BEFORE THE

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

____________________________________ _ ______ ) Application s of ) )

AIR CANADA ) ALASKA AIRLINES, INC. )

F RONTIER AIRLINES, IN C. )

JETBLUE AIRWAYS CORP ORATION )

SOUTHWEST AIRLINES C O. ) Docket No. OST

- 20 12

- 0029

SUN COUNTRY AIRLINES )

VIRGIN AMERICA INC. ) ) For exemptions from 14 C.F.R. Part 93, Subparts ) K and S, pursuant to 49 U.S.C. § 41718 ) (BEYOND

- PERIMETER SLOT EXEMPTIONS) )

________________________ ______ __ _____ ______ )

REPLY OF SOUTHWEST AIRLINES CO.

AND MOTION FOR LEAVE TO FILE

Communication with respect to this

document should be addressed to:

Ron Ricks Robert W. Kneisley

Executive Vice President

-- Associate General Counsel

C hief Legal and Regulatory Officer Leslie C. Abbott

Madeleine Johnson Senior Attorney

Vice President General Counsel SOUTHWEST AIRLINES CO.

SOUTHWEST AIRLINES CO. 1901 L Street, NW

2702 Love Field Drive Suite 640
Dallas, TX 75235

- 1611 Washington, DC 20036 bob.kneisley@wnco.com (202) 263

- 6284

April 9 , 20121 BEFORE THE

DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY WASHINGTON, D.C.

__ ________ _________________________________ ) Applications of ) )

AIR CANADA ) ALASKA AIRLINES, INC. )

F RONTIER AIRLINES, IN C. )

JETBLUE AIRWAYS CORP ORATION )

SOUTHWEST AIRLINES C O. ) Docket No. OST

- 20 12

- 0029

SUN COUNTRY AIRLINES )

VIRGIN AMERICA INC. ) ) For exemptions from 14 C.F.R. Part 93, Subparts ) K and S, pursuant to 49 U.S.C. § 41718 ) (BEYOND

- PERIMETER SLOT EXEMPTIONS) )

____________ ____________________ ___________ )

REPLY OF SOUTHWEST AIRLINES CO.

AND MOTION FOR LEAVE TO FILE

Southwest files this Reply to the Responses of both Frontier and JetBlue, filed

April 5 and April 6 , 2012 respectively. 1 Southwest requests leave for the filing of this

Reply pursuant to Rule 6 of the Department’s Rules of Practice , 14 CFR §302.6. Good

cause exists because this Reply will correct incorrect and/or misleading statements

contained in the responses of Frontier and JetBlue, and thereby contribute to a more

accurate record for the Department’s decision in this proceeding

.

Reply to Frontier :

In a continuing campaign to divert attention from its own weak proposal

– which

would waste scarce beyond

- perimeter exemptions on the tiny DCA

- COS market

--

1 Common names of airlines are used.2

Frontier attacks Southwest’s DCA

- AUS

- SAN proposal with irrelevancies and

misrepresentations. F rontier’s claim that BWI is an effective substitute for DCA is flatly

contradicted by the Department’s own conclusions based on extensive economic

analys i s of airline competition in the Washington DC region. As a re sult of that analysis,

t he Department found that “the three DC area airports are not interchangeable

, ” 2 and “it

is quite clear that the airports are not economic substitutes.” 3 Further, in a comparison

of experienced yields among the DC area airports, the Department found that :

the average yield in all markets at DCA is 27 cents per mile , v ersus
17 cents at Dulles and 14 cents at BWI. If the airports were effective economic substitutes for all passengers, we would expect to see a greater self

- equalizatio n of yields and the yield spreads would not differ so significantly

. 4

It is hard to imagine a more clear statement of the issue which Frontier continues to

argue. In fact, the Department specifically distinguished the only case that Frontier

cites (Order 2006

- 6

- 17, June 12, 2006

, concerning an award of DCA slot exemptions for

Sarasota/Bradenton) . The Department explained that its decision in that case was

based on several factors and that “ i n no way was the Department...stating or implying

that servi ce between DCA, IAD, and BWI was interchangeable.” 5

In addition , there is the fact that the recent DOT/FAA

- mandated divestiture of 16

DCA slots ( for 8 roundtrip flights) produced record bids from limited incumbent carriers

that obviously place a n extremely high value on access to DCA . Southwest itself bid

$32 million for the 8 available slot pairs, yet was topped by JetBlue’s extraordinary $40

million bid

– an average of $5 million per roundtrip . If BWI were an acceptable

2 Grant of Petition with Conditions , 70 Fed. Reg. 26322, May 11, 2010, at 26332/2.

3 Id. at 26332/3

4 Id. at 26333/1

5 Id. at 263 3 2/3 ( f n. 70).3

substitute, as Frontie r’s theory postulates

, carriers certainly would not be willing to pay

tens of millions of dollars for the right to operate a few flights at DCA.

Frontier’s attack on Southwest ’s projected fares is equally baseless

. Southwest

specifically explained in its March 12 Application th e relationship between its projected

DCA

- AUS fare and its current BWI

- AUS fare :

BWI is a major focus city for Southwest and seats available to the local

BWI market are limited due to the si gnificant capacity allocated to passengers connecting at BWI. This has the effect of raising the weighted average fare earned for the local BWI segment. In the case of the DCA

AUS market, the share of seats available for the local market will be
greater an d it is expected that a larger share of the market will be leisure

at DCA than at BWI. The leisure market books further in advance and pays lower fares than the business market. Finally, as a small DCA participant and a relative newcomer, Campbell

- Hill exp ects Southwest to be more price aggressive in order to create patronage and capture loyalty as it builds a more significant DCA presence over the long run. All factors considered, Southwest’s weighted average fare in the DCA markets will

resemble its system average for comparable distances (see Appendix 8),

rather than the BWI

- AUS average fare. 6

Neither Frontier nor any other applicant has responded to this explanation in any

meaningful way

. The point is that t he main driver in Southwest’s pricing s trategy is

distance

– not the number of competitors, or the identity of competitors. Consistent with

that strategy , Southwest’s projected fares in this case are based on its yield curve, i

. e

. ,

the empirical relationship between Southwest’s actual system

- wide yields to market

distance ( see Southwest’s March 12 Application, Appendix 6). Accordingly,

Southwest’s proposal in this case is to establish DCA

- AUS and DCA

- SAN fares to

target w eighted average result s of $169 and $196 respectively. This is f or fared

passengers only and before ticket taxes, PFC’s and other government imp osed

6 Exhibit WN

- 200 at p. 3, fn. 4.4

charges. 7 This is the Company’s plan and expectation , consistent with its historic

pricing philosophy , and Frontier has given no legitimate basis to challenge it

. 8

Reply to JetBlue :

JetBlue c ontinues to c onfuse the r ecord by misrepresenting (or perhaps

misunderstanding) b asic facts about Southwest’s service proposal. First, JetBlue’s

claim s that Southwest’s forecast load factors will exceed 100% are based on the glar ing

mistake of relating one

- way passengers , on the one hand, to round

- trip seats on the

other. Southwest will operate a 175

- seat B737

- 800, for 365 days a year. This will

produce 127,750 one

- way seats 9

. All of Southwest’s passenger numbers are one

- way

and they are so designated in its exhibits. So

, any load factor computation must use

127,750 seats as the denominator of a fraction where the number of O&D p assengers is

the numerator. JetBlue, on the ot her hand, computes implausible load factors for

Southwest because it uses 63,875 round trip seats 10 as the denominator. Southwest

has forecast a load factor of 85% over the critical sector (DCA

- AUS), which is entirely

reasonable (Exhibit WN

- 202).

Secon d, JetBlue ignores the fact that Southwest clearly stated that it “estimated

traffic stimulation assuming all market participants reduce their fares to Southwest’s

level ” (Exhibit WN

- 200, at page 3

, emphasis added ). If other carriers reduce their fares

in response to Southwest’s entry

-- an entirely reasonable assumption

-- Southwest

expects they will capture some of the stimulat ed traffic. Exhibit WN

- 124 states this

7 Exhibits WN

- 121 and WN

- 122.

8 Frontier’s argument regarding fare stimulation in the LIT

- PHX market (Response at 7) is equally

baseless. Southwest did vacate that m arket for less than a year in 2008

- 2009, but average fares in the

market remained almost unchanged during that time. Therefore , as Southwest stated in its April 3 Limited Response, the correct point for measuring fare stimulation due to Southwest’s entry is when Southwest originally entered that market in March 1994.

9 175 seats x 365 days x 2 directions (DCA to AUS/SAN and SAN/AUS to DCA).

10 127,750 2. This is the total capacity that JetBlue erroneously claims Southwest will operate.5

explicitly in a highlighted box : “Assuming competitors respond by lowering their fares,

some of the newly generated passengers will be carried by Southwest and others will

be carried by competing carriers who lower their fares in response to Southwest ”

(emphasis added) . Southwest never suggested it would carry all of the new traffic

generate d by its initiation of low

- fare service at DCA

. This is the essence of “the

Southwest effect”

-- that competing carriers are forced to lower their fares in response to

Southwest ’s competition , and as a result all airlines in the market carry more traffic.

JetBlue’s hypothetical load factor calculations are based on the fallacious assumptions

that Southwest will carry 100% of the market stimulation with 50% of its scheduled

seats and should be disrega rded in its entirety. Stripping away these errors, the

advantages of Southwest’s proposal for DCA

- AUS over JetBlue’s become absolutely

clear, including a significantly larger aircraft, a much larger AUS presence, and lower

fares.

In a final attempt to discredit Southwest’s traffic forecast, JetBlue has cherry

picked two markets that prove nothing (Response at 2, fn. 1). In the case of EWR

Chicago, market fares declined by just 6% according to JetBlue, so naturally little price

stimulation would be exp ected. In the DCA

- AUS market, on the other hand, Southwest

will provide the only nonstop service (unlike JetBlue’s EWR

- CHI scenario) and it

expects to reduce fares by 36 % , which will easily support Southwest’s forecast price

stimulation of 72% (Exhibits W N

- 121 and WN

- 202). 11 JetBlue’s second market choice

of LGA

- Chicago is even less relevant, as the average market fare increased by 12%

.

Even so the traffic increased by 16%. One can only imagine the increase in traffic if

11 Southwest ’s f orecast of total DCA

- AUS traffic stimulation is 110%, comprised of price stimulation of 72% and service stimulation of 22% (these factors are multiplicative, not additive). Id.6

fares had declined by 36% as Southwest expects for DCA

- AUS

. In sum, J etBlue’s

analysis of Southwest’s market stimulation is completely misinformed and should be

disregarded in its entirety.

C ONCLUSION

For the reasons given above and in its prior pleadings

, Southwest urges the

Department to grant it two beyond

- perimeter DCA slot exemption s to provide nonstop

service between DCA and AUS

, with single

- plane beyond service to SAN.

Respectfully submitted

,

__________________________ Robert W. Kneisely

April 9 , 20127 C ERTIFICATE OF SERVIC E

I hereby certify that on April 9 , 2012 , a copy of the foregoing was served via e

mail on the following persons:

anita.mosner@hklaw.com (Air Canada) megan.lawrence@alaskaair.com (Alaska Airlines) Marshall.Sinick@squiresanders.com (Alaska Airlines) Edward.Saucer@squiresanders.com (Alaska Airlines robert.cohn@hoganlovells.com (Frontier Airlines) patrick.rizzi@hoganlovells.com (Frontier Airlines robert.land@jetblue.com (JetBlue Airways) jhill@dowlohnes.com (JetBlue Airways) perkmann@dowlohnes.com (JetBlue Airways) John.Fredericksen@suncountry.com (Sun Country Airlines) barbara.russell@virginamerica.com (Virgin America) john.varley@virginamerica.com (Virgin America) jegillick@zsrlaw.com (Virgin America)

susan.kurland@dot.gov todd.homan@dot.gov brian.ctr.meehan@faa.gov

Jim Smith

Director of Aviation

Austin

- Bergstrom International Airport jimsmith@ci.austin.tx.us

John E. Potter

President and Chief Executive Officer Metropolitan Washington Airports Authority john.potter@mwaa.com

info@airlineinfo.com

__________________________ Dorothy C. Sauvinet