SU

PPLEMENTARY

COMMENTS

JOINT APPLICATION

F 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.S.C.

5S 41308-41309

FOR APPROVAL

OF AND ANTITRUST IMMUNITY

FOR ALLIANCE

AGREEMENTS DOCKET DOT-OST-2009-0155

Hubert Horan 19 October

2010

I am filing

these comments

assupplementary

to comments

submitted

on 12 October

DOT-OST-2009- 0155-0030

which were my initial

response

to the Department's

Show Cause Order of 8 September

filed under DOT-OST-2009-0155-0026. These comments

are being

filedpursuant

to the Department's

Order 2010-9-18

which established

a 22 October

deadline

for answers

and objections

to initial comments

on the Show

Cause Order.

In addition

to other legal

tests, airline applications

for immunity

from the antitrust

laws cannot be granted unless applicants

meet the section

41308(b)

requirement

that they prove

the likelihood

of significant

Public Benefits. The original Delta/Virgin

applicationl

identified

potential

Public Benefits using the exact

approaches

and methodologies

used by ATI applicants

in the Skyteam,

Star, Oneworld

and USJapan Alliance cases.' In each of those cases, the Department

granted immunity,

and in each

of those
cases the Department's

decision was based

on the clear,

explicit ruling that the applications

had fully proven the likelihood

of substantial

Public Benefits as required

by section

41308(b).

Inthe Show

Cause Order, the Department

reached the exact

opposite

conclusion,

and rejected

the Delta/Virgin

application
on the grounds

that it had"failed

to show that the proposed

alliance will generate

sufficient

Public Benefits to justify

a grant of antitrust

immunity."3

In my initial

commentsa,

I objected

to the Department's

ruling and pointed

out that every

significant aspect of its Public

Benefits analysis in thiscase

wasinconsistent

with the Public

Benefits analysis in the other four cases.

My testimony

laid out incompatible

approaches

in the area

of "double

marginalization" driven pricing benefits in connecting

markets,

in the area

of benefits

from increased

nonstop capacity,

in the area

of benefits

from increased

inter-alliance

competition,

and in allof the other benefits (such as cost reductions,

network and frequent

flyer scope expansion,

revenue increases

due to expanded

yield

' Joint Application

Of Delta

Air Lines,

Inc., Virgin Blue AirlinesPty Ltd, Virgin Blue International Airlines Pty Ltd D/B/A V Australia,

Pacific BlueAirlines

(NZ) Ltd, Pacific

BlueAirlines(Aust) Pty Ltd Under 49 U.S.C.

$$ 41308- 41309For Approval

Of And Antitrust

ImmunityFor Alliance Agreements,

DOT-OST-2009-0155-0001. 'Joint Application

of Alitalia-Linee

Aeree Italiane S.p.A., et.ql. for approval

of antitrust

immunity

(the "Skyteam" case), DOT Docket OST-2007-28644); loint Applicationof Air Canada, The Austrian Group, British Midland Airways Ltd., Continental Airlines,

lnc., Deutsche

Lufthansa

AG, Polskie

Linie Lotniecze

Lot S.A.,Scandinavian Airlines System, Swiss International

Air Lines,

Ltd.,TAP Air Portugal,. to Amend Order

2007-2-16

under 49 U.S.C. 8$ 41308

and 41309 so as to Approve

andConfer

Antitrust

Immunity,

(the"Star/Continental" case); American

Airlines-British

Airways-lberia-Finnair-Royal Jordanian

Joint Application

For Antitrust

Immunity

(the "Oneworld"

case), Show Cause Order l3 February

2010, DOT Docket

OST-2008-0252-3390, and the "US-Japan Alliance Case"

or "Japan

case" which consolidated

the separate

antitrust immunity applications of All Nippon Airways,

Continental

Airlines,

Inc.,United

Air Lines,

lnc and American

Airlines and Japan Air Lines,

DOT-OST

### 20r 0-0059 3 Delta/Virgin

Show Cause Order, DOT-OST-2009-0155-0026, p.l, 5, " Horan Comments.

DOT-OST-2009-0

l 55-0030Horan, Supplemental

Delta/Virgin

Comments 1-9

October 2010

management

system scope) ever cited by previous

applicants.

The DOT

had not changed

itsdecisional standards

based on new evidence

or conditions,

in fact the DOT falsely claimed that its "approach

to this
case isconsistent

with past

cases."s I demonstrated

that allof these

differences

weredue

to inconsistencies

in the Department's

analytical

assumptions

andapproaches,

and none

of these inconsistencies

could possibly be explained

byfactual

evidence

or case-specific

conditions.

Since there is only one lawestablishing

the Public

Benefit ATI requirement,

here can onlybe one Public

Benefits review process consistent

with the law. I argued

that at least

oneof the Department's two utterly inconsistent

Public Benefits approaches

mustbe inconsistent

with the law. I demanded that the DOT publically

acknowledge

that the Delta/Virgin

Public Benefits analysis wasinconsistent

and incorrect,

that DOT publically

affirm that there

could onlybe one legally

valid Public Benefits approach,

and that DOT publically

affirm that it would

not change

basic decisional

standards

without clearly stating that it was doing so, and without clearly defining the legal

andevidentiary

basis for changing

those standards,

and allowing

interested

parties an opportunity

to review

andcomment

on the changed

decisional

standards. I demanded

that the Show

Cause Order's objections

be withdrawn,

and that the original

Delta/Virgin application

be approved

because it clearly

met allof the Department's previous,

consistently

applied Public Benefits decisional

standards.

On 13 October

Delta and Virgin submitted

comments

on the Department's

Show Cause Order.6 Many of these comments

simply sought o clarify

or more fully explain claims made in their initial

application. However

the comments

included a series of totally

new Public

Benefits claims that were materially different

from theiroriginal

claims andare materially

different

from claims

made by any previous

ATI applicant.

The applicants

paid the consulting

firm of Compass

Lexecon to undertake

a study that purports

to show tangible ATI driven consumer

benefits from lower

prices and increased

nonstop and connecting

service. The studyT was included

as an appendix

to the applicants

L3 October

comments

and is the basis

of new claims

thatATI wouldincrease

the consumer

welfare of US-Australia

passengers

by 5zl to 54 million

annuallv.s

The revised

Delta/Virgin

application

was not posted

to regulations.gov

until 15 October.

Under the conditions

defined in Order 2010-9-18

other parties

to the case

had less thana week

to review

and comment.

The Compass

Lexecon analvsis that is the basis

for the totallv

new527-54

million benefit claims appears hiehlv dubious;

althoueh

Order 2010-9-L8

does not permit

a fullv rieorous

critique,

it appears

unlikelv that these

benefit claims could survive a serious.

obiective

review

I Delta

has proven its willingness

to present

deliberately

inappropriate

and deceitful

claims based on internal planning

models in past cases. The Department

of Justice

discovered

that benefit

claims based on QS|-models

in the Delta-Northwest merger that were "wildly

inconsistent"

with

5 Delta/Virgin Show Cause Order, p.2; case

data in the table are from the US-Japan Alliance Case

Show Cause Order, pp. 13-15

and Delta/Virgin

Show Cause Order, p.5-t2. " Delta/Virgin

Comments

DOT-OST-2009-0155-0033 ' RobertWilling, Mark Israel, Byan Keating and Jonathan Orszag, "Measuring

Consumer

BenefitsFrom Antitrust lmmunity for Delta Air Lines and Virgin Blue Carriers", paid advocacy

work prepared

on behalf of Delta and Virgin Blue, DOT-OST-2009-0 155-0033,

appendix.

As the authors

areall members

of the consulting

firm Compass !-execon,

this will be referred

to as "the Compass

Lexecon

study". 8 Delta/Virgin Comments p. 2; Compass

Lexecon

study p. I

### I

Horan, Supplemental

Delta/Virgin

Comments L9 October 20L0

predictions

that the model

actually used in the carriers'

normal course of business.e

Airline QSI models are highly

sensitive

to coefficients

reflecting

the relative

"quality"

of alternative

schedule options (i.e. the extent

to which

consumers

would favor online connections

over ATl, codeshare
or interline

connections)

and the testimony

presented

to DOJ hadbeen

deliberately

rigged to show greater merger benefits than Delta

and Northwest

wouldhave

estimated

in theirown internal studies. TheCompass

Lexecon studies makes no effort

to explain

the coefficients

that drove its QSI

trafficestimates,

and makes

no effort to demonstrate that the coefficients

have any rigorous statistical

basis, or are identicalto

the ones

that Delta

routinely

uses to evaluate

the impacts of competitive

alliance and codesharing

shifts. This data drives allof the subsequent "consumer

welfare"

estimates

andcannot

be accepted

withoutindependent

verification. I The testimony

also fails to demonstrate

that results

were not artificially

distorted

by using the before-and-after

ATI schedule

scenarios

that did not properly

reflect changes olely attributable

to ATl. There is no way

to evaluate

the legitimacy

of these claims with data

on the public

record. Even if Delta has not artificially

manipulated

model coefficients,

the Compass

Lexecon use of QSI model as the foundation

of its "consumer

welfare"

analysis appears fundamentally

flawed. As the study points out,airline

QSI (or related

logit) modeling

of consumer

choice fundamentally

ignores price.1o Compass

Lexecon assumed

some current Qantas and United

passengers

shifted to Delta/Virgin

because it assumed

all passengers

have a greater

preference

for "ATl connections" than theydo for "codeshare non-ATl connections."

But in the real

world this shift would only
occur if the price

offered by Delta/Virgin

to these incremental

passengers

was fully competitive with the prices

paid by highly

marginal

United andQantas

passengers.

The applicants

own testimonyll

suggests

the assumption

is false-DL/VA

already achieve higher fares in markets where they have

competitive

service so the QSI predicted

share shifts might also be false. The marginal

passengers

are flying United because of lower fares, and there is nothing

in this analysis to justify

the claim

that they

would switch solely because of strong

preference

for ATI connections
over regular

codeshare

connections.

The Compass

Lexecon analysis also fails to address

the real world yield management

issues on beyond

gateway

connecting

flights. The QSI-predicted

share shift wouldnot occur

unless the value

of the incremental

Atlanta-Sydney

passenger

was greater than the separate

Atlanta-Los

Angeles and Los Angeles-Sydney

passengers

that they

would displace.

The QSI model explicitly

ignores the possibility

that the marginal

new traffic might be lower value. Thelogic

used by Compass

Lexecon in itsQS|-based

"consumer

welfare"

calculations

violated basic laws of supply

and demand.

lf scheduling

improvements

increase demand for scarce

seats on the applicants'

flights, allother things equal it should

allow them to increase

fares. Yet Compass Lexecon explicitly

assets, without any plausible

supporting

evidence,

that as the applicants

see increased

emand for these

seats they will sell them at lower

fares. 12

' The Year in Review: Economics at the Antitrust Division, 2008-2009, Review of Industrial Organization (2009) v35 o356 r0 Oi alternatively

QSl/logit network planning tools assume

that the marginal

passengers

predicted

to switch from
one schedule

option to another

are paying average.

and not marginal

prices. This directly violated

the logic of all airline revenue management

systems.

Airlinesusing

these network planning

tools are fully aware

of these issues, and do not apply the tools to inappropriate cases as Compass

Lexecon

hasdone here. " Delta/Virgin

comments

p. l0 '' Compass

Lexecon study p.7 Under

certain limited conditions

the increased

emand for these

seats could lead

to lower average

fares, but Compass

Lexecon

hasfalsely assumed

that this would automatically occur underany conditions 

## THoran, Supplemental

Delta/Virgin

Comments 19 October 2010

I All of Compass

Lexecon's

"consumer

welfare"

analysis is based on flawed

competitive

response assumptions.

lf this application

isgranted,

Delta and Virgin will be the only US-Australia carriers offering "true ATl" interline

connections.

lf consumers

actually have a strong preference

for these connections

over existing Qantas-American

"alliance

codeshares

without ATl" asits modeling assumptions

explicitly

claim, then Qantas-American and others will surely

apply to match

these advantages,

and the "consumer

welfare"

gains Compass

Lexecon isclaiming

will be wiped

out. f Compass

Lexecon inappropriately

imits itsestimated

"consumer

welfare gain" to the QSl-estimated traffic shift from Qantas/United

flights to Delta/Virgin

flights. lt has failed to demonstrate

true net positive gains across the entire

market. lt does not show

the offsetting

Qantas/United

losses, or the losses

in other Delta/Virgin

markets where traffic has been displaced

bythe hypothetical

new transpacific

traffic. I The quantified

"consumer

welfare"

gains improperly

conflate alleged gains from increased

nonstop service andalleged

gains from gains

for connecting

passengers

on the existing

capacity base. Nothing in the public

Compass

Lexecon testimony

addresses

the Show

Cause Order concerns

that nonstop benefits cannot be accepted

without clear, convincing

evidence

that Delta

and Virgin wouldincrease

operations

above today's levels solely asa result

of profitable

increased

emand generated

as a direct result of immunity.

These claims must be evaluated

totally separately

from the "improved

connection

quality" claims. I Compass

Lexecon's

use of price elasticity

measures

from a separate,

totally unrelated

studyl3 appears totally inappropriate.

There is no basis

for theirassumption

that estimates

of average price elasticity

across the entire

US domestic

markets based on time series

analysis would accurately

reflect elasticities

for an extremely

narrow category

of marginal

traffic (people highly sensitive

to "trueATl"

versus "alliance

codeshare

without ATl" quality differences)

in a single international

market at a single

point in time where

(as the Show

Cause Order notes) there has been unusually

intense price competition

of late. I The regressions

used by Compass

Lexecon as an alternative

basis for claiming

ATl-driven

price benefits appear totally useless in this context. The approach

appears fundamentally

flawed, and thereis no basis

for the claim

that the coefficient

demonstrates

that changing

the nature

of connecting

service causes consumer

prices to change.

The regressions

assign allobserved
consumer

behavior

differences

to the small

difference

between

"trueonline",

"ATl alliance", "alliance

codeshare

without ATl", "codeshare

but not alliance"

and "traditional

interline" connection

differences.

The study totally ignores huge correlations

between

these categories

and other factors (schedule

competitiveness,

frequent

flyerloyalty,

local market presence,

the level

of price competition)

that are actually driving the observed

behavior.

A regression

based on data from a single

pointin time cannot

be used as evidence

that major

shifts between

these categories
over time actually

led to price cuts in the markets

where the shifts

occurred.

The study's claim of
a statistically

significant

price difference

between

online and true ATI contradicts

the applicants' basic claim that with ATI

these services would be priced

in an identical

manner. The regression results suggest that non-immunized

alliance codesharing

provides

no consumer

pricing benefits relative to traditional

interline connections

which suggests

that the vast

majority of industry codesharing

isof no value

to consumers

. These regressions

are largely

driven by structural differences

between

the North

Atlantic (the onlyplace

where ATI is found) and the Pacific

and Latin markets.

Compass

Lexecon has no basis to claim the regression

coefficients

reflect he

" The study,

Berry, S. and Jia, P., (2008)"Tracing the woes:

An EmpiricalAnalysis of the Airline Industry", NBER working paper 14503

was trying to develop

a very high-level

estimate of the importance

of increased

(aggregate average Domestic

only) price sensitivity

to the declinein aggregate industry financialperformance.

### I

I Horan, Supplemental

Delta/Virgin

Comments 1-9

October 20L0

pricing differences

between

different

connections

that would be observed within markets

with si mila r structura

l/competitive

conditions.

n Twocomments

in the Oneworld

caseto found serious deficiencies

in the regression

analysis that Compass

Lexecon submitted

in that case,

anda more

detailed review might identify many more problems

with the regressions

presented

in this case I The Compass

Lexecon paper fails to acknowledge

(much less address) the Show

Cause Order's

concerns

that measuring

pricing shifts solely attributable

to ATI is very difficult under conditions where othermuch

more powerful

factors (global recession,

major recent competitive

shifts) would tend to overwhelm

any impacts

that alliance

pricing might have

It is especiallV

unreasonable

to expect

hattestimonv

that proposes

a radicallV

newapproach

to ATI benefit claims. and is based

on detailed

statistical

modelins

canbe fullv reviewed

within the timeframe established

bv Order

20L0-9-18

By basing

its Public

Benefit claims on the Compass

Lexecon study, Delta/Virgin

has clearly rejected the Brueckner/Whalen "double marginalization"

hypothesis

that hadbeen

used to justify

claims of connecting

market consumer

pricing gains in allother

casestt, and is proposing

a totally new basis for connect

market pricing gains that is totally inconsistent

with "double

marginalization" based claims. DOT cannot accept he new,

incompatible

Compass

Lexecon based claims without explicitly

acknowledging

that its findings in all other cases were illegitimate. The two approaches

to estimating

connect market pricing gains are mutually

exclusive;

one cannot accept oneapproach

withoutrejecting

the other.

The"double

marginalization"

claims in the original Delta/Virgin

application

and in every

other ATI application

are explicitly

based on the belief that granting

ATI eliminates

tructural

barriers to efficient

interline pricing, and prices

fall automatically

once the barriers

that force

airlines to set inefficiently

high prices are removed.

The Compass

Lexecon paper claims that consumer

pricing benefits in connecting

alliance markets are strictly due to consumer

preferences

for the higher

"quality"

of "trueATl"

connections.

"Double marginalization"

says consumer

behavior

changes because new, lower prices are introduced following

ATI; Compass

Lexecon says consumer

behavior

changes aren't price driven but are because of preferences

for "higher

quality" schedules,

"Double marginalization"

says that beneficial

change occurs when internal

airline pricing staff change their behavior;

Compass Lexecon says prices falldue to marketplace

shifts that internalairline

staff practices

had nothing to do with. I The Compass

Lexecon study falsely implies thattheir explanation isconsistent

with the Brueckner/Whalen

"double marginalization"

hypothesis.lu

Compass

Lexecon present absolutely

no evidence

demonstrating

any logical

or factual

connection

between

the two approaches.

Either they do not understand

the "double

marginalization"

hypothesis

or are trying to deliberately

mislead the Department

given its past rulings The applicants

arecertainly

free to develop

totally new Public

Benefits estimation

approaches

but there is no way

that the legitimacy

of any totally new methodology

could be demonstrated

under the extremely

brief review period established

under Order 20I0-9:J.$

especially

given the many

ra Depaftment

of Justice

Oneworld Comments, DOT-OST-2008-0252-3374, appendix

A and B; Horan Oneworld Comments,

DOT-OST-20

08 -0252-3

389 '' Horan Delta/Virsin Comments. p.2-6. 16 Via references

tJBrueckner/Whalen

claims or "double marginalization" effects at pp 3, 4,6 and 14. 

### THoran, Supplemental

Delta/Virgin

Comments L9 October 201-0

questions

and deficiencies

this comment

has already identified.

The Department

cannot accept the new Delta/Virgin

connect market Public Benefits without accepting

that the "structural interline pricing barriers"

theory used to justify

connect market Public Benefits claims in every other case is wrong. lt isdifficult

o believe

that the Department

could reach such a conclusion within the defined

review period. I The totally new Compass

Lexecon testimony

on connecting

market pricing benefits includes detailed data submissions

filed as confidential

company

data. lt is ludicrous

to assert

hat DOT

or other interested

parties could possibly review the detailed

data and regression

methodology within the week

allowed under the Order.

Inthe Oneworld

case parties had (and

required)

several months to prepare

rigorous rebuttals

to the (seriously

deficient)

Compass

Lexecon statistical analysis presented

in that case.

Parties in thiscase

would require

even more time to thoroughly review the Compass

Lexecon testimony,

as they must

address the legitimacy

of the detailed

data, the statistical

methods,

and attempt to supplant

the longstanding

"double marginalization" approach

with a totally

newapproach

to connecting

market price benefits. I By supporting

a fundamental

change to itsconnecting

market price benefits claims with confidential

data filed at this verylate

date, Delta/Virgin

make it impossible

for any outside party to fully review

the legitimacy

of these claims.

lf DOT and the Applicants

would like

a full, rigorous

review of these radicallv new Public

Benefit claims, DOT mustreopen

the case

and permit

the thorough

review that wouldhave

been possible if these claims had been included

inthe orisinal

application.

lf DOT and the applicants

want a full resolution

of claims

in the L3 October

submission,

the new schedule

must allow for a full review

of the statistical

methodology,

the dataused

in the regression

analysis, the schedules

used in the "before-and-after ATl" comparison,

the coefficients and algorithms

used in the QSI

planning tool, and the fundamental

logic behind the totally

new methodology

linking benefits to consumer

preferences

for "higher

quality" connecting

schedules. There mustbe opportunities to test whether

the statistical

methods

produce similar results using data from other

time periods

and markets,

and theremust befull opportunity to evaluate whether

the proposed

new benefits

hypothesis

should supplant

the incompatible

"double marginalization"

hypothesis

used in allother

ATI cases. Since a full review

would require

DOT to either

explicitly

reject or reaffirm

the "double marginalization"

based claims behind all previous

ATI Public Benefits decisions,

otherparties

that have not yet participated

in this case may have

an interest

in doing so Such a review would require

at least 4 to 6 weeks

from the point

that all interested

parties had full

access to the relevant

data. In establishing

such a review

process, DOT and the applicants

must
ensure that all parties

filing confidentiality

affidavits

have full access

to the relevant

data.

Alternativelv,

the DOT could strike allCompass

Lexecon based Public Benefit claims from the case record, and erant the application

on the basis

that it meets

the Public

Benefits tandards

allother ATI applications

have met

I lf DOT

does not wish to reopen

the case,

the Compass

Lexecon based claims must be stricken,

as it would be impossible

for DOT or any other interested

parties to complete

a full, rigorous

review of these claims within the current

schedule. 

### I

I



## I

### T

Horan, Supplemental

Delta/Virgin

Comments 19 October 2010

Asdemonstrated

above, thereis little

likelihood

that the Compass

Lexecon based claims would survive a full, rigorous

review, thus it is highly

likely that striking

the claims

at this point

would produce the same

effective

result as a full, rigorous

review would. Nothing in the Compass Lexecon based testimony

appears to come anywhere

close to meeting

the burden

of proof of Public Benefits that section

41308(b)

imposes on applicants

eeking antitrust

immunity.

None of the radically

newapproaches

for estimating

connect market pricing benefits have ever been tested using data from other markets

or time periods.

The applicants

have provided

no evidence showing that the statistical

correlation

that they attribute

to "consumer

preference

for higher quality connecting

schedules"

could not be explained

by any of the other,

more powerful

factors that usually

explain consumer

behavior. lf the Department

maintains

the current

case schedule

it is important

hatthe Compass

Lexecon based claims be formally

stricken,

so theycannot

be quoted

as evidence

or precedent

in any future case.

Respectfully

submitted, 

### I

ubert Horan 

### 19 October 20L0

### Horan,

Supplemental

Delta/Virgin

Comments 19

October 2010

CERTIFICATE

OF SERVICE

I herebycertify that I havethis date served the foregoing document on the persons identified below by causing a copyto be sent by electronic mail.


### carl.nelson@aa.com howa rd_kass@usa

i rways.com benja m in.slocum@

usa i rways.com hkamen@coair.com dan.weiss@coair.com j effrey. m a n I ey@u nited.com steve. morrissey@u

n ited. com jhill@dlalaw.com byerlyjr@state.gov todd.homan@dot.gov peter.irvine@dot.gov ch ristopher.

ma ndel @dot. gov sacha.vanderbel

len@delta.com anita.mosner@hklaw.com sophy.chen@hklaw.com merren.mcarthur@vi

rginbl ue.com.au dayna.hall@virginblue.com.au jeff

. morgan@delta.com Jill.ftacek@usdoj.gov



## A--

19 October

2010