BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. CONSOLIDATED ANSWER OF DELTA AIR LINES, INC.

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1 BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. U.S. - CHINA AIR SERVICES (2001 Docket OST CONSOLIDATED ANSWER OF DELTA AIR LINES, INC. Communications with respect to this document should be addressed to: D. Scott Yohe Senior Vice President - Government Affairs DELTA AIR LINES, INC K Street, N.W. Washington, DC ( John J. Varley Assistant General Counsel DELTA AIR LINES, INC. Law Department # Delta Boulevard Atlanta, Georgia ( Robert E. Cohn Alexander Van der Bellen SHAW PITTMAN 2300 N Street, N.W. Washington, D.C ( Counsel for DELTA AIR LINES, INC. November 16, 1999 Notice: Any person who wishes to file a reply to this answer must do so by November 23, 1999, and must serve that reply on Delta Air Lines, Inc., and on all persons on the attached service list.

2 BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. November 16, 1999 U.S. - CHINA AIR SERVICES (2001 Docket OST CONSOLIDATED ANSWER OF DELTA AIR LINES, INC. This is a complex proceeding which will require the Department to carefully weigh a number of important public interest criteria to maximize the benefits of the extremely valuable China service opportunities. There are four new entrant applicants for the single Year 2001 designation, and seven new entrant and incumbent carriers have requested a total of 51 frequencies out of an available pool of ten U.S.-China frequencies. Delta hereby submits this consolidated Answer to the competing applicants proposals. Since the number of applicants substantially exceeds the number of available opportunities, the Department must engage in a carrier selection process. As Delta will demonstrate in this route case proceeding, Delta s dual gateway New York/Portland proposal will maximize the value of the combination carrier designation and the ten available frequencies by providing new nonstop service in

3 Page 2 the largest U.S.-China market that lacks this important convenience, new nonstop China service from a West Coast gateway that will enhance intergateway competition, and new network service and competitive benefits to scores of cities across the United States. It is essential that the Department select a combination carrier to maximize the benefits of the U.S. flag combination designation opportunity and the ten available frequencies. There has not been any new U.S.-flag passenger service to China in nearly twenty years. By contrast, the United States was able to secure an all-cargo opportunity to China in 1992, which was rededicated to small-package express service as recently as U.S.-China travelers need and deserve the service and competitive options that only a new U.S.-flag combination carrier can provide. The U.S.-China passenger marketplace is dramatically underserved. Whereas major European cities such as London, Frankfurt and Paris receive competitive nonstop service from virtually every major U.S. carrier, Beijing and Shanghai are served only by United and Northwest. Furthermore, Beijing is perhaps the most important international city within nonstop range of New York that does not receive nonstop service. Without the ability to offer service with its own aircraft, Delta is precluded from serving the U.S.-China market in any meaningful way. Delta has no ability

4 Page 3 to serve either of China s two most important cities, Beijing and Shanghai. American, the only other new combination carrier applicant, is able to serve both of these cities on an online basis in conjunction with its partner, China Eastern. Moreover, due to the inherent differences between passenger and cargo services, cargo carriers are able to enjoy an even greater presence in China without offering service directly, through a variety of joint venture, interline, and air freight forwarder arrangements. The successful negotiation of the first U.S. combination carrier designation for China in two decades is indeed a rare and extraordinarily valuable opportunity. In order to achieve the maximum benefit from that important and hard-won opportunity, it is critical that the new entrant designee be awarded all ten available frequencies to maximize its competitive impact in a marketplace where all of the incumbents enjoy a substantial head-start and where the incumbents already hold, respectively, ten (Federal Express, 15 (Northwest and 19 (United frequencies. Delta s two-gateway New York/Portland proposal will ensure that the traveling and shipping public receives the maximum benefits attainable from an award in this case.

5 Page 4 Delta responds as follows to the individual applicants: UPS UPS is, by its own admission, practically an incumbent in the U.S.-China marketplace. The selection of Delta to provide new combination service in critical China markets which Delta is barred from serving will do far more to create U.S.-China competition than UPS s proposal. UPS is already an established competitor in the U.S.-China express package business: UPS already has a significant surface infrastructure in place in China... In fact, UPS began operations in China in 1988, 11 years ago. Through a joint venture relationship with its partner Sinotrans, UPS operates dedicated UPS-branded service to 21 major Chinese cities. Also with Sinotrans, UPS provides service to an additional 108 cities in China. The only thing UPS is lacking is the ability to operate its own aircraft to China. UPS Application at 7. UPS s success in developing a substantial presence in China through its joint venture arrangement underscores the critical differences between cargo and combination services, and why it is imperative that a combination carrier be selected in this proceeding to maximize U.S.-China competition. Cargo is far less sensitive, indeed, often indifferent, to the actual identity of the operating carrier, the circuity of routing, or the number of stops on the itinerary. The selection of UPS would change but a single element in a distribution chain which is, for the most part, unseen by its customers. By contrast, the

6 Page 5 selection of Delta would create a truly new and highly visible network of attractive consumer alternatives for travel between the United States and China s two most important cities. American Delta s proposed combination services are superior to American s for a variety of service and competitive reasons. Most important is the fact that Delta s New York gateway is four times larger in terms of China traffic than American s Chicago gateway. Indeed, New York is the largest U.S.-China local market without nonstop service, and would be the first China Gateway on the entire east coast. The Midwestern region is comparatively well served. Chicago is already home to one of the two U.S. flag incumbents, United, which offers a variety of online services to Beijing and Shanghai. Furthermore, United has indicated in this proceeding that it intends to upgrade its U.S.-China services currently operated via Tokyo, and will offer daily nonstop service between Chicago and China effective in April (Application of United. United already has more than sufficient frequencies in its existing allocation to operate daily Chicago-China service, and United s announced service plans significantly diminish the benefits of American s proposal.

7 Page 6 In addition to duplicating services by United at Chicago, American s proposed China services would closely overlap Detroit s catchment area, where Northwest operates a large hub and nonstop China service just 237 miles to the east. Delta service at New York would fill a critical service void on the east coast and should be afforded priority over American s duplicative Midwestern proposal. Polar Polar ranks in last place among the new entrant applicants. Significantly, Polar is the only applicant that proposes no new nonstop U.S.-China service. All of Polar s services would operate to and from China via Seoul. Due to the fifthfreedom nature of Polar s services, less capacity would be available to meet the needs of the U.S.-China marketplace. Polar is also the only new entrant applicant to propose less than daily service. On balance, the selection of Polar would be a poor use of the valuable new entrant designation. Federal Express Having just received six frequencies in the recent U.S.-China Air Services Proceeding (OST enabling Federal Express to more than double its U.S.- China service over the next year, Federal Express is now seeking an additional eight frequencies for still more China service. Were Federal Express to receive the eight frequencies it is requesting, only two frequencies would be left for the new entrant applicant, effectively nullifying the benefit of the new designation

8 Page 7 opportunity. The slight incremental benefits of enabling FedEx to add frequencies on established routes and to expand services to secondary markets in China do not warrant denying these important competitive opportunities to a new designation carrier proposing service on critically important but as yet unserved U.S.-China routes. Northwest Northwest is one of the two largest U.S.-China incumbents. Counting the six frequencies it received in the last proceeding, Northwest holds 15 U.S.-China frequencies. With this many frequencies at its disposal, Northwest has considerable flexibility to maximize its U.S.-China services without resorting to the ten frequencies that should be reserved for the new entrant designee. Furthermore, rather than maximizing the benefits of the valuable China frequencies by operating all nonstop U.S.-China services as Delta proposes, Northwest operates (and proposes to increase fifth-freedom China services via Japan.

9 Page 8 United United holds 19 U.S.-China frequencies to claim first place for the most incumbent frequencies. United was awarded five frequencies in the last proceeding, and uses all of its current China frequencies to operate fifth-freedom service via Tokyo. In its application, United speaks of its major commitment to upgrade its services between the U.S. and China, such as new nonstop services between Chicago and San Francisco, on the one hand, and China, on the other hand. However, most of United s contemplated service upgrades can be accommodated simply by reallocating its Tokyo one-stop frequencies to operate nonstop services. It would be patently unfair to award United any more frequencies on top of the 19 it already holds at the expense of the new entrant designee, particularly when United has ignored the valuable U.S.-China nonstop service opportunities at its disposal for many years.

10 Page 9 WHEREFORE, Delta Air Lines, Inc. respectfully requests that the Department promptly issue an order instituting a carrier selection proceeding, and therein grant Delta s application for a Certificate of Public Convenience and Necessity and allocation of U.S.-China frequencies. Respectfully submitted, Robert E. Cohn Alexander Van der Bellen SHAW PITTMAN 2300 N Street, N.W. Washington, D.C ( Counsel for DELTA AIR LINES, INC.

11 CERTIFICATE OF SERVICE I hereby certify that a copy of the foregoing Answer of Delta Air Lines, Inc., has been served this 16 th day of November, 1999, on each of the following persons via first class mail, postage prepaid: Thomas J. White Acting Deputy Assistant Secretary for Transportation Affairs Department of State 2201 C Street, N.W., Room 5830 Washington, D.C Jeffrey A. Manley Bruce H. Rabinovitz Kirkland & Ellis 655 Fifteenth Street, N.W. Washington, D.C M. Rush O Keefe, Jr. Vice President, Regulatory Affairs Sarah S. Prosser Managing Attorney, Legal & Regulatory Affairs David A. Glauber Senior Attorney Federal Express Corporation 1980 Nonconnah Boulevard Memphis, Tennessee Stephen H. Lachter Law Offices of Stephen H. Lachter 1150 Connecticut Ave., NW, Suite 900 Washington, DC Kenneth P. Quinn John E. Gillick Winthrop, Stimson, Putnam & Roberts 1133 Connecticut Avenue, N.W. Washington, D.C His Excellency Mr. Li Zhaoxing Ambassador of the People s Republic of China 2300 Connecticut Avenue, N.W. Washington, D.C Carl B. Nelson, Jr. Associate General Counsel American Airlines, Inc th Street, N.W., Suite 600 Washington, D.C Elliott M. Seiden Vice President, Law & Gov t Affairs Megan Rae Rosia Managing Director, Gov t Affairs & Associate General Counsel Northwest Airlines, Inc th Street, Suite 310 Washington, D.C David L. Vaughan Kelley Drye & Warren LLP th Street, N.W., Suite 500 Washington, D.C John Brockley Director of Aviation Portland International Airport P.O. Box 3529 Portland, OR 97208

12 Robert J. Kelly Director, Aviation Dept. Bradley Rubinstein Manager, Air Service Development & External Affairs The Port Authority of New York and New Jersey One World Trade Center, 65W New York, NY Ronny D. Just Vice President-Transportation Metro Atlanta Chamber of Commerce 235 International Blvd., NW Atlanta, GA Miguel Southwell Director of Marketing and Public Relations City of Atlanta Hartsfield Atlanta International Airport Suite 300 P.O. Box Atlanta, GA Carlos Martel Deputy Commissioner International Trade Georgia Department of Industry & Trade 285 Peachtree Center Ave. Atlanta, GA Pauline C. Donovan