BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. 1999 U.S.-ITALY COMBINATION SERVICE CASE Docket OST-98-4854 ANSWER OF DELTA AIR LINES, INC. TO OBJECTIONS Communications with respect to this document should be addressed to: D. Scott Yohe Senior Vice President - Government Affairs DELTA AIR LINES, INC. 1275 K Street, N.W. Washington, D.C. 20005 (202 216-0700 John Varley Assistant General Counsel Alexander Van der Bellen Attorney DELTA AIR LINES, INC. Law Department #986 1030 Delta Boulevard Atlanta, Georgia 30320 (404 715-5408 Robert E. Cohn Katherine M. Aldrich SHAW PITTMAN POTTS & TROWBRIDGE 2300 N Street, N.W. Washington, D.C. 20037 (202 663-8060 Counsel for DELTA AIR LINES, INC. March 10, 1999
BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. March 10, 1999 1999 U.S.-ITALY COMBINATION SERVICE CASE Docket OST-98-4854 ANSWER OF DELTA AIR LINES, INC. TO OBJECTIONS Delta Air Lines, Inc. ( Delta files this Answer to the Joint Statement of Objections ( Objections filed by American Airlines, Inc. ( American and the City of Chicago (jointly, the Objectors in response to Order 99-2-24 ( Show Cause Order. The Show Cause Order tentatively awarded Delta primary authority to operate seven weekly frequencies between Atlanta and Rome and backup authority to US Airways, Inc. ( US Airways. The Objections fail to contradict the Department s critical reasons for selecting Delta: New gateway to Italy: [W]e can derive major public benefits from an award in this case by providing for new gateway services to Italy. This consideration strongly supports Delta s Atlanta-Rome application because only Delta would open a new gateway to Italy.... Atlanta is the only gateway at issue in this proceeding that does not have nonstop service to Italy. It is also the largest airport in the country without nonstop service to Italy. Delta would remedy this deficiency.... Show Cause Order at 4. Service to an underserved region: [O]nly Delta would permit the Southern region of the country to enjoy the benefits of U.S.-carrier
Page 2 gateway services.... The South is one region of this country that does not have its own U.S.-flag gateway to Italy. Delta would again remedy that situation by using its connecting complex at Atlanta to improve significantly air transportation between a large number of Southern communities and Italy. These are the type of significant public benefits that provide the cornerstone of our efforts to expand U.S.-carrier services in the U.S.-Italy market.... Show Cause Order at 4. Enhancement of intergateway competition: The selection of Atlanta as a new gateway to Italy should also increase competition in the U.S.-Italy market. Most of the U.S. airlines serving this market... do so from one of their major hubs.... The selection of Atlanta as a new gateway to Italy will intensify intergateway competition in the market. The competitive impact of Delta s service from Atlanta should be strong, since the record shows that it is likely to attract a large number of behind gateway passengers, many of whom may now be using gateways served by Delta s competitors. Show Cause Order at 5. Enhancement of competition against foreign airlines: [T]he selection of Atlanta as a new gateway should increase competition between Delta and foreign airlines serving other points, such as Miami. Id. The most online service benefits: Delta would provide single connection service to the most cities; first round-trip single connection service to the most cities; and improved elapsed travel times for the largest number of U.S. cities.... Delta would increase convenience to the most passengers in this case, even after substantial reductions were taken for alleged overstatements. Show Cause Order at 6. The Department s decision is amply supported by the evidence of record. The Objectors have raised no new arguments that have not already been considered and rejected by the Department in its well-reasoned decision. Therefore, the Department promptly should issue a final order making its decision
Page 3 final and awarding Delta frequencies and certificate authority to operate Atlanta- Rome nonstop service. 1 In further support of this Answer, Delta states the following: 1. The Objectors have not refuted the Department s conclusion that only Delta proposes to offer new gateway services to Italy. As the Department stated, we can derive major public benefits from an award in this case by providing for new gateway services to Italy. This consideration strongly supports Delta s Atlanta-Rome application because only Delta would open a new gateway to Italy. The Department correctly determined that Atlanta is the only gateway at issue in this proceeding and is also the largest airport in the country without nonstop service to Italy. Show Cause Order at 4. As Delta emphasized in its Brief and Exhibits, the lack of nonstop service at Atlanta is the most critical gap in U.S.-Italy service (Exhibit DL-RT-1, page 2. 2. Nor do the Objectors challenge the Department s determination that the southern region is underserved and does not have its own U.S.-flag gateway to Italy, and that only Delta will remedy this important void in U.S.-Italy service. The Department correctly noted that Delta would provide single-carrier service to Italy for 53 southern cities (Show Cause Order at 4 and increase online service options convenience for over 118,000 southern-tier 1 Delta takes no position with respect to the Objectors challenge to the
Page 4 passengers traveling to Italy over the new Atlantic gateway. Delta Brief, Attachment B. Indeed, as the Department noted, Delta will offer first roundtrip single connection service to more than 30 southern cities and the first or first competitive roundtrip service to more than 40 southern cities, more than any other applicant. Show Cause Order at 4-5. 3. Also unrefuted is the Department s finding that Delta would provide significant service benefits to points outside of its core Southern tier service area, by offering online connections to more than 100 cities, including roundtrip single-connection service to more than eighty points. Show Cause Order at 5. 4. With respect to competition, the Department focused on the fact that Delta is the only major U.S. network carrier, and the only applicant in this case, that does not have the right to serve Italy from one of its major hubs. Enabling Delta to serve Atlanta-Rome would open the largest U.S. airline hub for service to Italy, thereby maximizing market structure benefits and intergateway competition. Thus, the Department correctly found that Most of the U.S. airlines serving this market... do so from one of their major hubs. These hubs allow them to collect traffic from points behind the gateway and flow that traffic to Italy over that gateway. All U.S. airlines in the market compete for at least a substantial portion of the same so-called behind gateway traffic. The selection of Atlanta as a new gateway to Italy Department s back-up award to US Airways.
Page 5 will intensify intergateway competition in the market. Show Cause Order at 5 (emphasis added. 5. The Objections ignore the key elements of Delta s service proposal which formed the basis of the Department s determination that Delta s proposal is superior to American s. Indeed, Appendix A of the Show Cause Order graphically depicts the substantial service advantages of Delta s proposal compared to American s. The Appendix shows that Delta proposes to use the largest aircraft in this proceeding, providing 34% more new U.S.-Italy seats than American. The Appendix also shows that Delta will benefit the most U.S.-Italy nonstop and connecting passengers -- 35% more than American. 6. Unable to refute the key carrier-selection factors which overwhelmingly favor Delta over American, the Objectors attempt to redefine the carrier selection issues in a way that tries, but fails, to place American s Chicago- Rome proposal in a more favorable light than Delta s Atlanta-Rome proposal. The Objectors claims are flawed. 7. The Objectors argue that the Department s decision is in error because it fails to address the greater need for service to Rome and the compelling need for a Midwestern Rome gateway. Objections at 2. They claim that the most critical issues [sic] to be decided in this case is which of the two Italian gateways proposed to be served by the applicants, Rome or Milan, has the greater need for additional service by a U.S. carrier. Objections at 2.
Page 6 The Objectors attempt to recast the critical carrier selection issue is all wrong. The Department correctly determined that the most critical issue is which of the applicants in this case will enhance the U.S.-Italy market structure by establishing new gateway hub service to Italy. The Department observed that it has used new Italy bilateral opportunities to create new gateways to Italy, believing that new gateway service was an effective way to expand service and consumer choice in a regulated market. Show Cause Order at 3. After pointing out that six U.S. airlines now operate to Italy from five different U.S. gateways, including Chicago, New York, Newark, Washington, D.C., and Philadelphia, the Department noted that the new gateway operations have allowed U.S. airlines to use their networks effectively to link the regions served by these networks to Italy. Against this background, the Department said, we can derive major public benefits from an award in this case by providing for new gateway services to Italy. This consideration strongly supports Delta s Atlanta-Rome application.... Show Cause Order at 4. The Objectors do not refute the fact that only Delta will provide the major public benefit of opening up an entirely new gateway to Italy. 8. The Objectors try to distract attention away from the superiority of Delta s service proposal by arguing that Chicago allegedly has a larger catchment area than Atlanta. This argument is misplaced. The size of
Page 7 Chicago s catchment area, however large it may be, does not accurately reflect, to use the Objectors own words, the real measure of public benefits because it does not establish how many passengers will actually use the service. Objections at 5, footnote 3. This is because Chicago s catchment area numbers include all cities that have nonstop service to Chicago by all carriers; it does not relate to the service American actually proposes in this case. 2 This defective analysis ignores the fact that Delta s Atlanta hub is substantially larger than American s Chicago hub, which will allow Delta to provide more cities and more passengers with improved Italy service than American. Delta s Atlanta hub is the largest single airline hub in the world, offering over 800 daily departures to 148 nonstop destinations. American s Italy 2 Even using Chicago s flawed catchment area analysis, Chicago s effective market size is not significantly larger than Atlanta s. See, Objections at 10. Moreover, most of the behind gateway cities that American will serve are in the northeast quadrant, which already receives a plethora of U.S.-flag service to Italy. See, DL-R-122, which shows that Delta will serve 107 cities outside the northeast quadrant compared to only 32 by American. Fully 84% of Delta s forecast passengers come from outside the well-served northeast quadrant. DL-R-121.
Page 8 proposal does not come close to matching the broad array of online connecting services, including first roundtrip single connections and total roundtrip single connections that Delta can provide at Atlanta. Delta will offer 89 cities single connection service compared to 66 by American. Exhibit DL-RT-1, page 5. Furthermore, Delta will offer almost twice as many cities first roundtrip single connection service as American (37 versus 19. Id.; Exhibit DL-R-104. In terms of online connecting passengers, Delta will benefit 48% more U.S.-Italy passengers than American. Exhibit DL-R-113. The Show Cause Order found that Delta would provide single connection service to the most cities; first round-trip single connection service to the most cities; and improved elapsed travel times for the largest number of U.S. cities. Compare DL-120 to AA-310 and US-303. See also, DL-R-103, DL-R-105, and DL-R-107. Show Cause Order at 6. 9. The evidence shows that American s service benefit claims are exaggerated. As Delta s rebuttal exhibits show, although American claims to propose first online service to 31 cities, only 19 cities will receive roundtrip service, and all but four are operated by commuter flights. DL-R-151. Furthermore, Delta will serve 20 more top 75 U.S.-Rome city pairs with single connection service than American. DL-R-152. While the Objectors assert circuity advantages, 82% of the traffic for which American claims a circuity advantage comes from cities with an insignificant (i.e., less than 10% circuity difference between Atlanta and Chicago. DL-R-156. Furthermore, in six of the seven cities
Page 9 for which American claims to have the least circuity, foreign flag carriers offer less circuitous connections than American. DL-R-155. 3 10. The Objectors geographic diversity argument is also in error. First, it fails to recognize that the southern region is the only region in issue in this case that does not already have a U.S.-flag gateway to Italy, and that Delta is the only applicant proposing to remedy this situation. Show Cause Order at 4. The Midwest already enjoys nonstop services to Italy provided by American and Alitalia at Chicago. Second, the Objectors argument ignores the fact that all of the existing U.S.-flag gateways to Italy are located in the northeast quadrant of the country. This is graphically depicted in Exhibit DL-110. See also DL-R-108. Atlanta is located over 500 miles from the nearest U.S.-gateway to Italy, while Chicago already has nonstop service to Italy. DL-R-101. The lion s share of American s traffic forecast is comprised of traffic from the already well-served northeast quadrant of the United States. By contrast, a substantial portion of Delta s forecast passengers, fully 84% of its forecast 139,000 passengers are from cities located outside the northeast quadrant. In fact, Delta will benefit 139% 3 The Objectors inflate American s alleged passenger benefits by claiming that alternatively either 270,000 passengers or 215,005 passengers will benefit from American s selection. See, Objections at 10. This claim is impossible in light of the fact that American proposes to carry only 122,078 passengers, less than half the number of passengers that the Objectors claim American will benefit.
Page 10 more passengers than American from regions of the country that currently have no U.S.-flag gateways to Italy. DL-R-121; DL-RT-1, page 3. Third, the Objectors attempt to characterize Atlanta as just another eastern gateway is off the mark. Atlanta is located in the heart of the southern region, which has no U.S.-flag gateway to Italy. 11. The Objectors criticisms of Delta s traffic forecast are without merit. As the Department correctly concluded: we believe that arguments that [Delta] forecast is overstated are themselves overstated and have failed to show that Delta s proposal would not benefit the most U.S.-Italy passengers. On this point we note that the American and US Airways forecasts for Delta show that Delta would increase convenience for the most passengers in this case, even after substantial reductions were taken for alleged overstatements. AA-R-111 and US-R- 310. Order to Show Cause at 6. 12. Delta s forecast is reasonable. It is soundly based on assumptions that reflect Delta s actual market experience on other Atlanta-Europe services. Delta s projected growth rate of 14%, which the Objectors claim is too high, is based on the actual historic growth rate experienced in the U.S.-Rome market from 1994 through 1998. That growth rate reached as high as 30% in 1997. DL-305. With respect to stimulation in the local Atlanta-Rome market, Delta applied a factor of 175%. As noted in Delta s brief, this is substantially below the stimulation rates experienced by Delta on many new Atlanta-Europe routes, which
Page 11 ranged as high as 728% and averaged 195%. DL-306. With respect to behindgateway cities, Delta applied stimulation rates based on its past experience in generating traffic from online service improvements. The overall rate for all behind-gateway city pairs used by Delta is only 4.9%. Delta s use of a 75% stimulation factor for Orlando-Rome is reasonable in light of the special enhanced service that Delta will offer Orlando customers with a dedicated, one-hour changeof-gauge flight. 13. Finally, the Objectors repeat the argument rejected by the Department that Delta should not receive an award in this case because it already holds New York-Italy authority. The Department correctly concluded that Atlanta s opponents in this case have overstated Delta s position in the market, highlighting that Delta will provide only thirty-five percent of the total U.S.-carrier U.S.-Italy frequencies and less than twenty percent of all service in the markets. Show Cause Order at 6 (emphasis included in original. In choosing between three applicants, each of which is an Italy incumbent, the Department correctly assessed, based on the evidence of record in this case, the substantial benefits that would accrue from authorizing Delta to operate from its major Atlanta hub as compared to the benefits that would result from the other applicants proposals.
Page 12 In conclusion, for all of the reasons discussed above, the Department should promptly enter a final order granting Delta seven weekly frequencies and Atlanta- Rome certificate authority. Respectfully submitted, Robert E. Cohn Katherine M. Aldrich SHAW PITTMAN POTTS & TROWBRIDGE 2300 N Street, N.W. Washington, D.C. 20037 (202 663-8060 Counsel for DELTA AIR LINES, INC.