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

BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) Application of ) ) VIRGIN ATLANTIC AIRWAYS LIMITED ) Docket No. OST-00-6952 ) for exemption from Subparts K and S of Part 93 ) of Title 14, Code of Federal Regulations, pursuant ) to 49 U.S.C. 41714(b)(1) ) ) ANSWER OF THE CITY OF CHICAGO On February 17, 2000, Virgin Atlantic Airways Limited ( Virgin ) applied for a routine slot exemption. The application requested the continuation of Virgin s slot exemptions so that it may continue daily non-stop combination service between Chicago O Hare International Airport ( O Hare ) and London s Heathrow Airport beyond the April 1, 2000 expiration of its two current slot exemptions and throughout the 2000 summer season. On February 22, 2000, however, US Airways filed an Answer, opposing the grant of Virgin s slot extension request. US Airways opposition is based on its inability to initiate on an extra-bilateral basis its proposed Pittsburgh-London/Gatwick service following British Airways withdrawal from the route for economic reasons. The City of Chicago ( Chicago ), owner and operator of O Hare, hereby answers in strong support of the Virgin application. Chicago respectfully urges the Department to reject US Airways misguided arguments, which, in effect, call upon the Department to take actions that unfairly punish Chicago because of the current political impasse in talks between the United States ( U.S. ) and the United Kingdom ( U.K. ). Instead, Chicago urges the Department to 60226339.04

grant expeditiously the continuation of the slot exemption requested in Virgin s application because Virgin s service (i) is demonstrably in the public interest, adding valuable service, customer convenience and choice, and competition; (ii) provides economic benefits to the Chicago region in terms of increased jobs, trade, and tourism of approximately $225 million; (iii) is consistent with U.S. bilateral obligations; and (iv) is fully consistent with the Department s prior grants of slot exemptions. So that there be no doubt: Chicago fully supports the liberalization of the Bermuda II Air Service Agreement between the U.S. and the U.K. (the Agreement ) and the U.S. government s laudable efforts to increase competition at London Heathrow and restore Pittsburgh- London/Gatwick service via the bilateral process. Pittsburgh certainly deserves to regain its service to London/Gatwick and US Airways ought to be able to serve this market. Chicago also supports any bilateral or administrative approvals necessary to effectuate global alliances between U.S. and U.K. carriers, such as code-sharing agreements between United Air Lines ( United ) and British Midland, or American Airlines ( American ) and British Airways. Finally, consistent with Chicago s strategic vision to maximize service, choice, and competition in all air services, the City supports strongly the addition of a third U.K. carrier in the Agreement to fly from London Heathrow to U.S. cities. By doing so, Chicago fully expects to welcome warmly British Midlands to O Hare, creating the most competitive, diverse, trans-atlantic aviation corridor in the U.S. In the meantime, it is vital to permit U.S. carriers with existing route rights to London to accommodate the growing demand in this market. As the Department is aware, under Annex II of the Agreement, carriers may only increase their existing frequencies as of right by application of the 150% rule, which effectively limited automatic increases, during this past 2

Annex II round, to an increase of 30 frequencies at O Hare. This minimum increase does not begin to address the burgeoning demand in the Chicago-London market. Since the 1995 minideal, when United was finally allowed to enter this lucrative market, traffic has gone from under 600,000 annual passengers to now over 1.2 million annual passengers. Still, United and American were prevented from adding their requested services during the most recent Annex II talks, and permitted to add just a small fraction of their requests. From Chicago s perspective, most troubling was United s inability to offer thrice-daily, year-round service, providing robust competition to the other three competitors during the busy summer travel season. Chicago strongly urges the Administration to address this inequity in the context of the current negotiations. At the same time, gaining approval for Virgin s application for the continuation of slot exemptions represents a top priority for Chicago. In this regard, the reasons for favorable action on Virgin s application are clear: Favorable action satsifies the public interest standard as described in 49 U.S. 41714(b)(1). Favorable action will ensure the continuation of needed inter and intra-gateway competition for service between two of the most important financial centers in the world and will benefit a great number of American passengers and shippers. Favorable action will ensure the continuation of economic benefits for Chicago, the surrounding region, and the U.S. as a whole. For Chicago alone, this translates to an estimate of more than $225 million in annual benefits in terms of increased jobs, trade, and tourism. Unfavorable action would be inconsistent with the bilateral treaty obligations of the U.S. and likely further harm the already strained bilateral aviation relationship between the U.S. and the U.K. Unfavorable action would, in practice, unfairly punish Chicago. One American city should not have to lose so that another city can gain. 3

I. LEGAL AUTHORITY Subparts K and S of 14 C.F.R. Part 93 designate O Hare, among others, as a high density traffic airport and prescribe certain air traffic rules for the operation of aircraft at this airport. These regulations limit the number of allocated Instrument Flight Rule ( IFR ) operations (takeoffs or landings) for specified classes of users during certain periods of the day. Sections 93.215 and 93.217(a)(3) of the high density rule provide that slots may be allocated to foreign air carriers. Moreover, Section 93.217(a)(6) provides a mechanism by which the FAA allocates additional slots at O Hare for international scheduled air carriers and commuter operations. Finally, pursuant to 49 U.S.C. 41714(b)(1), the Secretary may, by order, grant exemptions from the requirements of Subparts K and S to enable air carriers and foreign air carriers to provide foreign air transportation using Stage 3 aircraft, upon a finding that such action is in the public interest. II. FAVORABLE ACTION IS IN THE PUBLIC INTEREST a) Virgin s Service to O Hare Enhance Competition and Benefits U.S. Consumers First, there is little doubt that favorable action on Virgin s application for the extension of slots will further enhance competition for the public benefit, and provide continued new entry and important competition to the U.S.-U.K. air services market. Virgin s entry into the Chicago- London market has increased competitiveness on a high-traffic route between the U.S. and the U.K. Virgin Atlantic has a tradition of bringing excellent service at low cost to the consuming 4

public. The new entrant airline has continuously received industry and traveler awards for bringing lower ticket prices and improved quality of service. 1 Business leaders and travelers from Chicago and London have been long time strong supporters of Virgin s service to O Hare. Since Virgin s entry into the market, Virgin has given O Hare passengers comfort, amenities, and entertainment options on Chicago-London flights. Moreover, as the second largest business market in the United States, O Hare is a very suitable U.S. gateway for Virgin. O Hare is home to a diverse and sophisticated mix of business and leisure travelers that is ideal for Virgin s service between O Hare and Heathrow. b) Virgin s Service to O Hare Has an Economically Beneficial Effect in the U.S. in Terms of Jobs, Trade, and Tourism Second, Virgin s entry into the Chicago market has a beneficial economic impact on Chicago, the surrounding Midwest region, and the U.S. Chicago has identified these figures in the past. These powerful figures speak for themselves. In its answer in support of Virgin s initial application for slots at O Hare filed on March 12, 1999, Chicago conservatively estimated the annual economic benefit of Virgin s international air service to be over $174.0 million for the Chicago region in terms of increased jobs, trade, and tourism. 2 This figure increases to over $188.0 million if calculated using the industry average 76% load factor in the Chicago-London 1 Virgin has received many awards for its innovative service. See Virgin Atlantic Airways Begins Daily Nonstop Chicago-London Route, PR NEWSWIRE, Novemb er 1, 1999. 2 Sources: (1) projected traffic using aircraft type (A-340 with passenger capacity of 295) and load factor of 70 percent (207 per arrival or departure per day); and (2) Booz, Allen and Hamilton, Chicago Aviation Policy, Nov. 12, 1998 (concluding that $2,310 of economic benefit is generated by each international passenger enplanement). U.S. Department f Transportation T-100 Report. 5

market. 3 If travelers vacation spending and stays in area hotels are included, Virgin s economic benefits to the Chicago region are estimated to be as high as $225 million. 4 These significant benefits are the primary reason why Virgin must remain on the roster of airlines flying into O Hare. destination and gateway. Virgin contributes to the City s growth as an international Any loss of Virgin s service, even if only temporarily, would negatively impact Chicago s economy and the economy of the Midwest. Moreover, as O Hare is an important international gateway and Chicago-London/Heathrow is a critically important business route, any loss of Virgin service due to unfavorable action by the Department would be harmful to the U.S. economy. II. FAVORABLE ACTION IS NECESSARY TO FULFILL THE BILATERAL RESPONSIBILITIES OF THE U.S. AND THE U.K. Third, grant of the application is fully consistent with, if not required by, the bilateral air service obligations of the United States under Bermuda II. 5 Virgin s Chicago operations have already been authorized under the U.S.-U.K. Agreement. Article 3(2)(b)(I) authorizes double designation by the U.S. or the U.K. on any route to which certain traffic thresholds have been achieved. These thresholds have been achieved in the London-Chicago market a long time ago. In fact, the growth in traffic has been phenomenal. Between 1994 and 1997, Chicago-London traffic increased from 564,028 to 1,099,444 passengers, a growth rate of 79 percent. 6 Furthermore, according to available T-100 statistics, between 1997 and 1998, Chicago-London 3 U.S. Department of Transportation T-100 Report, Year Ended November 30, 1998. 4 Sandra Guy, Why Virgin Chose to Fly Into Chicago, CHICAGO SUN TIMES, September 22, 1999, at 59. 5 Article 3(2)(b)(i) of the U.S.-U.K. Air Services Agreement authorizes double designation for routes like Chicago- London that exceed 600,000 passengers per year. With the mini-deal signed in 1995, which brought United Air Lines onto this route, the traffic threshold has been significantly exceeded. See Order 99-3-20. 6 U.S. Department of Commerce, U.S. International Air Travel Statistics Report, 1994 and 1997. 6

traffic grew by another 26 percent after new capacity was added, including American s Chicago- London service. By granting exemption authority now, the Department will achieve the benefit in Bermuda II designed to add competition in route segments. The argument that Virgin is asking the Department to create new slots is inaccurate. Virgin is seeking a slot exemption as the only means for it to continue the exercise of its bilateral authority; it is not an extra-bilateral event. While Chicago recognizes that the U.S. and U.K. are presently at an impasse over Pittsburgh-London service, Chicago strongly urges the Department to resist calls to use the slot exemption process as a political tool in a high stakes aviation strategy that will most likely have the unintended effect of harming U.S. passengers and shippers, not only from the Midwest region, but all across the United States. III. FAVORABLE ACTION IS WARRANTED AS VIRGIN HAS BEEN RESPONSIVE TO THE DOT S PROCEDURAL REQUIREMENTS Fourth, Virgin has filed a timely request for the extension of the slot exemption request with the DOT. Although Virgin has lodged with the FAA a timely requests for slots at O Hare, the FAA has been unable to accommodate Virgin s requirements through the regular allocation process. DOT has never, in the history of slot exemptions, turned down a slot exemption request that was filed in a timely manner and met the Department s requirements. 7 It is simply unprecedented for the Department to do so. Moreover, to turn down Virgin s slot request now, would make little sense, particularly at this time when Congress seems poised to repeal the High Density Rule ( HDR ) at O Hare. As the Department is no doubt aware, Congress is on the 7 See Kuwait Airways Corporation (Order 96-3-40); Turkish Airlines (Order 97-3-31); Polski Linie Lotnicze LOT, S.A. (LOT) (Order 97-4-11); Lufthansa German Airlines ( Lufthansa ) (Order 98-4-28); Iberia Lineas Aereas de Espana, S.A. (Order 98-6-8 and 98-10-12); Scandinavian Airlines System ( SAS ) (Order 98-8-26); Compania Mexicana de Aviacion, S.A. ( Mexicana ) (Order 98-10-26); SAS (Order 99-2-22); Lufthansa (Order 99-2-22); Societe Air France (Order 99-2-23); Mexicana (Order 99-2-24); All Nippon Airways Co., Ltd. (Order 99-2-25); 7

verge of enacting a phase repeal of the HDR, which will, in effect, mean that as of May 1, 2000, all foreign carriers that now have to go through the slot exemption process should no longer need to do so. Fifth, grant of this exemption could assist in paving the way for further liberalization in one of the world s largest and most important aviation corridors. It could provide a sorely needed measure of good will in a relationship that is currently off-track. Chicago continues to strongly support the liberal use of the Secretary s slot exemption authority to ensure the highest and best use of O Hare s available capacity. Toward that end, Chicago urges prompt, favorable action on Virgin s application. Finally, as required by the Department and urged by Chicago, Virgin will operate this service with Stage 3 compliant Airbus A-340 aircraft or Boeing 747-200 aircraft. In other words, Virgin s slot application meets all the necessary procedural criteria, and therefore should be granted. CONCLUSION Chicago recognizes that Virgin s exemption application comes at a particularly sensitive time in U.S.-U.K. aviation relations. At the same time, Chicago respectfully urges the Department to resist calls for retaliation over negotiation, for renunciation over compromise. Grant of the instant application would further demonstrate the enormous, pro-consumer advantages of liberalization, and perhaps help create a climate conducive to jump-starting liberalization negotiations between the U.S. and U.K. In summary, Chicago respectfully submits that the service to be provided with the grant of these slot exemptions is clearly in the public interest, and urges that the application be granted as soon as possible. Japan Airlines Company, Ltd. (Order 99-2-25); Singapore Airlines Ltd. (Order 99-3-15); and LOT (Order 99-3- 16) (in which the Department granted exemptions under similar circumstances). 8

WHEREFORE, for the foregoing reasons, Chicago respectfully requests that the Department grant expeditiously Virgin s application for an exemption from Subparts K and S of 14 C.F.R. Part 93. Respectfully submitted, Dated: March 3, 2000 /s/_kenneth P. Quinn Kenneth P. Quinn Asaf S. Hahami WINTHROP, STIMSON, PUTNAM & ROBERTS 1133 Connecticut Avenue, N.W., Suite 1200 Washington, D.C. 20036 (202) 775-9800 (202) 833-8491 (fax) E-mail: quinnk@winstim.com hahami@winstim.com Counsel for the City of Chicago 9

Certificate of Service I hereby certify that I have this date served a copy of the foregoing Answer by U.S. mail on all persons named on the attached service list. /s/ Asaf S. Hahami Asaf S. Hahami Washington, D.C. March 3, 2000 60226339.04

Service List Frances Farrow Executive Director, Corporate Services, and General Counsel Virgin Atlantic Airways Limited The Office, Manor Royal Crawley Business Quarter Crawley, West Sussex RH10 2NU United Kingdom Joel Stephen Burton Donald T. Bliss, Jr. O Melveny & Myers LLP 555 13 th Street, N.W. Suite 500 West Washington, D.C. 20004 Nathaniel P. Breed, Jr. Shaw, Pittman, Potts & Trowbridge 2300 N Street, N.W. Washington, D.C. 20037 Richard J. Fahy, Jr. Consulting Attorney TWA 1800 Diagonal Road Suite 600 Alexandria, VA 22314 Hershel Kamen Staff Vice President International and Regulatory Affairs Continental Airlines, Inc. Dept.: HQSGV P.O. Box 4607 Houston, TX 77210-4607 Jeffrey N. Shane Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20037-1420 Robert E. Cohn Shaw, Pittman, Potts & Trowbridge 2300 N Street, N.W. Washington, D.C. 20037 Anthony Fortnam Vice President, Government & Industry Affairs British Airways Plc 1850 K Street, N.W., Suite 300 Washington, D.C. 20006 Mrs. Patricia J. Hayes First Secretary of Transport British Embassy 3100 Massachusetts Avenue, N.W. Washington D.C. 20008-3600 Lawrence M. Nagin Executive Vice President Corporate Affairs and General Counsel USAir, Inc. Crystal Park Four 2345 Crystal Drive Arlington, VA 22227 60226339.04

R. Bruce Keiner Crowell & Moring 1001 Pennsylvania Avenue, N.W. Washington, D.C. 20004 Thomas White Deputy Assistant Secretary for Transportation Affairs Department of State 2201 C Street, N.W., Room 5531 Washington, D.C. 20520 Megan Rae Poldy Associate General Counsel Northwest Airlines, Inc. 901 15 th Street, N.W., Suite 310 Washington, D.C. 20005 Carl B. Nelson, Jr. Associate General Counsel American Airlines, Inc. 1101 17 th Street, N.W., Suite 600 Washington, D.C. 20036 Lorelei Peter Manager, Airspace and Air Traffic Law Branch Office of the Chief Counsel DOT/Federal Aviation Administration 800 Independence Avenue, S.W. Washington, D.C. 20591 William K. Ris Jr. Senior Vice President Government Affairs American Airlines, Inc. 1101 17 th Street, N.W., Suite 600 Washington, D.C. 20036 Jeffrey A. Manley Wilmer, Cutler & Pickering 2445 M Street, N.W. Washington, D.C. 20005 60226339.04 3