at, AirTran/Southwest is heavily committed to Chicago and has the large market presence to ensure its -CUN service is a success. 6 In fact, AirTran and Southwest together serve 27 cities with less than 4% circuity from that would provide additional passenger support for service to Cancun (Exhibit FL-R-19. Frontier, by contrast, has exactly zero connections at to support its proposed -Cancun service (Exhibit F-R-11. Lacking such support, Frontier has advanced a self-serving description of Chicago-Cancun as primarily a local O&D market (Answer at 8. But this characterization would apply to Frontier only 4 Frontier states that it has entered into an agreement with Apple to replace Apple Vacations current allocation of seats on USA3 s flights and will ensure Apple Vacations customers a seamless transition from USA3 s service without disruption Frontier Application at See, e.g, Notice of grant of petition with conditions (US/DL Slot Swap, affirming 8 slot pair bundles based on DOT/FAA s finding that there is likely to be greater overall public benefit if the larger (i.e., 8 slot pair bundles are retained whereas smaller bundles of slots could make certain new entrants highly vulnerable and frustrate the competitive responsiveness we are seeking. 76 Fed. Reg. 6372, 6378 (Oct. 13,

8 because it has no connecting support, and not to other U.S. carriers serving the market which rely heavily on connections: 53% of United s -CUN passengers are connecting, and 25% of American s -CUN passengers are connecting, while USA3 (into whose shoes Frontier wishes to step has zero connecting passengers. In addition, 43% of Southwest s passengers at are connecting. Thus, Frontier s description of the Chicago-Cancun market as primarily local O&D simply reflects that carrier s own lack of network support and exposes a serious weakness in its proposal. Without passenger support from behind- destinations, Frontier cannot hope to provide daily service outside of the peak season, and its proposal for daily flights in only 4½ months of the year reflects that fact. AirTran/Southwest, on the other hand, can support at least daily service all year-round in -CUN due to its extensive network at and large numbers of connections to behind-gateway cities. 7 III. FAR FROM A PROVEN TRACK REC, FRONTIER HAS TERMINATED OVER HALF ITS MEXICO ROUTES AND DOES NOT PROVIDE DAILY SERVICE IN ANY OF THOSE THAT REMAIN. Frontier first began serving Mexico from its Denver hub in 23. In 24 it began a long series of experiments with 21 other Mexico routes. Frontier has since abandoned 13 of those routes (Exhibit FL-R-18. Moreover, in all eight of its remaining Mexico markets, Frontier provides less than daily year-round service (Id.. This is Frontier s proven track record (see Frontier Answer at 2. Frontier s history of 7 Frontier notes that AirTran provides less-than-daily service in the BWI-CUN market for two months of the year (September and October. That level of service reflects the relatively limited connecting support that AirTran has at BWI standing alone, however. As Southwest and AirTran schedules are integrated, service levels will increase to at least daily year-round. In September 212, for example, AirTran will offer daily service plus two flights on Saturdays in this market and in October 212 will offer 12 weekly flights. 8

9 unreliable service to Mexico should not be rewarded with the grant of yet another limited-entry route award. That is especially true in this case, where Frontier has no existing service at its proposed gateway and no passenger feed at, and stakes the entire success of its service on one customer (Apple Vacations, which would be in a position to drive any price bargain that could easily cause Frontier to abandon yet another Mexico route. With no connecting market support at, and very little market identification in all of Chicago, it is clear that Frontier would be a very weak competitor in the -CUN market. To survive it must have the Apple Vacations contract which could easily be served by charter authority. For all these reasons the Department should not squander limited entry authority on Frontier and block AirTran/Southwest (and Midway Airport from the market by doing so. IV. DESPITE CLAIMS TO THE CONTRARY, FRONTIER S BUSINESS INTEREST IN THE CHICAGO-CANCUN MARKET CAN BE WELL- SERVED WITH CHARTER AUTHORITY. Despite belated protestations that it requires scheduled authority, Frontier has offered no evidence that it would generate a single individually ticketed passenger on its -CUN flights. Instead, the only passengers Frontier credibly asserts it will carry are those provided via a single contract with Apple Vacations. Because Apple will control the marketing and distribution as well as much if not all of the schedule, Frontier can supply this contractual lift via charter service that is permitted under the U.S.-Mexico bilateral agreement. Therefore, as we noted previously, the competing applications of AirTran/Southwest and Frontier present the Department with a win-win opportunity. 9

10 Awarding scheduled authority to AirTran/Southwest would provide reliable and competitive year-round daily service at Midway Airport, while allowing Apple Vacations customers to continue to avail themselves of travel packages with the air portion operated by Frontier at, alongside the services of both United and American. AirTran/Southwest would compete at against the scheduled services of United and American, as well as the charter services by Frontier at, allowing four U.S. carriers to share and compete in this important aviation market. CONCLUSION For the reasons given above and in our prior pleadings, we urge the Department to grant AirTran s application for -Cancun exemption authority, and to designate AirTran for such service under the U.S.-Mexico Agreement. Respectfully submitted, Robert W. Kneisley December 22, 211 1

11 CERTIFICATE OF SERVICE I hereby certify that on December 22, 211, a copy of the foregoing was served via on the following persons: msinick@ssd.com (Alaska Airlines carl.nelson@aa.com (American Airlines sascha.vanderbellen@delta.com (Delta Air Lines jeff.morgan@delta.com (Delta Air Lines robert.cohn@hoganlovells.com (Frontier Airlines patrick.rizzi@hoganlovells.com (Frontier Airlines jhill@dowlohnes.com (JetBlue Airways dkirstein@yklaw.com (Spirit Airlines jyoung@yklaw.com (Spirit Airlines John.Fredericksen@suncountry.com (Sun Country Airlines dan.weiss@united.com (United Air Lines howard_kass@usairways.com (US Airways pmurphy@lopmurphy.com (USA3 barbara.russell@virginamerica.com (Virgin America susan.kurland@dot.gov paul.gretch@dot.gov brian.hedberg@dot.gov brett.kruger@dot.gov todd.homan@dot.gov esta.rosenberg@dot.gov john.allen@faa.gov ursk@dos.gov Rosemarie S. Andolino Commissioner City of Chicago Department of Aviation rosemarie.sandolino@cityofchicago.org Erin O Donnell Managing Deputy Commissioner City of Chicago Department of Aviation, Midway Airport Erin@cityofchicago.org Leslie C. Abbott

12 Note: Includes only intra-alliance connections and uses a minimum connect time of 1 hour and a maximum connect time of 3 hours. Source: Official Airline Guide schedules for December 17, 211. Exhibit FL-R-11 Recorded O&D Traffic to Cancun is Much Higher at than Because Has Much Better Service to Cancun than Flights Daily Roundtrip s 6 6 Average Daily Online Roundtrip Connections 4 Connecting Flights Best -CUN Roundtrip Elapsed Time = 7:25 Best -CUN Roundtrip Elapsed Time =12:7

13 Exhibit FL-R-12 In Large Markets With Similar Service Originates 99.4% As Many Chicago Passengers As Domestic Chicago Originating O&D Passengers 2,, 1,62,592 1,63,918 1,5, 1,, 5, Average Daily Departures per Market Note: Includes all markets that had 3 or more roundtrip daily nonstops from both and and had similar total departures (plus or minus 2. Source: DOT, Origin-Destination Passenger Survey, YE Q2 211; Official Airline Guide, schedules for YE Q2 211.

14 Exhibit FL-R-13 The AirTran/Southwest Proposal Would Bring First Competitive Service to While Frontier Could Easily Serve Apple Vacations with Charter Authority Annual Roundtrips AirTran/Southwest Proposal Service Service Annual Roundtrips Frontier Proposal Service Service AA C H A R T E R 365 UA F9 FL/ NONE AA UA F9 FL/ Source: F9 frequencies calculated from page 7 of Frontier s Reply and Answer. AA and UA frequencies from OAG, YE Q2 212.

15 Before Southwest Served -IAD the Originating Passengers Were 41 Times the Originating Passengers But Today is 22% Larger than Traffic Exhibit FL-R-14 IAD Chicago Originating O&D Passengers 23 IAD Chicago Originating O&D Passengers YE Q , 11, 117,89 12, 11, 19,693 = 1.22 Times 1, 1, 9, 9, 89,555 8, 41 Times 8, 7, 7, 6, 6, 5, 5, 4, 4, 3, 3, 2, 2, 1, 2,893 1, Source: DOT, Origin-Destination Passenger Survey.

16 Before Southwest Served -BUF the Originating Passengers Were 34 Times the Originating Passengers But Today is 73% the Size of Traffic Exhibit FL-R-15 BUF Chicago Originating O&D Passengers 23 BUF Chicago Originating O&D Passengers YE Q , 48,912 7, 67,254 4, 34 Times 6, 5, =.73 x 49,44 3, 4, 2, 3, 2, 1, 1, 1,437 Source: DOT, Origin-Destination Passenger Survey.

17 Exhibit FL-R-16 Southwest s Entry in -MSP Stimulated Total Chicago Traffic And Lowered Fares at Both and Average Fare O&D Passengers $17 $16 $15 $14 $13 $12 $11 $1 $9 $8 $7 $6 $5 $4 $136 $79 $159 $87 8, 75, 7, 65, 6, 55, 5, 45, 4, 35, 3, 25, 2, 268,61 488,34 71, ,955 $3 15, $2 1, $1 5, $ Before After Before After Before After Before After Note: Before Period = CY 28. After Period = YE Q1 21. Source: DOT, Origin-Destination Passenger Survey.

18 Exhibit FL-R-17 Southwest s Entry in -LGA Stimulated Total Chicago Traffic And Lowered Fares at Both and Average Fare O&D Passengers $16 $15 $14 $142 $154 1,6, 1,5, 1,4, 1,3, 1,326,139 1,535,678 $13 $12 $11 $1 $11 $129 1,2, 1,1, 1,, 9, 8, 7, $9 6, $8 5, 4, 435,12 $7 $6 3, 2, 1, 172,23 $5 $ Before After Before After Before After Before After Note: Before Period = YE Q2 29. After Period = YE Q2 21. Source: DOT, Origin-Destination Passenger Survey.

19 Frontier Has Abandoned 13 of 21 Mexico Routes It Started Since 24 and Doesn t Provide Daily Year-Round Service in Any of the Remaining Markets Exhibit FL-R-18 Market Start Date End Date Total Months Category 1 ABQ-PVR December 27 May 28 6 Dropped 2 AUS-CUN November 24 March 25 5 Dropped 3 BNA-CUN November 24 June Dropped 4 DEN-ACA December 25 April Dropped 5 DEN-GDL December 26 January Dropped 6 DFW-MZT June 27 April 28 1 Dropped 7 LAX-SJD December 26 April Dropped 8 SAN-CUN December 26 August 27 9 Dropped 9 SJC-PVR December 27 January 28 2 Dropped 1 SJC-SJD March 27 January Dropped 11 SMF-PVR December 27 December 27 1 Dropped 12 SMF-SJD March 27 January Dropped 13 STL-PVR December 21 April Dropped 14 DEN-CZM 61 Not Daily Year-Round 15 IND-CUN 44 Not Daily Year-Round 16 MCI-CUN 89 Not Daily Year-Round 17 MCI-PVR 5 Not Daily Year-Round 18 MCI-SJD 21 Not Daily Year-Round 19 MKE-CUN 15 Not Daily Year-Round 2 SLC-CUN 78 Not Daily Year-Round 21 STL-CUN 45 Not Daily Year-Round Source: Official Airline Guide schedules for Frontier from January 24 to June 212.

20 AirTran/Southwest Would Connect 27 Markets At With Less Than 4% Circuity Exhibit FL-R-19 SEA PDX MSP SFO SMF OAK SJC RNO SLC DEN OMA MCI IND STL DTW CLE CMH PIT BUF MHT ALB BDL BOS PVD ISP LGA EWR Current FL/ Service (<4% Circuity Destinations 27 Weekly Departures 776 Weekly Seat Departures 15,292 Current FL/ Markets Proposed FL/ Market CUN Source: OAG schedule for the week of November 14, 211.

21 Frontier Would Not Connect Any Markets at to Support Its Proposed Cancun Service Exhibit FL-R-11 DEN Current Frontier Capacity Destinations 1 Weekly Departures 23 Weekly Seat Departures 2,994 CUN Current Frontier Market Proposed Frontier Market Source: OAG schedule for the week of November 14, 211.

22 The Population within a 6 minute Drive is 94% of the Population within a 6 minute Drive Exhibit FL-R Minute Drive % of Population Within 6 Minutes 8.8 million 8.3 million 94% = 1 residents 6 Minute Drive Source: Targetpro.