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Order 2005-10-2 F TRAN TO SP EN UNITED STATES OF AMERICA O TM RT DEPARTMENT OF TRANSPORTATION D EP A R A T I ON OFFICE OF THE SECRETARY WASHINGTON, D.C. UN CA IT ED RI E ST M ATE S OF A Issued by the Department of Transportation on the 5th October, 2005 Served: October 5, 2005 2005 U.S.-ARGENTINA COMBINATION FREQUENCY PROCEEDING Docket OST-2005-21949 ORDER TO SHOW CAUSE Summary By this order, we tentatively select Continental Airlines, Inc. (Continental) to provide scheduled combination air service between Houston, Texas, and Buenos Aires, Argentina, and allocate seven weekly frequencies to Continental to operate its proposed services. We have also tentatively decided to select Delta Air Lines (Delta) as the backup carrier to Continental’s primary award for service in the New York-Buenos Aires market. We will afford interested parties 7 calendar days to file objections and 3 calendar days to file any answers to such objections. Background Air service between the United States and Argentina is governed by a bilateral aviation agreement between the parties that permits U.S. carriers to operate only 56 weekly frequencies in that market. Currently, just three U.S. airlines provide U.S.-Argentina air service: American Airlines (American), United Airlines (United) and Delta. American holds 28 frequencies, United holds 14 frequencies, and together they operate 85 percent of all U.S. nonstop service in the market. Delta holds 7 frequencies and entered the market in December 2001. The remaining seven frequencies are at issue in this proceeding, having been held by United for many years but not used since September 2001. Continental does not serve the U.S.-Argentina market. American now uses all of its frequencies to serve Argentina from Dallas/Ft. Worth, Miami and New York; Delta uses all of its frequencies to serve Argentina from Atlanta; United uses seven 2 frequencies to serve Argentina from Washington, D.C., and plans to reinstate daily service to Argentina from Chicago in December 2005. In April, Continental and Delta each filed an application for exemption authority and allocation of United’s seven unused frequencies and filed pleadings opposing the other’s application and further supporting their own. In addition to the submissions of the applicants, the City of Houston and the Greater Houston Partnership (the Houston Parties) and the Regional Business Partnership, Newark (the New Jersey Parties) filed answers in support of Continental’s application, and the Port Authority of New York and New Jersey (The Port Authority) filed an answer in support of Delta’s application. By Order 2005-7-23, we determined that it was in the public interest to reallocate seven of United’s unused frequencies and to institute this proceeding for that purpose. Continental and Delta filed supplements to their applications. The applicants and the Houston and New Jersey parties filed answers to the supplements, and the applicants and the Houston parties filed replies under the procedural schedule set forth in our order instituting this proceeding. Applications Continental has proposed to provide daily New York/Newark-Houston-Buenos Aires flights using 169-seat Boeing 767-200ER aircraft beginning November 29, 2005. Delta has proposed to provide daily New York (JFK)-Buenos Aires flights using 199-seat Boeing 767-300ER aircraft beginning December 1, 2005. Position of the Parties Applicants Continental maintains that the primary objective in this case should be to promote new entry in the U.S.-Argentina market, and that only by selecting Continental can the Department achieve this objective and provide the following public benefits: (1) the first nonstop service at Houston; (2) one-stop single-plane service in the New York/Newark-Buenos Aires market; (3) nonstop-to- nonstop connecting service between Buenos Aires and 111 points in the United States via its Houston hub; (4) significant new inter-gateway competition for all of the incumbents; and (5) the first competitive Argentine gateway west of the Mississippi. Continental believes that it would provide the greatest public benefits in this case because Delta (1) would provide the third nonstop service at New York; (2) would not provide any new on-line service because all of its proposed on-line points already have service to Argentina via Atlanta; (3) would not provide meaningful competition beyond New York; (4) and would not provide meaningful service to the Western region of the United States. Continental also argues that Delta’ traffic forecast is highly exaggerated; that Delta would not be able to compete effectively at New York because it lacks a New York hub that is required for such competition; that there is no need for additional nonstop service at New York since there are now a large number of empty seats in the New York-Buenos Aires market; and that the cases cited by Delta in support of its selection in this proceeding actually support Continental’s selection. 3 Delta believes that the principal objective in this case should be to restore competitive U.S.-flag service at New York, and that only by selecting Delta can the Department achieve that objective. In support of its position Delta maintains that New York is the largest and most important market in this proceeding, and the second largest U.S.-Argentina O&D market; that New York enjoyed the benefits of competitive U.S.-flag service for many years until United dropped out of the market; and that Delta would restore those benefits. Delta also maintains that its selection would provide strong competition against American at New York, the leading carrier in that market and in the overall U.S.-Argentina market. Delta maintains that its selection would provide the greatest public benefits in this case because: (1) Delta would provide substantially superior service, greater competition, and benefit more passengers at New York than Continental; (2) Delta would offer more capacity and carry more passengers than Continental overall; (3) there is a much greater demand for nonstop service at New York than at Houston, since New York is six times larger than Houston in terms of O&D passengers to Argentina; and (4) Continental’s on-line service proposal would not provide significant service or competitive benefits because all of Continental’s proposed on-line points already receive nonstop-to-nonstop connecting service to Argentina and because the overall U.S.- Argentina market already receives highly effective network competition. Delta also argues that Continental’s traffic forecast is highly exaggerated; that Continental cannot be trusted to implement and maintain service to Argentina because it has defaulted on numerous opportunities to serve U.S.-Latin America limited-entry markets; and that the Department’s recent decisions in the 2005 U.S.-China Services Case (OST-04-19077) and the U.S.-Ukraine Third Country Code-Sharing Case (OST-2004-17373) warrant Delta’s selection in this proceeding. Delta states that this is because in the China Case DOT chose New York over other gateways and service at existing gateways over service at new gateways; and because in the Ukraine Case the Department chose an incumbent over the applications of potential new entrants. Civic Parties The Houston and New Jersey Parties support the selection of Continental in this case. Houston believes that Continental would provide the greatest public benefits in this case for many of the same reasons cited by Continental. In addition, Houston emphasizes that air service to Houston is extremely important to the continued growth of Houston’s economy, and that Continental would make a valuable contribution to that growth by substantially improving service between Houston and Argentina. Houston also asserts that only Continental has proposed service to the underserved Southwestern and Western Regions of the United States. Finally, Houston believes that Delta’s argument that Continental’s application should be rejected for poor performance in U.S.-Latin America markets is entitled to no decisional weight in this case because many airlines – including Delta – have experienced service disruptions due to adverse economic conditions affecting Latin America. New Jersey takes the position that Continental would provide the most significant public benefits in this case because while Continental would provide New Jersey passengers with more convenient service to Argentina and many other communities with new connecting service to Argentina, Delta would only duplicate nonstop service at New York now operated by other airlines and connecting services to Argentina that it now offers via its Atlanta hub. The Port Authority supports Delta’s application. It believes that that the seven frequencies at issue here have been historically committed to New York-Buenos Aires service and should remain dedicated to that service to meet the needs of that market. In this regard, The Port Authority notes 4 that in the 1999 U.S.-Argentina Combination Service Case (OST-1999-6210) the Department found that the strong demand for New York-Buenos Aires nonstop service justified the selection of a third U.S. carrier to provide that service. Tentative Decision We have tentatively decided to select Continental to serve the U.S.-Argentina market and to allocate seven frequencies for its proposed Houston-Buenos Aires services. We have also tentatively decided to select Delta as the back-up carrier for Continental’s primary award. In tentatively deciding to choose Continental in preference to Delta, we appreciate that both applicants have submitted solid service proposals, and we regret that we do not have an aviation relationship with Argentina that would permit both applicants to provide the economies of both nations with the combined benefits of the services that they have proposed in this case. This is especially true since the evidence in this proceeding shows that the economy of Argentina is now improving1and because our experience with the benefits of an open relationship in other international markets demonstrates that it would make a far greater contribution to that recovery than the existing restrictive aviation regime. However, we must choose between two qualified applicants because of the very limited opportunities now available to us to respond to the service needs of the U.S.-Argentina aviation market. The last time we addressed this issue in detail we found that there was an overriding need for new entry in that market because of severe restrictions on U.S. carrier service in the market, the dominant positions of the incumbents in the market, and because new entry offered the greatest prospect for improving service and competition in the market.2 We believe that these considerations are still valid today. There is a continuing need for new entry in a market that remains heavily restricted and dominated by the incumbents and we tentatively believe that the selection of Continental in this proceeding would best meet that need. We also tentatively believe that these considerations support a finding that the selection of Continental would provide the greatest public benefits in this case. While Delta would provide significant benefits in the New York-Buenos Aires market, Continental’s proposal, together with its status as a new entrant, would afford both competition and service benefits to travelers throughout much of the United States. Specifically, the major public benefits of selecting Continental in this proceeding include that it would be a new entrant in the U.S.-Argentina market; open a new gateway to Argentina; provide first nonstop service at Houston, a Continental hub; provide new one-stop single-plane service at New York/Newark; and provide a broad range of new service and competitive options throughout the U.S.-Argentina market. Houston is one of the largest U.S.-Buenos Aires O&D markets, and is growing more rapidly than the overall U.S.-Argentina market, even though it receives no nonstop or single-plane service to 1 See Exhibit Dl-124. 2 1999 U.S.-Argentina Combination Service Case, OST-1999-6210. Order 2000-12-13, at 8-ll 5 Argentina.3 Currently, the best service in the Houston-Buenos Aires market requires time- consuming one-stop on-line connections via existing gateways. Continental proposes to remedy that situation by introducing daily nonstop Houston-Buenos Aires service that would substantially reduce travel time in that market.4 Continental estimates that it will carry more than 30,000 Houston-Buenos Aires nonstop passengers in the forecast year.5 Thus, the selection of Continental would provide a large number of people traveling to or from Houston with the benefits of substantially improved service to Argentina. The record also shows that the implementation of Continental’s proposal to introduce an entirely new U.S.-flag network in Argentina and to use that network to provide new nationwide on-line service to Argentina would provide important public benefits in the overall U.S.-Argentina market for two reasons. First, Continental’s proposal would provide a large number of passengers and communities with new service options, including new one-stop single-plane service in the Newark/New York-Buenos Aires market and new nonstop-to-nonstop on-line connections in 83 additional behind-gateway markets.6 Moreover, Continental’s connecting service at Houston would provide new U.S.-Argentina inter-gateway competition by offering attractive competitive alternatives for the flights operated by all of the U.S. incumbents in the market, including, in particular, American’s service at Dallas and Miami, United’s service at Chicago, and Delta’s service at Atlanta, which, as Continental points out, now offers on-line connecting service to Argentina from 166 U.S. cities.7 In comparing the applications of Continental and Delta, we note that Delta would provide daily nonstop service in the New York-Buenos Aires market, which generated more than 250 passengers per day in calendar year 2004 and which currently receives daily nonstop flights from American, three weekly nonstop flights from Argentinas Aerolineas, and on-line connecting service from 9 other airlines.8 We tentatively find that although the implementation of Delta’s proposal would provide important public benefits by increasing the service and competitive choices available to New York-Buenos Aires passengers, Delta’s proposal does not offer a broad range of public benefits outside of the New York-Buenos Aires market because Delta would provide on-line connecting service through New York to only 23 U.S. cities and because Delta already provides all of these cities with on-line connecting service via Atlanta.9 Accordingly, we do not tentatively believe that the selection of Delta would substantially increase either service options or competition in behind-gateway markets. This is an important consideration in the context of the case because Continental has proposed to enhance service and competition in its chosen primary market as well as in a large number of behind-gateway markets. 3 See Exhibit HOU-201. 4 See Exhibit CO-538. 5 Exhibit CO-301. 6 See Exhibits CO-200 and 300. 7 See Exhibits CO-100, 200 and 506. 8 DOT O&D Survey Data, YE1Q05, and August 2005, Official Airline Guide Schedules. 9 See Exhibit DL-302 and Continental Reply at 22, fn. 19. 6 In these circumstances, we have tentatively determined that new entry would provide the greatest service and competitive public benefits in the Argentina market at this time, considering, in particular, that: (1) Continental’s Houston-Buenos Aires nonstop service would provide a large number of passengers with the most significant service improvement that could result from a decision in this case; (2) Continental would offer new on-line service to 80 more cities and at least 50,000 more passengers than Delta;10 (3) Continental would provide effective competition against more incumbents, in many more markets and over a much broader geographic area than Delta. Both applicants claim that the other applicant has greatly exaggerated the traffic that it would carry on its proposed service to Argentina. We tentatively believe that the traffic forecasts of both applicants are overstated in certain respects. Nonetheless, we have tentatively determined that the proposals of both applicants are viable, and further, that such variables do not affect the merits of their proposals to serve Argentina. We do not agree with Delta’s contention that Continental’s application should be rejected because Continental has failed to implement or has abandoned service in a number of U.S.-South America markets. The record shows that virtually every U.S. airline providing combination service to South America has reduced, suspended or terminated service to that region because of adverse economic conditions. Indeed, Delta suspended service to Argentina and Brazil for a period of two years for similar reasons.11 That being the case, we tentatively believe that the recent past performance of either applicant in U.S.-Latin America market is not a significant carrier selection consideration in this case, and further, that each applicant would implement and maintain its proposed services based on our examination of all matters in this record, including the applicants’ service proposals and traffic forecasts. Third, we also tentatively do not agree with Delta’s view that our decisions in the U.S-China and the U.S.-Ukraine cases, cited in our summary of Delta’s position in this case, warrant its selection in this proceeding. In China, we authorized Continental’s New York/Newark-Beijing nonstop service because we found that the most serious service deficiency presented for our consideration in that case was the lack of any U.S. carrier-operated nonstop service in that market; we authorized American to provide competitive service at Chicago because we found that American would provide the greatest competitive benefits in that case; and we chose both airlines, in part, because they offered the public benefits of new entry and extensive network service.12 None of these considerations warrants an award to Delta in this case. In Ukraine, we chose an incumbent because we found that the incumbent would provide superior service benefits, including the only on-line service that would not have required on overnight stay in that case, and because the potential new entrants would not have provided “the procompetitive benefits normally associated with a new entrant”.13 Again neither of these considerations supports an award to Delta in this case. 10 See Exhibits C0-301 and DL-302 and DL-R-117. 11 See Exhibit HOU-607 and Delta Reply at 6. See, also, Application of Delta for a Dormancy Waiver, OST- 99-6210 and Notice of Action Taken in that docket. 12 See Order 2005-2-14 at 16-19. 13 See Order 2005-4-18 at 4-5. 7 Backup Award We have tentatively decided to make Delta backup to Continental’s primary award because it has submitted a solid service proposal in this case and because we believe that it is in a position to implement its proposed services if necessary for reasons that we have already discussed. Operating Authority and Terms, Conditions and Limitations We propose to grant Continental Houston-Buenos Aires exemption authority for a period of two years, subject to renewal, and to make this authority effective immediately upon issuance of a final order in this proceeding. Consistent with our standard practice, we have tentatively decided to require institution of service within 90 days after issuance of our final order in this proceeding. In addition, consistent with our standard practice, we propose that the frequencies allocated in this proceeding will be subject to our standard 90-day dormancy condition, wherein any frequencies not operated for a period of 90 days (once inaugurated) would be deemed dormant. Under the terms of the dormancy condition, if any of the frequencies allocated are not used for a period of 90 days (once inaugurated), the allocation with respect to each unused frequency would expire automatically and the frequency would revert to the Department for reallocation.14 ACCORDINGLY, 1. We tentatively decided to (a) select Continental Airlines to operate scheduled combination air service in the Houston-Buenos Aires market, and (b) allocate seven weekly frequencies to Continental to operate its proposed services, subject to the conditions proposed in this order; 2. We tentatively select Delta Air Lines as backup to Continental’s primary award for services between New York and Buenos Aires and tentatively allocate seven weekly frequencies to operate its proposed services on a backup basis; 3. We direct any interested parties having objections to our tentative decisions set forth in this order and in ordering paragraphs 1 and 2 above, to file their objections with the Department, Dockets, Docket OST 2005-21949, U.S. Department of Transportation, 400 Seventh Street SW, Room PL-401, Washington, DC 20590, no later than 7 calendar days from the date of service of this order; answers thereto shall be filed no later than 3 calendar days thereafter.15 14 The frequencies allocated represent valuable rights obtained in exchange for rights to Argentine carriers. Accordingly, we remind the selected carrier that the frequencies awarded are for weekly operations. A scheduled carrier may not bank frequencies from one week to the next. 15The original filing should be on 8½" x 11" white paper using dark ink and be unbound without tabs, which will expedite use of our docket imaging system. In the alternative, filers are encouraged to use the electronic filing submission capability available through the Dockets/DMS Internet site (http://dms.dot.gov) by following the instructions at the web site. 8 4. If timely and properly supported objections are filed, we will afford full consideration to the matters or issues raised by the objections before we take further action;16 if no objections are filed we will deem all further procedural steps to be waived and will proceed to enter a final order awarding the authority proposed in this order; and 5. We will serve this order on all parties to this docket of this order; the Ambassador of Argentina in Washington, D.C.; the U.S. Department of State (Office of Aviation Negotiations); and the Federal Aviation Administration. By: KARAN K. BHATIA Assistant Secretary for Aviation and International Affairs (SEAL) An electronic version of this document is available on the World Wide Web at http://dms.dot.gov//reports/reports_ aviation.asp 16As we are providing for the filing of objections to this tentative decision, we will not entertain petitions for reconsideration of this order.
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