COMMENTS ON THE SECOND SHOW CAUSE ORDER

]OINT APPLICATION

OF DETTA AIR LINES, INC,, VIRGIN BLUE AIRLINES PTY LTD, VIRGIN BLUE INTERNATIONAL

A}RLINES PTY LTD D/B/A V AUSTRALIA,

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

FOR APPROVAL

OF AND ANTITRUST IMMUNITY

FOR ALLIANCE

AGREEMENTS

DOCKET DOT-OST-2009-0155

Hubert Horan l lune 2011

I am filing these comments

in response

to the Department's

Second Show Cause Order filed underDOTO5T-2009-0155-0055

(Order 2011-S-8)

and the Department's

subsequent

Order 2011-5-17

governing initial comments

on theSecond

Show cause Order. These comments

are based in part on comnents

on the First Show Cause Order filed on 12 October 2010 under DOT-OST-2009-0030

and on 19 October 2010 under DOT-OST-2009-0034.

I have substantialexpertise

and interest in questions

related to airline industry competition,

airline alliance economics

and airline antitrust issues. My professional

background

and experience

is documented

in prior DOTfilings

in theOneworld

and Us-Japan Alliance cases and a full list of publications

and bio8raphical

information

is available at my website, horanaviation.com.

I have no active business orfjnancialinterests

with anyofthe

partjes tothis case, and am only commenting

as a private citizen concerned

about he issues

raised by this case.

A. THEDEPARTMENT'S

TENTATIVE

RULING IS FUNDAMENTALLY

INCONSISTENT

WITH THE FINDINGS

OF ITS COMPETITIVE

ANALYSIS,

AND ANY DECISION

GRANTING

ANTITRUST

IMMUNIry

MUST IMPOSE CONDITIONS

CONSISTENT

WIH THAT COMPETITIVE

ANALYSIS

The Second Show Cause Order approved

the requested

grant of antitrust

immunity

on theconditions that the proposed

joint venture was implemented

within 18months

of a final order, and that the applicants

honor a two-year

capacity agreement

memorialized

in a document

dated 15 April 2011.1 lt is not unreasonable

for the Department

to have imposed timing and capacity conditions,

however the condition5,

as tentatively

stated, are unacceptable.

The specific conditions

that theShow

Cau5e Order says the applicants

must meet are directly contradicted

by the document

that would govern ihe applicants'

future actions defined. The actual conditions

also directly contradict

the competitive

analysis that the Department

claims is the basis for its decision.

The Malnland

US-Australia

market had been a Qantas-United

duopolv between 2003 and the inauguration

of new Virgin Australia and Delta service in 2008']. Prior to 2OO3 three carriers (air New Zealand, Northwest

and Continental)

had unsuccessfully

attempted

to sustain

a position

in thls market. The Department

explicitly recognized

that there was considerable

"uncertaint[y]

that the market,

over the long term, could sustain the added capacity''

recently introduced

by Virgin Australia and Delta.r The

' Second Show Cause Order, l0 May2011,

DOT-OST-2009-01

5 5-005 5, p.l6 'Air New Zealand

press r€l€ase dated l0 February

2001 announcing

the suspension

ofdirect Los

Angeles-Sydney services (effectiv€

April200:). These

comments

will refer to the newly

announced

"Virgin Ausaalia"

branding instead ofthe sepamte

"V Australia

' "Pacific Blue" and "Virgin Blue"brdnding

used in thepasl. ' Second Show Cause Order p.7l-loran,

Comments

on the Second

0elta/Virgin

Show Cause Order, l lune 2011

application

for antitrust

immunity

constituted

a clear acknowledgement

that neither

VirEin Australia nor Delta felt that the market

could not sustain

the current

capacity ifthose available

seat miles were provided byfour competitors.

Virgin Australia/Delta

collusion to reduce

its available

seat mile capacity would directly violate the public

interest requirements

under49 U.S.C.55 41308-41309,

automatically precluding

any grant ofantitrust

immunity.

The Department

clearly reco8nizes

that it cannot

allow a waiver ofthe antitrust

laws that would reduce

competition

unless it fullyeliminates

the uncertainty

as to whether

todays available

seat mile capacity is fully sustainable

ifoperated

bythree competitors.

This uncertainty

was exacerbated

bythe post-2008

recession,

but as the Department

clearly states. the real issue is whether the added

capacity is sustainable

over the long-term.

The Department's

competitive

analysis not only reco8nized

seriols uncertainty

about the lonS-term viability ofthe recently

added Virgin Australia/Delta

capacity, but that "a grant of antitrust

immunity couid have provided the applicants

with extra incentive and ability to reduce

capacity in the market

to put upward

pressure on fares"a in violation of 49 U.S.C.

55 41308-41309,

and that without imposing conditions

on the market

capacity levels, the claimed consumer

"benefits might not have materialized"5. This recognizes

that ATI would leapfrog

Virgin Australia/Delta

from weak

f3/#4 market

positions to #2 in the overall Mainland-uS

Alstralia market and to near-parity

with H1 Qantas in thecritical

LosAngelesSydney market.s With this enhanced

market position drlving up fares via reduced capacity might be a much moreprofitable

move than new

expenditures

to improve

product5 and services,

The Department's

competitive

analysis not only recognized

the requirement

to sustain

4! oftoday's

USAustralia capacityover

the long-term,

but the critical

ong-term

need to sustain

relatively balanced market shares, since "three carrier groups, each with its own alliance,

in a longhaul

market, are likelyto continue to operate

in a competitive

environmentthat

benefits the travelling

and shipping public."7 | do not accept

he Department's

long-stated

view that there

are no benefits

to consumers

when there are more than three competitors

in international

longhaul ma*ets, and

thus no risk

to consumers

from any industry consolidation

so long as three competitors

remain, Howeverthe

Department

clearly recognizes that consumers

will face higher prices and reduced service when an international

longhaul market that had supported

three competitors

is reduced

to only two. One

risk, alreadV noted, is thatthe capacity

of the new recent entrants may not be fully sustainable.

Another risk is that United

would now be the smallest of the three competitors

in the overall market, with a very weak position in thecritical

Los Angeles-Sydney

and a permanent

disadvantage

in the Australia-origin

market. The Department

correctly recognizes

that antitrust immunity

cannot be granted if it leads to capacity

cuts and price increases that harm consumers.

8ut the same consumer

detriments

would occur ifATlleads

to capacity

cuts by the Virgin/Delta

joint venture, or if ATI leads to capacity

cuts by United.

Aa noted earlier, the Depaftment has explicitly recognized

that there is uncertainty

as to whether

tod ay's ca pacitv is sustainable,

even with three competitors,

and that jt cannot grant lmmunity

until this uncertainty

is fully addressed.

As the Department

said in the First

Show Cause Order, immunity

cannot be granted

ifthe principal

result "would be to improve

the market

share of Delta and V Australia

without certainty of...large scale public benefits such as increased

capacity, lower fares or more efficient services."3

' Ibid. ' rbid, p.2 ' Ibid. pp. I l-12. ' Ibid, p.l2 " First Show Cause Order, 8 September

2010. DOT-OST-2009-0155-0026, p.l2Horan,

Comments

on the Second

Delta/Virgin

Show Cause Order, 1.lune 2011

There is no data or objective

evidence presented

in the Second Show Calse order that wouid fully address the risk that antitrust immunity

could lead to service

cuts and price increases that would harm consumers,

and it is difficult to ima8ine

that any historical data could convincingly

demonstrate

hat these risks did not exist. The Department

oteg some evidence that fares have increased

of late, but these are short-term

shifts, and while they suggest

that carrier

financial results are less awfLrl than they miSht have been in 2009, they do nothing

to prove whether alloftoday's

capacity issustainable

in the longer-term

future. The only data that would have

lent some credence to the view

thatthis capacity

is sustainable

would have

been internal carrier route profitability

data showing that all ofthe four carriers' current operations

already earn returns that covered

the cost (or came very close to covering

the cost) of thecapital

invested in US-Australia

flying. The applicants

did not submit, and the Department

did not request any such data. Such data, if it existed,

would still not address the risk that the newly

immunized joint venture

would have

the "incentive

and ability" to profitably

cut capacity,

or the risk

that ATt would lead to market

share shifts that would

make it prudent

for united

to cut capacity.

Since thereis no historical

data that could

demonstrate

that these

risks do not exist,

the app canI5 submitted

a "Mutual

Capacity Coordination

Agreement"

where they committed

to matnratn

currenr capacity levels for 24 months,'

and theShow

Cause Order imposed the conditions

memorialized

in that document

as a condition

for its tentative grant of antitrust

immuniW.

In concept, such a capacity commitment

could provide a reasonable

basis foraddressing

the potential

risks to consumers.

In reality, that capacity agreement

contains huge loopholes

that could allow the applicants

o flout all of the issues

raised in the Department's

competitive

analysis. The Show Cause Order fails to reveal any of these loopholes

and falsely states that the applicants

have made a firm commitment

to operate

at least 555 annual Delta and 1260

annual Virgin Australia services. The Department

cannot grant immunity without absolutely

clear and transparent

conditions,

and the applicants

cannot have independent discretion

to judge whether those conditions

are stillbinding.

The agreement

improperly

allows the applicants

to reduce

capacity in ways that would harm consumers if there are any "external events beyond the parties'

control thatmaterially

affect he demand foror the cost of providing

transpacific

air service." 1o Given the dynamic and volatile nature ofthe industry,

this open ended loophole virtually Buarantees

that the carriers

would be able

to claim the self-granted "right" to cut flying,

while retaining

the full private

benefits to collude

under antitrust immuniW.

Whileit ls not unreasonable

to incorporate

some flexibilityto

cope with act,of,God

caliber crises that could

lead to a lar8e

buttemporary

drop in demand

(along the lines of a terrorist

action or majorhealth

scare that
was unlikely to redltce

the long-term

demand for air travel) the agreement

improperly

rrears any material change in demand

levels or operating

costs as a ..force majeure,, event that would

allow the capacity commitments

to be disregarded.

The applicants

claim the rithtto reduce

capacity if West Texas Intermediate

prices reach S120 per barrel, only 9% higher than they stood the day thecapacjty agreement

was filed (15 April) and only 5% higher than they stood atthe beginning

of May. An agteement

that protects

consumers

only iffuel prices

never increase more than 5-10%

over the next two years

makes a mock€ry

ofthe issues

raised bythe Department,s

competitive

analysis. Even iffuel prices remained flat, consumers

would be fullyat risk

ifthe applicants

decided that other

costIncreases
or exchange

rate shifts had somehow

invalidated

the capacity

agreement.

The agreement

also improperly

defines "capacity"

in terms offlight departures

instead of available

seat miles/kilometers

(or seat departures).

Downgauging

flights (for exam ple 747s tot77s ot 787s)

could reduce market capacity



### ,l;u,ji""1.ir" nt.a

"" t 5 Ap.il 201 I under Dor-osr-o155-005i.Horan,

Comnents

on theSecond

Delta/Virgin

Show Cause Order, l June 2011

30 to 50%, causing fa. greater

harm to consumers

than any ofthe issues

raised in the oepartment's competitive

analvSis,

The Second Show Cause Order clearly states that antitrust immunity

would have been unacceptable under the market

conditions

of 2009-10

when there were obvious rlsks that caoacitv levels were unsustainable

and clearly states that without firm conmitments

from the applicants

to maintain

that capacity for two years, there would be serious risks thatimmunity

would actually increase the risk that

consumers

would get less service at hi8her fares. The Department

must not grant antitrust immunity

in this case without imposing the following

conditions:

I 5ince

consumer

benefits in thjs case are totally contingent

on maintenance

of current

total market capacity levels, antitrust immunity

will be automatically

withdrawn

if the annual mainland

USAustralia nonstop !eq!mile capacity operated by either united or the Delta/Virgin

Australia joint venture fall by more than 10% from current levels, or if the nonstop

seat mile capacity operated by either Qantas or thecombination

of United

and the DL/VA

venture fail bymore than 20%. I In the event of act-of-God

caliber crises causing a significant

but temporary

drop in demand,

the appllcants

may request a one-time

waiver oftheircapacity

commitmentfora

period of up to 90 days without cancellation

f antitrust

immunity.

The end pojnt of the ori8inal 24 month

capacity agreement

will be extended

by the length

of the waiver period. Waivers may not be granted because of changes

in demand conditions

or operating

costs that are not clearly temporary

and clearly caused by one-time xternal shocks. Aside from this one-time waiver, there can be no conditions

where the applicants

maintain antitrust immunity

but capacity levels fall more than specified in the previous

paragraph.

External shocks that significantly

depress demand for more than 90 days must be seen as secular market changes (not short-term

aberrations)

and the impact of antitrust

immunity

on consumers

must bereevaluated

based on those changed conditions. I lf the

applicants

do notwish

to be bound

bythese capacity commitments,

they retain the right to formally terminate

thecurrentjoint

venture agreement.

lf they feelthat an alternate capacity arrangement

could meet the public

interest requirements

of 49 U.S.C.

55 4130841309,

they retain the right to submit

a totally new antitrust immunity

application,

but must submit new eviden€e on market

prices and competitive

conditions,

and thefe can beno presumption

that the
new application

will be granted.

The conditions

ensure a clear and transparent

link between the applicants'

ability to collude

under antitrust immunity

and maintenance

oftoday's

eat mile capacity for two years. lf capacity

is not maintained,

the applicants

lose antitrust immunity.

These new conditions

are fully consistent

with the competitive

analysis n the Second Show Order, while maintaining

the flexibility

needed to handle

true force-majeure

events. These conditions

actually increase the applicants'

ability to make schedule adjustments

that do not affect

aggregate

capacity and to make small/short-term

capacity adjustments that would not materiallv

affect market orice levels, lf market condition

remain at current

levels or improve, the applicants

should have no difficulty meeting thecapacity

conditions.

lf market conditions

are a bit volatile but the joint venture generates

the synergies

claimed by the applicants,

they should also have no difficulty

meeting thecapacity

conditions.

These conditions

eliminate the r,sk thatthe applicants

could harm consumers

by cutting capacity while still retaining the right to collude

on price and service, These conditions

eliminate the rjsk that carriers could massively

harm consumers

by simply downgauging

existing flights. These conditions

eliminate the riskthatATlmerelytransfers marketshare from United to Delta/Vir8in

without providing any significant

benefits to consumers

(or actually harmingHoran,

Comments

on the Second Delta/Vir8in

Show Guse Order, l June 2011

consumers

by forcing United to reduce

flying). In theevent

hat today's capacity is unsustainable because market conditions

fundamentally

worsen and a competitive

shakeout

;s required, these conditions

eliminate the risk that that shakeout

would be distorted

by governmental

actions giving Delta/Virgin

special competitive

advantages

that united

did not have.

These conditions

eliminate the risk that theclearly

stated condition

that the applicants

must maintain current capacity for two years could be nullified

by loopholes

and open-ended

exceptions

that are not disclosed

in the Department's

own decision.

Furthermore,

the Department's

entative

ruling granting the applicants

18months

to implement

their joint venture is also fundamentally

inconsistent

with the Department's

competitive

findinB that applicants

must be"in a position

to deliver

substantial

consumer

benefits atthe time immunity

is requested"ll

and it is totally inconsistent

with thecommitment

to maintain

capacity levels for 24 months from the time of the Final

Order. The applicants

have had nearly two years

to plan the implementation

f animmunized

alliance, and have had nine months to adjust those implementation plans to meet concerns raised by the First Show Cause Order. There is nothing

on the record

ofthecase that explains why the joint venture could not be implemented

until three and a half years from the applicants'initialfiling.

The "specificfacts

and circumstances"

aboutthe

"competitive

nature ofthe markets affected by immunity"

maybe very different in 18 months

andmaybe

totally inconsistent

with the facts and circumstances

assumed in theSecond

Show Cause Order. lmplementation

18months

from

now could change the applicants'

"24 month" capacity commitment

to a "5 month"

capacity commitment.

lfthe Department

grants immunity

in its FinalOrder

it musteither

require impiementation

within 6 months ofthat Final

Order, or require

the applicants

to honor their capacity commltment

for 24months from the time of implementation,

istead of24 months

from thetime ofthe FinaiOrder.

81, THE DELTA/VIRGIN

AUSTRALIA

SHOW CAUSE ORDERS ESTABLISH

THREE KEY CRITERIA

FOR THE EVALUATION

F WHETHER

AN ANTITRUST

IMMUNITY

GRANT WItL CREATE PUBLIC BENEFITS

As the Department

has explained

inevery recent case, 49 U.S.C. 55 41308(b) dictates that airlines can only be granted immunityfrom

the antitrust laws if the reduction

ofcompetition

would Benerate sufficient

Public Benefits so thatthegrantofATlwould be required

to servethe

public interest, and the burden is on the aoplicants

to demonstrate

those Publlc Benefits. The Show Cause Orders in this case established

three major criteria torevaluating

Public Benefits.l'?

I Public

Benefits must be significant

and immediately

achievable

in a form tan8ible to consumers
across the market

as a whole; they cannot include carrier benefits that will not be delivered to
consumers

or shifts of traffic and market positions between incunbents

that do notcreate

"large scale Public Benefits such as increased

capacity, lower fares or more effcient services"rr

and

" Second Show Cause Order p. 14. First Show Cause Order p. 5. '' The Public

Benefits analysis in the First

and Second Show Cause Orders wer€ tully consist€nt.

TheSecond

Show Cause Orderconfirms

this stating that its tentative

findings were based on me€ting

"the high standard

set out and explained

by Order 2010-9-4"

(p.7) and at no point

does theSecond

S)row Cause order aller any ofthe criteria

stated in the First

Show Cause Order. 'r Second

Show Cause Order p. I 3, First

Show Cause Order p.9, I 2Horan,

Comments

on theSecond

Delta/Virgin

Show Cause Order, l June 2011

applicants

must be"in a position

to deliver

substantial

consumer

benefits atthe time immunity

is requested"'o I Public

Benefits depend on "specific

facts and circumstances"

about he "competitive

nature of the markets affected by immunity"

in the specific

markets affected by entitrust

immunityls

but cannot be accepted

if major/ recent external changes (such as the global recession)

or large, recent capacity/competitive

shifts make it impossible

to determine

whether future, long-run Public Benefits would be created byantitrust

immunity

in the relevant

markets or ifthere

are physical barriers that could prevent benefirs'rom

beinB .ealizedr6
I Pubiic

Benefits (of the magnitude

required to meet the 55 41308(b) standard)

cannot exist unless current aggregate

market capacity can clearly be sustained

financially

over the long-run,

as Public Eenefits from increased

service/capacity

cannot exist unless current capacity is fully sustainable, and if current capacity is not sustainable,

immunity

would provide "applicants

with extra incentive and ability to reduce

capacity in the market

to put upward

pressure on fares"rT creatjng a major public detriment

that would preclude any grant of immunity.

82, ANTITRUST

IMMUNITY

CANNOT BE GRANTED

BECAUSE THE CASE RECORD HAs ABSOLUTELY

NO OBIECTIVE

FACTUAL EVIDENCE

THAT SIGNIFICANT

PUELIC BENEFITS

MEETING ANY OF THESE CRITERA WILL ACTUALLY

BE CREATEO,

THUS THEREQUIREMENTS

OF 49 U,S,C, 55 41308{b) HAVE

NOT BEEN MET

The Second Show Cause Order asserts that Public

Eenefjts will be created if immunity

is granted in this

case but does not jnclude any data, analysis or quantitative

evidence to support

that assertion.

Despite articulating

criteria for evaluating

whether an application

creates the Public

Benefits required for an immunity

grant, the Department

provides no data, analysis or quantitative

evidence demonstrating

that those criteria have been met. The Second Show Cause Order never defines the nature

or magnitude

of the Public

Benefits being asserted-it

asserts that Public Benefits will be created but never

actually says thatprices

will fall and never actually says that service or capacity

will increase.

There are no numbers linked to the alieged Public Eenefits, thus we do not know

whether the Department

thinks ten dollars worth of benefits

would be created or ten million

dollars. Since the decision doesn't document

the tvoe
or magnitude

of Public Benefits it is asserting,

and provides no factual evidence supporting

its assertion, is impossible

to say that the requirements

of 49 U.S.C.

55 a1308(b) have been met, and thus immunity cannot be Branted. Since the tentative decision is based solely on blind faith, it would beimpossible

for anyone to ever determine

whether the implemented

joint venture had actually created any of the Pu blic Benefits used to justify antitrust immunitv.

I The Second Show Cause Order does not include

any objective factual evidence suggesting

that USAustralia passengers

would actually achieve "large scale Public Benefits such as increased capacity, lower fares or more efficient services" if antitrust

immunity

is granted. Although the Department

claims that immunity

depends on "specific

facts and circumstances"

about he "competitive

nature of the fiarkets affected by immunity"

the Second Show Cause Order fails to present any objective data showing that the specific facts in these markets can justify a grant of antitrust immunity.

The only two sentences

in theSecond

Show Cause Order with any data on market capacity and fares expli€itly suggest that the "specific

facts and circumstances"

in these

rl Second

Show Cause Order p. l,l, Fhst

Show Cause Orderp. 5.

;; Se€ond Show Cause Order. p.13, First Show cause Order p.l0-l I

r? Second Show Cause Order p.7,First Show Cause Order p.8Horan,

Comments

on the Second Delta/Virgin

Show Cause Order, 1 June 2011

markets might notjustify

immunity,

and that capacitygrowth

is extremely

improbable

in the nearterm.ts

Since the Second

Show Cause Order doesn't attempt to quantify

those benefits or estimate their general magnitude,

and thus there is no basjs forclaimjng

that those benefits meet the requirements

of49 U.S.C.55

41308(b) While the Second

Show Cause Order spends some time arguing

that public

Benefits could not have been possible given the market

conditions

and systems barriers that existed last year, and asserts that progress

has been made on both fronts, the Order

includes absolutely

no factlal evidence demonstrating

that Public

Benefits will be produced

with today's

conditions

and svsrcms now that the alleged barriers have been addressed.rsThe

claim that conditions

are nota5 bad as they hadbeen

before does not constitute

evidence that they are now

good, and certainly

does not constitute

theevidence

that is requked

under 49 U.5.C. 55 41308(b) As noted in the first section

ofthese comments,

even thou8h the Department

acknowledges

that Public Benefits cannot be created if today,s capacity levels are not fully sustainable,

and acknowledges

that ATI would give the applicants

,,extra incentive and ability,, to harm consumers lf today's capacity is not fully

sustainable,

The Second Show Cause Order has absolutely

no evidence demonstrating

that this capacity

is, in fact, financially

sustainable.

Asalso noted earlier, the Department's

claim that this lack ofevidence

is fullV addressed

by the imposed

capacitv conditjons

i false. The capacity commitments

stated bv the Deoartment

ln the Second Show Cause Order are not the commitments the applicants

have actually agreed to. The applicants

have agreed to a much

shorter maximlm

commitment

term (since

they have

18 months

to imDlement the joint venture) and can ignore thecommjtment

completely

if there are any material changes to market conditions

they deem unfavorable. The Second Show Cause Order does not jnclude

any objective factual evidence suggesting

that antitrust immunity

will lead to signiflcant

operational

savings or that hypothetical

efficiency

gains would be passed on to consumers

in the form of lower fares orjncreased

service. Sucn savrngs would presumably

have to also belarge enough to cover the development

and implementation costs ofthe new

systems that allowed

the applicants

to overcome

the objections

raised by the Department

in the First

Show Cause Order. The Second Show Cause Order incjudes nothin8 that would support its assertion that synergies will be created, and absolutely

nothing to explain

why and howthese

hypothetical

synergies would actually be converted

to tangible

public Benefits, as required by 49 U.S.C.

5541308(b) The Second Show Cause Order does not include

any objective factual evidence sug8esting

that the applicants

are "in a position

to deljver

substantial

consumer

benefjts atthe time immunity

is requested".

The Order grants the applicants

18 months to implement

theirjoint

venture, even though the Order

claims that the systems

and management

barriers it was concerned

with have been fully addressed.

This strongly suggests that the applicants

are not in a position

to deliver significant

benefits on a timelV

basis.

'" S€cond

Show Cause Order p.7 '' Neither the First or Second

Show Cause Order ever provided objective factualevidence

about lhe specific rnarket conditions

and systerns deficiencies

ofconcem.

What was the revenue

management

functionatiry

issue, and how would it block

theproduction

ofPublic Benefirs?

How did the Depanment define..marker

conditions

precluding Public Benefits"

last year and how did i. define.,marker condirions

ensuring public Benefits" this year? Borh issues could have been explained

in generat

terms wirhour compromising

any competjtively

sensitive dala. Ahhough

lhese mark€t conditions

and systems barriers quesrions

are nor centrat ro rh€ Departrnent's

failure to meer he legal requir€tuents

of 49 U. S.C. SS 4 I 3 08(b), they further illusfate

that the Depanmenl's

ATI decisions

are nor substanliared

by any objective.

faclual evidence.Horan.

Comments

on the Second

Delta/Virein

Show Cause Order, l June 2011

! The Department's

claim that theelimination

of "double

marginalization"

pricing markups'o

will lead to lower average passenger

fares is a willfully

false and fraudulent

claim and thus cannot beused
as evidence of Public Eenefits in this case. There is no data supporting

theclaim that "Double Marginalization"

priclng oarkups have ever existed in international

aviation markets, and there
are absolutely

no "specific

facts and circumstances"

howing that consumers

suffer from artificial pricinS markups Inthe markets

affeded bythisapplication. The onlypotential

reason a "double marginaliration"

pricing claim could berelevant

to an ATt Public Benefit analysis

the fraudulent hypothesis

that competitive

airline markets are incapable

of setting

prices at efficient

level because ofa structuralbarrier

to profit maximizing

pricing that exists in every interline market worldwide,

a barrier that can only be eliminated

by mergeroa

antitrust immunity.

The only researcherto

make this fraudulent

claim was a paid consultant

to an ATI applicant.

Theresearch
was fraudulent

because it had absolutely

no data supporting

the central

"structural

barriers to efficient interline pricinE" hypothesis.

The Department

is fullyaware

that both

the original research claim ofstructural

pricing bar.iers and its application

to ATI Public Benefits analysis are indefensible,

since detailed analysis refuting those claims have been presented

in past cases and in the published

literaturerr

and the Oepartment

has never challenged

any ofthosecounterarguments

andhas never presented

any independent

data oranalysis

supporting

the original "double marginalization"

claims. NoATtcase

record includes any objective evidence that anyATl grant in the last

ten years

has ever created a single dollar ofconsumer

benefits from lower interline pricinS, and the case record includes objective,

verjfiable

evidence that ATI grants have reduced consumer

welfare bybillions

of dollars.

The Department

blatantly contradicts

jtself by inslstinS Publlc Eenefits cannot be assumed andeDendent

of"the oarticular

facts and circumstances

ofthis case"L

but thenasserting

the existence

of ,,double

marginalization,, benefits which (by definition)automatically reduce interline fares by 17-30%

re8ardless

ofthe facts about market or competitive

conditions

jn any particular

case. The applicants'

original filing in this case claimed interline prices would automatically

fall after immunity

was Sranted, a claim expiicitly based on the "double

marginalizatlon"

hypothesis

(worldwide

structural

pricing barriers) and the First Show Cause Order rejected them.'lr The somewhat

vaguer assertion of ,,double marginalization"

benefits in the Second

Show Cause Order reflects the Department,s

willful disregard

for the legal

requirement

under 49 U.S.C. 5541308(b)

that antitrust

immunity

cannot be granted

without legitimate,

objective,

factual evidence of public Benefits.
Respectfully

submitted,



## .'l r, ,l

., Lt (tC(,/ L/( t!' '

Hubert Horan 1 lune 20l l

'" Second

Show cause Order p. 14

_ Past case testimony

includes DOT-OST-2008-0252-3398 and 3394. A more corhplete summary ofth€se issues
can be found in "Double

Marginalization

and the Counter-Revolution

Againsl Liberal Airline Competition"

37 Tronspottotion

L@ Jounal 3 pp-

25 t-291. " First Show Cause Order p.5

- These applicant claims were originally

made ar DOT-OST-2009-0155-0001 p26-27. The wild inconsistency between the Public

Benefits analysis in this case versus prcvious ATI cases

was documented

ar lengrh in DOT-OST2009-0155-0030,

bur theSecond

Show Cause Order simply ignored the issue ofthese inconsistencies.Horan,

Comments

on the Second

Delta/Virgin

Show Cause Order,lJune

2011 9

CERTIFICATE

OFSERVICE

I hereby certify that I have

this date served

the forcgoing documeni on the persons identified

below by causing

a copy to be sent by electronic mail.


### carl.nelson@aa.com howard_kass@usairways,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 christopher.mandel@dot.

gov sacha.vanderbellen@delta.com anita.mosner@hklaw.com sophy.chen@hklaw.com merren.mcarthur@virginblue.com.au dayna.hall@virginblue.com.au jeff,morgan@delta.com Jill.Ptacek@usdoj.gov

Hubert Horan I June 2011