BEFORE THE U.S. DEPARTMENT OF TRAN S PORTATION OFFICE OF THE SECRETARY WASHINGTON , D

. C

.

____________________________ _ ____ _____ _____ ) Application of ) ) SOUTHWEST AIRLINES CO. ) ) f or an exemption pursuant to 49 U.S.C § 40109 ) Docket No. OST - 2014 - 0222 to engage in foreign scheduled air transportation ) of persons, property and mail between Houston ) Hobby International Airport and Cancun, Mexico City ) Puerto Vallarta, and San Jose del Cabo, Mexico ) ) (HOU

- CUN) ) (HOU

- MEX) ) (HOU

- PVR) ) (HOU

- SJD) )

_____________________________ _ ________ _____ )

REPLY OF SOUTHWEST AIR LINES CO

. Communications with respect to this document should be sent to:

Ron Ricks Robert W. Kneisley

Executive Vice President

- Associate General Counsel Chief Legal & Regulatory Officer Leslie C. Abbott Mark Shaw Senior Attorney

Vice President General Counsel & SOUTHWEST AIRLINES CO. Corporate Secretary 919 18th Street, N.W., Suite 600 Southwest Airlines Co. Washington, D.C. 20006 2702 Love Field Drive bob.kneisley@wnco.com Dallas, TX 75235

- 1611 (202) 263

- 6284

January 8, 20151 BEFORE THE U.S. DEPARTMENT OF TRAN S PORTATION OFFICE OF THE SECRETARY WASHINGTON , D

. C

.

______________________________ _ __ _____ _____ ) Application of ) ) SOUTHWEST AIRLINES CO. ) ) f or an exemption pursuant to 49 U.S.C § 40109 ) Docket No. OST - 2014 - 0222 to engage in foreign scheduled air transportation ) of persons, property and mail between Houston ) Hobby International Airport and Cancun, Mexico City , ) Puerto Vallarta, and San Jose del Cabo, Mexico ) ) (HOU

- CUN) ) (HOU

- MEX) ) (HOU

- PVR) ) ( HOU

- SJD) )

_______________________________ _ ______ _____ )

REPLY OF SOUTHWEST AIR LINES CO

. Southwest Airlines files this Reply in response to the Answer filed by United 1 and SkyWest on December 29, 2014 ( “ United Answer”) in this proceeding. Instead of addressing the merits of Southwest’s Application, United ’s Answer raises inapplicable procedural objections and ma tters outside the scope of DOT’s decision . The Department should reject these transparent attempts to delay Southwest’s competitive
service and instead act expeditiously to enable Southwest t o enter and compete in the markets in question. Specifically, we urge the Department to promptly (1) withdraw one of the two authorities held by United and its partner carrier in both the Houston

– MEX
and Houston

-- SJD market s , and (2) grant the exempti on authority and corresponding

1 Common air carrier names are used

.Reply of Southwest Airlines January 8, 2015

2 designations requested by Southwest to enable it to serve HOU

- MEX and HOU

- SJD , as described in Southwest’s Application. 2
I. A Formal “ Carrier Selection Proceeding ” is Unnecessary and Unwarranted f or DOT to Grant the Relief Requested by Southwest

. In what appears to be no more than a delaying tactic, United argues that a formal “carrier selection proceeding” is required before DOT can withdraw and reallocate one of United’s two designations on each of the routes at issue. This argument has no
merit. It ignores the overriding fact that United controls two route designations in both of
the markets involved , leaving Southwest, a potential new entrant , with none

. Importantly, United will retain one of its de signation s in each market if the other is reallocated to Southwest. Thus, unlike a traditional “carrier selection case,” United will
not be shut out of the market if Southwest is permitted to enter. To the contrary, by reallocating one of United’s two designations to Southwest, the Department will enable
both carriers to compete in the se market s

. The Department has all the informati on it needs to decide whether to grant the relief Southwest seeks. A formal selection proceeding would serve no purpose except
to prevent a new entrant from serving these markets in a timely manner. Because of the long lead time required for launch ing new international service , Southwest plans to
open the flights at issue in this proceeding for sale before the end of February. Thus, the procedural delay sought by United would be injurious to Southwest and jeopardize
the timely inauguration of its serv ice. The choice before the Department is clear , and

2 Southwest ’s Application also request s authority and corresponding designations to serve HOU

- Cancun (CUN) and HOU

- Puerto Vallarta (PVD)

. No party is contesting the Application with respect to these two markets. Southwest requests that the Department expeditiously grant authorit y in these marke ts along with the HOU

- MEX and HOU

- SJD authorities

.Reply of Southwest Airlines January 8, 2015

3 does not require a formal proceeding beyond the present one : either perpetuate the status quo where limited or no U.S. carrier competition exists in these markets, or
reallocate one of United’s double de signations to Southwest to allow it to enter and compete with United.
T he case for reallocating United’s duplicate designations is also compelling for
two additional reasons . First, United is and will continue to be able to provide an
unlimited number of daily flights , using any gauge of aircraft , with the one designation it
will retain on each route

. Therefore, United’s service in these markets will not be interrupted , and its ability to achiev e “important network connecting opportunities and
time

- of

- day travel choices” 3 will be entirely within United’s scheduling discretion. Second , Southwest’s low

- fare, large

- jet, daily service will provide consumer benefits far superior to the SkyWest’s regional

- jet United Express service that is duplicative of the service United already provides

. Southwest’s competition will r educe fares in the four proposed Houston

– Mexico markets by an average of $117 round

- trip, 25% below current fares. These fare reductions are projected to stimula te an additional 273,000 passengers annually in the four markets. The combination of these reduced fares and resulting passenger stimulation will generate $33 million annually in consumer fare savings. 4 Significantly, United ’s Answer does not challenge t hese projected

consumer benefits or provide a similar analysis for the existing United Express service.
Moreover , the 1988 order that United cites in support of a carrier selection proceeding is inapposite to this case . In that proceeding, the DOT requested

3 United Answer, p. 2. 4 Southwest’s Application, p p

. 4

- 5 and Exhibits 1

- 7.Reply of Southwest Airlines January 8, 2015

4 applications for new U.S.

- Mexico route authority made available by the recently
amended U.S.

– Mexico aviation agreement

. 5 In that case, each new route authority was available to a single carrier , where the winner gained market access while the loser

was entirely shut out. Here, by contrast, United will not l ose market access by the reallocation of one of its two existing designation s in Houston

– MEX and Houston

- - SJD

. In fact , United and SkyWest were specifically put on notice of the possibility that one of their dual authorities might be withdrawn and reallocated in the event another carrier sought to enter these markets. In granting the United/SkyWest application for
Houston

– MEX, the Department expressly stated that “should a competing U.S. carrier present a firm proposal to provide scheduled Houston

- Mexico City service, we would be prepared to reconsider whether, in those circumstances, award of the authority gr anted here continues to be in the public interest.” 6 DOT has ample information based on the record in this proceeding to determine whether maintaining United’s double designations “ continues to be in the public interest .”

5 In the Matter of U.S.

– Mexico Air Transportation Operation s , Order 1988

- 7

- 43, July 26, 1988, p.1 (Docket OST

- DOT

- 45728) cited on p. 2 of United’s Joint Application (“By this order, we tentatively establish procedures for acting on authority requested by U.S. carriers pursuant to the recently amended U.S.

– Mexico Agreement, and invite all U.S. carriers (certificated and small aircraft) interested in serving the U.S.

– Mexico market to file applications with the Department.”)

6 Notice of Action Taken , issued Sept. 3, 2014, in Dockets DOT

- OST

- 2014

- 0129 and

- 0130 , p . 2. Similarly, in response to concerns raised by Southwest that the Houston

- SJD market would be fully subscribed if United and its partner carriers were permitted to hold all three designations for any period of time, the Department prohibited both SkyWe st and ExpressJet from simultaneously holding designations as a United Express carrier in that market

. Since that time, Spirit has been awarded the third Houston

– SJD designation and thus no more U.S. carrier designations are available. See Notice of Action Taken , issued July 29, 2014, p. 2, in Dockets DOT

- OST

- 2014

- 0100 and

- 0101

.Reply of Southwest Airlines January 8, 2015

5 Beyond this, D epartment precedent favoring new entrant carrier access to U.S.

– Mexico markets supports the relief Southwest is requesting

. For example, i n 2005 four
carriers sought the final LAX

- MEX designation. In awarding authority to Alaska Airlines , t he Department cited t he competitive benefits it would bring to the market as a new
entrant carrier , while denying a competing application by American because it already
had access to the market via a code share relationship : ...Alaska would be a new entrant in the Mexico City market, a market it has long sought to enter. Not only will this mean that it will bring new service options to consumers, and a competitive impetus to incumbents to improve their service offerings as well , but it should give Alaska an incentive to increase and maintain a presence in this important transborder market. ....Selection of American would create a less meaningful gain in U.S. carrier presence vis

- à

- vis selection of Alaska because American already serves this market through its code share with Mexicana. 7
T he Department addressed a similar issue in 2000 in selecting a carrier for the final designation in the LAX

- SJD market. The DOT concluded that greater public benefits would result from selecting a new entrant ( i n th at case American ) over United , which had access to the market via a code

- share with Mexicana : United now serves the Los Angeles

– San Jose del Cabo market under its code

- share arrangement with Mexicana, and since there are no frequency limitations on services provided under the U.S.

- Mexico aviation agreement, United is free to increase this service in conjunction with its partner in response to market demand. On the other hand, American does not now serve Los Angeles

– San Jose del Cab o and would be a new entrant to the market. The Department has consistently found that new entry is a significant carrier selection factor because it provides consumers with new service options and incumbents with new incentives to provide consumers with service that meet s their needs. 8

7 Los Angeles

- Mexico City Exemption Proceeding , Order 2005

- 05

- 01, May 4, 2005, p. 6 (Docket

- OST

2005

- 20406). 8 Los Angeles

- San Jose del Cabo Proceeding , Order to Sh ow Cause 2000

- 11

- 23, Nov

. 21, 2000, p. 6, confirmed by Final Order 2001

- 1

- 11, January 18, 2001 (Docket

- OST

- 2000

- 8361).Reply of Southwest Airlines January 8, 2015

6 Consistent with this policy of favoring new entry in U.S.

- Mexico markets, we urge the Department to grant Southwest’s Application without delay. Granting Southwest’s Application is even more strongly warranted in this case given that United will retain
unencumbered access to the market s in question with its own aircraft

. II

. The DOT Should Grant Southwest the Authority It Seeks u nder the Current U.S.

– Mexico Bilateral Agreement; United is Free to Seek Extra - B ilateral Relief for its Duplicate Designations

. United argues that the DOT should grant “ extra

- bilateral authority ” to Southwest to operate o n the routes where United controls two designations , rather than withdrawing one of United’s duplicate designations and reallocating it to Southwest

. Southwest has no objection to United seeking extra

- bilateral relief to enable it to continue operating a sec ond designation on these routes . However, there is no justification for requiring Southwest to obta in extra

- bilateral authority

– after all, Southwest is a new entrant that requires a designation to gain first

- time access to these
markets

. Beyond this, United implies that the extra

- bilateral option is virtually guarantee d
and risk

- free, but this is not the case . T he U.S. Government cannot grant extra

- bilateral relief unilaterally ; it must convince th e Government of Mexico to agree . There is no guarantee whatsoever that the Mexican Government would be willing to grant such authority outside the recently negotiated bilateral agreement. Indeed, t he extra

- bilateral authority that United describes is likely to be perceived by Mexico as controversial and premature , particularly given that the new agreement has not bee n fully approved within
the Mexic an Government

.Reply of Southwest Airlines January 8, 2015

7 In fact t h ere is no guarantee that the new U.S.

– Mexico aviation agreement will go into effect on January 1, 2016 as United asserts. At the very least, the new agreement is subject to internal ratification by the Mexic an S enate , a process in which industry politics and extraneous events create uncertainty

. If the Mexican Government does not ratify the agreement , the existing U.S.

- Mexico bilateral agreement (and its
strict limits on U.S. carrier designations ) would continue to govern the availability of
route authorities in trans

- border markets . Southwest ’s new Houston

- - Mexico s ervice should not be put at risk by being subject ed to these kinds of uncertainties outside Southwest’s control. Accordingly there is no basis for requiring Southwest to obtain
extra

- bilateral authority to access U.S.

- Mexico m arkets in which United retains double designations under the current agreement

. However, Southw est has no objection to United seeking such extra

- bilateral authority for itself or its partner carriers if it wishes to
do so.
III

. There is No Justification for the Department to Delay the Approval of Southwest’s Application Due to Airport Facilities o r CBP Resources

. Finally, there is no merit to United ’s contention that the DOT should not even consider Southwest’s A pplication until Southwest has “demonstrated” that the Hobby International Terminal will be completed on time and that sufficient C ustoms and Border Protection ( CBP) resources will be available for international service

. 9 These issues are outside the scope of this proceeding , and conditioning the grant of international route authority upon these factors would create a terrible DOT p recedent

.

9 United Answer, p. 6

- 8.Reply of Southwest Airlines January 8, 2015

8 The D epartment holds unique and independent jurisdiction among federal agencies over i nternational air transportation , including the authorization of U.S. carriers to serve specific routes

. The re is no reason or justification for the Department to predicate the grant of international route authority on the availability of particular airport facilities or CBP resources. F or the Department to do so would in effect delegate its unique jurisdiction over the grant of international route au thorities t o other federal agencies or entities that are neither authorized nor qualified to make decisions regarding international aviation policy

. United has given no reason why the DOT
should depart from its standard practice in granting new international route authorities
and impose additional or unique requirements in this case. Apart from that, United’s argument is a red he r ring in any event because construction of the Hobby International Terminal remains on schedule and is projected
to b e completed well prior to the planned launch of Southwest’s Houston

– Mexico
service

. Moreover, both the Houston Airport System (HAS) and Southwest have
received assurances from both the Department of Homeland Security (DHS) and CBP
that the required resources will be in place by th e time of Southwest’s new service

.

~~~~~~~~~~~~~~~~~~~ For the reasons given above and in its A pplication, Southwest urges the Department to expeditiously (1) withdraw one of the two authorities held by United and its partner carrier in the Houston

– MEX and Houston

- - SJD market s , and (2) grant the exemption authority and corresponding designations requested by Southwest. The record of this proceeding conclusively demon strates that Southwest ’s new entry into the proposed Houston

- Mexico markets will provide independent competition andReply of Southwest Airlines January 8, 2015

9 significant new low

- cost travel options for passengers , and clearly is in the public
interest. Respectfully submitted,

______________________ Robert W. Kneisley January 8, 2015C ERTIFICATE OF SERVIC E I hereby certify that on January 8 , 201 5 , a copy of the foregoing was served via e - mail on the following persons: msinick@ssd.com (Alaska Airlines) howard.kass@aa.com (American Airlines) robert.wirick@aa.com (American Airlines) sascha.vanderbellen@delta.com (Delta Air Lines) chris.walker@delta.com (Delta Air Lines) matwood@cozen.com (Frontier Airlines) stephen.lachter@cozen.com (Frontier Airlin es) robert.land@jetblue.com (j etBlue Airways) jhill@cooley.com (j etBlue Airways) perkmann@cooley.com (j etBlue Airways) robert.cohn@hoganlovells.com (Republic Airways) patrick.rizzi@hoganlovells.com (Republic Airways) dkirstein@ yklaw.com (Spirit Airlines) jyoung@yklaw.com (Spirit Airlines) thomas.ting@suncountry.com (Sun Country Airlines) dan.wei ss@united.com (United Air l ines) steve.morrissey@united.com (United Airlines) gmurphy@crowell.com (United Airlines) sseiden@crowell.com (United Airlines) john.varley@virginamerica.com (Virgin America) susan.kurland@dot.gov brian.hedberg@dot.gov brett.kruger@dot.gov reese.davidson@dot.gov todd.homan@dot.gov peter.irvine@dot.gov cristinasa@state.gov info@airlineinfo.com

__________________________ Leslie C. Abbot t