REPLY

TO THE REPLY OF THE JOINT APPLICANTS

JOINT APPLICATION

F DELTA IR LINES, INC., VIRGIN BLUE AIRLINES PTY LTD, VIRGIN BLUE INTERNATIONAL

IRLINES PTY LTD D/B/A V AUSTRALIA,

PACIFIC BLUE AIRLINES (NZ) LTD, PACIFIC BLUE ATRUNES (AUST) PTY LTD UNDER 49 U.S.C. 55 41308-41309

FOR APPROVAL

OF AND ANTTTRUST IMMUNITY

FOR ALLIANCE

AGREEMENTS

DOCKET DOT-OST-2009-0155

Hubert Horan 6 June 2011

On 1 lune lfiledcomments (at DOT-OST-2009-0155-0058) in response

to the Department's

Second Show Cause Order (Order 2011-5-8 at DOT-OST-2009-0155-0055). On 3 June the Joint Applicants

filed a reply to my comments.

Pursuant to the Department's

order 2011-5-17

establishing

the schedule

for comments

and replies to the Second

Show Cause Order, I am filing this reply to theJoint

Applicants.

A. THE 15 APRIL DOCUMENT

GOVERNING

THE CAPACITY

COMMITMENT

IS FUNDAMENTALLY INCONSISTENT

WITH THE DEPARTMENT'S

COMPETITIVE

ANALYSIS

AND IS DESIGNED

TO UNDERMINE THE CONSUMER

PROTECTIONS

IN THE DEPARTMENT'S

RULING. THE JOINT APPLICANTS

HAVE FAILED TO ADDRESS ANY OF THE IDENTIFIED

DEFICIENCIES

WITH THE 15 APRIL DOCUMENT,

AND HAVE

RAISED NO OBJECTIONS

TO THE PROPOSED

MODIFCATIONS

TO THE CAPACITY

COMMITMENT

THAT WOULD RESOLVE THESE DEFICIENCIES.

THUS THE DEPARTMENT

MUST REJECTTHE

15 APRIL DOCUMENT

AND INCLUDE THE PROPOSED

MODIFICATIONS

I ANY NEW CAPACITY

COMMITMENT.

The competitive

analysis presented

in the Second

Show Cause Order identified

serious risks to USAustralia passengers

if the joint applicants

were given unfettered

freedom to collude

on pricing,

capacity and service. The Department

identified

a clear link between passenger

interests and maintaining virtually all of the capacity

currently operated in the market,

noting serious "uncertaintlyl

that the market, over the long term, could sustain the added

capacity"

recently introduced,

and correctly observing

that unfettered

immunity

"could have provided the applicants

with extra

incentive and ability to reduce

capacity in the market

o put upwdrd

pressure onfares".l

The Department

emphasized

that these consumer

issues were Iinked to the long-term

sustainability

of the total capacity in the market (not just the capacity

operated

by the applicants)

and that antitrust

immunity

could not begranted

if the only impact "would be to improve

the market

share of Delta and V Australia"

at the expense

of Qantas andUnited

"without certainty of...large scale public benefits uch as increased

capacity, lower fares or more efficient services."2

The Department

also clearly stated thatapplicants

must be "in a position to deliver

substantial

consumer

benefits at the time immunity

is requested"3

The Second Show Cause Order said that it would

substantially

eliminate those risks by requiring

that the joint applicants

maintain current capacity levels for 24 months.

However the actual

terms of that capacity commitment

were defined (and would be governed)

by a document

prepared on 15 April by

I Second Show cause Order p.7 2 Ftst Show

Cause Order, 8 September20l0,

DOT-OST-2o09-0155-0026, p.12. ' Second Show Cause Order p. 14, FirstShow

Cause Order p. 5.Horan,

Reply to Delta/Virgin,

6 June 2011

the applicants,

not by the wording that appears

in the Second

Show Cause Order itself.4 However that 15 April document

is wholly inconsistent

withthe Department's

competitive

analysis and largely nullifies the stated

decision in the Second

Show Cause Order. The Department

states that immunitv

must be conditioned

on maintenance

of today's

market capacity for 24 months,

explains that it could

not grant immunity

without this firm commitment

because of the risk

of anti-competitive

behavior,

and then says that the commitment

will begoverned

by anapplicant-drafted

document

that delinks

immunity

from the maintenance

of today's

market capacity, establishes

a simple mechanism

whereby theJoint Applicants

can maintain the private

benefits immunity

while cancelling

the consumer

protections

of the capacity commitment,

and includes various other terms that directly

contradict

the findings

of the Depa rtment's competitive

analysis.

The 15 April document

undermines

the necessary

link between ATI and the maintenance

of today's

total market capacity by creating anopen-ended

waiver process whereby the applicants

could easily get permission

to keep ATI without honoring the capacity

commitment.

The 15 April document

improperly establishes

a process whereby waivers may be granted if there was virtually any change that "materially affect(s) the demand

for orthe cost

of providing

transpacific

airservice"

and lists an extraordinarily broad range of reasons

that would justify cancelling

the capacity

obligations.5

The 15 April document says that theJoint Applicants

are willing to honor the capacity

obligations

if market conditions

are as good or better than they were in April 2011, but demand

the right to cancel the obligations

(butkeep immunity)

if they feel market conditions

have become materially

worse than they were in April 2011. Thus the 15 April document

delinks immunity from "prevention

of risks of anti-competitive

capacity cuts and price increases"

and "prevention

of risks that the Joint Applicants'

Us-Australia

operations

are materially

less profitable

than they are today." This isa loophole

large enough to fly a 747

through. The Second Show Cause order says thatcapacity

commitments

are required

because of the likelihood

of anti-competitive

behavior if market conditions

don'tremain

as good as they are today. The 15 April document

makes anti-competitive

behavior more likely because it says theJoint Applicants'

can readily get the capacity

commitment

cancelled

if conditions

don'tremain

as good as they are today.

Except for temporary

"force majeure" events there is no need

for the capacity

commitment

to include any waiver provision.

Any airline can petition the DOT for relief from prior

regulatory

commitments

if theyhave

evidence that markets

have changed in ways that eliminate

the need to impose

the condition. lf markets

change so that today's totalmarket

capacity is not sustainable

and the identified

risks of anticompetitive

behavior arerealized,

antitrust immunity

must besuspended.s

Waivers for "force

majeure" events would only beconsistent

with the Department's

competitive

analysis if based on "act-of-God" events (such as a terrorist

or public health scare) that temporarily

depressed

demand but were highly

a The public

version ofthe actual

capacity commitment

was filed on l5 April 201

I under DOT-OST-O155-0053. Page 16ofthe Second

Show Cause Order clearly states that thejoint applicants'

obligations

will be govemed

by that l5 April document.

not by Lhe

wording ofthe Departments'

decision. ' The joint applicants

l5 April submission,

p..3 Item6 on page

3 lists a wide range

ofmarketplace

changes that could trigger a waiver request, but notes these are just illustrative,

and anyother

reason affecting h-anspacific

costs and demand might justif, a waiver

request. 6 All parties

would recognize

that consumers

face few risks from antitrust

immunity

under firture scenarios (i.e. robust economic

conditions,

strong demand growth) where all oftoday's US-Australia capacity is financially sustainable.

Under these conditions

the terms ofthe l5 April document axe of little consequence.

As the Department's

competitive

analysis recognized,

it is far from certain

that these conditions

will be realized.

The issue is what will happen

under the l5 April document

terms if market conditions

worsen and all oftoday's Us-Australia market capacity is not financially

sustainable.

### T

I Horan, Reply to Delta/Virgin,

5 June 2011

unlikely to permanently

change market conditions.

lf long-term

conditions

had not changed,

then today's total market

capacity is still viable in the long-term.

Under such conditions

a temporary

capacity waiver could be justified as long as the capacity

was fully restored once the temporary

problem had passed. The 15 April document

improperly

lumps changes in fuel prices

in exchange

rates together with terrorist attacks as justifications

for waivers.

The15 April document

improperly

creates the expectation that capacity

commitment

waivers could be granted following

any marketplace

change that the applicants

(at their sole discretion)

deem "material".7

My 1 June

comments

also identified

three other major inconsistencies

between the Department's competitive

analysis, and the actual

terms of the capacity

commitment.

The 15 April document

completely

undermined

the necessary

link between ATI and the maintenance of today's

totalmarket

capacity by using flight departures

as the basis for the capacity commitment,

instead of seat departures

or available

seat miles. This means massive reductions

in capacity via aircraft downgauging

would not count

as violations

of the capacity

commitment,

even though this would have the same

impact on consumer

prices as reductions

in frequency

using today's aircraft. The 15 April document

completely

undermined

the necessary

link between ATI and the maintenance

of today's

totalmarket

capacity by limiting

the capacity

commitment

to departures operated

by the applicants.

Consumers

would be just as harmed

if ATI allowed the applicants

to drive United out of the Los

Angeles-Sydney

market as they would if ATI allowed the applicants

to cut back ontheir owncapacity.

As currently stated, the capacity

commitments

are inconsistent withthe Department's

stated concern that antitrust

immunity

cannot be justified if it merely leads to market

share shifts among incumbents

hat provide

no "substantial

public benefits." By granting the applicants

18 months

to actually

im plement their joint venture, the currently

stated conditions

are totally inconsistent

with the stated

requirement

that the applicants

must be capable of delivering

significant

benefits "at the time immunity

isgranted"

and undermines

the basic concept of a 24 month

capacity commitment,

which could now beas

little as a six month commitment.

Toaddress

these issues, I proposed

simple modifications

to the capacity

commitment

including:

I A clear

statement

that the antitrust

immunitv

envisioned

under this application

would be forfeited if totalmarket

capacity fell materially

below current levels, eliminating

the basic consumer

pricing risks identified

by the competitive

analysis. lf today's totalmarket

capacity levels were not sustainable,

antitrust immunity

could not be reestablished

without a totally new application,

and

a DOT review of competitive

and public benefits issues under the materially

different conditions of that time. There can be no expectation

that DOT will fundamentally

change the basis of its ATI grant and delink immunity

and capacity without a complete

reopening

ofthe ATI

case.

' The Joint Applicants' 3 June Reply misstates the concernI raised in my I June comments. I was not concemed

that the applicants' could unilaterally invalidate the terms ofthe capacitycommitment. I was concemed that the applicants

had (a) established

a procedure

whereby waivers wholly inconsistent with the competitive analysis could be readily granted and (b) established a firm expectation t}lat any market change ofconcern to the applicants would provide a legitimate basisfor a waiver ofthe capacityconditions,instead oftrue "force majeure" events that were temporary in nature and unlikely to change long-term market conditions. 

### T

### T

I Horan, Reply to Delta/Virgin,

5 June 201L

Clearly limiting "force majeure" waivers to true "force

majeure" events that were temporary

in nature, andlimiting

those waivers to 90 days,

eliminating

the risk that antitrust

immunity

could distort competition

if today's competition

proved to be unsustainable.

There can be no expectation

thatwaivers

could begranted

just because

market conditions

were no longer identical to the conditions

of June 2011. Redefining

the capacity

commitment

in terms of available

seat miles (not departures),

and as a 24 month commitment

from the time of imolementation

(not the time of the final decision).

The Joint Applicants'

3 June Reply does not challenge

any of the deficiencies

identified

in my 1 June Comments,

does not in any

way challenge

any of the inconsistencies

I identified

between the 15 April document

and the competitive

analysis published

in the Show

Cause Order, and does not provide

any
reasons why the modifications

to the capacity

agreement

I proposed

should not be included

in the Department's

Final Order. The 3 June Reply makes says I have made "erroneous

claims" but doesn't provide a single example of factual

evidence showing that any of those claimed deficiencies

and inconsistencies

were "erroneous."

Since the modified

conditions

I orooosed

are consistent

withthe Department's

competitive

analysis, and the original

15 April conditions

are not, the Department

cannot grant immunity

without adopting my proposed

modifications.

The Joint Applicants

demand that myconcerns

thatapproval

that mystated

concerns that ATI could harm consumers

under certain conditions

be dismissed

out of hand

as "unsubstantiated

soeculation." This isa ludicrous

argument,

his section of my comments

consists mostly of quotes

from the Department's

own competitive

analysis which explicitly recognizes

that consumers

could be harmed under certain market conditions

and that antitrust

immunity

could not be granted under any and all market conditions.

The Joint Applicants

are demanding,

in effect, that DOT findings uch as their "uncertaint[y]

that the market,

over the long term, could sustain the added

capacity''

recently introduced,

and their observation

that unfettered

immunity

"could have provided the applicants

with extra incentive and ability to reduce

capacity in the market

o put upward

pressure on fares" must be dismissed

out of hand

as "unsubstantiated

speculation"

because the Department

can't demonstrate with 100%

certainty that those risks will materialize.

This isa ludicrous

argument

that suggests

airlines must begranted

freedom to collude

inviolation

of the antitrust

laws unless it can be proven

with 100% certainty that consumers

will be harmed.

The risk thatall of today's

capacity might not be sustainable

in the long run is not an unsubstantiated risk. The risk thatconsumers

would be harmed

if theJoint Applicants

use unfettered

immunity to reduce

capacity is not an unsubstantiated risk. The risk that
consumers

would be harmed

if the new

joint venture causes United to materially

reduce capacity is not
an unsubstantiated

risk. The risk that theJoint Applicants

would exploit he huge loopholes

in the capacity commitment

to preserve

the private

benefits of immunity

while undermining

the intended protections

for consumers

i not an unsubstantiated risk.

The Joint Applicants

claim that the 15 April document

is simply designed to protect

them from "force majeure" events8 is willfully dishonest.

Allowing waivers for any change that "materially

affect(s) the demand for or the cost

of providing

transpacific

airservice"

is not a "force

majeure"

provision.

From an initial reading of the 15 April capacity commitment

document,

it was not clear whether theJoint Applicants

sincerely respected

the Department's

stated competitive

concerns but the lawyers

had done
a sloppy job embodying

those concerns in the agreement,

or whether

theJoint Applica nts deliberately crafted a document

with enough

loopholes

to largely

nullify the consumer

protections

demanded

by the

E Reply ofthe Joint

Applicants,

p.3Horan,

Reply to Delta/Virgin,

6 June 2011 5

Department.

The Joint Applica nts' bogus "force majeure" claim illustrates

whythe 15April

document must beseen as a deliberate

attempt o destroy

the intended

consumer

protections

in the Second

Show Cause order. lf the Joint Applicants

were honestly interested

in meeting

the Department's

concerns, their Reply

would have either demonstrated

that the 15 April document

fully protected

consumers,

or constructively

suggested

language that would better protect consumers.

Given their actual Reply, one must conclude that theJoint Applicants

have no respect

for the consumer

risks in this case, and cynically believed they could undermine

all of the Department's

demanded

conditions

with small

print in a document

they thought no one would read, This makes it especially

imperative

for the Department

to reject he 15 April document

and impose clearly written, transparent

conditions

consistent

withtheir competitive

analysis.

B. THE JOINT APPLICANTS

DO NOT CONTEST

MY COMMENTTHATTHE SECOND SHOW CAUSE ORDER INCLUDED

ABSOLUTELY

NO OBJECTIVE

FACTUAL EVIDENCE

THAT SIGNIFICANT

PRICE OR CAPACITY PUBLIC BENEFITS WILL BE CREATED

BY IMMUNITY

AND DO NOT CONTEST

MY CLAIM THAT THE DEPARTMENT

CANNOT GRANT IMMUNITY

BECAUSE ITHAS NOT MET THE PUBLIC BENEFITS REQUTREMENTS

OF 49 U.S.C. 55 41308(b)

InSection

B of my 1 June

Comments,

I pointed out thateven

though the Second

Show Cause Order explicitly recognized

that ATI cannot begranted

under 49 U.S.C. 55 41308(b) without evidence of "large scale Public Benefits uch as increased

capacity, lower fares or more efficient services"e,

the Department's

Second Show Cause Order failed to present

any factual, quantitative

data or analysis

that significant

Public Benefits would be created if immunity

was granted in this case. The Department simply asserted that immunity

would generate Public Benefits, but didn't

explain exadly what magnitude

or type of benefits

would becreated,

didn't present any legitimate

objective vidence supporting

their assertion.

The Second Show Cause Order outlined criteria for evaluating

Public Benefits claims at some length, but never

evaluated

any objective vidence of possible

benefits against those criteria. The Second Show Cause Order discussed

barriers that might

have totally precluded

the possibility

of meeting

the49 U.S.C.

95 41308(b)Public

Benefit test at some length, but presented

no evidence that Public

Benefits large enough to meet the 49 U.s.C.

55 41308(b) would becreated

even if those barriers had been eliminated.

While the Second

Show Cause Order made vague, unsupported references

to possible

operating

synergies,

it provided

no evidence

that large

synergies would actualiy becreated,

(and more importantly

under 49 U.S.C. 59 41308(b))

presented

no evidence

that any hypothetical

synergies would actually be passed

onto consumers.

I argued that since

the Public

Benefits requirement

of 49 U.S.C.

59 41308(b) cannot besatisfied

by an unsubstantiated

assertion,

antitrust immunity

cannot be granted in this case.

The iointApplicants'

3 June Reply does not challenge

any of these specific riticisms of the Second

Show Cause Order. lt does not challenge

my claim that legitimate,

objective vidence of significant

Public Benefits is required

by 49 U.S.C. 55 41308(b) and that unsubstantiated

assertions

do not meet

that requirement.

lt does not point to any factual, quantitative

data or analysis

about pricing or capacity benefits in the Second

Show cause order that I might

have missed, lt does not challenge

my claim that the Department's

assertion of "double

marginalization"

benefits was not only unsubstantiated,

but was willfully false, fraudulent,

and directly contradicted

the Department's

stated Public Benefits criteria. lt does not present

any evidence that hypothetical

operational

synergy Bains would actually be passed

on to consumers

in the form

of lower fares or increased

service.

e Second Show Cause Order p. 13, FirstShow

Cause Order p.9, l2Horan,

Reply to Delta/Virgin,

5 June 2011

The Joint Applicants'

3 June Reply merely asserts that their submissions

include claims of Public Benefits.

My argument

is that there is no legitimate

vidence of Public Benefits in the Department's Second Show Cause Order. My argument

is that the Department

cannot grant immunity

unless the Department

demonstrates

that the evidence

onthe case

record meets the49 U.S.C.

$9 41308(b) Public Benefit test. The Joint Applicants

have not challenged

either of these arguments,

which were directed at the Department,

not at theJoint

Applicants.

My comments

raised serious arguments

about he lack of evidence

of Public Benefits. Even though the applicants

have been working onthis case for two years,

the only responses

to these Public Benefits arguments

they can think of are "Competition

in the Us-Australia

and US-South Pacific market is now
more robust han eve/' and

the news that Qantas

has begun service to Dallas-Ft.

Worth and that Continental

intends to begin Houston-Auckland

service once aircraft withthe needed

range capabilities
are deliveredlo.

The antitrust laws cannot be suspended

every timeanairline

asserts that markets

are "robus/'. The Second Show Cause Order clearly recognizes

thateven

if April 2011 conditions

seem "robust'' it recognizes

thatgranting

immunity

without strict capacity conditions

would have violated 49 U.S.C. 55 41308(b) by "provid(ing)

the applicants

with extra

incentive and ability to reduce

capacity in the market

o put upward

pressure on fares"l1

Neither of the referenced

route announcements

are benefits related to antitrust

immunity.

lf this is the best counter-argument

theJoint Applicants

can come up with,it should

raise even more serious concerns that there are no legitimate

Public Benefits from immunity

in this case. Since the Joint Applicants

are clearly trying to undermine

the conditions

that the Department

says are a minimum

requirement

for the creation

of Public Benefits, and the Joint Applicants'

can't counter the arguments

here with any clear evidence of Public Benefits, the Department and other interested

parties must reconsider

the possibility

that the iointApplicants

are consciously, deliberately

pursuing immunity

in order to gain the "extra

incentive and ability to reduce

capacity in the market o put upward

pressure onfares" that would create huge public Detriments.

The Department must reverse its tentative grant of antitrust

immunity

until it can provide legitimate,

objective vidence that substantial

Public Benefits meeting the requirements

of 49 U.S.C.

SS 41308(b) will becreated,

and until it also establishes

rigorous, transparent

capacity commitments

that will terminate

immunity

if today's market capacity cannot be financially

sustained

in the long-term.

Respectfully

submitted,

Hubert Horan 5 June 201 1

ro Reply ofthe Joint

Applicants

p.2 " Second Show Cause Order p.7Horan,

Reply to Delta/Virgin,

5 June 2011

CERTIFICATE

OF SERVICE

I hereby certify that I have

this date served the foregoing

document

on the peBons identified

below by causing

a copy to be sent

by electronic

mail.

carl. nelson@aa.com howard_kass@usa

irways.com benjamin.slocum@usairways.com hkamen@coair.com dan.weiss@coair.com steve.morrissey@united.com jhill@dlalaw.com todd. homan@dot.gov peter.irvine@dot.gov paul.gretch@dot.gov keith.glatz@dot.gov christopher.mandel@dot.gov sacha.vanderbellen@delta.com jeff.morgan@delta.com anita.mosner@hklaw.com sophy.chen@hklaw.com merren.mcarthur@virginbl ue.com.au dayna.hall@virginblue.com.au jeff.morgan@delta.com J ill.ftacek@usdoj.gov urskr@state.gov

Hubert Horan 6 June 201 1