Order 2015

- 4

- 10

UNITED STATES OF AMERICA

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation

on the 17 th day of April , 2015

Served: April 17 , 2015

Joint Application of

ALASKA AIRLINES, INC.

and AMERICAN AIRLINES, INC. Docket DOT

- OST

- 2015

- 0025

for transfer of international route authority pursuant to 49 U.S.C. §§ 40109, 41105

Docket DOT

- OST

- 2005

- 20406

Docket DOT

- OST

- 2010

- 0222

Docket DOT

- OST

- 2015

- 0042 Application of

ALASKA AIRLINES, INC.

for amendment of exemption

Application of

AMERICAN AIRLINES, INC.

for amendment of exemption

Application of

DELTA AIR LINES, INC.

for an exemption pursuant to 49 U.S.C. §40109 (Los Angeles

- Mexico City)2 ORDER TO SHOW CAUSE

Summary

By this order the Department tentatively decides to (1) grant the joint application of Alaska Airlines, Inc. (Alaska) and American Airlines, Inc. (American) for transfer to American of international route authority held by Alaska authorizing scheduled foreign air transportation between Los Angeles, California, and Me xico City, Mexico, and (2) grant the requests of Alaska and American for amended exemption authority to permit American to serve the Los Angeles

Mexico City route with its own aircraft, and permit Alaska to display its two

- letter designator code

on Americ an’s flights between Los Angeles and Mexico City.

Application

By application filed February 11, 2015, Alaska and American (collectively, the “Joint Applicants”),

request the transfer to American of international route authority held by Alaska authorizin g scheduled foreign air transportation of persons, property, and mail between Los Angeles, California, and Mexico City, Mexico. 1 2

The Joint Applicants state that American plans to commence double

- daily nonstop service between Los Angeles and Mexico Cit y on June 4, 2015. In this regard, the Joint Applicants further request that the Department amend their current exemption authorities to (1) permit American to serve the Los Angeles

- Mexico City route with its own aircraft, and (2) permit Alaska to display its two

- letter designator code on American’s flights between Los Angeles and Mexico City. The Joint Applicants request that both exemptions be reissued for a two

- year period.

The Joint Applicants state that their proposed transfer satisfies the applica ble statutory provisions, 49 U.S.C. §§ 40109 and 41105, and Department decisional criteria that the Department must use in considering international route transfers. They further state that it is clear that the proposed transfer to American of the Los Ang eles

- Mexico City route would satisfy the public interest test under section 40109 by, among other things, increasing the number of daily flights in the Los Angeles

Mexico City market, 3 i ntroduc ing Mexico City service at American’s Los Angeles hub , and

increas ing competition in the U.S.

- Mexico and Los Angeles

- Mexico City markets. The Joint Applicants further state that, u nlike other route transfer cases where the transferring party abandons

service

, here Alaska would remain a n active competitor in the market by placing its AS* code on

American

- operated fli ghts. The Joint Applicants also assert that the proposed transfer would satisfy the requirements of section 41105 by enhancing each carrier’s viability, strengthening the domestic airline industry, an d bolstering the U.S. trade position.

1 Alaska holds exemption authority to engage in scheduled foreign air transportation of persons, property, and mail between Los Angeles and Mexico City. See Notice of Action Taken dated August 25, 2014 in Docket DOT

- OST

- 2005

- 20406. American holds exemption authority to hold out code

- share service only between Los Angeles and Mexico City. See Notice of Action Taken dated July 19, 2012 in Docket DOT

- OST

- 2010

- 0222, kept in force pursuant to American’s timely filed renewal application.

2 Under the U.S.

- Mexic o aviation agreement, two U.S. carriers may be designated to provide scheduled foreign air transportation of persons, property and mail between Los Angeles, California

, and Mexico City, Mexico. Currently,

Alaska and United Airlines, Inc. (United) are desi gnated to provide service between Los Angeles and Mexico City, meaning that the market is fully subscribed

. 3 The Joint Applicants state that Alaska currently operates a single daily service in the market, while American proposes

to introduce twice

- daily service.3 Responsive Pleadings

On February 26, 2015, Delta Air Lines, Inc. (Delta) filed an answer opposing the joint application. Delta also filed a competing application for Los Angeles

- Mexico City exemption authority in

Docket DOT

- OST

- 2015

- 0042.

In its answer, Delta argues that the Joint Applicants inappropriately rely on the certificate transfer provisions of 49 U.S.C. § 41105 in support of their request to transfer limited term exemption and designation authority. In support, Delta cites the Department’s decision to institute the 1997 U.S.

- Argentina All

- Cargo Frequency Proceeding

. 4 There, Delta argues, the Department stated that the certificate transfer provisions of section 41105 do not apply to frequency or exem ption allocations. Delta also argues that the Joint Applicants improperly rely on merger precedent to support their arguments, when the Joint Applicants are not merging. Delta contends that the Department should open a route case to consider the merits o f the competing Los Angeles

- Mexico City applications

and asserts that

, in such a proceeding

, the Department should select Delta, which would provide

thrice

- daily service in the market.

On March 6, 2015, the Joint Applicants filed a reply

. The Joint Applicants state that their agreement to transfer route authority is the type of market

- based transaction that the Department has routinely approved without consolidating applications from other carriers and without opening carrier selection proceedings.

The Joint Applicants also argue that the Department has used certificate transfer criteria to decide exemption route transfer cases and that the 1997 U.S.

- Argentina All

- Cargo Frequency Proceeding cited by Delta is inapposite, as that case involved the t ransfer of under

- utilized frequencies, which is not the case here. They add that, in any case, there is no scenario in which the authority would be transferred or awarded to Delta, because if the Department fails to promptly approve the transfer,

Alaska w ill continue to operate the route.

On March 13, 2015, Delta filed a m otion for l eave to file and surreply. Delta states that the route transfer sought by Alaska and American is directly contrary to the Department’s original public interest determination to award Los Angeles

- Mexico City authority to Alaska instead of American.

Delta cont ends that the Department should conduct a route case to take a fresh look at the respective merits of the competing applications.

On March 15, 2015, the Joint Applicants filed a response to Delta’s surreply. 5 They state that the Department has found rep eatedly that market

- based transactions involving the sale of international route authority

– such as this one

– should be approved promptly and without consideration of competing applications. The Joint Applicants strongly urge the Department to apply the se precedents, and approve their application without further delay.

Tentative Decision

The Department has tentatively decided to approve the Joint Applicants’ request to transfer to American the international route authority held by Alaska, authorizing scheduled foreign air

4 Order 97

- 11

- 35.

5 American and Alaska request leave to file their response. We will grant the request.4 transportation of persons, property, and mail between Los Angeles, C alifornia, and Mexico City, Mexico, subject to conditions. The Department also tentatively approves the request to amend American’s and Alaska’s respective exemption authorities to (1) allow American to serve the Los Angeles

- Mexico City route with its own aircraft, and (2) permit Alaska to display its two

- letter designator code on American’s flights between Los Angeles and Mexico City.

As a threshold matter, the Department has examined the proper regulatory framework for considering the proposed transact ion. The Joint Applicants cite two statutory provisions that they regard as dispositive : 49 U.S.C. §§ 40109 and 41105. The first sets forth the Department’s authority to issue exemptions and the second addresses the Department’s power to transfer

certifi cates. The exemption statute imposes a public interest test. The Joint Applicants assert that the public interest test in this context incorporates the Department’s public interest test for deciding certificate transfer cases. That assertion, combined w ith the Joint Applicants’ express reliance on the certificate transfer provision of the statute, means that the Department should decide the present exemption transfer application based on certificate transfer policies and precedents. Furthermore, they co ntend that when those policies and precedents are applied to the facts of this case, their application warrants approval without the need for the Department to consider competitive applications for the route.

Delta, on the other hand, asserts that the cer tificate transfer precedents are not applicable here

because no certificate authority is actually being transferred. Delta cites the Department’s instituting order in the 1997 U.S.

- Argentina All

- Cargo Frequency Proceeding , Order 97

- 11

- 35, in support. Del ta argues that

, because the certificate precedents are inapplicable, the Department should consider competitive applications and that, if it did so, it would select Delta’s application.

The Department tentatively decides that the Joint Applicants’ positio n is the more persuasive. In 1989 the Department directly addressed the question of the appropriate decisional framework for an exemption route transfer case. 6 The Department decided that the proper regulatory framework for exemption route transfers was the same as for certificate transfers, namely section 401(h) of the Federal Aviation Act, the predecessor provision to 49 U.S.C. § 41105. 7

The Department does not view the 1997 Argentina instituting order cited by Delta as persuasive. The Department’s 19 97 order stated quite clearly that what was involved in the 1997 Argentina situation was a “frequency allocation case” and that “frequency allocations are not certificate

awards.” 8 That 1997 case did not involve the traditional type of route transfer that was before the Department in 1989, and that is before the Department here.

Having tentatively determined that the Department should decide this transfer as it would decide a certificate transfer under § 41105

, the Department must now determine whether t he transfer satisfies

the standards set forth in the statute

.

Section 41105 provides that no certificate may be transferred unless the Department approves the transfer as being consistent with the public interest. The Department has adopted as its public

6 In re joint request of Horizon Air Industries, Inc. d/b/a Horizon Air and San Juan Airlines, Inc. to transfer transborder commuter design ations and related authority in four U.S.

- Canada markets, Undocketed, Orders 89

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- 22 and 89

- 5

- 14.

7 Id

. 8 Order 97

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- 35, at 5.5 interest standard in such cases a policy of allowing proposed transfers, provided that they do not conflict with important international aviation policy objectives and are not otherwise inconsistent with the public interest. 9 In determining whether a transfer of route authority is consistent with the public interest , the Department must consider three additional specific criteria: the effect of the

transfer on (1) the viability of each of the carriers involved, (2) competition in the domestic airline industry, and (3) the trade position of the United States in the i nternational air transportation market.

In this case, the Department tentatively finds that the transfer meets the standards for approval. Specifically, the Department notes that American’s proposed Los Angeles

- Mexico City service will exceed the frequ ency levels currently operated by Alaska ( American plans to offer two daily flights, as opposed to Alaska’s single daily ) . Furthermore, American would provide new intragateway competition at Los Angeles to existing service offered by United, code

- share se rvice offered by Delta, and the services of Mexican carriers. Moreover, as Los Angeles is already an American hub, its Los Angeles

- Mexico City service will provide new online connecting options to passengers in the western United States, thereby increasin g intergateway competition. Finally, the Department notes that, despite the transfer, Alaska will remain a presence in the market by virtue of its code

sharing on American’s flights. The Department tentatively finds that these benefits would not
conflict with important international aviation policy objectives or otherwise be inconsistent with the public interest. 10

The Department tentatively finds that approval of the transfer would also be consistent with the

additional criteria that it must consider. R egarding the transfer’s effect on the carriers’ viability, the Joint Applicants assert that American will be strengthened through the addition of an important new route at its Los Angeles gateway, and Alaska will remain a competitor in Mexico City while

ob taining the flexibility to deploy its aircraft in support of its service elsewhere on its network. Regarding the transfer’s effect on competition in the domestic airline industry, the Joint Applicants

assert that the addition of an important international route at American’s west coast Los Angeles hub will enhance American’s ability to grow its domestic services at that hub, providing greater competition to other airlines serving the Los Angeles region, as well as increased benefits for consumers resulting from more options. Regarding the transfer’s effect on the U.S. trade position, the Joint Applicants assert that approval of the transfer will immediately inject a strong, new competitor into the Los Angeles

- Mexico City market, generating enhanced competi tion with Mexican carriers and thereby strengthening the U.S. trade position. The Department tentatively finds no evidence in the record to rebut these arguments, or that otherwise demonstrates that the proposed transfer would produce adverse effects.

9 Joint Application of Delta Air Lines, Inc. and United Air Lines, Inc. for approval of the transfer of certificate authority

pu rsuant to 49 U.S.C. § 41105 (New York

- London), Order 2006

- 9

- 5, at 3.

10 Delta claims that “the proposed route transfer would eviscerate the Department’s public interest determination to

award the LAX

- MEX route to Alaska over American.” Delta Surreply at 2. We tentatively disagree. In the 2005 Los Angeles

- Mexico City Combination Service Proceeding, Docket OST

- 2005

- 20406, the case to which Delta refers (and a case which resulted from Delta’s termination of its Los Angeles

- Mexico City services), the Departme nt selected Alaska over three other applicants, including American, based on the particular circumstances of that record and, especially, the particular elements of Alaska’s proposal. Notably, these included that Alaska was proposing twice

- daily service ( as opposed to the once

- daily service it is now providing and equivalent to the twice

- daily service that American would now provide), that it was the only applicant in the proceeding to be proposing single

- plane service behind the Los Angeles gateway, and t hat it would be a new entrant in the Mexico City market, a market it had long sought to enter.

Order 2005

- 05

- 01, at 5

- 6. The Department determined that those collective attributes justified a finding that Alaska’s proposal was superior to the other three proposals then under consideration. The Department tentatively finds no basis to conclude that the comparative determination made then dictates the public interest determination to be made now.6 Th erefore, consistent with § § 41105 and 40109 , and Department policy and precedent concerning route transfers, the Department tentatively finds that the route transfer proposed by American and Alaska is consistent with the public interest.

The Department ne vertheless recognizes that the certificate transfer framework does not fully resolve the issue of how to treat competing applications. Therefore, the Department will address Delta’s assertion that, rather than consider the transfer request independently, the Department must instead undertake a comparative evaluation of the transfer application with Delta’s own application for Los Angeles

- Mexico City authority. While the Department can, and generally does, elect to treat transfer applications on their own merits, it is not precluded from consolidating them with competing route applications, and it has done so in certain carefully defined circumstances. Usually those circumstances involve cases where there are strong public policy reasons for reviewing the general service needs and status of a market . See, for example, Order 91

- 8

- 1, 11 where the Department noted, as an exception to its general policy disfavoring consolidation , a case where there were strong public policy reasons for reviewing the service need s and status of the market.

The Department tentatively finds that the current condition of the U.S.

- Mexico market does not warrant deviating from our normal disinclination to consolidate competing route applications with a transfer request. Saying that, t he Department is cognizant that the United States and Mexico recently concluded negotiations on a modernized air transport agreement, and the Department anticipates that there could be substantial changes in the market within the next year. Against this background, the Department tentatively finds it in the public interest to limit its approval of the Joint Applicants’ requests for amended exemption authorities to a period of one year

. 12 A timely renewal application will provide an appropriat e vehicle for consideration of whether the situation prevailing in the market at that time might call for a different regulatory treatment.

ACCORDINGLY,

1. The Department direct s interested persons to show cause why it should not issue an order making final the tentative findings and conclusions set forth in this order ;

2. The Department tentatively grants American Airlines, Inc. amended exemption authority under 49 U.S.C. § 40109 for one year to engage in scheduled foreign air transportation of persons, property, and mail between Los Angeles, California, and Mexico City, Mexico;

3. The Department tentatively grants Alaska Airlines, Inc. amended exemption authority under 49 U.S.C. § 40109 for one year to engage in scheduled foreign air transportation of persons, property, and mail between Los Angeles, California, and Mexico City, Mexico, subject to the condition that the services may be provided on a code

- share basis only;

4. The Department tentatively dismisses t he application of Delta Air Lines, Inc. in Docket DOT

OST

- 2015

- 0042, for exemption authority under 49 U.S.C. § 40109 to engage in scheduled foreign

11 Finalized by Order 91

- 10

- 35.

12 If this decision is made final, consistent with Department policy regarding U.S.

- Mexico authorizations, the Department will grant the requested amended exemption authorities, subject to the standard dormancy notice requirements set forth in condition 7 of Appendix A of Order 88

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- 2.7 air transportation of persons, property, and mail between Los Angeles, California, and Mexico City, Mexico;

5

. The Department directs any interested parties having objections to its tentative findings and conclusions set forth in this order and in ordering paragraphs 1 through 4 above, to file their objections, in the above

- captioned dockets, with the Departme nt’s Docket Section, U.S. Department of Transportation, Docket Operations, M

- 30, West Building Ground Floor, Room W12

- 140, 1200 New Jersey Avenue, SE, Washington, DC 20590, no later than ten (10) calendar days after the date of service of this order; answe rs thereto shall be filed no later than seven (7) calendar days thereafter; 13

6. If timely and properly supported objections are filed, the Department will accord full consideration to the matters or issues raised by the objections before it takes furthe r action; if no objections are filed, the Department will deem all further procedural steps to be waived and will make final its tentative findings and conclusions proposed in this order;

7. The Department grants all motions for leave to file otherwise u nauthorized documents in this proceeding; and

8. The Department will serve a copy of this order on Alaska Airlines, Inc.; American Airlines, Inc.; Delta Air Lines, Inc.; the Mexican Ambassador to the United States in Washington, DC; the Federal

Aviation Administration; and the U.S. Department of State (Office of Aviation Negotiations).

By:

BRANDON M. BELFORD Deputy Assistant Secretary for Aviation

and International Affairs

(SEAL)

An electronic version of this document is available on the World Wide Web at: http://www.regulations.gov

13 The original filing should be on 81⁄2" x 11" white paper using dark ink and be unbound without tabs, which will expedite use of the Department’s docket imaging system. In the alternative, filers are encouraged to use the elect ronic filing submission capability available through the Dockets/FDMS Internet site ( http://www.regulations.gov ) by following the instructions at the web site.