COMMENTS ON THE SHOW CAUSE ORDER

JOINT APPLICATION

OF DELTA IR LINES, INC., VIRGIN BLUE AIRLINES

PTY LTD, VIRGIN BLUE INTERNATIONAL

AIRLINES

PTY LTD D/B/A V AUSTRALIA,

PACIFIC BLUE AIRLINES

(NZ) LTD, PACIFIC BLUE AIRLINES

(AUST) PTY LTD Under 49 U.5,C.

55 41308-41309

FOR APPROVAL

OF AND ANTITRUST IMMUNITY

FOR ALLIANCE

AGREEMENTS DOCKET DOT-OST-2009-0155

Hubert Horan 12october

2010

I am filing

these comments

in response

to the Department's

Show Cause Order filed under DOT-OST2009-0155-0026

(Order 2010-9-4)

which invited

comments

from all interested

parties, andthe Department's

Order 2010-9-18

whlch extended

the deadline

for comments

to 13 October.

I have substantial

expertise

andinterest

in questions

related to airline

industry competition,

airline alliance conomics

and airline antitrust

issues. My professional

background

and experience

is documented

in prior DOT filings in the Oneworld

and US-lapan

Alliance cases and a full list of publications

and biographical

information

is available

at mywebsite,

horanaviation.com.

I am based

in Phoenix,

Arizona.

I have no active

business or financial

interests

with any

of the parties

to this case, and am only commenting

as a private

citizen concerned

about the issues

raised bythis case.

A.THE DELTA/VIRGIN

SHOW CAUSE ORDER MUST BE REJECTED

IN IT5 ENTIRETY

BECAUSE

ITS PUBLIC BENEFITS

STANDARDS

ARE TOTALLY

INCONSISTENT

WITH THE PUBLIC BENENFITS

STANDARDS

USED IN EVERY OTHER RECENT AIRLIN E ATI CASE

41. In the Show

Cause Order issued on 8 September,

DOT tentatively

denied the Delta/Virgin

application for antitrust

immunity

on the grounds

"that fail to show thatthe proposed

alliance will generate sufficient

Public Benefits to justify

a grant of antitrust

immunity."l

Reviews of antitrust

immunity applications

consist of a section

41309(b)

analysis of impacts

on competition,

and a section

41308{b) review to determine

whether the application

generates

sufficient

Public Benefits to justify

the requested suspension

of the antitrust

laws. DOT denied the Delta/Virgin

application

solely on the basis

that it failed the section

41308(b)

Public Benefits test, and the comments beloware strictly

limited to Public

Benefits issues. TheDelta/Virgin

Public Benefit claims consisted

of the same

four basic

claims made in every other recent airline ATI application:

n granting

ATI would generate

huge Public Benefits by eliminating

structural

barriers to efficient interllne

pricing; granting ATI would immediately

lead to 17-30%

reductions

in fares paid by consumers

presently

using non-immunized

interline itineraries

n granting

ATI would generate

Public Benefits as applicant's

increased

nonstop capacity

I Joint Application

Of Delta

Air Lines,

Inc., Virgin Blue AirlinesPty Ltd, Virgin Blue Intemational Airlines Pty Ltd D/B/A V Austmlia,

Pacific Blue Airlines

(NZ) Ltd, Pacific

BlueAirlines

(Aust) Pty Ltd Under

49 U.S.C.

$S 41308- 41309 For Approval

OlAnd Antitrust

Imrrunity For Alliance Agreements,

DOT-OST-2009-0I

55-0026,

p.l, 5, rhe
case and the applicants

will be referred

to as "Delta/Virgin"

while recognizing

that the Australia/new

Zealand based Virgin branded

airlines thatarepafties

to this case

are separate liom Virgin branded

airlines in other countries.Horan, Comments

on the Delta/Virgin

Show Cause Order, 12 October

2010



# n granting

ATI would generate

a variety

of "other"

Public Benefits due to each alliances'

ability to offer itscustomers

an expanded

set of market,

schedule

and frequent

flyer redemption options, cost reductions

from facilities

rationalization,

joint purchasing

and other sources, and each alllances'

ability to better

optimize

revenue on its network

through volume discounting

and the application

of yield management

tools to a broader

network scope. granting ATI would generate

Public Benefits by enhancing

"inter-alliance

competition"

I The standards

used for evaluating

the Public

Benefit claims in this case were completely

different from andincompatible withthe standards

for evaluating

the Public

Benefit claims in the four other recent, major airline ATI cases-the

North Atlantlc Skyteam,

Star, and Oneworld

cases and the US-Japan

Alliance case decision from last

week .7 il the following

two sections

of thesecomments

describe and compare

the DOT's

two incompatible

sets of Public

Benefits decision standards.

Sections

B1/B2/C1/C2

compare

the standards

used to evaluate

"double margina lization" based pricing benefit claims, sections B3/C3 compare

the standards

used to evaluate

the nonstop

capacity benefit claims, sections B4/C4 compare

the standards

used to evaluate

the "other"

benefit claims and sections B5/C5 compare

the standards

used to evaluate

the "inter-alliance
com petitiveness"

benefit claims.

n section

D of these

comments

summarizes

these comparisons

and demonstrates

thatthe differences

between

findings are exclusively

due to the different,

incompatible

standards used, and are not explained by any differences

in the "facts"

of each case.

B. THE SKYTEAM,

STAR, ONEWORLD

AND JAPAN CASES FOLLOWED

A SINGLE,

CONSISTENT

APPROACH TO THE EVALUATION

OF PUBLIC BENEFIT CLAIMS

81. Inthe Star,

Skyteam,

Oneworld

and Ja pan cases, DOT clearly ruled that any ATI application structured

like the original

mid-90s alliances

willgenerate

huge Public Benefits resulting

from the elimination

of structural

"double margina lization" barriers to efficient

interline

pricing, and that these massive price reductions

will occur automatically

whenever

ATI granted, and the same

magnitude

of price reductions

willoccur

regardless

of market

or competitive

conditions

I Major

"double marginalization"

price cuts are central to each of these ATI cases3, and are far and away the largest

andmost

important

Public Benefit claim in each application,

accounting

for 67%

'Joint Application

of Alitalia-Linee

Aer€e Italiane S.p.A., et.a1. for approval

ofantitrust

immunity

(the "Skyteam" case). DOT Docket

OST-2007-28644):

Joint Application

of Air Canada,

The ANtrian croup. British Midland Airways Ltd.,Continental Airlines.Inc.,

Deutsche

Lufthansa

AG, Polskie

Linie Lotniecze

Lot S.A.,Scandinavran AirlinesSystem,

Swiss International

Air Lines,

Ltd., TAP Air Portugal.. to Amend

Order 2007-2-16

under 49 U.S.C. $S 4I 308 and

4 | 309 so as

to Approve

andConfer

Antitrust

Immunity.

(the "Star/Continental" case); American

Airlines-British

Airways-lberia-Finnair-Royal Jordanian

Joint Application

For Antitrust

lmmunity (the "Oneworld"

case), Show Cause Order I 3 February

2010, DOT Docket

OST-2008-0252-3390. and the "US-Japan Alliance

Case" whichconsolidared theseparate

antitnlst immunity

applications

ofAll NipponAirways, Continental Airlines.

Inc.. United

Air Lines,

Inc and American

Airlines and Japan Air Lines,

DOT-OST-2010-0059 '' Skyteam Finaf Order DOT-OST -2007 -28644-0174.

p.l4- 15, Continental/Star Final Order, DOT-OST-2008-0234- 0253, p.l5-16, Oneworld

Show Cause OrderDOT-OST-2008-0252-3390 pp.30-32,

US-Japan

Alliance

Case Show Cause Order, DOT-OST-20l0-0059-0180. p.l3-14 

# trHoran, Comments

on the Delta/Virgin

Show Cause Qrder,12

October 201.0

of all Public

Benefits (S92 million annually)

in the oneworld

case.4 The basis for these

claims is the hypothesis

that international

airlines are incapable

of establishing

efficient interline prices on an arms-length

basis because of "double

marginalization"-the automatic

application

of "double markups"

above the fares

that they would set on an onl;ne

itinerary.

Independent

airlines have no way to prevent

these double markups,

and the structural

barriers to efficient,

revenue maximizing fare setting that can only be overcome

by merger

or antitrust

immunity

(the functional

equivalent of merger) I TheDoT's

rulings that ATI grants willalways

drive enormous

consumer

benefits isentirely

based on
a 2000 paper by Brueckner

and Whalen5 that argued

thatobserved

that North

Atlantic price levels fell in the mid-1990s

following

the original

introduction

of immunized

alliances,

andhypothesized thatthese

consumers

gains were entirely due to the elimination

of the structural

barrlers that forced airlines to set interline

prices at inefficiently

high levels. Brueckner

and Whalen claimed that all of the observed

mid-90s consumer

gains were attributed

to ATI's removal of the structural interline pricing barrier, and none of the mid-90s

pricing shifts had anything

to do with unique 1990s supply/demand

conditions,

cyclical economic

factors, carrier service/productivity improvements

or any other factors6. Also integral to the "double

ma rgina lization" hypothesis

is the claim

that the sa

me magnitude

of price reduction

s (I7 -30%

price cuts,roughly

5200-250

per ticket in the Oneworld

case)7 would occur in any airline market following

grants of antitrust immunity

at any point in the future,

regardless

of market

or competitive

conditions.

Since the 90s price cuts were strictly due to the elimination

of the structural

"double ma rginalization"

barrier andhadnothing

to do with 90s

market conditions,

any and every future ATI grant will lead to the
same 5200-250

consumer

price cuts, regardless

of market

conditions.

In the Star,

Skyteam, Oneworld

and Japan cases, DOT fully accepted

appiicant

claims thatATI would create huge "double ma rgina lization" pricing cuts solely on the basis

of citations

of the Brueckner/Wha len papert and references

to mid-90s

North Atlantic pricing shifts. These applicants

did not provide

r Oneworld

Apptication DOT-OST-2008-0252-0001 p. 7. 24, exhibit

JA- 13, JA- l9 Other

applicants

did not bother to quantiry

their Public

Benefit claims, but the logic used

to derive

the Oneworld

estimate that$92 million ofthe total$137 million annual Public Benellts was identical

to the logic underlying the "double

marginalization"

and otherPublic

Benefit ciaims in everv other case i Brueckner,

J. K. and Whalen.

W. T., (2000).

"The PriceEffects

of lnternational

Airline Al liances",

The Journal o/ Lqv, and Econonics v43 n2. o. 503 6 However

Brueckner

and Whalen

provide no evidence

supporting

theircentral

hypothesis

thatobserved

90sNorth Atlantic price shifts were caused by the removal

ofstructural

pricing barriers. Their regressions

show that prices

fell during the time period

when inrmunized

alliances

were first introduced.

but none

oftheir data

or statistical

analysis data supports their hypothesis

that the pricing

benefits ofthe early

alliances

was totally due to the elimination

of structural

barriers to efficient

interline pricing. Brueckner

and Whalen

did not examine

North Atlantic

alliance pricingunder

different

supply/demand

or competitive

conditions,

and made

no attempt

o demonstrate

that the observed

90spricing

shifts could not have

been caused by other factors. ' Brueckner

and Whalen's

statistical

updates attempted

to breakdown

the original

estimate of interline-to-allrance regression

coefficient

(25%) intodifferent

inrpacts interline

to-irnmunized

alliance (30%) and non-immunized codeshare

to-imrnunized

alliance coefficients

(17%). Oneworld's

estimated

$92 rnillionin annual

pricing benefits
wasderived

by simply multiplying their existing intra-alliance

traffic by these

coefficients.

But none

ofthese updates supponed

their"structural

pricing" causation

hypothesis

or theirclaimthat

ATI would generate

similar pricins impacls under nralket condition". " Brueckner

and Whalen

published

flve subsequent

papers that updated

some ofthe statistical

estinrates

of I990s North Atlantic

pricing shifts, but these

statistical

updates areirrelevant

to the antitrust

claims ofapplicants

citingthe 'double marginalization"

hypothesis.

Since the later papers merely repealed the original

2000 hypothesis

that the observed

shifts were entirely caused by the elimination

of"double malginalization" structural

barriers, without

### T

Horan, Comments

on the Delta/Virgin

Show Cause Ordet,12

October 2010

any other evidence

or cite any sources upporting

their "double

ma rgina lization" Public Benefil claims because no other research

as found evidence

of structural

interline

pricing barriers, and
no other

analysis of the links

between

ATI and structural

pricing barriers has ever been published.e ln the Star,

Skyteam,

Oneworld

and Japan cases, DOT fully accepted

applicant

claims that ATI would create huge "double ma rgina lization" pricing cuts without requiring

any evidence

thatthe claimed 17 -30o/o price cuts would actually

occur undercurrent

competitive

conditions

in the applicants' actual markets.

ln these cases evidence

that Continental

European

prices fell following

the original three ATI grants in the 1990s

fully satisfies the need

for evidence

thatATI would drive major price cuts in the UK

and Japanese

markets in 201010.

5ince the DOT fully accepts the Brueckner/Wha

len hypothesis

thatthe pricing

benefits of the original

mid-90s alliances

was entirely due to the elimination

of structural

"double ma rginalization"

barriers, andhad absolutely nothing to do with 1990's

supply/dema

nd/com petitive conditions

or any other factors,

evidence of current

supply/dema

nd/com petitive conditions

wou ld have no bea ring on theva

lidity of the applicants'

claims. Under the Brueckner/Wha

len hypothesis,

fares paid by interline

passengers will f all L7-30%following anygrant of ATl, regardless of whether

ATIis granted

during the dotcom boom,

or in the midst

of a major

worldwide

recession. DOT affirmed

its complete

support for ATI Public Benefit claims based on the Brueckner/Whalen "double ma rginalization"

hypothesis

in the Oneworld

case by rejecting

all evidence

challenging these claims out of hand.

This included

evidence

demonstrating

that the alleged

structural

pricing barriers do not exist,

evidence

showing thatthe interline

pricing behavior

linked to "structural barriers"

was fully explained

by rational,

revenue-maximizing

behavior,

evidence

showing thatthe observed

90s pricing

shifts were largely

explained

by short term productivity

gains and market dynamics

that no longer

exist, claims thatthe applicants

"double ma rginalization"

claims failed to meel Horizontal

MergerGuidelines

requirements

that Public

Benefits claims must be based

on verifiable,

case-specific

evidence

that is neither

vague nor speculativetl

and evidence

showing that recent

ATI gra nts ledto higher

(not 17 -3Oo/o lowerl fa res .t' DOT

dismissed

this evidence

with

providing

any new evidence

to support

he original

claim. these subsequent

papers arenot sources

separate from the original 2000 paper.

These papers are described

at Horan

Comments,

DOT-OST-2008-02

52-3389.

pp.4-6. ' Sonre ATI applications

have cited papers by other authors that citedBrueckner

and Whalen withoutundenaking any original

analysis ofthe "double

marginalization"

hypothesis,

andsonre

applications

cite papers

thatassume

the truth ofthe "double

marginalization"

andsimplyapply Brueckner/Whalen regression

coefficients

to new sets

of data. (for exanrple

the Brattle

affidavit

in the Oneworld

Application

(DOT-OST-2008-0052-000I

, exhibits

JA- l3/ I9 the source

of the S92

million "double

marginalization"

benefit claim). Thus the original

2000 Brueckner/Wlalen paper remains the sole source for every

"double malginalization"

claim in every

ATI case

before the DOT. '" US-Japan

Alliance

Case Show Cause Order, p. 13, Oneworld

ShowCause

Order, p.22 ' ' Federal

Trade Commission,

Departnent

ofJustice,

Horizontal

Merger Guidelines

( 1997) p.3I '' The evidence

at Horan

Comments

DOT-OST-2008-02

52-3389,

pp.2-21 was based

on my personal

experience managing

theoriginal

Northwest/KLM

alliances

andsevelal

other major airline alliances,

and my direct

knowledge ofhow the actual

economics

of the original

Noflh Atlantic

alliances

and how they hadchanged since the mid-90s. The Department

ofJustice

submitted

detailed comments

arguing that DOT's acceptance ofPublic Benefit

claims fell well short

ofthe Horizontal

Merger Cuidelines

evidentiary

standards

DOT is obligated

to follow Department

of Justice comments

on the Star/Continental ShowCause

Order. DOT-OST-2008

-0234-0239.

Both Arnerican

Airlines (in the Star

and Skyteam

cases) and the Deparlment

ofJustice

also presented

detailed analysis thatcontradicted "double marginalization"

claims ofautomatic

$200-250

fare cuts andshowed

no evidence

ofconsumer

pricing benefits from recent

expansions

ofATl grants.

Robyn, J.. Reitzes.J.

(2005) untitled

analysis ofthe Skyteam antitrust immunity

application

prepared

on behalf

of American

Airlines DOT-OST-2004-19214, Robyn. J., Reitzes.J.

(2006) untitled analysis ofthe Star

Alliance

antitrust immunjty

application

prepared

on behalfof 

### I

### Horan,

Comments

on the Delta/Virgin

Show Cause Qrder,12

October 2010

the simple

assertion

that "the Bruckner

and Whaien models demonstrate

the important

principle that alliances

facilitate

cooperative

pricing that canreduce

pricing"lrand

made no attempt

to refute any of the counter-evidence presented. I ln the US-Japan

case last week, the DOT further affirmed

its absolute

support of Public

Benefit claims based on the Brueckner

/Whalen's

hypothesis

whenit stated

that "ln a review

of international

airline cooperation

between

1990 and 2000, Whalen found that immunized

alliances
are associated

with 50 percent

higher passenger

volumes

and 16 to 2L percent

lower fares that non-immunized

alliances.

Other studies have pointed to fare reductions

and welfare gains that
occur when cooperating

ailiances

eliminate

or reduce

two separate

markups,

or dou ble
ma rginalization,

on lnterline

routes."la

The DOT

also explicitly

accepted

Brueckner

and Whalen's analysis as an objective

"independent

thirdparty

study of immunized

alliances"ls

rejecting

case testimony

challenging

the objectivity

of this analysis on the basis

that Brueckner

was a paid consultant

for United

Airlines throughout

the period

thatthis

analysis was conducted,

and he prepared

paid testimony

in support

of several

Star Alliance ATI applications.16

82. Inthe Star,

Skyteam,

Oneworld

and Japan cases, DOT has clearly ruled thatany the only condition ATI applicants

need to meet to have claims of "double

margina lization" and other similar Public Benefits accepted

is thattheir

joint venture is structured

like the original

mid-90s alliances;

DOT acceptance

of huge Public Benefit pricing claims in these cases was not contingent

on any other requirements.

Any DOT imposition

of new requirements

not found

ln the original

90s alliances

would invalidate

all Public Benefit claims based on "double

ma reinalization".

I The Brueckner/Whalen hypothesis

that DOT

has accepted

in each of these cases holds that the huge North Atlantic pricing shifts observed

in the mid-90s

were completely

explained

by the elimination

of structural

pricing barriers that occurred

when immunity

was granted,

and wasnot due to any other factors. The Brueckner/Whalen hypothesis

that DOT

has accepted

in each of these cases holds that the original

three 1990s

alllances

(Northwest-KLM,

Delta-Swissa

ir-sa bena and United-Lufthansa-SAS) were fully capable

of realizing

the huge 1990s

price impacts observed lU -3O% price cuts, roughly 5200-250

per ticket).

There is nothing

in the Brueckner/Whalen hypothesis

or in any

testimony

presented

by any subsequent

ATI application

demonstrating

that these 17-30% price cuts could only have been achieved

under certain kind of marketplace

or

American

AirlinesDOT-OST-2005-22922; Depafiment

ofJustice

comments

on the Oneworld

Show Cause Order, DOT-OST-2008-0252-3374, appendix

A and B. rl Oneworld

Show Cause Order o. 32 '" US-Japan

Alliance

Case, Show Cause Order, DOT-OST-2010-0059-0180, p.13. The only "other

studies" cited are Brueckner

and Whalen's

subsequent

statistical

updates to thejroriginal

2000 paper. '' Ibi.l. "' Moorman.

R. (2000)

"UnitedTums

to Academics

to Show Alliances

Aid Consumers",lvlation lleek andSpace Technolog,v

| 53 n l4 2 October

2000 p. 56. Brueckner's paid Star

Alliance

advocacy

includes "An Evaluation

of the Sk),team-Wings

Antitrust

Immunity

Application"

submitted

in docket

DOT-OST-2004-

19214 and "An Evaluation

ofthe Latest

Star Alliance

Application

for Antitrust

Immunity"

submitted

in docket

DOT-OST

2005- 22922. Brueqkner's

paid advocacy

role was not disclosed in anyof his

joumai articles.

Since Brueckner's

paid advocacy

role wasdocumented

in the Oneworld

case (DOT-OST-2008-0252-3389, p.5)the endorsement

of Bruckner

asan "independent.

hird-par1y"

expert in the US-Japan

case demonstrates

that DOT rejects

any notion that his ongoing

paid United/Star

advocacy

role undermines

the legitimacy

ofhis "double

marginalization" hvDothesis.

### Horan,

Comments

on the Delta/Virgin

Show Cause O'der,12

October 2010

implementation

conditions",

and as noted above

the DOT

has specifically

rejected counter-claims that one cannot

assume that the t7-3O%

price cutsobserved

in the 1990s

will automatically

occur following

ATI grants in 2010. I Any claim

that the observed

77-30% pticing benefits were contingent

on any conditions

that the original three mid-90s alliances

did not meet

would invalidate

the entire

Brueckner/Wha

len hypothesis

and would invalidate

the DOT'S

Public Benefits findings in each ofthese cases. One cannot claim that these benefits were contingent

on a global

scope of alliance

cooperation

since all of the original

alliances

were limited

to a specific,

non-com prehensive

set of NorthAtlantic markets.

One cannot claim that thesebenefits

were contingent

on very long-term

strategic, contractual

commitments

to a specific

set of alliance

partners,

since these alliances

underwent

a variety of majorstrategic

shifts (ongoing

entry/exit

among Star partners,

Delta's complete abandonment

of its original

partners,

etc). Onecannot

claim that benefits

were contingent

on specific types of "metal neutral"

alliance administrative

systems,

because neither Delta

or United hadsuch

systems,

and the Northwest/KLM system wasquite different

from the current

Skyteam system. The claims that ATI applications

will generate

huge Public Benefits from the elimination

of structural

"double ma rginalization"

barriers and the claim

thatthese

Public Benefits willonly

be significant

under conditions

that Delta-Swissair

dd not meetin 1997

are totally inconsistent

and mutually

exclusive.

.
83. Inthe Star,

Skyteam,

Oneworld

and Japan cases, DOT has clearly ruled that an applicants'mere intention

to increase

nonstoo caoacitv at some ooint in the future is sufficient o demonstrate

Public Benefits that help

justifyantitrustimmunity

ln the US-Japan

case, neither applicant

made positive

claims or commitments

that immunity

would actually provide consumers

with higher

levels of US-Japan

nonstop capacityl8,

but the DOT

ruled that the "ATlapplicants'lntentions to introduce

new nonstop

service" constituted

a Public Benefit justifying

its grant of immunity.Ls In the Oneworld

case, the applicants

stated their intention

to restart

Dallas-Ft.

Worth-Madrid service, and said thatthey

would give "serious consideration

to launching

service" on other routes20.

DOT specifically

rejected evidence

presented

by Virgin

Atlantic linking Dallas-Ft.Worth service to cyclical

economic

conditions,

and their argument

the resumption

of service

wasnot a proximate

result of immunity,

and ruled

that Oneworld's

"applicants'lnfention

to introduce

new nonstop service" was a significant

Public Benefit justifying

its grant of immunity.2r DOT specifically cited capacity

increases

introduced

by Northwest/KLM

in the mid 1990s

asthe evidence

justifying its ruling

that immunity

for Oneworld

would create nonstop capacity Public Benefits in 2010.22

" In all cases.

these public benefits are assumed to require

the "Open Skies" bilateral conditions

that the original mid-90s North Atlantic alliances operated under. '" The Star applicants

said that immunity

would "strengthen

our ability to maintain

and expand nonstop service" (DOT-OST-2009-0350-0001, p. l7) while AA/JL said that immunity

would merely create "increased

opportunities for new or expanded

transpacific

routes and services" (DOT-OST-2010-0059,

p.22) '' US-Japan

Alliance Case, Show Cause Order, DOT-OST-2010-0059-0180, p.l3 '" Oneworld

Application.

DOT-OST-2008-0252-000 I, p.24-26. '' Oneworld

Show Cause Order. DOT-OST-2008-0252-3390. p.30 '1 Ihid. o.31. 

### I



## t

### I

T Horan, Comments

onthe Delta/Virgin

Show Cause Order, L2 October 2010

In the Star case, DOT specifically

ruled thatthe mere

"likelihood

of new routes

and expanded capacity on existing

routes" and that the applicants would have

"a view towards

growing capacity"

constituted

a Public Benefitjustifying

its grantof immunity.'z3 ln these cases, DOT clearly established

that Public

Benefits from expanded

nonstop capacity would be created

irrespective

of economic

onditions

or marketplace

supply/demand

conditions.

In thesecases

noneofthe applicants submitted

any evidence

that expanded

nonstop capacity would be viable under current market condltions,

and DOT

accepted

these Public Benefit claims without any evaluation of currentmarket

conditions.

Even in the US-Japan

market, where demand conditions

have been stagnant

for years,

large portions of existing

capacity are highly unprofitable,

and where the market

is facing unprecedented

volatility

due to the dramatic increase in Tokyo airportcapacity,

DOT ruled that antitrustimmunity would lead

to increase nonstop capacity thatwould

benefit consumers,

and thatthese

Public Benefits could be assumed without any actual analysis of marketplace

conditions. In the Oneworld

case, DOT not only re.jected

Virgin Atlantic's

demand to reject

applicant

nonstop service claims on the basis

of current

market evidence,

but clearly

established

thatthe Oneworld benefit claims could be accepted

solely on the basis

of evidence

that KLM/Northwest

increased service in a different

set of markets

18 years ago.2a

84. Inthe Star,

Skyteam,

Oneworld

and Japan cases, DOT has clearly ruled thatother

(non-pricing)

Public Beneflts can be accepted

on faith, wlthout any need to quantify

or otherwise

demonstrate

that benefits claims were neither

vague, speculative

or insignificant,

without ca

se/ma rket-specific

evidence

that benefits wouldbe

the proximate

result of the ATI

appllcation,

and without any evidence

demonstrating that immunity

would create

net positive

benefits for the entire market

Each ATI application

includes a highly similar set of "other"

Public Benefits claims including:

(1) each alliances'

ability to offer its customers

an expanded

set of market,

schedule

and frequent

flyer redemption

options, (2) cost reductions

from facilities

rationalization,

joint purchasing

and other sources, and(3) each alliances'

ability to better

optimize

revenue on its network

through volume discounting

and the application

of yield management

tools to a broader

network scope. While "double marginalization"

price reductions

is far-and-away

the largest

source of Public

Benefits in any of these cases

(67% in the Oneworld

case), the DOT

has emphasized

the importance

of these "other" claims

saying that "our decision

to approve

the alliance

is not based

solely on the theory of cooperative

pricing. lt is based

on a broader

set of Public

Benefits that are likely

to result,

such

as greater options for travelers

due to schedule

andinventory

coordination,

volume discounting, expanded

access to discount

fares, reduced costs, and expanded

code sharing and frequent

flyer reciorocitv".2s In each other case,

DOT accepted

that the validity

ofthese "other" benefit was completely

selfevident and thus did not require

applicants

to E quantify

the benefits

claims, or otherwise

demonstrate

that they were not immaterial E explain

how consumers

would realize the claimed

benefit (i.e. through lower prices or ;^^-^^-^,J ^^ ^--:+.,1

Lo PdLr LY/

' Continental/Star

Show Cause Order. DOT-OST-2008-0234-0193. D.18-19. ?r DOT accepted

the claimthat

ATI would lead

to increased

Oneworid

nonstop service because Nodhwest/KLM hadsignificantly

expanded

nonstop capacity after they received

ATI in 1992.

Oneworld

ShowCause

Order.DOTOST-2008-0252-3390. o.3 I 25 Oneworld

Final Order. DOT-OST-2008-02

52-3390-

D.32 

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T

## T

T

I Horan, Comments

on the Delta/Virgin

Show Cause Order, L2 October

2010

X provide

case-specific

evidence

showing these benefits could actually be achieved

under currentmarket

and competitive

conditions

n demonstrate

that benefits

that the applicants'

might realize

(such as increased

network or frequent

flyer scope)

would not be offsetby detriments elsewhere,

demonstrating

that there would be net positive benefits for consumers

across the entire market.

85. Inthe Oneworld

and Japan cases, DOT has clearly ruled that the reducing

the number

of market competitors

via ATI intoan oligopoly

dominated

bythe three

alliances

constitutes

a Public Benefit under section 41308(b)

and can help justify antitrust

immunity,

and ruled

that improving

applicant competitiveness

versus other alliances

also constituted

a Public Benefit under section 41308(b)

In the Skyteam

case DOT argued that consumers

would benefit

from reduced

competition

because the expanded

Skyteam would be more competitive with the larger

Star network,

and then in the Star case said consumers

would benefit

from further reductions in competition

because this would offset increased Skyteam

strengths

in their home market

countries26 In the Public

Benefits findings in the US-Japan

case, DOT ruled that eliminating

existing competition betweenUnited,

Continental,

ANA, JAL and American

via "a grant of immunity will be beneficial by enhancing

inter-alliance

com petition...We

believe that competition

among the three alliances is ;mportant

to consumer

benefits in the short

andlong

term."2t In the Public

Benefits findings in the Oneworld

case, DOT explicitly

ruled that enhanced

interalliance competition

"is a Public

Benefit" separate

from its section

41309(b)

competitive

findings and separate

from other benefits

derived from double

marginalization

and other sources. "Oneworld

will become

more competitive

in a number

of markets,

exerting increased

competitive discipline

on fares and service

in those markets.

Consumers

getting a third viable

option will enjoy
more destinations,

better connections,

and improved

schedules,

and betterfrequent

flyer benefits.

These benefits complement

he annual

surplus from price

reductions

and increased traffic on currentinterline routes."28

ThusDOT

explicitly

ruled that consumer

welfarehad been damaged

in recent

years when American

and British

Airways andlberia

competed

independently against the immunized

Star and Skyteam

alliances,

and that consumer

welfare would be materially

increased

after the number

of competitors

was reduced

to just three. In both cases,

DOT ruled that the Public

Benefits that would be created by reducing

transatlantic and transpacific

ompetition

to just these

three immunized

alliances

was self-evident,

and thus immunity

could be granted

without quantifiable

or verifiable

evidence

of the specific

consumer benefits that would be created in these specific cases, nor explanations

of the precise

form (price reductions,

capacity increases,

etc) that the benefits

would take. In each

case the DOT'S

decisions
on benefits

achieved

by the applicants

(i.e. strengthening

Skyteam

relative to Star, or strengthening

Oneworld

relative to Star and Skyteam)

were also

self-evident

and did not require quantifiable,

verifiable

evidence

of exactly

how consumers

would benefit

each time the applicants
were strengthened.

'" DOT used

"enhancement

of inter-alliance

competition"

as a majorjustification

for its approval

ofthe Continental,/Star

ATI application.

but did not specifically include this within its section

4 1308(b)

Public Benefits aralysis until the later

cases. See Continentallstar

ShowCause

Order p.10. '' US-Japan

Alliance

Case. Show Cause Order, DOT-OST-20l0-0059-0180. pl4-15 '" Oneworld

Show Cause Order. DOT-OST-2008-0252-3390. p.32 

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## T

T Horan, Comments

on the Delta/Virgin

Show Cause Order, L2 October

2010

C. IN THE DELTA/VIRGIN

CASE DOT USED A SECOND

APPROACH

TO EVALUATE

PUBLIC BENEFIT CLAIMS THAT WAS TOTALLY

INCOMPATIBLE

WITH THE APPROACH

USED IN ALL OTHER CASES

C1. TheDelta/Virgin

Show Cause Order iscompletely

inconsistent

withthe DOT'S

rulings in the Skyteam, Star, Oneworld

andJapan

cases as it completely

rejects the Brueckner/Wha

len "double

ma rginalization" hvpothesis

that Public

Benefits are created

whenever

ATI eliminates

structural

barriers to inefficient interline pricing andinsists

thatthe potentialfor

Public Benefits will vary considerably

with short-term
ma rket/com

oetitive conditions

Consistent

with all other applications,

the Delta/Virgin

Public Benefits claim was fundamentally based on the elimination

of the structural

interline pricing barriers thatwould

follow a grant of immunity.

Consistent

with allother

applications,

the Delta/Virgin

Public Benefits claim was based
on the Brueckner/Wha len "double

ma rginalization"

hypothesis

thatobserved

1990s alliance benefits were entirelv due to the elimination

of structural

barriers that occurs

whenever

ATI is granted,

has since they have

nothing to do with market-specific conditions

similar {17-30%,

5200- 250 per ticket)

fare cuts

will occur

whenever

ATI is granted,

regardless

of market

conditions. TheDelta/Virgin

Show Cause Order iscompletely

inconsistent

with all these other cases, asit insists that pricing

benefits cannot be assumed

independent

of "the particular

facts and circumstances of the case."2e

DOT accepted

claims of huge "double marginalization"

Public Benefits in every other case without examining

any evidence

ofthe particular

market/competitive

facts ofthose cases, because the "double

margina lization" hypothesis

fundamentally

assumes

that market/com

petitive factshave

no bearing

on these Public

Benefits.

Either ma rket/com

petitive facts aretotally irrelevant

o this aspect

of ATI Public

Benefits,

or the Brueckner/Whalen "double marginalization"

hypothesis

must be rejected

in its entirety,

and all prior DOT

Public Benefits findings are totally invalid. At least one of these two claims

is totally inconsistent

with the law. TheDelta/Virgin

Show Cause Order claims that it is impossible

to properly

measure

ATI pricing benefits in a market

hat has recently undergone

major capacity and competitive

shifts, and given this uncertainty,

immunity

cannot begranted

on the basis

of claims

that pricing

benefits might occurto. This is diametrically

opposed

to the US-Japan

Alliance Show Cause Order, where the DOT readiiy accepted

applicant

claims of "double

margina lization" pricing benefits despite market volatility

several orders of magnitude

greater than anything

occurring

in the US-Australia

market. Despite the enormous

uncertainty

surrounding

the bankruptcy

reorganization

ofJapan Air Lines (unprecedented

in Japanese

business

history), and the sudden

radical increase in Tokyo airport capacity (that will alter competitive capacity and yields to levels

never seen before) and other volatile shifts in Asian airline competition,

the DOT accepted

"double marginalization"

benefits claims completely

on faith, and did not require

applicants

to produce

any evidence

proving that these "double ma rginalization"

pricing benefits would occur under the partlcular

facts and circumstances

of today's

Japanese

market. TheDelta/Virgin

Show Cause Order similarly claims that it is impossible

to properly

measure

ATI pricing benefits in today's

environment

given the huge

impact of the global

economic

recession

.r1 This completely

contradicts

the DOT's

Oneworld

finding, where it explicitly

accepted

the applicants

claim that immunity

would generate

the exact

same rate (17-30%)

"double 

### T



# r

:' Deha/Virgin

Blue Show Cause Order'. DOT-OST-2009-0155-0026. p.5 '" lbid. p.6. I I t' lbid p. t o

### I Horan,

Comments

on the Delta/Virgin

Show Cause Order, !2 October

2010 10

margina lization" pricing gains in the middle

of the global

economic

recesslon

as the original

three North Atlantic alliances

realized in the middle

of the economic

boom of 90s.

C2. TheDelta/Virgin

Show Cause Order iscompletely

inconsistent

with allother

case findings as ir fundamentally

rejects the Brueckner/Whalen "double ma rglnalization"

hypothesis

that public

Benefits comparable

to those observed

in the 1990s

(17-30% pricing gains) can be generated

by any immunized alliance structured

along the lines

of the original

1990s alliances

and claims that prlcing

pubiic Benefits can only be achieved

if alliances

meet structural

andimplementation

conditions

that are totally inconsistent

with the Brueckner/Whalen "doublemarginalization,, hypothesis

Consistent

with all other applications, the Delta/Virgin

Public Benefits claim uses

evidence

from Brueckner

and Whalen's

analysis of 1990s

alliance impacts to predict

that an alliance

structured along the same

lines as the original

1990s alliances

(Northwest-KLM,

Delta-swissair-sabena

ano u nited-Luftha

nsa-5AS) will achieve

the same 17-30%

pricing ga ins observed

when thoseoriginar ATI grants eliminated

the structural

barrier to efficient

interline pricing. The Delta/Virgin application

is fully consistent

withthose

gos alliances

and thus its public

Benefits claim is consistent

with all other granted

ATI public

Benefit cjaims. The Delta/Virgin

Show Cause Order is completely

inconsistent

with allthese

other cases,

as it insists that pricing

beneflts cannot be realized

unless Delta/Virgin

meet alliance structural

and implementation

requirements

that none

of the 90s

alliances

met. lf pricing

public Benefits are contingent

on new, modern requirements the Brueckner/whalen "doublemarginalization" hypothesis

(that large

benefits were possible

using the management

approaches

of the 1990s) must be rejected

in its entirety.

Either the "doublemarginalization" hypothesis

allows one to predict future ATIpricing

impacts based on the impacts

observed

in the 90sor all prior DOT public Benefits findings (based on predictions

using Brueckner/Wha

len coefficients,

asseen in the Oneworld

case) are totally invalid.

At least one of these

two claims

istotallv inconsistent

with the taw. TheDelta/Virgin

Show Cause Order claims that pricing

Public Benefits cannot be achieved

unless the alliance

partners

make a long-term

strategic

commitment

to an exclusive

set of partners within a comprehensive, global network integration

plan. Dor neverbothers to define

exactly what strategic

commitments

are a prerequisite

for public

Benefits,

provides

absolutely

no evidence

that Public

Benefits cannot be achieved

under morelimited,

focused alliance arrangements.

The DOT'S

claim completely

contradicts

its Public

Benefit findings in every oth€r case, which were entirely based on alliances

with more

limited, focused arrangements.

Dor dismisses

this application

asa "tactical"

arrangement

hat cannot

achieve public Benefits because virgin might possibly pursue non-Delta

alliance arrangements

in othermarkets

at some future point.3'zThis

cannot betrue unless

one acknowledges

that the original

Delta-swissair-sabena alliance (where Delta had no strategic

ommitment)33

created no Public

Benefits.

DOT claims thar Delta's other partnership

arrangements,

such as west coast

codesharing

withAlaska

Airlines would serious undermine

Delta/Virgin

public Benefits;34

a claim that blatantly

contradicts

its previous finding that Lufthansa's

partnership

with Jetblue would in nowav limit

the public

'- Ibid. n.6. l0 i Deltamade

thedecision

to abandon

its Swissair-sabena

alliance in favor ofan alternative

Air France

alliance rwo l:I.,b.f91. l*]:r"ir^: finaLrciri difficulries

led ro bankruprcl

reorganizarion. uella vlrsln Blue 5hou Cause Order. p.8. The Star

carriers also have a huge non-immunized

partnership

with USAirways

thatcompletel),

overlaps

their immunized,.A-+" arrangements. 

### T



## T

### Horan,

Comments

on the Delta/Virgin

Show Cause Order,I2

October 2010 LL

Benefits thatthe Continental/Star alliance would generate.ss

DOT claims that Delta/Virgin

cannot createPublic

Benefits if Canada,

Mexico and New Zealand

are excluded

from the alliance

scope at thispoint,

a claim that is wholly unsubstantiated

and cannot be true unless

one also argues that
noneof the alliances

of the 1990s

(which all had limited market

scopes) created any Public Benefits. I The Delta/Virgin

show Cause

Order claims that pricing

Public Benefits cannotbe achieved

unless the alliance

partners first implement

a comprehensive

alliance administrative/profit-sharing system comparable

to the Star

Alliances'

"A++" scheme.

DOT cannot deny the applicants'

Public Benefits claims on this basis

because the Delta/Virgin

application

fully meets

the standards

of the 1"990s alliances,

whenno onehad"A++" typerevenue

sharing schemes,

and only one of the three alliances

had a rudimentary

"metal-neutral"

administrative

approach.

DOT cannot rule that significant

alliance Public Benefits require specific omplex

administrative

tools that werenot
common

in the 90s

without also ruling that every

other Public

Benefit finding based in part on the "doublemargina

lization" hypothesis

isfaise and invalid.

All other cases

accepted

pricing Public Benefits claim solely based on ATI'S ability to eliminate

structural

pricing barriers without these complex systems.

n DOT

presents

absolutely

no legitimate

evidence

that the Delta/Virgin

case or the US-Australia market have special characteristics

justifying

special implementation

systems conditions that not found

in any transatlantic

or US-Japan

market or in any

other ATI case. As noted above, DOT claims that the "tactical"

nature of this alliance or current

US-Austraiia

yield volatility

justify the imposition

of special

conditions

is completely

spurious.

C3. The Show

Cause Order's rejection

of Delta/Virgin

claims of increased

nonstop service based on evidence

that expansion

would be financially

problematic

under currentmarket

conditions

completely violates all other case

precedent

holding that the merely

stating the general

intention

of increasing nonstop capacity at some point constituted a Public Benefit that would help.justify an ATI grant

The Delta/Virgin

nonstop Public Benefits claim was completely

consistent

with the claims

made in all other cases but the Show

Cause Order rejected it saying it had "no basis

to conclude

thatthe proposed

alliance willadd significant

capacity in the near

future given the significant

increase that has already occurred."36

This completely

contradicts

the rulings

in every other case

where the DOT accepted

nonstop Public Benefit claims on the mere assertion that applicants

might increase service at some future point,and accepted these Public

Benefit claims without any case/marketspecific evidence

demonstrating

that nonstop

expansion

would be financially

viable undercurrent conditions.

Four weeks after issuing

the Delta/Virgin

Show Cause Order, the DOT

issued a totally contrary

ruling in the Japan

case saying that the mere "opportunity" for expanded

transpacific service and the applicants'"intention" to eventually

introduce

new services constituted

a Public Benefit justifying

antitrust

immunity3'.

At least one of these

two findings

is totally inconsistent with the law and must be rejected. The Show

Cause Orderalsorejected

the Delta/Virgin

nonstop Public Benefit claim because

"the applicants

have not made

a convincing

case that antitrust

immunity

would enable

them to achieve consumer

benefits that would not otherwise be possible."38

Thisimposes

a standard

on 

### I

I

" Continental/Stat

Show Cause Order DOT-OST-2008-0234-0193. D. l5- l6 16 Deharvirgin

Blue Show Cause Order. p.8 " USJapan

Alliance Case. Show Cause Order. p.13, 15. " Delta/Virgin

Blue Show Cause Order. p.8-9

### IHoran,

Comments

onthe Delta/Virgin

Show Cause Order, 12October

2010 12

Public Benefits findings that DOT

had explicitly

rejected in the Oneworld

case, when it credited the resumption

of Dallas-Ft.

Worth-Madrid

nonstop service as a Public

Benefit directly proximate to the ATI

grant, and explicitly

rejected counterclaims

that Oneworld

hadfailed

to make a convincing

case that this service

would never

have been restarted

without the immunity grant.3e At least one of these

two findings

is totally inconsistent

with the law and must be rejected.

C4. The Delta/Virgin

Show Cause Order completely

violates all precedent

established

in the Star, Skyteam,

Oneworld

andJapan

cases because it rejects

Public Benefit claims unless the applicants demonstrate

that they are not vague, speculative

or insignificant,

hat they would not occur absent the grant of immunity

and that benefits

arenot limited

to the applicants

or isolated

passengers,

but represent

net positive

benefits across the entire market.

The Delta/Virgin

"other" Public

Benefits claim was completelv

consistent

with the "other" claims made in all other cases but TheShow

Cause Order rejected

them because

the applicants

had not met the "highstandard" of demonstrating

that their "efficiency

claims arevalid."40

In every other case, DOT hadaccepted

claims of "costsavings

from consolidation

and activities

such as joint procurement"4l

completely

on faith,without any evidence demonstrating

the exact

source of efficiencies,

any evidence

showing that the likely

cost savings were large

enough to fully offset

the costs of alliance

implementation,

any evidence

that the net savings

after implementation

costs were significant

enough to constitute

a material

Public Benefit, or any evidence

showing that any comparable

or recently

implemented

alliances

had actually achieved

significant

savings. The Show

Cause Orderalso rejects

these "other" Public

Benefit claims because the applicants

have not demonstrated

with certainty

that they would constitute "large scale public benefits"

accruing to consumers

across the market

as a whole,

asopposed

to benefits

that would only be realized by the applicants.a2

This completely

reverses the position

DOT took in every

other case

where almost every claimed Public Benefit (other than nonstop

expansion

and"double

marginalization"

driven price cuts) was strictly limited to the applicants.

Each other ATI application

claims expanded network scope, connecting

opportunities

and frequent

flyer redemption

opportunities

asa Public Benefit, aithough

by definition,

these claims only apply

to the scope

and schedule

opportunities of the applicants'

network,

not the market

asa whole.

Adding Continental

to the Star

Alliance increases

the Star Alliance network,

and increases

options for customers

who choose

to only fly within the Star Alliance network,

but it reduced

networks

and customer

options elsewhere.

DOT not only accepted

all star, Skyteam,

Oneworld

and Japan Alliance public Benefit claims without any evidence

of net market-wide

consumer

benefits,

but explicitly

rejected Oneworld

case comments

arguing that these private

applicant

benefits could not be accepted in a section 41308(b)

Public Benefits ana lvsis.a3

C5. The Delta/Virgin

Show Cause Order completely

violates all precedent

established

in the Star, Skyteam,

Oneworld

andJapan

cases wherebyreducing

international

airline competition

into an oligopoly

dominated

bythe three

alliances

constitutes

a major Public Benefit, and anyimmunity

grant that strengthens

applicants

relative to the other alliance

groups is a major Public

Benefit.

'" Oneworld

ShowCause

Order, DOT-OST-2008-0252-3390. p.30-31 t0 Delta/Virgin

Blue Show

Cause Order, p. l0 '' US-Japan

Alliance Case, Show Cause Order, p.l3; every

other other case includes similar wording "' Delta/Virgin

Blue Show

Cause Order, p.l2 '' Horan

Oneworld

Comments.

DOT-OST-2008-0252-3394. p.l4-16. 

### I

### Horan,

Comments

onthe Delta/Virgin

Show Cause Order, 12October

2010

Whereas

DOT hadfound major Public Benefits justifying

ATI in every

other alliance

case when applicants

increased

their market

share versus larger alliances,

DOT suddenly

rejected the Delta/Virgin

claim that combining

their smaller/weaker

market positions

into one more competitive

with Qantas

and United

on the basis

that enhancing

competitive

position did not constitute

a Public Benefit justifying

ATl. In every

other case

DOT accepted

that enhancing applicant

competitiveness

would benefit

consumers

without requiring

any evidence demonstrating

the likelihood,

magnitude

or tangible

form such

consumer

benefits mighttake, but suddenly

rejected identical

Delta/Virgin

claims because they did "not provide

any detailed information

in the wav of analvsis

or evidence

to suooort

their claims."aa

At least one of these

two rulings is totally inconsistent

with the law. In the Show

Cause Order DOT

falsely claimed that "for the firsttime we are being asked to grant an antitrust

exemption

to help two carriers

establish

a better position

versus incumbents

in essentially

a single bilateral market that is open

to competition."

os In fact DOT

has openly acknowledged

that it granted

ATI to Skyteam

to help them establish

a better position

versus Star's overall transatlantic

position,

granted ATI to Star/Continental

to help them counteract

he merged Skyteam's

increased

home market

dominance,

and granted

ATI to Oneworld

to help remedy their structural

disadvantage

versus Star and Skyteam.

The US-Japan

ATI decision was designed

to allow the weak

American-JAL

position to strengthen

itselfversus

the historically stronger

Delta and United

positions,

and allow the weaker

Japanese

hub positions

at Narita

to strengthen

themselves

versus the Korean

hub positions

at Seoul.

Every other ATI

decision

reflects the DOT willingness

to let major carriers

use antitrust

immunity

applications

to both improve

their competitive

position andto reduce

the total number

of market

competitors.

DOT presented

no legitimate

evidence

justifying

its decision

to deny Delta/Virgin

the exact

regulatory

relief that it had granted

to every other applicant.

D.THE DOT'S USE OF MULTIPLE,

INCOMPATIBLE

STANDARDS

FOR PUBLIC BEENFITANALYSIS

I ILLEGAL AND THE DIFFE RENCES BETWEEN

DELTA/VIRGIN

AD ALL OTHER CASES ARE STRICTTY

DUE TO THESE INCOMPATIBLE

STANDARDS,

AND15 NOT EXPLAINED

OR JUSTIFIED

BY ANY UNIQUE FACTS IN THE DELTA/VIRGIN

CASE

D1. The Delta/Virgin

Show Cause Order must be rejected in its entiretybecause it reflects

the DOT'S desire to decide

antitrust

cases completely

independently

of law, precedent

and evidentiary

rules. By establishing

two different,

conflicting

and contradictory

sets of Public

Benefit decision standards,

DOT is willfully

disobeying

the law-there can only be one set of decision standards consistent

with the law,

thus at least oneof the two sets

DOT is using is legally

impermissible. Establishing

multiple,

incompatible

sets of decision

standards

allows DOT to arbitrarily

and capriciously

decide antitrust

cases, since it can pick

and choose

whatever

criteria produce its preferred

decision.

Establishing

multiple,

incompatible

sets of decision

standards

allowsDOT

to undermine

the rights

of airlines,

consumers

and other parties

who will not have

anytransparent rules to follow in preparing

or evaluating

antitrust

immunity

applications.

These parties will have

" Delta.lvirgin

Blue Show

Cause Order, p.l2 " Ibid.The key issue

is the restructuring

ofcompetition

via ATI grants

in a fundamentally

openmarket environment.

The difference

between Australia

(a "single

bilateral market")

versus Europe (historically

a multiple bilateral market) was not meaningful

after the mid 90s,

and was completely

eliminated

by the US-EU bilateral. 

### 13



## T

THoran, Comments

on the Delta/Virgin

Show Cause Order, !2 October

2010 L4

no way to challenge

or appeal

DOT rulings, since the arbitrary

use of multiple

standards

destroys the concept

of case precedent,

and destroys

the basic

link between

rulings, the law,and casespecific evidence.

I As the summary

table belowdemonstrates, the Show

Cause Order's claim that DOT's

"approach

to this case

is consistent

with oast

cases"as is willfullv

false. The differences

between

the Public Benefits standards

in the Delta/Virgin

case andthe Public

Benefits standards

in the Skyteam,

Star, Oneworld

and Japan cases is not a question

of nuance

or degree.

There is incompatible

conflict between

the two sets

of standards

on everv

ootential

source of alliance

Public Benefits that applicants

in these cases have ever raised. There is incompatible

conflict between

the two sets

of standards

in terms of evidentiary

requirements,

evaluatlon

criteria and the economics/precedent used to justify

the standards.

PUBTIC BEN EFITS JAPAN

CASE (6 October) DELTA/VIRG|N CASE (8 Septembed Need case/ma rket specific evidence

to prove Double Marginalization

pricing benefits? NO-only evidence needed is citation of 2000 paper,

and claim that North

Atlantic fares fell in mid-90s-no case/market data needed YES-totally reject benefit claim unless applicants

prove potential

versus current market capacity and yield conditions

Need to meet detailed structura

I/systems criteria to achieve pricing benefits? NO-no structural/systems

criteria defined or eva luated;
assume huge benefits automatically

achieved YES- totally reject benefit claim because of failure

to meetvague structural/systems

criteria; DOT

assumes

huge barriers

to benefits unless applicants

prove otherwise Need case/market specific evidence

to prove nonstop benefits? No-don't evenneed to firm commitment

to addservicemere "opportunity"

or "intention"

sufficient;

no need to show service

would be viable YE5-totally reject benefit claim unless applica nts prove potential

versus current market

capacity and yield conditions

Evidence

needed to prove other benefit claims? (cost savings,
more connections) NO-don't even need to qua ntify benefits

or show benefits realized across entire market YES-totally reject unless applica nts prove claims are not vague, speculative,

insignificant,

unrelated tO ATI 

### ls strengthening
competitiveness

a Public Benefit? YES-faciiitating consolidation to 3 alliance

oligopoly

fineis a major Public Benefit; strengthening

applicants"'interalliance competition"

is a major Public Benefit 

### NO-improper to use ATI to help applicants

improve competitive position; must provide evidence proving consumers

better off with three competitors

instead of four

I None

ofthe other

(Skyteam,

Star, Oneworld

and Japan) cases would have been shown to have produced

the Public

Benefits needed to justify

antitrust

immunity

under section 41308(b)

if the Delta/Virgin

Public Benefit Standards

had been applied in those cases. TheUSJapan

Alliance applicants

had no evidence

that "double

marginalization"

pricing gains would actually be realized

'" DeltalVirgin

Show Cause Order. p.2; case data in the table areffom the US-Japan Alliance

Case ShowCause Order, pp. l3-15 and Delta/Virgin Show Cause Order, p.5-12.

### Horan,

comments

on the Delta/Virgin

Show Cause oder,12 october

2010 15

under current market conditions,

alleged "double marginalization"

priclng gains under current market conditions

would be almost

impossible

to estimate

given uncertainty

surrounding

JAL's bankruptcy

reorganization

and the capacity/yield volatility

that Tokyo

airportexpansion

will
cause, nonstop service claims are not credible

because future capacity

growth would be entirely attributable

to runway

expansion

and would not be a proxlmate

result of ATl, and the Japan "inter-alliance

co m petitive

ness" claims were rejected

out of hand in the Delta/Virgin case. DOT is using multiple,

incompatible

standards

so they can justify pre-determined

case decisions.

I The differences

between

the Public

Benefits standards

in the Delta/Virgin

case andthe Public Benefits standards

in the Skyteam,

Star, Oneworld

and Japan cases doesnot reflect

any "natural evolution"

of regulatory

standards

following

the evolution

of industry

conditions

over time. The completely

inconsistent

U5-Japan

and Delta/Virgin

decisions

were issued

less than a month

apart. Last week's Japan decision was completely

consistent

with the North

Atlantic decisions

issued

over a three year period-so highly

consistent

thatthe Japan Case applicants

considered

them settled law, and demanded

approval

because their applications

had been precisely

tailored to meet those standards.

"These agreements

satisfy allof the relevant

standards

for approval

and immunity

set forth in the Departments'recent decisions

granting antitrust

immunity."a'

D2. TheShow

Cause Order's claim that its rejection

of the Delta/Virgin

application

is justified

by the unioue facts of the case-barriers

to Public

Benefits not found in the facts

of other cases-is willfully false andmust

be emphatically

rejected.

The alleged "barriers"

to Public

Benefits are just

a smokescreen

to help conceal the use of arbitrary

and capricious

standards

incompatible

with all other cases.

I As shown in the table

below, DoT's assertion

of unique

"barriers"

to Public

Benefits in this case is false and wholly unsubstantiated.

One cannotjustify

the Delta/Virgin

Public Benefits findings on the basis

of case-specific

"barriers"

because the "barriers"

in this case

were not materially different

from the "barriers"

in anv other case.

and DOT

had even

evaluated

whether "barriers" might have

existed in any other case.

The difference

between

the findings

in these cases is strictly due to the use

of different,

incompatible

decision standards,

and has nothing

to do with difference

on the factual

record. Under the longstanding

standards,

all of the cases

would be found to produce

the Public

Benefits needed to justify

immunity

under section 41308(b).

Under the Delta/Virgin

standards,

none ofthe cases

wouldhave

metthe section

41308(b)

Public Benefits test.

ALLEGED

BARRIER

TO DT/VA PUBLIC BENEFITS 

### Actual

evidence of barrier

to benefits shown bv DOT? "Barrier" logic applied equally in other cases? Lack of alliance/ma

rket experience NO-pure assertion-citedno
exam ples of other deficient alliances

or evidence

of exact experience

needed for benefits 

### NO-United had no experience with BM l, TP, LO, LX or their home markets

Thin market

with few connecting

options 

### NO-fa lse claim-Austra

lia-US market is very large, connecting

options across U5A NO-market

volume/flow

criteria
never even suggested

in any other case

r7Joint uS-Japan

Alliance

Application

ofANA, Continental

and United,

DOT-OST-2009-0350-000l. p.3

### Horan,

Comments

onthe Delta/Virgin

Show Cause Order, !2 October

2010

Recent entry, market volatility precludes benefits NO-fa lse claim-many

a irline markets much more volatile than this NO-Ja pa nese market much

more volatile,

more strategic changes posslble but issue

totally ignored in Japan case 

### Exclusion of Ca nada, Mexico, New Zeala nd NO-false

claim-no evidence showing

how narrower

scope precludes

benefits NO-all of the original alliances had limited

scopes

4 separate

compa nies with separate

syslems NO-pure assertion NO-No problem with Star

links
across many more com panies, many more pricing

systems Other codesharing

(DL-AS) precludes

benefits 

### NO-pure assertion No-No problem with LH/86, no problem with conflicting

COlUS links to UA and Star Benefits impossible

if VA might pu rsue other alliance strategies

in other markets NO-might

limit benefits but
noevidence

it would preclude benefits NO-other airlines (Delta, American,

Swissa ir,Continenta

l) have allshifted

alliance strategies

E. DOT MUST FULLY WITHDRAW

THE DELTA/VIRGIN

SHOW CAUSE ORDER, APPROVE

THE DELTA/VIRGIN APPLICATION,

AND CLEARLY

AFFIRM THAT ALL AIRLINE

ANTITRUST

IMMUNITY CASES

WILL BE BASED

ON A SINGLE

CONSISTENT

5ET OF PUBLIC BENEFITS

STANDARDS

E1. DOT mustformally

withdrawand reject

all of its Public

Benefits Findings in the Delta/Virgin

Show Cause Orderas it cannot

apply different,

conflicting

and contradictory

standards

to different

section 41308(b)

Public Benefits analysis, andthe Show

Cause Order failed to provide

any legal

or evidentiary basis for rejecting

the previously

established

standards

in favorof totally new standards

DOT mustwithdrawand reject its finding

that Public

Benefits associated

with "double
ma rginalization"

pricing reductions

are not in any

way contingent

on case or market

specific competitive

conditions,

and withdraw

and reject

its ruling that pricing

Public Benefit claims must be supported

by evidence

particular

to the facts

and circumstances

of each case. DOT cannot
reverse the principle

that these

Benefits occur automatically

under anymarket

conditions

that had been firmly established

by rulings

in the Skyteam,

Star, Oneworld

and Japan cases unless DOT clearly demonstrates

thatthe fundamental

"double ma rginalization"

claims are false or are inconsistent

with the law. DOT mustwithdrawand reject its finding

that alliances

only create

pricing Public Benefits if they meet specified

structural

and implementations

ystems requirements

that noneof the original 1990s North Atlantic alliances

hadmet. DOT

cannot reverse the principle

that any alliance structured

along L990s lines (that did not take

these structural/implementation approaches)

will presumptively

generate

pricing benefits that had been

firmly established

by rulings

in the Skyteam,

Star, Oneworld

and Japan cases unless DOT clearly demonstrates

that the 1990s alliances

had in fact not created the Public

Benefits claimed in these cases or demonstrates

thal thispresumption

of 1990s

benefits is inconsistent

with the law. DOT must withdraw

and reject

its finding that claims

of alliance

nonstop capacity

Public Benefits are invalid without clear evidence

that nonstop

expansion

would be financiallv

viable under current market conditions.

DOT cannot reverse the principle

that Public

Benefits justifying

ATI can be lo



## T

T

T

### T

Horan, Comments

on the Delta/Virgin

Show Cause Order, \2 October

2010 17

assumed

solely on the basis

of sincere

applicant

intentions

to expand

capacity in the future,a principle

that had been

firmly established

by rulings

in the Skyteam,

Star, Oneworld

and Japan cases, unless DOT clearly demonstrates

that these

cases hadassumed

nonstop Public Benefits that had never

be achieved,

or demonstrates

that this regulatory

presumption

of Public

Benefits is inconsistent

with the law. DOT must withdrawand reject itsfinding

that other Public

Benefits claims (such as increased connecting

schedule

andfrequent

flyer benefits,

cost reductions,

andfare reductions

due to yield management

optimization

across larger networks)

are unacceptable

unless proven not to be vague, speculative,

insignificant,

or not proximately

resulting

from the immunity

grant, and are unacceptable

unless proven to be net positive

market-wide

benefits.

DOT cannot reverse the principle

that these Public

Benefits claims can be accepted

as a justification

for antitrust

immunity
even if they are undocumented and unquantified,

a principle

that had been

firmly established

by ruiings in the Skyteam,

star, Oneworld

andJapan

cases, unless DOT clearly demonstrates

that these cases had Public

Benefits claims had been

entirelv false, or demonstrates

that this regulatory

presumption

of Public

Benefits is inconsistent

with the law. DOT mustwithdrawand reject its finding

that applicant

use of ATI to improve

their competitive position does not constitute

a Public Benefit justifying

immunity.

DOT cannot reverse

the princlple,

firmly established

in the Skyteam,

Star, Oneworld

and Japan cases, that using

ATI to reduce international

competition

to an oligopoly

dominated

bythe three

alliances

creates Public Benefits,

and anyATI

grant that enhances

the competitiveness

of smaller

competitors

within that oligopoly

creates Public Benefits.

DOT cannot reverse

this principle

unless it demonstrates

that
consumers

do not benefit

when international

competition

is restructured

into a three alliance oligopoly,

or demonstrates

that that this regulatory presumption

of Public

Benefits is inconsistent with the law.

E2. DOT must accept

the Delta/Virgin

application

on the grounds

that it produces

sufficient

Public Benefits under section 41308(b)

to justify a grant of antitrust immunity,

as it clearly

meets all of the standards

used in the Public

Benefits analysis used in the Skyteam,

Star, Oneworld

and Japan cases. In granting

immunity,

DOT mustformally

reaffirm all of the standards

used in the Skyteam,

Star, Oneworld and Japan cases, and clearly establish

that it will use

only one set of section

41308(b)

standards

in all future cases,

and will not deviate

from existing

standards

without establishing

a clear legal and evidentiary

basis for doing

so.

DOT must reaffirm

its longstanding

standard

that anyATI

application

structured

along the lines

of the original

1990s NorthAtlantic

alliances

(Northwest-KLM,

Delta-Swissair-Sa

bena and UnitedLufthansa-SAS)

will achieve

major Public

Benefits by eliminating

structural

"double
ma rginalization"

barriers to efficient

interline pricing, leading to 77-3O%

price reductions

for
consumers

in those interline markets. DOT must reaffirm

its longstanding

standard

that ATI applicants

do not need

to present

any casespecific evidence

showing that "double

ma rgina lization" based Public Benefits will be achievable undercurrentma

rket/competitive

conditions;

DOT must presume

that every

ATI application structured

along the lines

of the original

1990s North Atlantic alliances

will create

these Public Benefits because every ATI grant removes

the same"doublemarginalization" barriers, and the entire "doublemarginalization" hypothesis

isfundamentally

based on the claim

that the efficiencies

created when thosebarriers

are removed

is totallv independent

of short-term market/competitive

conditions 

### I



## T

T

## t

T Horan, Comments

onthe Delta/Virgin

Show Cause Order, t2 October

2010 18

I DOT must reaffirm its longstanding

regulatory

presumption

that stated

applicant

intentions

to increase nonstop capacity constitutes

a Public Benefit justifoing

immunity,

and thatapplicants

do not have to present

detailed case/market-specific

evidence proving thatcapacity

increases would be financiallv

viable under current conditions DOT must reaffirm its longstanding

regulatory

presumption

that applicant

claims of increased connecting

schedule options, increased

frequent flyer seat availability,

cost savings, volume discounting,

and yield management

efficiencies

will beaccepted

as Public Benefits without the need for applicants

to present

evidence demonstrating

that the claims

are not vague, speculative, insignificant,

or unrelated

to the immunity

grant, and without the need for applicants

to present evidence demonstrating

that net positive

benefits will be realized

across the totalmarket. DOT must reaffirm its longstanding

standard that Public

Benefits hall be recognized

in any case where the application

facilitates

the consolidation

of international

viation into anoligopoly dominated

by the three alliances, and that Public

Benefits hall be recognized

in any case where immunity

strengthens

the applicants'

ability to compete

with larger

alliances within that oligopoly.

Respectf ully submitted,



# n / ,aal 

# '/WIPIfthA'

Hubert Horan 12October

2010

### Horan, Comments

onthe Delta/Virgin

Show Cause Order, 12October

2O1O

CERTIFICATE

OF SERVICE
I hereby certify that I have

thisdate served the foregoing

document

on the persons identified

below by causing

a copy to be sent

by eteitroiic mait. carl.nelson@aa.com howard_kass@usairways.com benjamin.slocum@usairwavs.com hkamen@coair.com dan.weiss@coair.com jeffrey.manley@united.com steve.morrissey@united.conr jhill@dlalaw.com byerlyjr@state.gov todd. ho m

a n@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.ftacek@usdoj.gov



# o / n --'\

/\/ 

# 'lwjL,/ Xhtta_

Hubert Horan 12 October 2010