BEFORE THE DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.



### ) Application of ) ) National Air Cargo Group, Inc. d/b/a ) National Airlines ) ) 

### for an exemption pursuant to 49 U.S.C. § 40109 ) and an amended certificate of public convenience ) and necessity pursuant to 49 U.S.C. § 41102 ) (foreign scheduled air transportation of persons, ) property and mail) ) ) Dockets OST-2012-0204

ANSWER OF NATIONAL AIRLINES TO 

### OBJECTIONS AND MOTION OF UNITED AIRLINES

Correspondence with respect to this document should be addressed to:

Mark W. Atwood Elizabeth J. Wadsworth Joshua P. Stein Cozen O'Connor 

### The Army & Navy Club Bldg. 1627 I Street, N.W. Washington, D.C. 20006 Tel. (202) 463-2513 Counsel for National Airlines


### September 4, 2013

### BEFORE THE DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.

) Application of ) ) 

### National Air Cargo Group, Inc. d/b/a ) National Airlines ) ) for an exemption pursuant to 49 U.S.C. § 40109 ) and an amended certificate of public convenience ) and necessity pursuant to 49 U.S.C. § 41102 ) (foreign scheduled air transportation of persons, ) property and mail) ) ) Docket OST-2012-0204



### ANSWER OF NATIONAL AIRLINES TO OBJECTIONS AND MOTION OF UNITED AIRLINES In a transparent ploy to delay, if not prevent, competition, United Airlines, the world's largest passenger carrier, has filed (over four months late) its objections to the Department's tentative grant of authority to National Airlines for scheduled passenger service between the United States and points in Afghanistan, via the United Arab Emirates. As will be shown in this answer, the purported objections of United — a disappointed bidder for the GSA contract for the same routes — are totally without merit, are based on false assumptions, and mischaracterize National's filings and applicable law. The Department should waste no time in dismissing United's objections without further delay to grant of National's authority.

### I. United's Objection Should be Dismissed as Untimely and Inappropriate. United's objections are directed at findings made in Order 2013-4-12, served April 15, 2013. National requested, prior to the issuance of the Order, that the Department shorten the period for responses. United, among others, was served with that motion, and did not object to it. Accordingly, the Department required responses to the Order to be filed within three days, 

### i.e. by April 18. United also declined to file objections to the Order at that time. Now, 

### four months later, United, stung by its loss of six U.S.-Dubai routes to National, 1 has filed a lengthy objection in an attempt to derail National's plans. United excuses its extreme tardiness by claiming that only when the General Services Administration "City-Pair Program" contract was awarded on August 16 did it realize that National planned to code share with Emirates on flights from sevenU.S. points, and thus asserts that National's application, and the Department's ShowCause Order, were defective. Had there been a significant change in circumstances or plans that would have affected National's authority request, its showing of ability to perform, or the basis of the Department's tentative findings, National would have amended its application accordingly. However, as will be shown below, 

### none of the assertions made by United have any bearing on the authority needed, National's financial or managerial competence to perform the proposed services, or the correctness of the Department's findings. Not only is United's manufactured indignation spectacularly ill-timed and unwarranted, but it has chosen the wrong forum in which to make these assertions. Its I United also bid for the same city pairs into Dubai for which National was selected. Though United was awarded a total of 1,730 routes, it apparently covets National's six routes as well. 2arguments are relevant not to National's route authority, which was the subject of the

Order, but only, at most, to the request (which has not yet been made) for authorization of the codeshare with Emirates, and to GSA's award of the contract (which United has now formally protested).


### National's Service Proposal Was (and Is) Accurate.
United maintains that National did not disclose the true nature of its planned service, in that its application references only the Washington Dulles-Dubai city pair as the likely market for codesharing with an unnamed U.S. or foreign carrier, whereas the GSA has now awarded National a "City-Pair Program" contract for government air transportation between six additional U.S. points and Dubai and/or points in Afghanistan. In fact, however, National never said or hinted that it intended to limit its service to one U.S. point; rather, its authority request was for "a point or points in the United States, a point or points in the United Arab Emirates, and beyond to a point or points inAfghanistan...." It referenced the Dulles-Dubai sector because that was the only citypair that, at that time, it anticipated offering via codeshare in conjunction with its DubaiAfghanistan operation. Subsequently, it became aware of the GSA's request for service at six additional U.S. points, and in March it made a bid for that contract. National made the Department fully aware of the scope of the planned GSA service in extensive discussions with DOT officials prior to issuance of the Order; at no time did they suggest that National needed to supplement its application.

3Thus, National did not amend its application to reflect the additional codesharing

because (1) it did not require additional route authority, (2) it did not affect the financial projections on which its fitness showing was based, (3) the GSA contract had not yet been awarded, and (4) the codesharing would, in any event, be the subject of a further application before the Department. The Department in 1993 abandoned the requirement of a detailed "illustrative service proposal" by applicants for authority. Since then the rules have required only "a description of the service to be 

### operated..." (emphasis added). (14 CFR § 204.3(t).) The service description is relevant to whether the carrier has the financial and other resources to operate the service, and thus consists of financial projections that include specific cost items associated with the operation of flights. Items that account for negligible costs are irrelevant to the financial projections and fitness analysis. Because the addition of six points -- to be served by Emirates under a codeshare -- would not entail any significant expenditures, and indeed has no impact on the "service to be operated" by National, there is no reason why its application needed to be amended to so reflect.

Ill. National's Use of the Emirates' Codeshare at Seven U.S. Points Does Not Affect the Department's Finding of Fitness. United has made numerous assertions intended to create the erroneous perception that National's marketing of flights from seven U.S. points, as opposed to one, will create a burden it will be unable to support. For example:

"The Dulles-Dubai route was the only codeshare market that National Airlines accounted for in the financial information it provided to the Department." (Objections at 6.)

4O "National Airlines must be able to show that it is adequately prepared to handle proposed operations that are orders of magnitude more complex than those that it currently provides." 

### (Id. at 4.) O "National Airlines will undoubtedly be required to make a substantial investment that was not contemplated in its application." 

### (Id. at 7.)

• "The Department's tentative decision only specifically referenced the single Dulles-Dubai codeshare segment." 

### (Id. at 4.)

• "National Airlines would also need to completely overhaul — or, in many instances, design and implement — company policies, including its existing contract of carriage that currently contemplates only passenger charter transportation with a single aircraft." 

### (Id. at 9.) 

### All of these statements are demonstrably false. United is wrong in assuming that National's service proposal was based even in part on the Dulles-Dubai codeshare. In fact, all of the cost elements laid out in the service proposal were related almost entirely to the carrier's operation between Dubaiand Afghanistan. National made this explicit in its analysis of start-up costs (Exhibit NA4), where it estimated $50,000 for legal work related to obtaining authorization of the operation, which included a small amount for working out the codeshare agreement. This work has already been done, and adding six points to the agreement would not cause any further legal expense. National also stated (at footnote 1) that it did not anticipate any further startup expense for the codeshare beyond the legal fees. The extension of the codeshare to six other points does not change that calculation. United's assertion that addition of further city-pairs will be "orders of magnitude more complex" is a gross exaggeration. No significant new investment will be needed, as tasks such as bookings, ticketing, customer call centers, refunds, banking, aircrew training and line station arrangements have all been contracted out. Operational and passenger-handling functions will be handled by the operating carrier. Any remaining

5tasks are expected to be handled by existing National staff. If any additional personnel

are needed as time passes, the number will be small.United is flatly wrong in stating that the Order cites only the Dulles-Dubai citypair. 

### The Department did not cite that market at all. There is simply no mention of it. National's codesharing was clearly not a major concern of relevance to its fitness to undertake the service. The Department did, however, make clear what it considered a "substantial expansion" of National's plans, and held that were the carrier to operate more than two passenger aircraft or operate its own aircraft on the U.S.-UAE leg of the service, it would be required to provide notice and fitness-related information. 2 It made no mention of changes to the codesharing arrangement. United is equally wrong in assuming that National needs to overhaul or adopt new policies to contend with passenger operations. While National appreciates United's advice on how to operate passenger service, the carrier is quite aware of its responsibilities and how to exercise them, and has had plenty of time to prepare. All the legal and policy work necessary to comply with those responsibilities has already been done. 3 The addition of six other codeshare points does not add perceptibly to this work.



### IV. Compliance with the Consumer Protection Rules at Additional Codeshare Points Will Not Create Significant New Expense for National United has gone to great pains to point out the numerous consumer protection requirements applicable to U.S. scheduled passenger carriers, such as implementing a Customer Service Plan, codeshare disclosures, accommodating disabled passengers,

2Order 2013-4-12, at 11. 3 Since National cannot yet offer scheduled passenger services, the relevant documents and policies, such as a revised contract of carriage, naturally do not yet appear on its website. 6disclosing baggage allowance and fees, handling customer complaints and processing

credit card transactions. United notes that compliance "is both costly and extremely resource-intensive," requiring "infrastructure upgrades and personnel hiring and training." This would be true if National were establishing its own operations at the seven U.S. points. But, of course, these points will be served entirely by Emirates under a codeshare agreement. The workload on National as a marketing carrier will be minimal. The rules cited by United require the marketing carrier to take legal responsibility to ensure these responsibilities are met — not to do the work itself. National is well aware of these requirements, and had some time ago undertaken the necessary preparation with respect to its first U.S. codeshare point, Washington Dulles. Adding six other codeshare points will cause some marginal additional work, but does not create any new burdens National must now meet. The carrier has already created a Lengthy Tarmac Delay Plan (LTDP), Customer Service Plan (CSP), and passenger service Contract of Carriage. It already has policies for accommodating disabled passengers, handling complaints and baggage claims. These policies will be fully needed for its own Dubai-Afghanistan operations even if the codeshare service were never implemented. National expects to work closely with its codeshare partner to coordinate the relevant provisions of their contracts of carriage and to ensure that National's codeshare passengers are treated in accordance with its LTDP and CSP and other regulations applicable to National. At the risk of being tedious, we must once again stress the only relevant point: adding six more U.S. codeshare points required under the GSA contract will not create

7any material additional work or expense not already incurred. Significantly, the DOT

rules do not require a marketing carrier to physically post personnel (even contractors) at each point served by an operating carrier. Perhaps United chooses of its own accord to base personnel at codeshare destinations such as Chiang Mai, Rotorua or Manama, thus incurring great additional expense — though frankly that seems improbable. Nonetheless, while the rules do affix legal responsibility, they recognize that the essence of codesharing is that the marketing carrier gets to stay home. All United has done is to recite the very obvious regulatory requirements with which National is already prepared to comply — though with the addition of intimidating words such as "operational complexity," "myriad regulatory obligations," "costly," etc. It has not shown how these regulations require a marketing carrier to expend significant financial or personnel resources to accommodate additional codeshare points. In fact, they do not.



### V. National's Codeshare is Fully Consistent with the Fly America Act. United's argument's concerning the Fly America Act are as vacuous as those concerning National's fitness United admits that the Fly America Act allows U.S. carriers to engage in codesharing with foreign carriers, but it implies that some sort of "balance" is necessary. Its point is that for a foreign carrier to operate a long haul, leaving the U.S. carrier to fly a relatively short leg, just — somehow -- 

### isn't fair. The GSA contracting process, however, was carried out in accordance with the requirements of the Fly America Act, and United has not cited any authority to the contrary. The Comptroller General has determined that service provided by a U.S.-flag

8carrier using space on aircraft owned and operated by a foreign air carrier under a

codesharing agreement is transportation provided by a U.S.-flag carrier for purposes of the Fly America Act. 4 Likewise, GSA regulations expressly provide that "U.S. flag air carrier service also includes service provided under a code share agreement with a foreign air carrier in accordance with Title 14, Code of Federal Regulations when the ticket, or documentation for an electronic ticket, identifies the U.S. flag air carrier's designator code and flight number." 5 Neither the Comptroller General's decisions nor the applicable GSA regulations contain any requirement of "balance" or "proportionality" between U.S. and foreign carrier stage length. Nor, in fact, do they contain any requirement that the U.S. carrier operate any portion of the flight at all. United's complaint that the subject arrangement makes it possible for a foreign carrier to skirt the Fly America Act is hauntingly similar to the argument made by American, and firmly dismissed by the GAO, 19 years ago, that such U.S.-foreign carrier codeshares have "created a 'loophole' that allows foreign air carriers to obtain city pairs contracts even though they are not eligible to participate in the CRAF program." 6 United observes that the Comptroller General recommended that the Department of State and GSA consider incorporating into the travel management policy restrictions designed to ensure that "the U.S. carrier maintains a significant role in the transaction" and does not simply act "as a booking agent for the foreign carrier."' GAO did not adoptthis as a legal requirement, but instead committed it to the relevant agency's policymaking discretion. GSA has exercised this discretion and expressly decided to omit

4 See, Fly America Act — Code Sharing — Transportation by U.S. Carrier, B-240956, Sept. 25, 1991, 70 Comp. Gen. 713; American Airlines, B-258721, Dec. 29, 1994, 95-1 CPD 

### if 5.
5 Federal Travel Regulation, 41 CFR § 301-10.134. 6 matter of American Airlines, supra, at 2.
7 Fly America Act — Code Sharing, supra, at 9-10. 9restrictive conditions such as the one United now seeks to impose. Instead, GSA

adopted only the restriction that the Comptroller General opined was required by the Fly America Act: that the entire ticket be issued by the U.S. carrier. 8 GSA in adopting this rule considered whether to impose more restrictive conditions on code-share arrangements, including requiring the use of the U.S. carrier's ticket stock and requiring the U.S. carrier to bear the financial risk of empty seats on aircraft operated under a codeshare. GSA declined to impose those requirements, noting that such restrictions would impede U.S. air carriers and the goals of the Fly America Act: .

The final rule provides that U.S. flag air carrier service includes service provided by a foreign air carrier under a code share agreement when the ticket, or documentation in the case of an electronic ticket, identifies the U.S. flag air carrier's designator code and flight number. 

### It is GSA's position that codesharing between U.S. flag air carriers and foreign air carriers increases opportunities for U.S. flag air carriers to expand into new international markets, which in turn promotes revenues to U.S. flag air carriers, thereby furthering the goals of the Fly America Act. 9 Even if United asserts that there is a legal requirement that a U.S. carrier maintain a significant role in the transaction, which there is not, National in fact proposes to play a significant role in these transactions: it will market and sell the transportation, receive the revenue and keep the profit above what it pays to the operating carrier, and it will operate the final leg of the service into Afghanistan on its own aircraft. Similar to the codeshare arrangements used by many other airlines, including United, the codeshare flights in this case between the United States and Dubai make it possible for National to offer service between two countries (the U.S. and Afghanistan), even though it does not fly its own aircraft over a portion of the route.

8 See, Federal Travel Regulation, § 301-10.134.
9 Federal Travel Regulation; User of Commercial Transportation, Fly America Act, 63 Fed. Reg. 63417 (Nov. 13, 1998) (emphasis added). 10Finally, United asserts that it is the Department's responsibility to enforce the Fly

America Act. United, however, has shown no authority to support this proposition. Instead, it very curiously relies on two DOT orders that frankly have nothing to do with the Fly America Act. Order 98-12-8 

### (Application of Korean Airlines, Ltd.) involved a review of a statement of authorization to carry U.S. mail under a code-share arrangement. This was governed by the USPS statutes and regulations, 1° not Fly America. In upholding the staff action, DOT simply stated that such arrangement was consistent with those the GSA deemed authorized under Fly America. Order 95-8-4 

### (Application of Loken Aviation, Inc.) similarly involved the Postal Service statute. The Department deferred the question of the legality of the arrangement, holding that it was "a matter ultimately to be determined by the Postal Service under its statutes and regulations." If relevant at all, this case actually 

### supports the legality of National's codeshare arrangement under the Fly America Act.
Conclusion For a carrier of the stature of United Airlines to submit an objection so utterly bereft of serious legal merit starkly reveals the carrier's true motive: simply to cause further delay to National's long-overdue authorization for U.S.-U.A.E.-Afghanistan scheduled passenger service. United is well aware of the October 1 deadline for implementation of service under the GSA contract, and has made no secret that it will use whatever means are at its disposal to thwart National's plans. The Department must not let its procedures be used for such clearly anticompetitive purposes. National applied for this authority in 

### December 2012 — over eight months ago. While the carrier understands the circumstances that have greatly delayed issuance of

10 Particularly 39 CFR § 5402, et seq. 11the final order in this proceeding, no purpose will be served by taking United's meager

bait and delaying the final order still further. National strongly urges the Department to dispose of United's objections in a separate order, rather than to recall the final order from Presidential review and make further amendments to it. That step would cause at least another 60-day delay in the startup of service that the Department has recognized to be of benefit to the public. ACCORDINGLY, National Airlines asks that the Department deny United Airlines' Motion for Leave to File, dismiss its objections, and proceed without further delay to issue the final order granting National the requested authority. Respectfully submitted,

Mark W. Atwood Elizabeth J. Wadsworth Joshua P. Stein Cozen O'Connor The Army & Navy Club Bldg. 1627 I Street, N.W. Washington, D.C. 20006 Counsel for National Airlines
Dated: September 4, 2013

12abeth 

### J. Wadsworth CERTIFICATE OF SERVICE I certify that I have served the foregoing document on the following persons on this 4th day of September, 2013, in accordance with the Department's Rules of Practice:



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