**BEFORE THE**

**DEPARTMENT OF TRANSPORTATION**

**WASHINGTON, D. C.**

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**[PUBLIC VERSION] JOINT RESPONSE OF AMERICAN AIRLINES, INC.**  **AND JAPAN AIRLINES INTERNATIONAL CO., LTD.**

**TO ORDER 2010-4-9 REQUESTING INFORMATION**

Communications with respect to this document should be sent to: For Japan Airlines :

TSUTOMU ANDO Executive Officer – International Affairs Japan Airlines International Co., Ltd. 4-11, Higashi-shinagawa 2-chome, Shinagawa-ku Tokyo 140-8637, Japan

TORU MIZUNO Vice President – International Affairs Japan Airlines International Co., Ltd. 4-11, Higashi-shinagawa 2-chome, Shinagawa-ku Tokyo 140-8637, Japan

YUKI SAITO Director, Government Affairs Japan Airlines International Co., Ltd. 1330 Connecticut Ave., N.W. Washington, D.C. 20036 For American Airlines:

VIRASB VAHIDI Senior Vice President – Planning American Airlines, Inc. P.O. Box 619616, MD 5634 DFW Airport, Texas 75161

KENJI C. HASHIMOTO Vice President – Strategic Alliances American Airlines, Inc. P.O. Box 619616, MD 5635 DFW Airport, Texas 75261

WILLIAM K. RIS, JR. Senior Vice President – Government Affairs American Airlines, Inc. 1101 17 th Street, N.W. Washington, D.C. 20036WILLIAM KARAS CAROL GOSAIN Steptoe & Johnson LLP 1330 Connecticut Ave., N.W. Washington, D.C. 20036 (202) 429-6223 wkaras@steptoe.com cgosain@steptoe.com ROBERT A. WIRICK Director, Regulatory American Airlines, Inc. P.O. Box 619616, MD 5635 DFW Airport, Texas 75261 (817) 963-0394 robert.wirick@aa.com

W. BRUCE WARK Associate General Counsel JEFFREY A. OGAR Senior Attorney American Airlines, Inc. P.O. Box 619616, MD 5675 DFW Airport, Texas 75261 (817) 967-3458 jeff.ogar@aa.com

CARL B. NELSON, JR. Associate General Counsel American Airlines, Inc. 1101 17 th Street, N.W. Washington, D.C. 20036 (202) 496-5647 carl.nelson@aa.com May 10, 2010**BEFORE THE**

**DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.** 

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**[PUBLIC VERSION] JOINT RESPONSE OF AMERICAN AIRLINES, INC.**  **AND JAPAN AIRLINES INTERNATIONAL CO., LTD.**

**TO ORDER 2010-4-9 REQUESTING INFORMATION**

American Airlines, Inc. and Japan Airlines International Co., Ltd. hereby provide the following joint response to Order 2010-4-9, April 16, 2010 requesting additional information. We respectfully urge the Department to complete its review as soon as possible and to issue a scheduling order promptly. Approval of the American/JAL application is clearly in the public interest, as the Parties’ proposed joint operations will benefit consumers with improved service and lower fares in transpacific markets, and bring into force the Department’s long-sought goal of open skies between the United States and Japan.

**Documents to Be Provided 1. An updated privilege log identifying and describing all**  **withheld documents, including previously submitted documents, as required by 14 CFR 303.04(h).**  **2. All updated and unredacted documents, including appendices and meeting minutes, regarding the following topics:** 

**● Alliance meetings and board or individual carrier**  **meetings since February 12, 2010 and the date of issuance of the attached order.** 

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**PUBLIC VERSION ●**  **Individual carriers’ U.S. – Asia route forecasts and analyses.**  American and JAL are separately producing privilege logs and any documents responsive to these requests on a confidential basis

under 14 CFR 302.12. **Clarification Questions 1. Please provide a thorough discussion of the public benefits that**  **will result if ATI is granted to the Parties, addressing the following:**  **a. Describe and quantify the specific benefits that ATI will provide consumers, and explain why immunity is necessary for**  **consumers to realize these benefits. b. Please discuss the formulae and methodologies that the**  **Parties will use to calculate benefits accruing to both internal stakeholders and external stakeholders (including,**  **but not limited to, communities, airports, and consumers). c. Please discuss how the Parties will ensure that they are**  **quantifying benefits uniquely attributed to ATI and not arising from an arms-length codesharing agreement.**  **d. Provide any relevant data and analysis from customer preference surveys, focus group results, and outside studies**  **or materials conducted for the airline regarding frequent flyer plans, airport experience, seamlessness of travel,**  **reservations, complaints, carrier preference, and fares as they relate to providing increased consumer benefits through**  **an alliance. Response to Item 1.a.**  In show-cause Order 2010-2-8, February 13, 2010 in the **one** world ATI docket, the Department identified a number of public benefits that have been shown to result from immunized joint ventures between U.S. carriers and their foreign carrier partners.

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**PUBLIC VERSION** “ (1) more options for travelers in numerous trans- atlantic city pairs, based on the applicants’ ability to closely coordinate schedules and inven- tory and to achieve fare combinability; (2) lower fares resulting from the reduction in double mar- ginalization on multi-segment itineraries; (3) volume discounting made possible when the alliance partners carry more passengers per flight and enjoy more efficient utilization of capacity; (4) expanded access to discounted fares result- ing from coordinated inventory; (5) reduced costs through shared sales, marketing, distribution procurement, fleet assignment, and frequent-flyer program management; and (6) expanded opportunities to earn and redeem miles due to the airline part- ners’ ability to share risks” (p. 30). Not only will these and other benefits accrue here, but ATI will also bring into force open skies between the United States and Japan, ending decades of restrictions. Absent approval of the American/JAL application, open skies will not take effect, whichwould harm consumers and represent a major setback for the Department’s goal of expanding open skies to the world’s largest markets. With antitrust immunity, the Joint Applicants will offer better service and lower fares to more than 11 million annual passengers traveling between the United States and Asia, including those traveling in 15,080 global airport pairs that will be newly added to the American immunized network. Antitrust immunity for the American/JAL alliance agreement and Joint Business Agreement (JBA) will strengthen the Parties' ability to maintain and expand their nonstop services on transpacific

routes. Econometric and other empirical analyses of previouslyapproved alliances suggest that an immunized American/JAL partnership will lead to increased nonstop service, particularly on hub-to-

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**PUBLIC VERSION** hub routes where more seats across the Pacific will be needed to accommodate the larger volumes of connecting traffic generated by the Joint Applicants' expanded network. See Randall Bennett, Patrick Murphy, and John Schmidt, “International Airline Alliance Development” (July 2009), pp. 27-28 (demonstrating that immunized alliances enhance carriers’ ability to maintain existing services on international routes as well as on domestic routes that offer network connections). Moreover, there is abundant evidence that “following previous ATI approvals, alliances added or expanded nonstop service between [their] U.S. and European hubs.” See Carl Shapiro and Theresa Sullivan, “Airline Antitrust Immunity,” DOT-OST-2004-19214, July 6, 2005, p. 13. The same result is likely to occur on transpacific routes served by immunized partnerships between U.S. and Japanese

carriers. Immunized revenue sharing, joint sales, and integrated route planning, which are core elements of a metal-neutral joint venture,enhance the carriers' ability to maintain and expand nonstop international service by producing efficiencies and creating the economic incentives necessary to justify the required investments. Given thedifficult operating conditions currently facing all airlines, immunity for the American/JAL agreements, including the JBA, is vital to enhancing the commercial opportunities available to American and JAL and enabling them to maintain and expand their transpacific service.

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**PUBLIC VERSION** In granting immunity last year to the transatlantic A++ agreements in the Star ATI docket, the Department identified as a substantial consumer benefit “[s]ignificant reduction of double marginalization . . . exerting downward pressure on fares and providing a wider range of fares to consumers.” See Order 2009-7- 12, July 10, 2009, p. l5. Similarly, in **one** world show-cause Order 2010-2-8, the Department found: “We do not expect the elimination of multiple markups to result from any anticompetitive con- duct. Consistent with economic theory and the experience of other alliances, the proposed alliance is likely to significantly reduce fares on “inter- line” routes on which only one partner operates one segment and only another partner operates another segment. The cooperation of the partners over the joint network increases overall traffic flows and revenue, providing each partner with the necessary incentive to avoid self-interested markups on a particular segment that they operate, which benefits consumers and the alliance as a whole. Many of the synergies of the alliance, including the ability to cooperatively price itineraries with multiple segments, would not occur but for the alliance agreements” (p. 31, citing studies by Jan Brueckner, Tom Whalen, and The Brattle Group). Moreover, in Star, the Department noted that “when two airlines have basic interline or codeshare arrangements to handle multiple segments [they] are unwilling to cooperatively price the combined itinerary for the consumer” (Order 2009-7-10, p. 12 n. 48). By

contrast, “in [an immunized] ‘metal-neutral’ sales environment, with revenue- or benefit-sharing, the airlines can balance risks and benefits for the benefit of the consumer and alliance as a whole.

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**PUBLIC VERSION** The airlines are willing to cooperatively price itineraries becausethey share the same incentive to make the sale and share the revenues” (Id ., citing Tom Whalen). Jan Brueckner has studied the development of the United/ Lufthansa alliance from its initial, non-immunized phase through the carriers’ implementation of immunized joint services. He found that “pure alliance membership reduces price by 4%, codesharing by afurther 7%, and antitrust immunity by an additional 16% over codesharing.” See Jan Brueckner, “International Airfares in the Age of Alliances: The Effects of Codesharing and Antitrust Immunity,” Review of Economics and Statistics 85, 105-118 (February 2003) ; see also Jan Brueckner, “The Economics of International Codesharing: An Analysis of Airline Alliances,” International Journal of Industrial Organizations 19, 1475

- 1498 (2001)

. Later studies have confirmed Professor Brueckner's conclusionthat immunized alliances generate fare-related benefits for consumers. See Compass-Lexecon, “Competitive Effects of Airline Antitrust Immunity,” DOT-OST-2008-0252, September 8, 2009, Supplemental Comments of Joint Applicants, Exhibit 1, p. 14; Randall Bennett, et

al ., supra , pp. 40-41; Tom Whalen, “Data Analysis of Codesharing, Antitrust Immunity, and Open Skies Treaties in International Aviation Markets,” 30 Review of Industrial Organizations 39-61 (2007).

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**PUBLIC VERSION**By approving and immunizing the American/JAL alliance agreements, the Department will enable the two carriers to significantly expand their on-line networks and compete more effectively with United/Continental/ANA (seeking immunity), United/Asiana (already immunized), Delta, Delta/Korean Air (already immunized), and numerous other carriers operating between the U.S. and Asia.Following approval, the American and JAL networks will be substantially enhanced. Linking American’s unique U.S. and international airports with JAL’s unique Asian airports will add 15,080 new global immunized airport pairs (150 AA unique U.S. airports + 82 AA unique international airports = 232 x 65 JAL unique Asian airports = 15,080). The 150 AA unique U.S. airports account for more than 5.2million annual passengers to/from Asia. The 82 AA unique international airports account for 3.8 million annual passengers to/from Asia. And the 65 JAL unique Asian airports account for 11.7 million annual passengers to/from the U.S. annually. Source : OAG December 2009 as adjusted by JAL’s restructuring plan announced on April 28, 2010; MIDT YE 2009). Antitrust immunity for American and JAL will produce a number of qualitative network-service benefits for consumers. Through immunized coordination of schedules and route planning, the Joint Applicants will be able to: • Upgrade current multi-segment city-pairs to one-connection

service

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**PUBLIC VERSION** • Offer travelers a wider choice of alternative on-line connecting points • Reduce travel times between connecting city-pairs • Offer fare combinability, which will allow itineraries using one carrier for the outbound transpacific segment and the other for the return at competitive fares • Facilitate economies of density by carrying more passengers per flight, thereby increasing utilization of equipment, facilities, and personnel, reducing per passenger handling costs and resulting in lower fares • Provide revenue management synergies to improve capacity allocation at a wider range of fares (business and leisure) over more itineraries • Reduce costs through shared sales, marketing, distribution, procurement, fleet assignment, frequent flyer program manage- ment, co-location of terminals, and other actions benefiting consumers with lower fares and more convenient service • Optimize the Parties’ transpacific schedules. To illustrate this last point, American and JAL currently operate departures to Tokyo from Los Angeles just 50 minutes apart, at 12:30 p.m. (AA 169) and 1:20 p.m. (JL 061). With antitrust immunity, the two carriers will be able to engage in discussions to operate at other times of the day, thereby providing more choices for nonstop O&D passengers as well as additional options for connecting passengers.

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**PUBLIC VERSION** Moreover, as the carriers integrate their networks and service offerings, more customers will enjoy the superior service benefits of on-line international travel via an integrated alliance. These benefits include better coordination of customer service policiesand enhanced responsiveness and accountability to passengers ticketed by an alliance partner. Immunity will also enable American and JAL to offer consumers a greater variety of joint fare products (including corporate fares, discounted fares, joint tour products, convention products, and group travel products); increase the number of consumers to whom these joint fare products are made available; and offer consumers discounted fares over a broader network of services. American and JAL will cooperate in the area of frequent flyer programs to enhance service benefits provided to AAdvantage and JAL Mileage Bank members, including increased access by one Party’s members to offers, incentives, and promotions made available by the other Party. The immunity that American and JAL are seeking will increase the attractiveness and competitiveness of their corporate products,particularly for companies that are substantial users of transpacific and intra-Asia services. American and JAL will be able to participate fully with each other in corporate travel agreements, expand the scope of their joint offerings to corporate clients, and offer smaller corporate accounts comprehensive, fully-integrated price/service proposals. Benefits to corporate customers will

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**PUBLIC VERSION** include discounted travel over a broader carrier network; increasedability to qualify for volume discounts; simplified travel management (one contract and one point of contact for administration); harmonized discounts that are easy to implement and communicate tostaff; and specialized reports that will enable the corporate customer to manage travel more effectively and qualify for additional discounts. In sum, antitrust immunity is essential in order to realize the consumer benefits described herein. As stated in the Parties’ joint application submitted on February 12, 2010 in DOT-OST-2010-0034:

“ Immunizing the proposed alliance is the only way to enable the Joint Applicants to compete on equal foot- ing with Star and SkyTeam. Greater integration between American and JAL through the JBA will create vibrant inter-alliance competition, as **one** world will be able to deliver significant service and fare improvements to customers. Because the full network benefits of the proposed alliance cannot be realized absent a grant of antitrust immunity, withholding approval would essentially preclude **one** world’s chances for long-term success in the alliance marketplace. “The JBA cannot and will not be implemented in the ab- sence of antitrust immunity. Although American and JAL have already agreed to the most important compo- nents of the relationship, such as governance, geographic scope, and the process for determining how revenues are pooled and shared, their negotiations cannot be completed without an exchange of confidential and highly sensitive transpacific segment information and competitive data. Such an exchange prior to a grant of antitrust immunity would not only carry some risk under the antitrust laws, but would also create a significant commercial risk if there is any doubt as to whether the Department will approve the transaction” (p. 30).

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**PUBLIC VERSION** Accordingly, the Joint Applicants urge the Department to approve their application and immunize the proposed alliance agreements so that American and JAL can finalize and implement their joint business (JB), consumers can enjoy the benefits of integration, and the historic open skies agreement between the United States and Japan initialed last November can enter into

force. **Response to Item 1.b.** American periodically reviews its economic contribution to thecommunities where it operates in connection with its annual corporate responsibility report. This analysis evaluates both the direct impact of local operating expenses and the indirect impact in the broader community based on empirical multipliers. This evaluation draws on periodic reports by the U.S. Bureau of Economic Analysis on industry GDP. Such an analysis could also be performed for each city American and JAL serves, incorporating an estimate of the impact of joint operations. The estimate would be based on both direct and indirect economic value, including direct and indirect employment. These measures could then be attributed to the contribution of the JB based on the proportion of direct operating expenses from those services as determined by the relevant underlying statistical

drivers.

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**PUBLIC VERSION** With respect to consumers, benefits can be measured in a variety of ways. Perhaps the most comprehensive is a simple measurement of market size and market share. Such metrics are directly impacted by the factors known to drive consumer air travel purchasing decisions, such as price, schedule, product, and service. The effectiveness of the JB in delivering consumer benefits will translate into incremental changes across each of those factors, but which will be captured in aggregate by the changes to market size and share earned by the JB. Growth in market size is an indication of a general improvement in the value proposition offered to consumers across the industry, and market share provides a measure of the relative performance of the individual carriers and alliances within that context. **Response to Item 1.c**The economic literature cited above distinguishes between armslength codesharing and immunized cooperation, and has consistently found that ATI results in lower fares. This result is due to elimination of double marginalization, an economic concept that the Department has recognized in other proceedings. See Order 2009-7- 12, July 10, 2009, p. l5. American and JAL have been in a codeshare relationship since 1998, and mutual partners in the **one** world alliance since 2007. Nonetheless, the Parties have not yet taken all the steps necessary for closer cooperation because their underlying commercial interests have not been sufficiently aligned. With a metal neutral JB, their

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**PUBLIC VERSION** commercial interests will mesh, and the Parties will be willing tomake new investments in areas that will directly benefit their customers, such as airport terminal co-location, technological interfaces between their respective reservations and check-in systems, increases in capacity on hub-to-hub routes, and many others. In addition to past lack of commercial alignment, the fear ofantitrust litigation has limited the Parties’ interest in aggressively offering integrated joint contracts to corporate buyers in competition with the products available from Delta and United, and their respective SkyTeam and Star alliances. The quantification of these incremental benefits is therefore appropriately measured from a reasonable pre-cooperative baseline, and largely attributed to ATI. However, unique attribution of such benefits may never be possible given the myriad extraneous factors that influence the various metrics that may be used to quantify those benefits. Such extraneous factors include, but are not limited to, fuel price volatility, industry capacity changes, and foreign exchange effects. In determining an appropriate baseline, similar to the Parties’ choice for an agreed base year, a period of 12 consecutive months will be identified that reasonably represents the pre-cooperative marketplace in terms of both competitive and economic relevance. The impact of recent economic factors such as the fuel price spike of 2008 and the global economic recession of 2009 will be carefully considered in choosing a baseline.

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**PUBLIC VERSION** As noted, the only U.S. airport to lose JAL services will be Kona, Hawaii. The Tokyo/Narita-New York frequency will be reduced from its current level of nine weekly flights to a daily service as a result of the discontinuation of the Sao Paulo service. The rest of the transpacific network and frequencies will be maintained. Most of the connecting flights between Tokyo/Narita and other Asian points will also remain unchanged. Given the relatively modest changes that are planned for JAL’s transpacific presence, JAL believes that the new network size and scope will not have a material effect on the JBA, which covers services between North America and Asia. On April 28, JAL submitted the new network plan to Japan’s Ministry of Land, Infrastructure, Transport and Tourism (MLITT) for approval. It will be an integral part of JAL’s reorganization plan which, in turn, will be submitted to the Tokyo District Court for approval. **15. Discuss what you foresee as major barriers to, and/or enablers of, competitive entry in the transpacific market, especially in**  **markets where the Parties have overlapping nonstop service.** With open skies between the United States and Japan, regulatory barriers to entry will be eliminated, with the exception of access to Tokyo International Airport at Haneda, which will for now remain subject to frequency limitations. Slots at Narita and Haneda arenot addressed in the open skies agreement. U.S. and Japanese carriers desiring to enter the U.S.-Japan market, or to expand their existing services, will need to acquire takeoff and landing slots to support their Narita and Haneda operations.

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**PUBLIC VERSION** Slots at Narita are available both through the IATA slot coordination process and through secondary trading and leasing. In this regard, Narita is no different from other major slot-controlled airports elsewhere in the world. We do not consider slots to be a major barrier to entry. American currently operates five daily nonstops between theU.S. Mainland and Narita (JFK-1, ORD-1, DFW-2, and LAX-1). By showcause Order 2010-5-7, May 7, 2010 in DOT-OST-2010-0018, American tentatively received authority to operate one daily nonstop between New York (JFK) and Haneda. JAL operates four daily nonstops between the U.S. Mainland and Narita (JFK-1, ORD-1, LAX-1, and SFO-1), and in its restructuring plan (Item 14) states that it will serve Haneda from San Francisco and Honolulu. JAL also operates six daily nonstops between Hawaii, on the one hand, and Tokyo, Osaka, and Nagoya, on the other, and three daily nonstops between Guam, on the one hand, and Tokyo and Osaka, on the other.Thus, the overlap markets between American and JAL are JFKNarita, LAX-Narita, and ORD-Narita. Each of these markets has multiple competitive services in addition to operations by American

and JAL.

● New York has daily nonstop service operated by Delta, Continental, and ANA (which displays the NH, UA*, CO*, US*, SQ*, and TG* codes).

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**PUBLIC VERSION** ● Los Angeles has daily nonstop service operated by Delta, United (which displays the UA, CO*, US*, NH*, and OZ* codes), ANA (which displays the NH, UA*, CO*, US*, AC*, and TG* codes), Korean Air, and Singapore Airlines (which displays the SQ, UA*, and US* codes).

● Chicago has daily nonstop service operated by United (which displays the UA, CO*, US*, NH*, and TG* codes) and ANA (which displays the NH and UA*, CO*, US*, SQ*, and TG* codes). There will continue to be at least three (and as many as five)nonstop competitors in all but one overlapping city pair, ChicagoTokyo, which will have two nonstop competitors assuming that American/JAL and United/Continental/ANA receive immunity in this proceeding. The Department has found that as long as two or more nonstop competitors will remain in a city-pair following a grant of ATI, there is no risk of a substantial reduction in competition. See Star, Order 2009-7-10, July 10, 2009, p. 18 (“we will not impose carve-outs in markets that only shift from four to three, or from three to two, nonstop competitors, as we are not convinced that these pose a risk of substantial reduction in competition”). Not only are the overlapping routes already highly competitive, but each of the operators on these routes is well-positioned to add frequencies. ANA has a hub at Tokyo, Delta has a hub at Tokyo, United has a hub at Chicago, Continental has a hub at New York, and Delta also has a substantial presence at both New York and Los