Order 20 1 2

- 3

- 1 0 UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

Issued by the Department of Transportation on the 1 6 th day of M arch , 20 1 2

Served: M arch 16 , 201 2

ORDER TO SHOW CAUSE

Summary

By this order we tentatively award primary exemption authority to AirTran Airways, Inc. (AirTran) to provide scheduled foreign air transportation of persons, property , and mail between Chicago , Illinois, and Cancun , Mexico.

Background

Under the U.S.

- Mexico air services agreement (the Agreement)

, three carriers may be designated to provide scheduled foreign air transportation of persons, property, and mail between Chicago and Cancun. Currently, American Airlines, Inc. (American) and United Air Lines, Inc. (United) are designated to provide these services and both do so from Chicago’s O’Hare International Airport (O’Hare)

. On November 21, 2011, Brendan Airways, LLC d/b/a USA 3000 Airlines ( USA 3000 ) , which holds the third designation, advised the Department that it w ould cease its U.S.

- Mexico serv ice s on January 30, 2012 , leaving one designation available for Chicago

Cancun service beginning January 31, 2012. 1

In light of USA 3000’s decision to discontinue its Chicago

- Cancun services, we received competing applications from Frontier Airlines, In c. (Frontier) and AirTran Airways, Inc. (AirTran), seeking exemption authority and a designation for the one available opportunity to serve the Chicago

- Cancun route

. By Order 2012

- 1

- 4, we instituted this proceeding in Docket DOT

- OST

- 2012

- 0001, to select one carrier to provide the subject services.

1 We note that Aerovias de Mexico, S.A. de C.V. ( Aeromexico) was recently granted exemption authority for Chicago

- Cancun scheduled services and plans to also serve the O’Hare

- Cancun route with multiple weekly non

- stop flights. See Docket DOT

- OST

- 2011

- 0231. 2012 CHICAGO

- CANCUN COMBINATION SERVICE PROCEEDING

DOCKET

- DOT

- OST

- 2012

- 00012 Applica n t Proposals

Pursuant to Order 2012

- 1

- 4, supplements/amendments, answers, and replies have now been filed in the 2012 Chicago

- Cancun Combination Service Proceeding . The applicant proposals for the

su bject services are briefly summarized in the table below.

Applicant Frequency Level/Seasonality Aircraft Type, Seats Startup Date

Frontier Daily year

- round from O’Hare Airport (ORD) Airbus A

- 320 (168 seats) on

hand Almost immediately after receipt of exemption

AirTran Daily year

- round from Midway Airport (MDW) Boeing 737

- 700 (137 seats

- 12 business class & 125 coach) on

- hand No later than March 11, 2012

Applications and Position s of the Parties

Frontier proposes year

- round daily service to Cancun from O’Hare

, to commence almost immediately upon receipt of an award of exemption authority from the Department

. 2 Frontier states that it would provide this service with its 168

- seat Airbus A

- 320 aircraft

.

Frontier maintains that it would provide the onl y low cost intra

- gateway competition against the incumbent carriers at O’Hare Airport

, United and American

, and offer greater public benefits and market structure benefits than would AirTran under its proposal to provide service from Midway International Airport (Midway). Frontier argues that it offers greater capacity than would AirTran

, by provid ing 22,600 more seats annually

. 3 Frontier also asserts that Midway is not an economic substitute for O’H are because it does n o t discipline fares at O’Hare and does

n o t capture a proportional market share. 4 Frontier states that

, a lthough Chicago

- Cancun is a large local leisure market, Frontier ’s proposed Cancun flight would connect to 83 behind

- O'Hare destin ations (southbound) and 121 beyond

- O'Hare destinations (northbound) on an interline basis with United and American

. 5 Frontier further states that it would provide substantially more passenger amenities than AirTran by offering 36 seats on each flight with “STRETCH” seating, live on

- board television at each seat, advanced seat assignments, and on

- board meals for

2 Frontier stated that it would commence public charters under an arrangement with Apple Vacations on or about January 31, 2012, in place of USA 3000, and would be able to convert to scheduled service immediately upon receipt of Department and Mexican government approvals. Amendment and Supplement to Application of Frontier Airlines, Inc., January 19, 2012 (Frontier Supplement) at 11. We have verified that the carrier has in fact begun charter service on this route under contract with Apple Vacations.
3 Frontier Supplement at 4.
4 Frontier Supplement at 5.
5 Answer of Frontier Airlines, Inc., January 26, 2012 (Frontier Answer) at 4.3 purchase

– all options t hat AirT ran does not currently provide, or will not provide when it fully integrates with Southwest Airlines Co. (Southwest)

. 6

AirTran responds that 88% of Frontier’s capacity will be contracted and marketed by Apple Vacations, and that only the remaining 12%

, or 14,784 annual seats

, would be available for sale to the public by Frontier. 7 AirTran argues that awarding it the exemption authority for scheduled combination service from Midway would not preclude Frontier from providing its capacity as a charter o perator for Apple Vacations , and would provide for more competition in the Chicago

- Cancun market

, since both carriers could offer service

. 8 Frontier argues in response that scheduled and charter service are not the same, and that it should not be “ penalized ” for initiating its O’Hare

- Cancun charter service. 9

AirTran proposes year

- round daily service to Cancun from Midway, b eginning no later than March 11, 2012. AirTran states that it would pr ovide this service with its 137

- seat Boeing 737

- 700 airc raft.

AirTran maintains that introducing nonstop Chicago

- Cancun scheduled combination service from Midway

, with the support of Southwest’s large presence at Midway, would generate far greater public benefits than would adding a third scheduled U.S. carrier in the Chicago

- Cancun market from O’Hare and would create a geographical diversity of service that would benefit the region

. 10 AirTran argues that it would offer a new, convenient and reliable low cost travel option to the traveling public at Midway and that , as a wholly

- owned subsidiary of Southwest, it and Southwest together offer nonstop service to 57 destinations from Midway with 21 convenient connections to its proposed Chicago

- Cancun flights. 11 AirTran asserts that service at Midway competes vigorously with service at O’Hare arguing that history shows that when Southwest has entered new markets from M idway

, fares have decreased and traffic has increase d at both Midway and O’Hare. 12 Because Frontier will largely perform charter service at O’Hare, AirTran argues that an award to Frontier needlessly blocks AirTran

, and Midway

, from the Chicago

Cancun market. AirTran notes that with only 12% of aircraft capacity for sale to the public in light of Frontier’s charter arrangement with Apple Vacations, Frontier’s scheduled service would have no meaningful impact on competition. 13

AirTran also states that it is the carrier best situated to maintain service given its large presence in Chicago and in light of Frontier’s U.S.

- Mexico service histor y. AirTran states that Frontier has provided continuous service on only 3 of the 26 U.S.

- Mexico routes that it has attempted and

6 Frontier Answer at 6

- 7. We note that AirTran is currently in the process of merging with Southwest ( See Order 2011

- 11

- 17). AirTran and Southwest have received a single FAA operating certificate and state that they expect full connectivity later in the year.
7 Answer of AirTran Airways, Inc., January 26, 2012 (AirTran Answer) at 3.
8 AirTran Answer at 6.
9 Frontier Answer at 16.
10 Supplement to Application of AirTran Ai rways, Inc., January 19, 2012 (AirTran Supplement) at 5.
11 AirTran Supplement at 3

- 4.
12 AirTran Supplement at 7.
13 AirTran argues that USA 3000, which provided charter service for Apple Vacations until January 31, had historically not sold scheduled sea ts to the public despite holding scheduled authority in this market. AirTran Answer at 2

- 3.4 those 3 were from Frontier’s hub in Denver , where it had the support of online connecting traffic

. AirTran questions Frontier’s ability to successfully compet e against the established network service of United and American at O’Hare with little behind

- gateway support, a minimal
presence at O’Hare, and with little name recognition in Chicago. 14

Frontier argues that AirT ran and Southwest currently have no connecting flights between their respective networks , and that it is uncertain when AirTran and Southwest would be fully integrated

. Moreover

, should the Department give credence to AirTran’s cited connections, Frontier asserts that twelve of those cities already have superior nonstop service to Cancun and one will lose nonstop service to Midway in June

. 15 AirTran calls th is alleged lack of connectivity misguided, and states that Southwest acquired AirTran precise ly for the purpose of integrating AirTran’s services into Southwest’s system

. 16 AirTran further argues that it understated i t s potential Southwest connecting traffic at Midway and that Southwest routinely carries connecting passengers via Midway on routes that have nonstop alternatives. 17

Tentative Decision

When we instituted this proceeding, we stated that our primary objective would be to maximize the public benefits that will result from award of the authority. In this regard, we stated that we would consider which applicant would be most likely to offer and maintain the best service for the travelling and shipping public. We stated that we would also consider the effect of the applicants’ service proposals on the overall competitive environment, incl uding the market structure and level of competition in the U.S.

- Mexico market, as well as on any other market shown to be relevant. In addition, we stated that we would consider other factors historically used for carrier selection where they are relevant

. 18

We have carefully examined the applicants’ proposals and the responsive pleadings in this matter and have tentatively decided that the public interest is best served by selecting AirTran for primary exemption authority to provide scheduled foreign air transportation of persons, property, and mail in the Chicago

- Cancun market

. 19 20 We tentatively determine that AirTran ’s service proposal w ould provide greater public benefits in terms of scheduled capacity and enhanced competition in the Chicago

- Cancun mar ket , and that a selection of AirTran would result in certain market structure benefits that would not be available with a selection of Frontier.

14 AirTran Supplement at 8

- 9.
15 Frontier Answer at 3

- 4.
16 AirTran Answer at 6.
17 Reply of AirTran Airways, Inc., January 31, 2012 (AirTran Reply) at 4

- 5.
18 Order 201 2

- 1

- 4 at 2.
19 Based on officially noticeable data, we tentatively conclude that AirTran is qualified to provide the services proposed. AirTran has been found fit to provide foreign scheduled air transportation of persons, property, and mail ( see Order 201 0

- 12

- 24, which issued blanket route integration certificate authority), and holds exemption authority to provide scheduled combination services in various U.S.

- Mexico city

pair markets. No information has come to our attention that would lead us to questi on the qualification of AirTran to conduct the proposed operations at issue here.
20 We tentatively find that our action here would not constitute a “major regulatory action” under the Energy Policy and Conservation Act of 1975, as defined by section 313.4( a)(1) of the Department’s regulations.5 Specifically

, we tentatively find that

, while Frontier ’s proposal relies on larger aircraft than that proposed by AirTran, AirTran’s proposal would inject more capacity into the market for scheduled service given that much of Frontier’s capacity will be used to fulfill its contract with Apple Vacations to provide the charter services previously perfor med by USA 3000 on the route

. 21 The record demonstrates that only a portion of Frontier’s capacity would be ava ilable for sale as scheduled service and Frontier has not demonstrated otherwise

. We have considered Frontier’s argument that it should not be “ penalized ” for its Chicago

- Cancun charter service ; 22 however, we do not agree that we can or should overlook the fact that , in essence, only a portion of Frontier ’s service proposal would require the scheduled authority at issue here. The Agreement does not limit the number of U.S. carriers that may provide charters in the U.S.

- Mexico market; only three carriers, however, may provide scheduled service in the Chicago

- Cancun market. Therefore, we tentatively find that the interests of the traveling public would be diminished if we were to forgo the opportunity to put a carrier into the market whose capacity would be devoted entirely to offering scheduled ser vice , especially when it would be in addition to the charter service that Frontier has already begun and can continue to provide. We have also considered the potential benefits that might be derived from Frontier’s proposed interline connections which would be sold as scheduled service if Frontier were selected

, but we tentatively find that any potential traffic would represent a very small portion of Frontier’s overall capacity and would not outweigh the benefits of AirTran’s larger scheduled service capacity.

We tentatively conclude that selection of AirTran’s proposal would also provide i mportant Chic ago

Cancun service and market structure benefits that would not be available if we were to choose Frontier

. AirTran would restore nonstop Chicago

- Cancun service from Midway and a structurally advantageous Chicago

- Cancun alternative that the public previously enjoyed

. As a result of our last carrier selection proceeding involving the Chicago

- Cancun market

, the public enjoyed the service and market structure benefits of having two legacy carriers compet ing at O’Hare, with a lower cost carrier serving from Midway. 23 We tentatively conclude that r estor ing those benefits through our selection of AirTran would provide the greatest service and travel options for the public and, therefore, best maximize the public benefits in this highly restrictive and sou ght

- after market.

F inally

, while AirTran places much emphasis on the benefits that might be anticipated from its merger with Southwest, our tentative decision is based on AirTran’s service proposal as it will be implemented in the near

- term and not on any alleged future benefits tha t may be derived through integration with Southwest ’s operations. E ven without the benefit of Southwest’s network, we tentatively find that the proposed capacity , service, and market

- structure benefits of AirTran ’s proposal outweigh the Frontier proposal

. Based on all of the above, we tentatively find that the services proposed by AirTran will provide the most benefits to the traveling and shipping public

, and will maximize use of the bilateral rights available to U.S. carriers in the Chicago

- Cancun marke t.

21 Application of Frontier Airlines, Inc. for an Exemption, November 21, 2011 at 2.
22 Frontier Answer at 15.
23 See Order 2006

- 4

- 22, Chicago

- Cancun Combination Proceeding.6 Backup Authority

When we instituted this proceeding, we stated that we would consider, based on the material in the record, whether it is in the public interest to award backup exemption authority. Because the Chicago

Cancun designation opportunity is a valuable and important right, we tentatively find that it is in the public interest to have a backup carrier in place should AirTran not institute service or if its authority in the market becomes dormant during the first year of operations . In this regard, we have tentatively decided to award Frontier backup exemption authority that can be exercised if AirTran abandons the Chicago

- Cancun city pair market. 24 25

Terms, Conditions, and Limitations

If our tentative decision is made final, we propose to issue to AirTran two

- year exemption authority for scheduled foreign combination service in the Chicago

- Cancun market. In addition, we will issue to Front ie r contingent exemption authority of one

- year’s effectiveness for backup scheduled foreign combination service in the Chicago

- Cancun market. Consistent with our policy regarding U.S.

- Mexico authorizations, we will issue the subject prima r y and backup U.S.

- Mexico authority on a city

- pair basis, imposing the standard 90

- day dor mancy condition and dormancy notice requirements for U.S.

- Mexico authority set forth in condition 7 of Appendix A of Order 88

- 10

- 2. We will also impose a startup condition for the primary award. In this regard, AirTran states that its proposed services c ould begin by March 11, 2012. 26 To allow sufficient time for AirTran to inaugurate service, we have tentatively decided to require institution of AirTran’s service within 90 days after the service date of a final order in this proceeding , consistent with o ur standard startup condition for U.S.

- Mexico services

.
ACCORDINGLY,

1. We tentatively select AirTran Airways, Inc. , for primary authority and propose to issue it exemption authority

, subject to conditions

, to provide scheduled foreign air transportation of persons, property, and mail between Chicago, Illinois, and Cancun, Mexico;

2

. We tentatively select Frontier Airlines, Inc. , for backup authority and propose to issue it backup exemption authority

, subject to conditions

, to provide sche duled foreign air transportation of persons, property, and mail between Chicago, Illinois, and Cancun, Mexico ;

3. We direct any interested parties having objections to our tentative decision set forth in this order and in ordering paragraphs 1 and 2, ab ove, to file their objections in the above

- captioned docket, with the Department’s Docket Section, U.S. Department of Transportation, Docket

24 Based on officially noticeable data, we tentatively conclude that Frontier is qualified to provide the services proposed. Frontier has been found fit to provide foreign scheduled air transportation of persons, property, and mail ( see Order 2011

- 6

- 12, whi ch issued Frontier certificate authority for various U.S.

- Mexico city

- pair markets), and holds exemption authority to provide scheduled combination services in various other U.S.

- Mexico city

- pair markets. No information has come to our attention that woul d lead us to question the qualification of Frontier to conduct the proposed operations at issue here.
25 Should Frontier’s back

- up authority be activated, we tentatively find that such action would not constitute a “major regulatory action” under the Energy Policy and Conservation Act of 1975.
26 AirTran Supplement at 2.7 Operations, M

- 30, West Building Ground Floor, Room W12

- 140, 1200 New Jersey Avenue, S.E., Washington, D.C., 20590, no later than ten (10) calendar days from the date of service of this order; answers thereto shall be filed no later than seven (7) calendar days thereafter ; 27

4. If timely and properly supported objections are filed, we will afford full consideration to the matters or issues raised by the objections before we take further action ; 28

5 . To the extent not granted, we deny all other requests in Docket DOT

- OST

- 2012

- 0001;

6

. We will serve this order on Frontier Airlines, Inc.; AirTran Airways, Inc.; The So uthwest Airlines Pilots’ Association; the U.S. Department of State (Office of Aviation Negotiations); the Federal Aviation Administration; and the Ambassador of Mexico in Washington, D.C.

By:

SUSAN L. KURLAND Assistant Secretary for Aviation and International Affairs

(SEAL)

An electronic version of this document is available on the World Wide Web at http://www.regulations.gov

27 The original filing should be on 81⁄2" x 11" white paper using dark ink (not green) and be unbound without tabs, which will expedite use of our docket imaging system. In the alternative, parties are encouraged to use the electronic submission capability available through the Dockets FDMS Internet site ( http://www.regulations.gov ) by following the instructions on the web site. Additionally, service by facsimile or electronic mail is authorized. Parties should include their fax numbers and email addresses on their submissions and should indicate the method(s) of service used on their certificates of service.
28 Because we are providing for the filing of objections to our tentative decision, we will not entertain petitions for reconsideration of this order.