REPLY TO THE REPLY OF THE JOINT APPLICANTS

JOINT APPLICATIONF DELTAIR LINES, INC., VIRGIN BLUE AIRLINES PTY LTD, VIRGIN BLUE

INTERNATIONALIRLINES 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 lfiled comments (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, Iam filing this reply to the Joint 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 aclear 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 marketo put upwdrd pressure on fares".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 be granted if

the only impact "would be to improve the market share of Delta and V Australia" at the expense of

Qantas and United "without certainty of...large scale public benefitsuch as increased capacity, lower

fares or more efficient services."2 The Department also clearly stated that applicants 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, First Show 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 with the 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 oftoday'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 be governed by an applicant-drafted document that delinks immunity from

the maintenance oftoday's market capacity, establishes a simple mechanism whereby the Joint

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 oftoday's total

market capacity by creating an open-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 air service" and lists an extraordinarily

broad range of reasons that would justify cancelling the capacity obligations.5 The 15 April document

says that the Joint 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 (but keep

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 is a loophole large enough to fly a 747 through. The

Second Show Cause order says that capacity commitments are required because of the likelihood of

anti-competitive behavior ifmarket conditions don't remain as good as they are today. The 15 April

document makes anti-competitive behavior more likely because it says the Joint Applicants' can readily

get the capacity commitment cancelled if conditions don't remain 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

they have evidence that markets have changed in ways that eliminate the need to impose the condition.

lf markets change so that today's total market capacity is not sustainable and the identified risks of anticompetitive behavior are realized, antitrust immunity must be suspended.s Waivers for "force majeure"

events would only be consistent 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 16 ofthe 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 Item 6 on page 3 lists a wide range ofmarketplace changes that

could trigger a waiver request, but notes these are just illustrative, and any other 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

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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 atemporary 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. The 15 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 total market 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 oftoday's total market 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 on their own capacity. As currently stated, the capacity commitments are inconsistent

with the Department's stated concern that antitrust immunity cannot be justified if it merely

leads to market share shifts among incumbentshat 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 is granted" and undermines the

basic concept of a 24 month capacity commitment, which could now be as little as a six month

commitment.

To address 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 total market capacity fell materially below current levels, eliminating the basic consumer pricing

risks identified by the competitive analysis. lf today's total market 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 concern I raised in my I June comments. I was not concemed that

the applicants' could unilaterally invalidate the terms ofthe capacity commitment. 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 basis for a waiver ofthe capacity conditions, instead oftrue "force majeure" events that were

temporary in nature and unlikely to change long-term market conditions.

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Horan, Reply to Delta/Virgin, 5 June 201L

Clearly limiting "force majeure" waivers to true "force majeure" events that were temporary in

nature, and limiting those waivers to 90 days, eliminating the risk that antitrust immunity could

distort competition iftoday's competition proved to be unsustainable. There can be no

expectation that waivers could be granted 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 tothe capacity agreement I proposed should not be included in the

Department's Final Order. The 3 June Reply makes says Ihave 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 with the

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 my concerns that approval that my stated concerns that ATI could

harm consumers under certain conditions be dismissed out of hand as "unsubstantiated soeculation."

This is a 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, ineffect, that DOT findingsuch 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 marketo 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 is a ludicrous argument that suggests airlines

must be granted freedom to collude in violation of the antitrust laws unless it can be proven with 100%

certainty that consumers will be harmed. The risk that all of today's capacity might not be sustainable in

the long run is not an unsubstantiated risk. The risk that consumers would be harmed if the Joint

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 the Joint Applicants would exploithe huge loopholes in the

capacity commitment to preserve the private benefits of immunity while undermining the intended

protections for consumers inot 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 air service" is not a "force majeure" provision. From an

initial reading of the 15 April capacity commitment document, itwas not clear whether the Joint

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 the Joint Applica nts deliberately

crafted a document with enough loopholes to largely nullify the consumer protections demanded by the

E Reply ofthe Joint Applicants, p.3
Horan, Reply to Delta/Virgin, 6 June 2011 5

Department. The Joint Applica nts' bogus "force majeure" claim illustrates whythe 15April document

must be seen as a deliberate attempto 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 the Joint 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

rejecthe 15 April document and impose clearly written, transparent conditions consistent with their

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 IT HAS NOT MET THE PUBLIC BENEFITS

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

In Section B of my 1 June Comments, I pointed out that even though the Second Show Cause Order

explicitly recognized that ATI cannot be granted under 49 U.S.C. 55 41308(b) without evidence of "large

scale Public Benefitsuch 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 be created, didn't present any legitimate objectivevidence

supporting their assertion. The Second Show Cause Order outlined criteria for evaluating Public Benefits

claims at some length, but never evaluated any objectivevidence of possible benefits against those

criteria. The Second Show Cause Order discussed barriers that might have totally precluded the

possibility of meeting the 49 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 be created 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

be created, (and more importantly under 49 U.S.C. 59 41308(b)) presented no evidence that any

hypothetical synergies would actually be passed on to consumers. I argued that since the Public Benefits

requirement of 49 U.S.C. 59 41308(b) cannot be satisfied by an unsubstantiated assertion, antitrust

immunity cannot be granted in this case.

The ioint Applicants' 3 June Reply does not challenge any of these specificriticisms of the Second Show

Cause Order. lt does not challenge my claim that legitimate, objectivevidence 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, ltdoes 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, First Show Cause Order p.9, l2
Horan, 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 legitimatevidence 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 on the case record meets the 49 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 the Joint Applicants.

My comments raised serious arguments abouthe lack of evidence of Public Benefits. Even though the

applicants have been working on this case for two years, the only responses tothese Public Benefits

arguments they can think of are "Competition in the Us-Australia and US-South Pacific market is now

more robusthan eve/' and the news that Qantas has begun service to Dallas-Ft. Worth and that

Continental intends to begin Houston-Auckland service once aircraft with the needed range capabilities

are deliveredlo. The antitrust laws cannot be suspended every time an airline asserts that markets are

"robus/'. The Second Show Cause Order clearly recognizes that even if April 2011 conditions seem

"robust'' it recognizes that granting 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 marketo 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 the Joint 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 ioint Applicants are consciously,

deliberately pursuing immunity in order to gain the "extra incentive and ability to reduce capacity in the

marketo put upward pressure on fares" that would create huge public Detriments. The Department

must reverse its tentative grant of antitrust immunity until it can provide legitimate, objectivevidence

that substantial Public Benefits meeting the requirements of49 U.S.C. SS 41308(b) will be created, 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.7
Horan, 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