BEFORE THE

FEDERAL AVIATION ADMINISTRATION

WASHINGTON, D.C.

----------------------------------------------------------------

:

UNITED AIRLINES, INC., :

:

Complainant, :

v. : Docket No. FAA-16-14-13

:

THE PORT AUTHORITY OF NEW YORK :

AND NEW JERSEY, :

:

Respondent. :

----------------------------------------------------------------

REBUTTAL REPORT OF DANIEL M. KASPER
1

I. Introduction 

1. In my Initial Report,

1

I explained in considerable detail the bases for my conclusion that the 

Port Authority of New York and New Jersey (“Port Authority”) has a de facto monopoly in 

the provision of commercial airport services in the New York metropolitan area. Briefly, the 

Port Authority not only controls LaGuardia, Newark Liberty International and John F. 

Kennedy International airports (“LGA”, “EWR” and “JFK”, respectively), airports that

account for over 96% of the origin and destination (“O&D”)

2

passengers and flights traveling 

to/from the New York metropolitan area,

3

but those airports are the only ones in the New 

York metropolitan area that have sufficient facilities to sustain airline hubbing operations.4 

Furthermore, the Port Authority’s monopoly is buttressed by the existence of substantial 

barriers to entry including:

 the huge investments required (for land and facilities) merely to be in a position to 

serve customers on demand;

 governmentally imposed restrictions on the establishment of new airports; and

 substantial economies of scale and scope (which, if substantial enough, result in 

what is sometimes described as a “natural” monopoly).

 

1

See Expert Report of Daniel M. Kasper, September 24, 2014, (“Initial Report”).

2 O&D passengers are counted based on the starting and ending point of each passenger’s journey, regardless of 

whether or not they make a connection. For example, a passenger traveling from New York City to Los Angeles 

making a connection in Chicago is counted as an O&D passenger for New York City and Los Angeles (but not for 

Chicago).

3

See Initial Report, Exhibit 6.

4

See Initial Report, ¶16 and Exhibit 5.
2

2. My Initial Report further demonstrated that:

 The Port Authority has used its market power to impose fees for airlines serving

EWR that are well above those charged to airlines using LGA and JFK, resulting in 

profit margins for the Port Authority of over 20% – again, well above the Port 

Authority’s profit margins at LGA and JFK;

5

 Slot constraints imposed by the Federal Aviation Administration (“FAA”) coupled 

with high demand made it impossible for United Airlines, Inc. (“United”) to relocate 

its EWR hub to another New York metropolitan area airport in order to obtain the 

benefit of lower charges at those facilities;6and,

 The higher airport fees United is required to pay at EWR put the carrier at a 

competitive disadvantage vis-à-vis airlines that serve the New York metropolitan 

area, principally from LGA and/or JFK.7

II. The Port Authority has a monopoly over the provision of commercial 

airport services in the New York metropolitan area.

3. The Port Authority recently submitted a report by Matthew H. Lee,8in which he claims that 

“the traditional view that airlines are natural monopolies is outdated....Today, airlines, in 

general, and United Airlines, specifically, wield and exercise contravening dominant market 

 

5

See Initial Report ¶ 23 and Exhibit 10.

6

See Initial Report ¶ 29.

7

See Initial Report ¶¶ 30-32.

8 This rebuttal report does not address all of the opinions of Mr. Lee that I disagree with or believe to be in error.
3

power.”

9

 Mr. Lee does not attempt to dispute either the huge scale of investment required or 

the existence of substantial governmental restrictions on the establishment of new airports.10

4. Moreover, Mr. Lee concedes that airports have traditionally been considered monopolies and 

that, as a result, governments have adopted policies to prevent the abuse of their monopoly 

power by – among other things – charging excessive rates.11 But he argues that a “shift in 

the economics of civil aviation ... highlight that airports differ from natural monopolies...”12

5. However, Mr. Lee fails to challenge my central point that – regardless of whether the source 

is natural or unnatural – the Port Authority clearly has monopoly power over airline access to 

the New York metropolitan area. Simply put, airlines that want access to the large volume of

passengers traveling to/from the New York metropolitan area – the nation’s largest source of 

passenger traffic – have no realistic alternative but to use airports controlled by the Port 

Authority.13

6. Likewise, Mr. Lee does not dispute the existence of high barriers to entry for airports in the 

New York metropolitan area. Nor does he contest the fact that the need to protect airport 

users from the potential abuse of monopoly power by airports has been widely recognized 

 

9

See Matthew H. Lee, “Airports do not Operate as Monopolies,” Prepared for the Port Authority of New York and 

New Jersey, February 5, 2015, (“Lee Report”), at pp. 11-12.

10 As the FAA has observed: “[G]iven the high cost of airport construction (e.g., more than $4 billion for the new 

Denver International Airport), building a new airport is not a common capacity enhancement technique.” See

Federal Aviation Administration, 1998 Capacity Enhancement Plan, Chapter 3, p. 45.

11 See Lee Report, at p. 2: “Traditionally, commercial airports were considered natural monopolies with high 

barriers to entry and significant economies of scale.”

12 See Lee Report, at p. 2 (emphasis added).

13 Since Mr. Lee has failed to rebut my central point – that the Port Authority has a monopoly over airline access to 

the New York metropolitan area – I simply note here that I disagree with Mr. Lee’s natural monopoly analysis. 
4

both here and abroad14 or that it underlies the U.S. DOT’s Policy Regarding Airport Rates 

and Charges. 

III. Access to the New York City metropolitan area is essential for United’s

continued competitiveness and economic viability.

7. As shown in Exhibit 1 below (replicated from my Initial Report for convenience), the New 

York metropolitan area is – by a wide margin – the largest domestic market in terms of both 

passenger volume and revenues. The sheer size of the New York metropolitan area market 

for both domestic and international air travel has made it a key focal point for all major U.S. 

carrier networks. Thus, the New York metropolitan area generated approximately 58 million 

“local” passengers (i.e., not including passengers making connections at New York 

metropolitan area airports) in 2013, 43% more than second place Los Angeles, and far more 

than any other U.S. city. 

 

14 See, e.g., Comments of the Federal Trade Commission Staff of the Bureau of Economics to U.S. Department of 

Transportation, September 14, 1994, at 11-12: “[A]irport services generally are not produced in competitive 

markets....The construction of a new airport, or the expansion of an existing airport, is time consuming; among 

other factors, entrants face substantial regulatory burdens at local, state, and federal levels. Accordingly, incumbent 

airport operators might possess market power in the pricing of airport services. In this instance it may be possible for 

the FAA to regulate the pricing of airport services in ways that reduce the welfare loss arising from monopoly 

pricing, yet allow airports to cover their costs.” See also “Proposal for a Council Directive on Airport Charges, 97/C 

257/03, Official Journal of the European Communities, 22/8/97, Para. 12 (describing airport services as “a 

monopoly situation”), the European Commission’s Economic and Social Committee (98/C73/08, Ibid, 9/3/98 Para. 

1.1.1.) noting that “...the airport management body is in a monopoly situation as regard to the provision of airport 

facilities and services” and Laurence E. Gesse, The Administration of Public Airports, 2

nd Edition, Coast Aire 

publications, 1986, p. VIII-3: “Airports are monopolistic in character...” 
5

EXHIBIT 1: LARGEST 15 DOMESTIC O&D MARKETS IN THE UNITED STATES (RANKED BY 

REVENUES)

8. The importance to United (and other airlines) of access to the New York metropolitan area is 

further illustrated by Exhibit 2, which shows that 18.4% of United’s passenger revenues in 

2013 were generated by local (i.e., O&D) traffic carried to/from New York metropolitan area

airports. Including passengers making connections at its EWR hub, 27% of United’s 

passenger revenues were generated as a result of serving New York metropolitan area

airports, mainly EWR.15 

 

15 In 2013, over 87% of United’s New York metropolitan area departures were at EWR. Source: OAG.

Source: US DOT DB1B, FY2013.

Notes: Airports in the following domestic metropolitan areas are grouped: Chicago (ORD, MDW), Cincinnati (CVG, DAY), Cleveland (CLE, 

CAK), Dallas (DFW, DAL), Houston (HOU, IAH), Los Angeles Basin (LAX, BUR, LGB), Miami (MIA, FLL), New York (LGA, JFK, EWR), San 

Francisco/Bay Area (SFO, OAK), Washington DC/Baltimore (DCA, IAD, BWI), and Tampa (TPA, PIE).

Metropolitan Area Millions % of US Total Billions % of US Total

1 New York 57.8 6.3% $12.7 6.9%

2 Los Angeles 40.5 4.4% $8.6 4.7%

3 Washington 39.2 4.3% $7.7 4.2%

4 Chicago 40.0 4.4% $7.6 4.1%

5 San Francisco 34.3 3.8% $7.5 4.1%

6 Dallas/Ft.Worth 27.5 3.0% $5.6 3.0%

7 Atlanta 25.5 2.8% $5.1 2.8%

8 Las Vegas 29.2 3.2% $5.1 2.8%

9 Miami 27.5 3.0% $5.1 2.8%

10 Denver 27.6 3.0% $4.7 2.6%

11 Boston 22.9 2.5% $4.7 2.5%

12 Houston 20.4 2.2% $4.6 2.5%

13 Orlando 26.5 2.9% $4.6 2.5%

14 Seattle 20.9 2.3% $4.4 2.4%

15 Phoenix 22.2 2.4% $4.1 2.2%

Passengers Revenue
6

EXHIBIT 2: PERCENTAGE OF PASSENGER REVENUE GENERATED BY TRAFFIC TRAVELING 

TO/FROM THE NEW YORK METROPOLITAN AREA

9. Due to the size and economic importance of the New York metropolitan area market,16 all

large (and most smaller) U.S. airlines provide service to one or more New York metropolitan

area airports,17 and all three U.S. large network carriers plus JetBlue operate hubs in the New 

York metropolitan area: United at EWR, American at JFK, Delta at both JFK and LGA, and 

JetBlue at JFK. 

10. In addition, the business model adopted by large network carriers, including United, Delta 

and American, is predicated on their ability to provide competitive levels of access to all 

major (and most minor) sources of traffic in North America and, increasingly, around the 

 

16 See Initial Report at ¶¶ 26-27.

17 American, Alaska, Delta, Frontier, Hawaiian, JetBlue, Southwest, Spirit, Sun Country, United and Virgin America 

serve EWR, JFK or LGA. Source: OAG. 

Source: US DOT DB1B, FY2013.

Note: Includes both domestic and international passengers. 

50.2%

18.4%

14.8%

11.8%

54.2%

26.5%

18.8%

13.9%

0%

10%

20%

30%

40%

50%

60%

JetBlue United Delta American

Percent of Revenue from NYC O&D Passengers

Percent of Revenue from NYC O&D and Connecting Passengers
7

globe.18 As shown in Exhibit 3 (replicated from my Initial Report for convenience), over 100

destinations that United serves from EWR are also served from JFK and/or LGA by one or 

more of its U.S. competitors. Without the access to the New York metropolitan area traffic 

provided by its EWR hub to/from these destinations, United would be uncompetitive with 

American, Delta and JetBlue, which operate major hubs at JFK (and, for Delta, LGA).

EXHIBIT 3: DESTINATIONS SERVED BY UNITED FROM THE NEW YORK METROPOLITAN AREA

EXCLUSIVELY FROM EWR THAT ARE SERVED BY OTHER U.S. CARRIERS FROM JFK AND/OR 

LGA

11. In addition, loss of access to EWR (and, hence, the critical New York metropolitan area

traffic flows) would seriously undermine the competitive position of United’s global alliance, 

the Star Alliance. In short, access to EWR – and through it, to traffic in the New York 

metropolitan area – is essential for United. 

 

18 See, e.g., Peter P. Belobaba, “The Airline Planning Process,” pages 164-167 in The Global Airline Industry, Peter 

Belobaba, Amedeo Odoni and Cynthia Barnhart, eds. West Sussex: John Wiley & Sons, Ltd., 2009.

Source: OAG, 2014.

Notes: Includes destinations with at least ten departures from the NYC metropolitan area in 2014.
8

IV. United does not have countervailing leverage to prevent the Port 

Authority from abusing its monopoly power.

12. Mr. Lee further asserts that even if the Port Authority does have a monopoly, the “growing 

concentration amongst air carriers leads to greater bargaining power for the airline”19 which a 

hubbing airline (e.g., United at EWR) could leverage “to counter possible monopolistic 

behavior by the Port Authority of New York and New Jersey.”

20 According to Mr. Lee, “in 

general, hub airports are financially vulnerable” to the withdrawal of the hubbing carrier, and

“[t]he risk of airline connecting hub abandonment is very real.”21

13. But this argument, too, is fatally flawed since neither EWR nor the Port Authority’s other 

major New York metropolitan area airports (LGA and JFK) are “financially vulnerable” to 

withdrawal of services by a hubbing (or any other) carrier. First, unlike the case at most of 

the smaller cities cited by Mr. Lee as being vulnerable to hub closures (e.g., Memphis, 

Pittsburgh, and St. Louis), the traffic at EWR, JFK and LGA is overwhelmingly “local” (i.e.,

consisting of passengers travelling to/from the New York City area as opposed to passengers 

making connections there).

22

 Since this large pool of local traffic would remain even in the 

event of a hub closure, other airlines would have strong incentives to add flights at EWR 

should United withdraw. Simply put, and as shown in Exhibit 4, traffic at most of the 

airports cited by Mr. Lee as being “vulnerable” to the closure of a hub had a substantially 

lower proportion of local passengers than the proportion that currently exists at EWR. 

 

19 See Lee Report at p. 5.

20 See Lee Report at p. 5.

21 See Lee Report at p. 6, citing Rigas Doganis, The Airport Business, New York: Routledge, 1992, at p. 202.

22 For example, local traffic currently constitutes 67% of the total traffic at EWR, 87% at LGA and 70% at JFK. In 

contrast, local traffic in 2000 (i.e., prior to their “de-hubbings”) made up less than 40% of passengers at Pittsburgh 

(“PIT”), Memphis (“MEM”) and St. Louis (“STL”). Source: U.S. DOT DB1B Database.
9

EXHIBIT 4: LOCAL PASSENGERS AS A PROPORTION OF TOTAL PASSENGERS AT AIRPORT

14. Thus, it is not surprising that the author cited by Mr. Lee in support of the proposition that 

the Port Authority might be vulnerable to the threat of withdrawal by United at EWR further 

noted that: “Airports with a high percentage of origin and destination passengers rather than 

transfer traffic are therefore in a particularly strong position. In these cases the financial 

failure of one carrier is not considered to be a major threat as the strength of the market will 

encourage another carrier.”23

15. In addition to the high proportion of local traffic at EWR, the Port Authority is further 

protected against the likelihood of harm from a potential withdrawal of services by United by

the limited supply of runway capacity in the New York metropolitan area coupled with the 

strong demand by airlines for runway take-off and landing slots at EWR, JFK and LGA. As 

the FAA has frequently noted, slot limits were imposed on the New York metropolitan area

airports “[b]ecause of the combination of high demand and limited ability to increase 

 

23 Doganis, op cit, at 201 (emphasis added). 

67%

35% 36% 38%

0%

10%

20%

30%

40%

50%

60%

70%

EWR, 2014 MEM, 2000 PIT, 2000 STL, 2000

Source: U.S. DOT DB1B.

Note: Excludes passengers travelling exclusively on international carriers. 
10

capacity at JFK, EWR and LGA.”24 In short, both the strong demand and the limited supply 

of slots ensure the ready availability of carriers to replace any flights lost if United were to 

withdraw from EWR.25

16. Finally, as explained in Section III above, the critical importance to United of maintaining 

access to the large pool of traffic in the New York metropolitan area plus the substantial 

investments United has already made at EWR make it exceedingly unlikely that United 

would – or could afford to – withdraw service from EWR, even in the face of excessive

airport charges. 

17. But even if we assume arguendo (and contrary to reality) that United would threaten to 

withdraw service from EWR, such a threat would not be credible since, if carried out, it 

would clearly cause far more damage to United than to the Port Authority. As explained 

above, the Port Authority would suffer little or no harm if United were to withdraw since the 

slots freed up by United’s withdrawal would be quickly claimed by other airlines seeking 

expanded access to the lucrative New York metropolitan area market. In fact, that is 

precisely what occurred after the failures of Pan American (“Pan Am”) and TWA in 1991 

and 2001, respectively. Although both carriers had operated major hubs at JFK for many 

years prior to their failures and had carried more passengers than any other airline at JFK, 

other carriers anxious to obtain better access to New York metropolitan area traffic quickly 

 

24 See Federal Register, Vol. 80, No. 5, January 8, 2015 at 1284.

25 American sold 88 slots at Reagan National and 34 slots at LGA for a total of $381 million in 2014, and, at the 

same time, acquired 24 slots at JFK valued at $44 million. See “American Airlines sells New York, Washington 

slots for more than $425 million,” The Dallas Morning News, March 10, 2014. Retrieved from 

http://aviationblog.dallasnews.com/2014/03/american-airlines-sells-new-york-washington-slots-for-more-than-425-

million.html/. 
11

replaced the flights lost as a result of the failures of Pan Am and TWA.

26

 Thus, as shown in

Exhibit 5, despite the bankruptcies of Pan Am and TWA, passenger traffic at JFK rebounded 

quickly. Indeed, between 1990-2014, passenger traffic at JFK actually grew faster than 

passenger traffic at EWR over the same period.

27

EXHIBIT 5: AVERAGE DAILY PASSENGERS (DEPARTING AND ARRIVING) AT JFK

18. In contrast, withdrawal of service from EWR would cause United not only to lose access to 

critical New York metropolitan area traffic but also to lose its principal East coast and 

transatlantic hub – a serious and potentially critical economic blow.28 In addition, by 

 

26 Pan Am was the largest carrier at JFK in 1990 and TWA was the largest carrier in 1991. Source: U.S. DOT T-100 

Database. 

27 Traffic at JFK had a compound average growth rate of 2.4% between 1990 and 2014, 0.5% higher than the 1.9% 

at EWR. Source: U.S. DOT T-100 Database.

28 The economics literature shows that when a firm has incurred substantial sunk costs (e.g., in a specific location or 

facility) and is left in a position where it is forced to buy a primary input from only a single supplier to avoid 

incurring those costs again (e.g., by moving to another airport), that supplier – here, the Port Authority – will have 

the ability by raising its prices to capture much of the profits of the “captive” firm. For a review of this literature, 

see, Joseph Farrell and Paul Klemperer, “Coordination and Lock-in: Competition with Switching Costs and Network 

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Pan Am Bankruptcy

TWA Bankruptcy

Source: U.S. DOT T-100 Database.

Note: 2014 is FYE 2014Q2.

9/11/2001
12

withdrawing from EWR, United would likely lose a large portion of its very substantial 

investment in facilities at the airport.

29

 Hence, a threat by United to withdraw from EWR 

would simply not be credible and would provide United with no leverage in seeking to get 

agreement from the Port Authority to reduce fees at EWR.

19. Finally, Mr. Lee claims that JetBlue’s ability to secure 75 slots at JFK in 1999 proves that 

United/Continental could have established a hub at JFK prior to 1999 and therefore had an 

alternative to serving EWR that it failed to use.30 Even if it were true (which it is not) that 75 

slots were then available to United at JFK, the scale of Continental’s hub at EWR even in 

1999 – when it operated 682 flights/day at EWR31– far exceeded the number of slots JetBlue 

obtained at JFK.

32

 Indeed, as shown in Exhibit 6, the total increase in the number of daily 

operations by all carriers at JFK between 1998 and 2014 was only 265, less than 40% of the 

number of daily operations Continental performed at EWR in 1998.33

 

Effects,” Handbook of Industrial Organization, Volume 3, Richard Schmalensee, Mark Armstrong, Robert D. Willig 

and Robert H. Porter eds., Oxford: Elsevier 2007. 

29 To finance the expansion of Terminal C-3 in 1999, Continental pledged its revenues from such expansion to cover 

the issuance of over $730 million in bonds, and Continental recently invested another $150 million in Terminal C to 

further expand and update its facilities. See Declaration of Frederick Longernecker, February 13, 2015 at ¶¶ 31, 33.

30 See Lee Report at p. 8.

31 Source: OAG.

32 In addition, JetBlue’s JFK slots were phased in over a three-year period. See DOT Order 99-9-11 at p. 14.

33 Source: OAG. 
13

EXHIBIT 6: COMPARISON OF AVERAGE DAILY OPERATIONS

20. As the Port Authority is certainly aware (if not Mr. Lee), however, the initial 75 JFK slots 

awarded to JetBlue were not available to Continental but were created specifically for “new 

entrants” (e.g., JetBlue) by the DOT “under circumstances determined by the Secretary to be 

exceptional” as the result of intense political pressure from the New York congressional 

delegation.34

 

34 See DOT Order 99-9-11 at p. 2. In approving JetBlue’s slot exemption request, the DOT noted that its findings 

were consistent with “statements by members of Congress, the General Accounting Office (GAO), and numerous 

community groups that we should more vigorously use our statutory authority to promote airline competition.” 

682

265

0

100

200

300

400

500

600

700

800

Daily Operations:

Continental at EWR, 1998

Growth in Daily Operations:

JFK 1998-2014

Source: OAG.

Note: Daily operations include both arriving and departing flights.
14

V. Conclusions

21. In response to my analysis showing that the Port Authority has monopoly power over access 

to airports serving the New York metropolitan area, Mr. Lee argues instead that the Port 

Authority’s monopoly is not a “natural” monopoly. However, it is the existence of the Port 

Authority’s monopoly power – not whether such monopoly power is natural or unnatural –

that is important, and Mr. Lee’s analysis fails to address (much less refute) the other factors I 

identified that indicate the existence of monopoly power. These factors include the 

extremely high airport market share held by the Port Authority, as well as the numerous and 

substantial barriers to entry that prevent competitors from entering the airport market and 

thereby protect the Port Authority’s monopoly power from competition. 

22. Mr. Lee also argues that United has – and has failed to use – leverage that could offset the 

Port Authority’s monopoly power. This supposed leverage exists, according to Mr. Lee,

because “hub airports are financially vulnerable” to the loss of a hubbing carrier.

35

 But this 

argument, too, is demonstrably inapplicable at EWR, where the airport’s high proportion of 

local traffic, the limited availability of New York metropolitan area airport capacity and the 

high demand by airlines for take-off and landing slots at all three major airports ensure that 

other airlines would quickly replace any flights lost if United were to close its hub at EWR. 

23. Finally, because access to New York metropolitan area traffic is essential to the success of 

United’s business strategy and because United has no viable alternative to serve the New 

York metropolitan area aside from EWR, a threat by United to close its hub at EWR would 

 

35 See Lee Report at p. 5.
15

clearly lack credibility and thus could not provide leverage to secure a reduction in excessive

Port Authority charges at EWR.

___________________

Daniel M. Kasper

Executed on March 24, 2015