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

Transcription

1 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C. ) Application of ) ) SOUTHWEST AIRLINES CO. ) ) for an exemption pursuant to 49 U.S.C ) Docket No. OST to engage in foreign scheduled air transportation ) of persons, property and mail between Houston ) Hobby International Airport and Cancun, Mexico City, ) Puerto Vallarta, and San Jose del Cabo, Mexico ) ) (HOU-CUN) ) (HOU-MEX) ) (HOU-PVR) ) (HOU-SJD) ) ) APPLICATION OF SOUTHWEST AIRLINES CO. Communications with respect to this document should be sent to: Ron Ricks Robert W. Kneisley Executive Vice President - Associate General Counsel Chief Legal & Regulatory Officer Leslie C. Abbott Mark Shaw Senior Attorney Vice President General Counsel & SOUTHWEST AIRLINES CO. Corporate Secretary th Street, N.W., Suite 600 SOUTHWEST AIRLINES CO. Washington, D.C Love Field Drive bob.kneisley@wnco.com Dallas, TX (202) December 11, 2014

2 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C. ) Application of ) ) SOUTHWEST AIRLINES CO. ) ) for an exemption pursuant to 49 U.S.C ) Docket No. OST to engage in foreign scheduled air transportation ) of persons, property and mail between Houston ) Hobby International Airport and Cancun, Mexico City, ) Puerto Vallarta, and San Jose del Cabo, Mexico ) ) (HOU-CUN) ) (HOU-MEX) ) (HOU-PVR) ) (HOU-SJD) ) ) APPLICATION OF SOUTHWEST AIRLINES CO. Pursuant to 49 U.S.C and Subpart C of the Department s Rules of Practice, Southwest Airlines Co. ( Southwest ) 1 hereby applies for an exemption from 49 U.S.C authorizing Southwest to engage in scheduled foreign air transportation of persons, property, and mail between Houston Hobby International Airport (HOU) on the one hand and (i) Cancun (CUN), (ii) Mexico City (MEX), (iii) Puerto Vallarta (PVR), and (iv) San Jose del Cabo (SJD), Mexico on the other hand. Southwest plans to begin selling flights on these four routes in the first quarter of 2015, and to commence operations with daily service in all four markets with Boeing aircraft configured for 143-seats on or around October 15, Common air carrier names are used herein. 1

3 Application of Southwest Airlines Co. December 11, 2014 I. Southwest s Proposed Service Between Houston and Mexico Will Provide New Low-fare Competition and is Clearly in the Public Interest. Southwest s application represents a rare and valuable opportunity to inject new competition in U.S. Mexico trans-border airline service. Under the terms of the current U.S. - Mexico Air Transport Agreement, three U.S. carriers are authorized to provide service between Houston (including both Houston Intercontinental Airport (IAH) and Houston Hobby Airport (HOU)) and CUN, PVR, and SJD. Two U.S. carriers are authorized to provide service between Houston and MEX. Currently one U.S. carrier designation is available on both the Houston CUN and Houston PVR routes. In the Houston MEX 2 market, United Airlines ( United ) holds one of the two allotted U.S. designations and ExpressJet (a United partner) holds the other - making this route a United monopoly. In the Houston SJD 3 market, United holds one U.S. carrier designation and SkyWest (a United partner) holds another. The third designation in this market is taken by Spirit Airlines. 4 Accordingly, no U.S. carrier designations are available in either the HOU MEX or HOU- SJD markets. In these markets, service by ExpressJet and SkyWest under the United Express brand means that two U.S. carrier designations are being used on behalf of one U.S. airline. The United Express service is marketed, distributed, priced and otherwise entirely controlled by United to complement its mainline service in those markets. 2 United holds certificate authority on the Houston-MEX route. See Orders and in Docket DOT-OST ExpressJet provides United Express service on the Houston-MEX route until January 6, 2015 when the service will be provided by SkyWest. See Notice of Action Taken, issued Sept. 3, 2014, in Dockets DOT-OST and (hereafter United-ExpressJet/SkyWest HOUSTON-MEX NOAT). 3 United and its partner carrier SkyWest hold certificate and exemption authority respectively on the Houston-SJD route. See Orders and in Docket DOT-OST and Notice of Action Taken issued July 29, 2014 in Dockets DOT-OST and (hereafter United- SkyWest HOUSTON-SJD NOAT). 4 See Notice of Action Taken, issued Sept. 18, 2014, in Docket DOT-OST

4 Application of Southwest Airlines Co. December 11, 2014 United and its partner carriers coordinate, rather than compete, with one another, and together utilize dual designations to provide consumers with a single carrier option. Southwest would be an independent, new entrant carrier on these routes and would provide year-round, daily, large-jet service offering consumers low fares, competition and new travel options. Given that Southwest is now prepared to enter and compete in the Houston MEX and Houston SJD markets, there is no justification for allowing United and its partner carriers to continue to hold dual authorities in these markets that would block that competition. Accordingly, we request that the Department: (1) withdraw one of the two authorities currently held by United and its partner carriers in both the Houston-MEX and Houston-SJD markets, and (2) grant Southwest exemption authority and corresponding designations to serve these two markets. Southwest also requests exemption authority and designations in the HOU CUN and HOU- PVR markets. II. Allowing One Carrier to Use Two Designations on a Fully Subscribed Route and Block New Entrant Competition is Contrary to the Public Interest. The Department s grant of duplicate authorities for both United and its partner carriers in the Houston-MEX and Houston-SJD markets took place when those carriers applications were unopposed, and thus Department s grant of those authorities did not impede any other carriers from entering in those markets. However, the Department made clear in granting those applications that the duplicate authorities would be subject to reconsideration if another U.S. carrier filed an application to provide competing service with its own aircraft on those routes and no designations were available. For example, when United and SkyWest filed a joint application on August 14, 2014 to 3

5 Application of Southwest Airlines Co. December 11, 2014 substitute SkyWest for ExpressJet as the United Express carrier in the Houston MEX market, the Department granted that application but stated that: should a competing U.S. carrier present a firm proposal to provide scheduled Houston-Mexico City service, we would be prepared to reconsider whether, in those circumstances, award of the authority granted here continues to be in the public interest. 5 Now that Southwest is filing this application and is prepared to begin service in these markets, the continued holding of duplicate authorities by United and its partner carriers is clearly no longer in the public interest. Southwest is of course aware that the U.S. and Mexican governments recently initialed an amended aviation agreement that will include open third and fourth freedom rights for passenger airlines once it becomes effective. Southwest applauds this historic agreement and appreciates the work of the U.S. Government delegation in achieving this result. However, the new agreement is subject to ratification within the Mexican government and is not scheduled to enter into force until January 1, 2016 in any event. Thus the new agreement will not provide access to the four blocked Houston Mexico markets named herein in time for Southwest s planned sales and service. III. Southwest s Houston-Mexico Service Will Provide Enormous Benefits to U.S. Consumers. Southwest s proposed service will generate new, low-cost travel options for a large number of U.S. consumers. A recent analysis by Campbell-Hill Aviation Group concludes that Southwest s competition will reduce fares in its four proposed Houston 5 United-ExpressJet/SkyWest HOUSTON-MEX NOAT, p. 2. See also United-SkyWest HOUSTON-SJD NOAT, p. 2, where DOT acknowledged Southwest s concerns that United and its partner carriers should not be permitted to hold all three designations at any one time. To accomplish this outcome, DOT made SkyWest s authority effective upon the date of withdrawal of ExpressJet s authority. However, since that time, Spirit has been awarded the third designation and thus no more U.S. carrier designations are available. 4

6 Application of Southwest Airlines Co. December 11, 2014 Mexico markets by an average of $117 round-trip, 25% below current fares. (Exhibit 1.) These fare reductions are projected to stimulate an additional 273,000 passengers annually in the four markets. (Exhibit 2.) The combination of these reduced fares and resulting passenger stimulation will generate $33 million annually in consumer fare savings. 6 (Exhibit 3.) These results demonstrate the enormous impact that Southwest Airlines can have in U.S. Mexico markets when simply allowed to compete. In addition, Southwest s Houston-Mexico flights will offer new travel options to millions of passengers in U.S. cities beyond Houston. Southwest has an average of 151 daily departures at Houston Hobby Airport to 43 nonstop domestic destinations. These cities will be given new, low-fare connecting options to Mexico from the inauguration of Southwest s Houston-Mexico flights. The Campbell-Hill analysis concludes that, in total, Southwest s service in the four planned Houston Mexico markets will provide new low-cost connecting options to 138 beyond-houston markets, 85 of which currently have no nonstop service to the respective Mexican destinations today. (Exhibits 4-7.) The total existing O&D passenger pool in these 138 markets is 5.8 million passengers. (Exhibits 4-7.) Southwest s ability to link its extensive domestic service in Houston with new nonstop service to four popular U.S. - Mexico destinations will create significant benefits for large numbers of consumers. IV. Additional Information In further support of this Application, Southwest states the following: 6 These savings projections are in fact conservative because they apply only to local Houston Mexico passengers and do not include fare savings or other benefits for the substantial number of passengers in other cities that will connect to Southwest s Mexico flights at Houston. 5

7 Application of Southwest Airlines Co. December 11, Southwest is a Texas corporation with its principal place of business at 2702 Love Field Drive, Dallas, Texas, Southwest is a citizen of the United States as defined by Section 40102(a)(15) of Title 49 of the United States Code and Section 204.2(c) of the Department s Economic Regulations. Southwest s president and at least two-thirds of its board of directors and other managing officers are citizens of the United States. Southwest is under the actual control of citizens of the United States and more than 75 percent of its voting interest is owned or controlled by persons that are citizens of the United States. 3. Southwest is fit, willing and able to conduct the services described in this application. Southwest commenced commercial service in 1971 as an intrastate airline, and has operated as a U.S. certificated air carrier since Southwest requests that the Department take official notice pursuant to Rule 24 of its Rules of Practice (14 CFR ) of Southwest's Certificate of Public Convenience and Necessity for Interstate Air Transportation, originally issued by Order , and subsequently amended by Order (May 15, 1986), Order (July 8, 1998), and Order (December 9, 2005). Southwest has consistently maintained its Certificate in good standing for the past 35 years. 4. Furthermore, Southwest already holds exemption authority from the Department authorizing service to a number of U.S. Mexico markets, such as BWI-CUN, AUS- CUN, AUS-SJD, DEN-CUN, MKE-CUN, MDW-CUN, SAT-MEX, SAT-CUN, SNA-MEX, and SNA-SJD. 7 Pursuant to Rule 24 of the Department s Rules of Practice, Southwest 7 See Notice of Action Taken issued October 23, 2013 in Docket DOT-OST

8 Application of Southwest Airlines Co. December 11, 2014 asks the Department to take official notice of all data on file necessary to establish Southwest s fitness. 5. Southwest proposes to publish the flights for sale in the first quarter 2015 and commence service between HOU and CUN, PVR, MEX and SJD on or about October 15, Southwest will provide daily service in all four markets using Stage III Boeing aircraft configured for 143 seats. 6. The requested exemption authority is fully consistent with the terms of the U.S.- Mexico Air Transport Agreement (Agreement) as amended by the two governments on December 12, The Agreement authorizes carriers designated by the U.S. to operate [f]rom a point or points in the United States to a point or points in Mexico. Annex I(A)(1)(a). Pursuant to the Agreement, three U.S. carrier designations are authorized on U.S. CUN, PVR and SJD routes, Annex I(B)(5), and two U.S. carrier designations are authorized on U.S. MEX routes, Annex I(B)(4). As noted above, one U.S. carrier designation is available in both the Houston CUN and Houston PVR routes but no U.S. carrier designations are currently available on the Houston MEX and Houston SJD routes. As explained above, Southwest is seeking the withdrawal of one existing designation in both the Houston MEX and Houston- SJD markets to enable Southwest to enter and compete. 7. The environmental impacts of Southwest s proposed services are de minimis, and will therefore not lead to a near-term annual increase in aircraft fuel consumption of 10 million gallons or more. Accordingly, grant of this application will not constitute a major regulatory action within the meaning of the Energy Policy and Conservation Act of 1975 or Part 313 of the Department s Economic Regulations. 7

9 Application of Southwest Airlines Co. December 11, Southwest will accept and comply with the terms and conditions that the Department routinely imposes on exemption authority for scheduled foreign air transportation. WHEREFORE, Southwest s proposed Houston - Mexico service will provide independent competition and significant new low-cost travel options for passengers and shippers in both the United States and Mexico. Accordingly, Southwest requests that the Department act expeditiously to: (1) withdraw one of the two authorities held by United and its partner carriers in the Houston MEX and Houston -- SJD markets, and (2) grant the exemption authority and corresponding designations requested by Southwest herein to enable it to serve HOU-CUN, HOU-MEX, HOU-PVR, and HOU- SJD as described above. Respectfully submitted, December 11, 2014 Robert W. Kneisley 8

10 CERTIFICATE OF SERVICE I hereby certify that on December 11, 2014, a copy of the foregoing was served via on the following persons: msinick@ssd.com (Alaska Airlines) howard.kass@aa.com (American Airlines) robert.wirick@aa.com (American Airlines) sascha.vanderbellen@delta.com (Delta Air Lines) chris.walker@delta.com (Delta Air Lines) matwood@cozen.com (Frontier Airlines) stephen.lachter@cozen.com (Frontier Airlines) robert.land@jetblue.com (jetblue Airways) jhill@cooley.com (jetblue Airways) perkmann@cooley.com (jetblue Airways) robert.cohn@hoganlovells.com (Republic Airways) patrick.rizzi@hoganlovells.com (Republic Airways) dkirstein@yklaw.com (Spirit Airlines) jyoung@yklaw.com (Spirit Airlines) thomas.ting@suncountry.com (Sun Country Airlines) dan.weiss@united.com (United Airlines) steve.morrissey@united.com (United Airlines) gmurphy@crowell.com (United Airlines) sseiden@crowell.com (United Airlines) john.varley@virginamerica.com (Virgin America) susan.kurland@dot.gov brian.hedberg@dot.gov brett.kruger@dot.gov reese.davidson@dot.gov todd.homan@dot.gov peter.irvine@dot.gov cristinasa@state.gov info@airlineinfo.com Leslie C. Abbott

11 EXHIBITS

12 Southwest s Service Will Reduce Roundtrip Fares By $117 or 25% on Average In the Four Houston-Mexico Markets Exhibit 1 Houston Average Roundtrip Fares $600 Current Estimated Average After Southwest $550 $538 $534 $500 $459 $481 $477 $450 -$81 -$203 -$183 -$134 - $117 (25%) $400 $350 $378 $335 $351 $346 $360 $300 $250 $200 $150 $100 $50 $0 MEX PVR SJD CUN Average Note: Includes only local passengers. No fare savings or benefits are calculated for new passengers connecting over Houston. Note: Fares Include baggage and rebooking/cancellation fees but exclude taxes. Source: Appendix

13 Southwest s Service Will Increase Passengers By Over 270,000 in the Four Houston-Mexico Markets Exhibit 2 Houston One-Way Passengers 700,000 Current Estimated After Southwest 697, , , , , , , , , , , , , , , , , ,000 50,000 Stimulation with WN Nonstop Service: 0 44,399 17,331 38,065 86,282 MEX PVR SJD CUN 4 Market Total +80, , , , ,670 Note: Includes only local passengers. No fare savings or benefits are calculated for new passengers connecting over Houston. Source: Appendix.

14 Southwest s Service Will Produce Over $33 Million in Annual Fare Savings in the Four Houston-Mexico Markets Exhibit 3 Houston Consumer Fare Savings (Millions) $35 $33.4 $30 $25 $20 $15 $14.4 $10 $10.2 $5 $3.1 $5.7 $0 MEX PVR SJD CUN 4 Market Total Note: Includes only local passengers. No fare savings or benefits are calculated for new passengers connecting over Houston. Note: Fares Include baggage and rebooking/cancellation fees but exclude taxes. Source: Appendix.

15 Southwest s Houston-CUN Service Will Provide Low Fare Access to 30 Potential Markets Beyond HOU, 13 of Which Have No Nonstop Service to CUN Today Exhibit 4 SEA PDX SLC DEN MCI S TL MDW IND PIT BOS OAK LAS LAX SNA SAN PHX TUS ABQ ELP MAF TUL OKC DAL AUS LIT MEM SAT HOU Existing O&D Passengers CY 2013 CRP Houston-CUN Beyond HOU to CUN Total 155,069 2,108,361 2,263,430 HRL CUN No nonstop CUN service Market with nonstop service to CUN Note: Markets limited to contiguous states and 40% circuity. Stimulation is not included in numbers above. Source: Adjusted MIDT, CY 2013 and Innovata schedules.

16 Southwest s Houston-MEX Service Will Provide Low Fare Access to 43 Potential Markets Beyond HOU, 26 of Which Have No Nonstop Service to MEX Today Exhibit 5 SEA PDX SLC DEN MCI S TL MDW IND PIT LGA EWR BWI BOS OAK LAX SNA LAS ABQ Existing O&D Passengers CY 2013 MAF AUS SAT TUL OKC LIT DAL HOU DCA BNA GSP CLT RDU MEM BHM ATL CHS PNS ECP JAX MSY MCO TP A FLL Houston-MEX Beyond HOU to MEX Total 213,281 2,507,128 2,720,409 MEX No MEX nonstop service Market with nonstop service to MEX Note: Markets limited to contiguous states and 40% circuity. Stimulation is not included in numbers above. Source: Adjusted MIDT, CY 2013 and Innovata schedules.

17 Southwest s Houston-PVR Service Will Provide Low Fare Access to 34 Potential Markets Beyond HOU, 24 of Which Have No Nonstop Service to PVR Today Exhibit 6 SEA PDX MDW BOS Existing O&D Passengers CY 2013 Houston-PVR Beyond HOU to PVR Total 17, , ,001 DEN TUL OKC DAL AUS MCI S TL HOU PIT LGA IND EWR BWI DCA BNA GSP CLT RDU MEM LIT BHM ATL CHS PNS MSY ECP JAX MCO TP A FLL PVR No PVR nonstop service Market with nonstop service to PVR Note: Markets limited to contiguous states and 40% circuity. Stimulation is not included in numbers above. Source: Adjusted MIDT, CY 2013 and Innovata schedules.

18 Southwest s Houston-SJD Service Will Provide Low Fare Access to 31 Potential Markets Beyond HOU, 22 of Which Have No Nonstop Service to SJD Today Exhibit 7 MDW BOS MCI S TL IND PIT LGA EWR BWI TUL OKC DAL LIT BNA MEM BHM GSP ATL DCA CLT RDU CHS AUS PNS MSY ECP JAX HOU MCO TP A FLL Existing O&D Passengers CY 2013 SJD Houston-SJD Beyond HOU to SJD Total 38, , ,727 No SJD nonstop service Market with nonstop service to SJD Note: Markets limited to contiguous states and 40% circuity. Stimulation is not included in numbers above. Source: Adjusted MIDT, CY 2013 and Innovata schedules.

19 Appendix: Detail of Consumer Benefits From Southwest Houston - Mexico Service

20 Consumer Benefits Methodology - Passengers (Traffic Stimulation and Fare Savings) Appendix 1 Page 1 Local O&D passengers were estimated by adjusting MIDT /1 data for direct bookings using Campbell-Hill methods. The data period was CY Mexico low cost carriers are excluded from the passenger numbers because they reported very limited MIDT data. The current average market fares were calculated using adjusted MIDT traffic and include baggage and cancellation/rebooking fees calculated from U.S. DOT Form 41 data. Fares exclude all taxes. The estimated fares after low cost service is introduced were estimated using log-log yield curves (fare per mile) based on the U.S. DOT domestic Origin-Destination passenger survey for CY Each observation in the yield curves was weighted by the number of LCC passengers in the market. Four curves were derived: Low Cost Carrier curve for leisure markets served nonstop by low cost carriers Low Cost Carrier curve for business markets served nonstop by low cost carriers Legacy Carrier curve for leisure markets served nonstop by low cost carriers Legacy Carrier curve for business markets served nonstop by low cost carrier $15 was added to each calculated fare to account for higher airport costs in Mexico than the U.S. The fare after Southwest service was calculated as the weighted average fare including Southwest s market share. Passenger stimulation Fare: Elasticity calculated for each market using an estimate of business/leisure mix from MIDT data and a business Ep /2 of and a leisure Ep of /3. Due to the high leisure concentration of the markets, the average Ep is approximately Service: QSI-based function using seat capacity to measure service change. The analysis uses an average aircraft size of 143 seats. Consumer benefits Campbell-Hill utilized an FAA formula for existing and stimulated passengers, and the net change in average market fare (See Consumer Surplus methodology in FAA, Airport Benefit-Cost Analysis Guidance, Office of Aviation Policy and Planning, Federal Aviation Administration, December 15, 1999.) 1/ MIDT stands for Market Information Data Tapes. It includes O&D passenger and fare data gathered via travel agencies. Raw MIDT passenger numbers must be adjusted to account for direct bookings. 2/ Ep = demand (traffic) elasticity with respect to price. 3/ FAA, Airport Benefit-Cost Analysis Guidance, Office of Aviation Policy and Planning, Federal Aviation Administration, December 15, 1999.

21 Appendix 1 Page 2 Summary of Consumer Surplus Benefits From Initial Southwest Houston-Mexico Service O&D Market Consumer Benefits One-Way New CY 2013 Predicted Service Fare Before Fare After Fare Fare Total Existing New Total Weekly WN WN WN Mileage Roundtrips Passengers Stimulation Nonstop Nonstop Savings Ep Stimulation Stimulation Passengers Passengers Passengers (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L) (M) MEX , % $229 $189 $ % 80,610 $8,595,574 $1,624,353 $10,219,927 PVR , % $269 $168 $ % 27,067 $1,756,121 $1,371,341 $3,127,462 SJD 1, , % $267 $176 $ % 48,217 $3,485,972 $2,207,869 $5,693,841 CUN , % $240 $173 $ % 117,775 $10,405,708 $3,951,574 $14,357, ,746 $238 $180 $59 273,670 $24,243,375 $9,155,138 $33,398,513

22 Appendix 1 Page 3 Summary of Consumer Surplus Benefits From Initial Southwest Houston-Mexico Service (A) Nonstop Miles. (B) Southwest weekly roundtrips to be operated initially. (C) Adjusted MIDT for CY 2013 /1. (D) Predicted Service stimulation from Campbell-Hill QSI Model. (E) Average Fare is based on Adjusted MIDT data for CY Includes average checked baggage and rebooking/cancellation fees per passenger derived by Campbell-Hill using DOT Form-41 and DOT data. (F) The After WN Service fare is based on a weighted average of the fare predicted by the relevant LCC yield curve (business or leisure) and the relevant legacy carrier yield curve (business or leisure) in markets with LCC competition. (G) Column E Column F. (H) See Page 4. Derived for each market based on the weighted average of business and leisure passengers. (I) Calculated using the price elasticity coefficient from Column H. The arc elasticity formula is: Arc Ep = [(Q2-Q1)/((Q1+Q2)/2)] / [(P2-P1)/((P1+P2)/2)], where Q1 = passengers before new LCC service, Q2 = Passengers after new LCC service, P1=Fare Before new LCC service, P2 = Fare After new LCC service. (J) (Column C x (1+ Column D) x (1+ Column I)) Column C. (K) Column C x Column G. (L) Column G x Column J x 0.5. For Consumer surplus calculation method see: FAA Airport Benefit-Cost Analysis Guidance, Office of Aviation Policy and Planning, Federal Aviation Administration, December 15, (M) Column K + Column L. 1/ MIDT stands for Market Information Data Tapes. It includes O&D passenger and fare data gathered via travel agencies. Raw MIDT must be adjusted to account for direct bookings.