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. :

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



## R EBUTTAL 

## R EPORT OF 

## D ANIEL 

## M. K ASPER1



### Introduction I.

1. In my I nitial Report , 1 I explained in considerable detail the bas e s 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 N ew 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/f rom the New York metropolitan area , 3 but those airports are the only ones in the New York metropolitan area that have sufficient f acilities to sustain airline hubbing operations. 4

F urther more, 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

s erve 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 counte d 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 Repo rt further demonstrated that :

 T he 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; 6 and ,

 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 met ropolitan

area , principally from LGA and/or JFK. 7


### The Port Authority has a monopoly over the provision of commercial II. airport services in the New York metropolitan area.

3. T he Port Authority recently submitted a report by Matthew H. Lee, 8 in which he claim s t hat
“the traditional view that airlines are natural monopolies is outdated

... . Today, a irlines, 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 p olicies 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. H owever, 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 Fe deral 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 R eport, 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 analys is.4

both here and abroad 14 or that it u nderlies the U.S. DOT’s Policy Regarding Airport Rates and Charges

.


### Access to the New York City metropolitan area is essential for United ’s III. 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 o f 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 C harges, 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 publicatio ns, 198 6 , p. VIII

- 3 : “Airports are monopolistic in character

.. .”5

E XHIBIT 1 : L ARGEST 15 D OMESTIC O&D M ARKET S IN THE U NIT ED S TATES (R ANKED BY R EVENUES )

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.6

E XHIBIT 2 : P ERCENTAGE OF P ASSENGER R EVENUE G ENERA TED BY T RAFFIC T RAVELING TO / FROM THE N EW Y ORK M ETROPOLITAN A REA

9. Due to the size and economic importance of the New York metropolitan area market, 16 all large (and most smaller) U.S. airline s 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 car riers, 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, S outhwest, Spirit, Sun Country, United and Virgin America serve EWR , JFK or LGA. Source: OAG.7

globe. 18 As shown in Exhibit 3 (replicated from my I nitial R eport for convenience) , over 10 0
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 hub s at JF K (and, for Delta, LGA)

.

E XHIBIT 3 : D ESTINATIONS S ERVED BY U NITED FROM THE N EW Y ORK METROPOLITAN ARE A E XCLUSIVELY FROM EWR THAT A RE S ERVED BY O THER U.S. C ARRIERS FROM JFK AND / OR LGA

11. In addition , loss of access to EWR (and , hence, the critical New York metropolitan area
traf fic 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., 2009.8



### United does not have countervailing leverage to prevent the P ort IV. Authority from abusing its monopoly power
.
12. Mr. Lee further asserts that e ven if the Port Authority does have a monopoly , the “growing concentration amongst air carriers leads to greater bargaining power for the a irline” 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 withdra wal 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 P ort Authority’s other major New York metropolitan area airports (LGA and JFK) are “finan cially 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 t here )

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

even t 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

- hubbing s ” ) made up less than 40% of passengers at Pittsburgh (“ PIT ”) , Memphis (“ MEM ” ) and St. Louis (“ STL ”) . Source: U.S. DOT DB1B Database.9

E XHIBIT 4 : L OCAL P ASSENGERS AS A P ROPORTION OF T OTAL P ASSENGERS AT A IRPORT

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 considere d 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 servic es 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, s lot 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).10

capacity at JFK, EWR and LGA.” 24 In short, b oth 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
ai rport charges.

17. But e ven 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, t he 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 N ew York metropolitan area market

. In fact, that is precisely what occurred after the failures of Pan American (“Pan Am”) and TWA in 199 1
and 200 1, 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 mil lion 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, a s 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

pas senger traffic at EWR over the same period

. 27

E XHIBIT 5 : A VERAGE D AILY P ASSENGERS (D EPARTING AND A RRIVING ) AT JFK

18. In contrast, withdrawal of service from EWR would cause United not only to lose access to
critical N ew 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 e conomics 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 suppl ier to avoid incurring those costs again ( e.g., by moving to another airport), that supplier

– here , the Port Authority

– wil l have the ability by raising its prices to capture much of the profits of the “captive” firm. For a review of this literature,
se e , Joseph Farrell and Paul Klemperer, “Coordination and Lock

- in: Competition with Switching Costs and Network12

withdrawing from EWR, United would likely lose a larg e portion of its very substantial
investmen t in facilities at the airport

. 29 Hence , a threat by United to withdraw fro m 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 a t JFK in 1999 proves that
U nited /C ontinental could have established a hub at JFK prior to 1999 and therefore had an alternative to serving EWR that it failed to use. 30 E ven if it were true ( which it is not) that 75
slots were then available to United at JFK, the scale of C ontin e ntal ’s hub at EWR even in
1999

– when it operated 682 flights/day at EWR 31

– far exceed ed 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 26 5 , less than 40% of the number of daily operations C onti n ental 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 Longe rnecker , February 13, 2015 at ¶ ¶ 31, 33.
30 See Lee Report at p

. 8.
31 Source: OAG.
32 In addition, JetBlue’s J FK slots were phased in over a three

- year period. See DOT Order 99

- 9

- 11 at p. 14.
33 Source: OAG.13 E XHIBIT 6 : C OMPARISON OF A VERAGE D AILY O PERATION S

20. A s 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 spe cifically for “new entrants” ( e.g., JetBlue ) by the DOT “ under circumstances determined by the S ecretary to be exceptional” as the result of intense political pressure from the N ew 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 prom ote airline competition. ”14



### Conclusions V.

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 existen ce 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 inc l ude the extremely high airport market share held by the Port Authority , as well as the numerous and
substantial barriers to entry t hat prevent competitors from entering the airport market and thereby protect the Port Authority’s monopo ly power from competition

.

22. Mr. Lee also argu es 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 b y airlines for take

- off and landing slots at all three major a irports ensure that other airlines would quickly replace any flights lost if United were to close it s hub at EWR.

23. Finally, because access to New York metropolitan area traffic is essential to t he 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 it s 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