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

BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) Application of ) ) Vuela Aviacion, S.A. (Volaris Costa Rica) ) ) Docket DOT-OST-2017-0040 For a Foreign Air Carrier permit ) pursuant to 49 U.S.C. 41301 ) and for an Exemption pursuant to ) 49 U.S.C. 40109 ) ) RESPONSE OF SOUTHWEST AIRLINES CO. AND MOTION FOR LEAVE TO FILE Southwest Airlines Co. (Southwest) 1 files this Response to the Reply of Vuela, S.A. (Volaris Costa Rica or Volaris CR) filed on April 21, 2017, in the above referenced docket. To the extent required, Southwest seeks leave from the Department to file this Response under Rule 6 of the Rules of Practice (14 CFR 302.6) for good cause shown. Southwest s Response is narrowly tailored to address the new information submitted in Volaris CR s Reply and will therefore contribute to a more accurate and informed basis for the Department s decision. In its Reply, Volaris CR characterized the waiver it requests of the substantial ownership and effective control requirements contained in the U.S. Costa Rica Air Transport Agreement as an oft-granted waiver and consistent with Department precedent. See Volaris CR Reply at 2. This is not correct. As demonstrated in Southwest s Answer and reiterated below, no foreign passenger airline that is wholly owned by foreign nationals from a third country has received 1 Common names of carriers are used herein. 1

a 100% waiver of this requirement by the DOT, a principle that is particularly important when the foreign nationals also control another passenger airline from the same region. 2 It is therefore not surprising that Volaris CR has failed to cite a single case, in its Application or Reply, which would support a waiver to permit 100% foreign ownership in the circumstances here. 3 Further, much more is at stake for the United States in this case than Volaris CR acknowledges. Granting the requested waiver under the circumstances presented here would represent a fundamental break with longstanding DOT policy that would be directly contrary to U.S. aviation interests. Volaris CR is asking the DOT to disregard important restrictions in the U.S. Costa Rica bilateral, and by extension all other bilaterals, which are in place to protect American interests. The proposal would also violate the recentlyamended U.S. Mexico bilateral by allowing what is effectively a Mexican-owned and controlled airline to operate nonstop service to the U.S. via a third country, thereby conducting seventh freedom service which clearly is not authorized under the U.S. Mexico agreement. The Volaris CR proposal is therefore contrary to U.S. bilateral agreements with both Costa Rica and Mexico. The U.S. Costa Rica market has nearly three million annual passengers, 71% of which originate in the United States. 4 For the DOT to provide what is in all respects a Mexican airline access to the U.S. Costa Rica market without any 2 The sole exception is the unique agreement that the U.S. negotiated with the European Union, which took place under a far different set of circumstances than the instant case. 3 Volaris CR s reference to the relationship of LACSA to Avianca adds nothing to this issue as Volaris CR does not cite to any CAB or Department Order discussing the original grant of authority to LACSA or any Order where the Department reviewed any acquisition of an ownership by Avianca. 4 MIDT, CY 2016. 2

Costa Rican owners would grant an unreciprocated competitive advantage to a foreign carrier at the expense of U.S. airlines. As a matter of both long-standing and current U.S. aviation policy, the Department should deny Volaris CR s waiver request. I. There is No Precedent to Support a Waiver of the Substantial Ownership and Effective Control Requirement Where No Home Citizenship Exists. Volaris CR cited several new cases in its Reply in an effort to justify its complete lack of ownership by Costa Rican nationals. However, similar to the Orders and Actions cited in its Application, these new cases are easily distinguishable. While Order 2015-7-3 stated Viva Colombia had only 39% national ownership, 50% of the air carrier was actually owned by Colombians. Twenty-five percent was owned by SEISA, which was wholly owned by Colombians, and 25% was owned by Grupo Fast S.A., of which Colombians owned 56.3%. Further, in Notice of Action Taken OST-2013-0165, while the Department waived the requirement when 99% of Copa Airlines (a Colombian airline) was Panamanian owned, that application was for a code sharing agreement with United Airlines and not for direct flights by Copa to the United States. Volaris cited to Order 87-4-7 as an example of a waiver granted to a carrier when the Department was unable to ascertain whether U.K. citizens substantially controlled Cathay Pacific. However, there is no discussion of ownership in Order 87-4-7. Order 92-11-37 stated that despite 51.85% of the airline being owned by a British Hong Kong Corporation, the record was unclear 3

if U.K. nationals substantially owned the airline. Id. at 9. The Cathay case is easily distinguishable from the current matter, as the Department was able to determine that at least 51.85% of the airline was owned by a British Hong Kong Corporation, while the Department knows Volaris CR is wholly owned by a Mexican holding company. Finally, Volaris CR would have the Department believe that its denial of LAN Ecuador s waiver in Order 2002-12-15 was due to concerns over a restrictive Aviation regime with Ecuador. This is misleading, as that issue was only one of the Department s concerns. The ownership and control of LAN Ecuador was the primary concern, as evidenced by the length of the discussion of that issue in the Order. Further confirmation of the importance of the ownership issues was the fact the Department later granted LAN Ecuador s application once 52.5% of the airline was controlled by Ecuadorians. In Order 2003-3-9, the Department cited ownership and control as the sole reason for the earlier denial: By Order 2002-12-15, we denied an earlier exemption request on the basis that the carrier was not substantially owned and effectively controlled by citizens of Ecuador. Id. at 1. Similarly here, the Department should protect U.S. carrier interests and deny Volaris CR s application, where no Costa Rican citizenship exists. II. Recent U.S. Agreements with Colombia and Brazil Do Not Relax the Bilateral Requirement for Substantial Ownership and Effective Control. Volaris CR incorrectly interprets the U.S. - Colombian and U.S. - Brazil Air Service Agreements to support its argument that the U.S. is relaxing the 4

ownership and control requirements. Yet Volaris CR concedes that notwithstanding the protests of Colombia and Brazil, the requirement of substantial ownership and effective control by nationals was retained in both bilaterals. See Volaris CR Reply at 9. Importantly, the Department stated in the Memorandum of Consultation that removing the substantial ownership and control requirement would be a significant departure from U.S. policy and practice See Volaris CR Application at 8, quoting U.S. - Colombian Memorandum of Consultations at 1 (Nov. 11, 2010). Further, Volaris CR seems to equate the definition of Airline of a Party in the U.S. - Colombian and U.S. - Brazil Agreements with the requirement of national ownership and control. It wrongly argues that substantial control can be demonstrated simply by showing an airline has received its Air Operator s Certificate from and has its principal place of business in the territory of that Party See Volaris CR Reply at 9-10. This argument would make unnecessary Article 3 of the Agreements, which require substantial ownership and effective control of that airline are vested in the other Party, nationals of that Party. Outside of the agreement with the EU which is a unique situation, the U.S. has never failed to include the substantial ownership and effective control language in its aviation agreements. And, as Southwest explained in its Answer, only in extremely unusual and rare circumstances not present here has the Department ever completely waived the requirement. Finally, Volaris CR wrongly asserts that the recent changes in Costa Rican law, which now allows foreign operators to control the majority of a Costa Rican 5

airline, such as Volaris CR, should automatically require the Department to approve the application. See Volaris CR Reply at 4-5. However, this is a matter of Costa Rican law and policy which has absolutely no effect on U.S. bilateral requirements. Indeed, when a particular country states it will accept complete foreign ownership of its airlines, the Department should be very careful in reviewing ownership and control applications from an applicant from such a country. III. Volaris Costa Rica s Service to the U.S. and Strategic Direction are Dependent on Volaris (Mexico). Volaris CR attempts to distance itself from Volaris (Mexico), despite sharing the same parent company, 5 as well as to minimize the size of its operation by arguing it has only a two aircraft fleet and only wet leased aircraft from Volaris for a brief period. However, it stated in its March 23, 2017 Application that: Volaris Costa Rica subleases its aircraft from Volaris, and is planning to sublease additional aircraft in the coming months. See Volaris CR Application at 6. Moreover, Volaris CR listed 73 aircraft on the Certificate of Insurance in its Application which presumably are all aircraft now in Volaris (Mexico) s fleet. While Volaris CR may only use two aircraft at present, by its own admission it plans to expand and clearly has access to Volaris (Mexico) s much larger fleet through its parent company. Volaris CR cited two cases, TNT and Deutsche BA, arguing that much larger airlines received waivers of the ownership and effective control 5 Controladora Vuela Compania de Aviacion, S.A.B. de C.V. (Controladora) a publically traded holding company organized under the laws of Mexico. 6

requirement. However, both of those cases can be readily distinguished and involve operations where the Department is more flexible. For example, TNT is a cargo carrier, and as Southwest noted in its Answer, the Department has always treated cargo airlines applications differently from applications for passenger service. Similarly, Deutsche BA was asking for a waiver to operate intra-europe code share flights with US Airways and not to operate direct passenger flights to the U.S. Importantly when Deutsche BA was granted its waiver, German nationals owned 51% of Deutsche BA. Volaris CR also claims Southwest is merely speculating about Volaris CR obtaining JFK slots from Volaris (Mexico). But this is hardly speculation and the applicant does not actually deny it. Volaris CR does not disclose where it will get the slots in either its Application or its Reply and it is common industry knowledge that there are no available slots at JFK. Accordingly, Volaris (Mexico) would likely be the only carrier that would give up slots to its sister company, which it already leases aircraft to and is owned by the same parent corporation. Significantly, as discussed in Southwest s Answer, the relationship between Volaris (Mexico) and Volaris CR will effectively give Volaris (Mexico) seventh freedom operations. Any notion that seventh freedom operations would be permitted was a concern for the Department when it agreed that LACSA could operate under the d/b/a TACA. The Department noted: In addition, we tentatively are not concerned that favorable action on the TACA Group s request would entice any of those carriers to initiate scheduled seventh freedom operations, for which they lack authority. The joint applicants indicate that they would not interpret approval of their plan as allowing them to expand their U.S. route 7

authority to initiate unauthorized seventh freedom flights. We have ample means to address any abuses in this area, as warranted. Order 2004-10-5 Volaris CR is not able to grant any assurance that the thin veil between Volaris CR and Volaris (Mexico) will prevent Volaris (Mexico) from effectively operating seventh freedom flights from Costa Rica by providing equipment and slots on top of its parent company s ownership and effective control of Volaris CR. While Volaris CR argues the two Costa Rican Board members may run its day-to-day operations, the primary concern is the larger strategic direction of Volaris CR to expand in the U.S. This is a situation the Department has seen before - namely where a minority director has disproportionate power because of strong elements of control. Under long-standing precedent the DOT considers the totality of the circumstances when making effective control determinations. 6 In this case: 1) Controladora put up all of the capital for Volaris CR; 2) as the owner of the carrier, Controladora would have appointed all of the board members and the General Manager; 3) a senior officer of Controladora sits on the board of Volaris CR; 4) Controladora (or Volaris (Mexico)) has licensed use of the Volaris name; 5) all of the applicant s aircraft are being provided from Volaris (Mexico); and (6) 6 For example, in the DOT s review of the Virgin America certificate application, the Department found that non-u.s. minority owners were able to exercise effective control under all the relevant circumstances, including the high level of foreign investment and influence over company leadership and marketing, even though the applicant had argued that its CEO was a U.S. citizen and the company was 75% owned and controlled by a U.S. investment company. Show Cause Order 2006-12-23 (December 2006). See also Acquisition by British Airways PLC of US Airways, Order 92-11-10 (November 1992; and Acquisition of Northwest Airlines, Inc. by Wings, Order 91-1-41 (January 1991), each applying a totality of circumstances analysis to find that minority foreign investors had effective control of the applicant carriers. 8

Volaris CR will get its JFK slots from Volaris (Mexico). 7 The totality of these circumstances compels a conclusion that Volaris CR is effectively controlled by Mexican interests. ~~~~~~~~~~~~ As explained above and in Southwest s Answer, permitting Volaris CR to operate nonstop flights between the U.S. and Costa Rica would have the practical effect of enabling Volaris (Mexico) to operate otherwise prohibited seventh freedom flights between Costa Rica and the United States. Such action would give a foreign airline a distinct competitive advantage over U.S. carriers, who have no authority to operate reciprocal seventh freedom services. More seriously, the precedent that would be established by granting a waiver in this case would compel similar waivers to airlines from many other countries. This would be inimical to U.S. aviation interests and clearly adverse to the American public interest. Accordingly, the Department should deny the Volaris CR application for both an exemption and a foreign air carrier permit. Respectfully submitted, May 2, 2017 Robert W. Kneisley 7 In addition, the corporate bylaws may have supermajority provisions which would further entrench Controladora s effective control over Volaris CR. 9

CERTIFICATE OF SERVICE I hereby certify that on May 2, 2017, a copy of the foregoing was served via e-mail on the following persons. jeremy.ross@alaskaair.com (Alaska Airlines) dheffernan@cozen.com (Counsel for Alaska Airlines) robert.wirick@aa.com (American Airlines) howard.kass@aa.com (American Airlines) chris.walker@delta.com (Delta Air Lines) alex.krulic@delta.com (Delta Air Lines) nssparks@fedex.com (FedEx) cefelts@fedex.com (FedEx) robert.cohn@hoganlovells.com (Counsel for Frontier) patrick.rizzi@hoganlovells.com (Counsel for Frontier) robert.land@jetblue.com (JetBlue Airways) esahr@eckertseamans.com (Counsel for JetBlue Airways) dderco@eckertseamans.com (Counsel for JetBlue Airways) rdavidson@eckertseamans.com (Counsel for JetBlue Airways) jyoung@yklaw.com (Counsel for Spirit Airlines) dkirstein@yklaw.com (Counsel for Spirit Airlines) dan.weiss@united.com (United Airlines) mwarren@jenner.com (Counsel for United) dsmalls@ups.com (UPS) Anita.Mosner@hklaw.com (Counsel for Volaris) Jennifer.nowak@hklaw.com (Counsel for Volaris) Tristan.atwood@hklaw.com (Counsel for Volaris) susan.mcdermott@dot.gov brian.hedberg@dot.gov benjamin.taylor@dot.gov Kristen.davis@dot.gov joseph.landart@dot.gov tricia.kubrin@dot.gov brett.kruger@dot.gov Robert.finamore@dot.gov bob.goldner@dot.gov Jeffrey.gaynes@dot.gov Matt.zisman@dot.gov todd.homan@dot.gov peter.irvine@dot.gov john.s.duncan@faa.gov EngleTS@state.gov Eugene.Alford@trade.gov 10

info@airlineinfo.com Amanda Hoff 11