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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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