PUBLIC VERSION 

BEFORE THE 

DEPARTMENT OF TRANSPORTATION 

WASHINGTON, D.C. 

Joint Application of 

AMERICAN AIRLINES, INC. 

BRITISH AIRWAYS PLC 

FINN AIR OYJ 

IBERIA LINEAS AEREAS DE ESPANA, S.A. 

ROYAL JORDANIAN AIRLINES 

under 49 U.S.C. §§ 41308 and 41309 for 

approval of and antitrust immunity for 

alliance agreement 

Docket DOT-OST-2008-0252 

OBJECTION OF VIRGIN ATLANTIC AIRWAYS 

TO ORDER TO SHOW CAUSE 

Communications with respect to this document should be directed to: 

Jill Brady 

General Counsel 

VIRGIN ATLANTIC AIRWAYS, LTD. 

The Office, Manor Royal 

Crawley, West Sussex RH10 9NU 

United Kingdom 

Anita M. Mosner 

Sophy Chen 

HOLLAND & KNIGHT LLP 

2099 Pennsylvania Avenue NW, Suite 100 

Washington, DC 20006-6801 

Phone: (202)419-2604 

Fax: (202) 955-5564 

Email: anita.mosner@hklaw.com 

Email: sophy.chen@hklaw.com 

Attorneys for 

VIRGIN ATLANTIC AIRWAYS LTD. 

Date: March 30, 2010 
PUBLIC VERSION 

BEFORE THE 

DEPARTMENT OF TRANSPORTATION 

WASHINGTON, D.C. 

Joint Application of 

AMERICAN AIRLINES, INC. 

BRITISH AIRWAYS PLC 

FINNAIR OYJ 

IBERIA LINEAS AEREAS DE ESPANA, S.A. 

ROYAL JORDANIAN AIRLINES 

under 49 U.S.C. §§ 41308 and 41309 for 

approval of and antitrust immunity for 

alliance agreement 

Docket DOT-OST-2008-0252 

OBJECTION OF VIRGIN ATLANTIC AIRWAYS 

TO ORDER TO SHOW CAUSE 

I. INTRODUCTION AND SUMMARY OF ARGUMENT 

On February 13, 2010, the Department issued an order which conferred tentative 

approval and antitrust immunity upon various members of the oneworld alliance, and 

upon the Joint Business Agreement ("JBA") between American Airlines, British Airways 

and Iberia. Order 2010-2-8, "Show Cause Order," or "SCO." Virgin Atlantic is submitting 

these comments on both the underlying decision by the Department to confer ATI upon 

this patently anticompetitive arrangement, as well as the (in)adequacy of the conditions 

that have been proposed by the DOT to mitigate the severe competitive and consumer 

harms threatened by this arrangement. 

What is most striking about the Show Cause Order is the disconnect between the 

findings made by the Department about the challenging competitive conditions on the 

nonstop overlap routes the Joint Applicants serve between the United States and 

London Heathrow, and the determination made by DOT that despite the persistent and 

significant barriers to entry at that airport, the alliance between AA and BA is somehow 
PUBLIC VERSION 

consistent with the public interest and should be approved. For example, the 

Department found that severe slot constraints at London Heathrow continue to persist, 

SCO at 24-25, and that BA and AA would have overwhelming shares in certain key 

overlap markets if the deal were approved, id. at 22-24. Similarly, DOT found that 

connecting services operated via other points in Continental Europe would not be an 

effective form of competitive discipline upon nonstop U.S.-London Heathrow services 

operated by the Joint Applicants. Id. at 16. Despite these findings in the record, the 

Department concluded nevertheless that the agreement would not restrict competition. 

Id. at 28-29. Quite simply, the conclusions that DOT has drawn in the Show Cause 

Order cannot be reconciled with the record before it. 

The Show Cause Order asserts that Open Skies has been a game-changer and 

that the U.S.-London Heathrow market has changed materially since this alliance was 

last proposed. Id. at 12-13. Unfortunately, the record supports the conclusion that the 

market (reflected by shares in key markets) has changed very little, see Virgin Atlantic 

Answer (May 18, 2009) ("VS Answer I") at 9-12, and that the proposed combination of 

the two very largest competitors in the U.S.-London Heathrow market continues to pose 

a significant threat to competition. 

Compounding the troublesome fact that the Department's conclusions are not 

supported by the record is that the remedies proposed by the Department are both 

poorly defined and fall far short of what is needed to even attempt to preserve 

competition in the U.S.-London Heathrow market, the largest and most important 

transatlantic market. Despite the fact that the market shares controlled by AA and BA on 

the U.S.-London Heathrow overlap routes are almost entirely unchanged since 

2001-2002 (when this alliance was last proposed), and that slot constraints at London 

Heathrow continue to persist and will continue to persist for the foreseeable future (DOT 
PUBLIC VERSION 

itself recognizes that this concentration of slots "poses the greatest risk of harm to 

consumers," SCO at 25), the Department nevertheless has proposed that BA and AA be 

required only to divest four daily U.S.-London Heathrow slot pairs, a far cry from that 

necessary to offset the loss of competition and a far cry from the sixteen daily 

U.S.-London Heathrow slot pairs the Department proposed to be divested by the Joint 

Applicants in 2002. See Order 2002-1-12, Docket No. OST-2001-11029 (Jan. 25, 2002) 

("2002 Order"). Also troubling is the fact that the Department would permit the Joint 

Applicants to lease these slots on only a short-term basis, with no clear right of renewal, 

again in flat contradiction of the 2002 decision. Indeed, the proposed slot remedies are 

both vague and ineffectual. As will be explained below, the Department has said little 

about the amount that might be charged for these slots, and what would happen if the 

demand for the slot leases were to exceed supply. Will the Department permit the Joint 

Applicants (or the trustee they appoint) to pick and choose the carriers which will 

compete against them, and the markets in which those slots might be used? The 

unreasonableness of this prospect should be clear. 

The utter inadequacy of the proposed slot remedies is not the sole problem with 

the Show Cause Order. In its review of the JBA, the Department determined that 

several provisions of that agreement retard and discourage, not encourage, the 

introduction of new capacity in the markets covered by the JBA. SCO at 33. Instead of 

drawing the correct inference about the JBA, which is that it reflects the clear intent of 

AA and BA to each lock down their largest competitor and sharply control the 

introduction of new fares and capacity in the market, the Department would merely have 

the Joint Applicants tinker with the wording of the JBA without receiving any assurance 

that these superficial amendments will have any practical effect on the actual operation 
PUBLIC VERSION 

of the alliance. Id. at 37. The Department simply cannot remedy with a Band-Aid a 

gaping hole in the case propounded by the Joint Applicants. 

The hole in the case being advanced by the Joint Applicants is highly material. 

The consumer benefits case propounded in public by the Joint Applicants is predicated 

on the argument that the loss of competition between AA and BA on the U.S.-London 

Heathrow routes is not an issue, because under the JBA the Joint Applicants will have 

strong incentives to expand capacity in the market. See, e.g., Joint Applicants Motion 

for Leave to File and Supplemental Comments (Sep. 8, 2009) at 7; Joint Applicants 

Answer to DOJ Motion (Jan. 11, 2010) at 22. However, a review of the private record in 

this case 

JBA at 5-6 (confidential). 

As Virgin Atlantic will explain in some detail below, the Department's conclusions 

in the Show Cause Order are both unsubstantiated and incorrect, and the remedies 

being proposed to cure those aspects of the deal that even DOT recognizes to be 

anticompetitive are both paltry and poorly conceived. Accordingly, the Department 

should not make final the tentative conclusions set forth in the Show Cause Order, and 

should instead deny the Application in its entirety. Alternatively, if the Department were 

to confer approval upon the alliance, then it must consider more carefully the sufficiency, 

mechanics and efficacy of the remedies it proposes, and issue an amended Show 

Cause Order which addresses the clear defects of Order 2010-2-8 and demonstrates 

how the remedies proposed will be adequate to address the severe competitive and 

consumer harms threatened by this alliance. Interested parties must then be given the 

opportunity to comment on these revised tentative conclusions. In a similar vein, 
PUBLIC VERSION 

interested parties must be provided the opportunity to review and comment upon the 

changes to the JBA that the Joint Applicants propose before any decision is made final. 

II. DISCUSSION 

The Department's tentative approval of the anticompetitive oneworld alliance is 

internally inconsistent on many levels. As will be shown below, the Department has 

determined repeatedly that many of the conditions at Heathrow that were problematic in 

2001-2002 continue to be problematic today, and that the combination of American and 

BA on key U.S.-London Heathrow routes may cause significant increases in market 

concentration. Despite the fact that the Department "recognizefs] Virgin Atlantic's 

concern that the large degree of overlap between American and British Airways both 

eliminates competition and limits the public benefits that are possible from the alliance," 

SCO at 31, DOT has set aside all of its dissonance and has tentatively determined that 

the vision of a three-alliance world would somehow justify approval of this massively 

anticompetitive deal. 

While Virgin Atlantic took no position on the two multi-carrier alliances that 

already have received ATI, the notion that approval of this deal will restore competitive 

"balance" to the market or create new consumer choice is completely illusory. Having a 

world dominated by three large global alliances does not necessarily result in the 

expansion of choice for transatlantic travelers, and in particular U.S.-U.K. passengers 

who represent more than a quarter of all traffic across the North Atlantic. In two of the 

six U.S.-London Heathrow overlap markets at issue in this case, Miami and Boston, 

Virgin Atlantic (a non-aligned carrier) is the sole source of competition to the BA/AA 

combine for travelers in the local market, and in the DFW-London Heathrow market, 

there is no competitive alternative at all. How this can be packaged and sold as an 

"expansion of competitive and consumer choice" defies all credulity. 
PUBLIC VERSION 

A. The Record Clearly Demonstrates the Continued Threat to Competition 

Posed by the Alliance. 

In its Show Cause Order, the Department agreed with Virgin Atlantic on several 

key points concerning the competitive harm threatened by the alliance in the 

U.S.-London Heathrow market. For example, the Department agreed that, despite the 

Joint Applicants' protestations to the contrary, London Heathrow remains a separate 

relevant market for time-sensitive travelers between the United States and London. Id. 

at 19. In addition, the Department agreed that severe slot constraints and barriers to 

competitive entry persist at London Heathrow. Id. at 24-25. The Show Cause Order 

also describes the very significant infrastructure issues (i.e., lack of sufficient runway 

capacity) at London Heathrow that constrain competition. Id. 

Looking next at the specific city-pairs, DOT found that AA and BA would have 

anticompetitive shares on several key London Heathrow overlap routes. Id. at 22-23. 

For example, DOT expressed concerns about the effect of going from three competitors 

to two competitors in the Boston-London Heathrow market. Id. DOT concluded that this 

would result in oneworld gaining a 68% share of bookings (opening up a 41% gap over 

Virgin Atlantic, the next largest competitor). Id. The lack of new entry on this route, 

combined with the lack of a suitable alternative hub to compete effectively with Boston, 

reduces consumers' alternatives if prices rise or service quality falls. Id. Also consistent 

with Virgin Atlantic's arguments, DOT determined that connecting services operated via 

hubs in Continental Europe would not discipline the AA/BA combine's market power on 

these routes. See id. at 16. Indeed, DOT endorsed verbatim Virgin Atlantic's view that 

"although Heathrow attracts a robust share of connecting transatlantic traffic from other 

major European hubs, the converse is not true." Id. Inexplicably, however, the 

Department has proposed to grant ATI despite clear and uncontroverted evidence in the 

record that there will be negative effects in the overlap markets and very few constraints 
PUBLIC VERSION 

on the combined market power of American and BA after immunity is granted, placing 

the interests of the traveling public at very severe risk. 

The record clearly shows that this alliance will reduce competition on routes 

between the United States and London Heathrow, which face unique infrastructure 

constraints. To make matters worse, AA and BA together will control nearly half of the 

Heathrow slots. This one-two punch will render competitive entry at Heathrow virtually 

impossible and ultimately reduce schedule, frequency and route options for consumers 

and increase price. Without a doubt, ATI will allow AA and BA—already the dominant 

carriers on the overlap routes—to consolidate their market power and quash 

competition. 

1. Slots at Heathrow continue to be both scarce and costly. 

DOT has squarely agreed with Virgin Atlantic that London Heathrow is severely 

slot-constrained, stating that "[t]here is ample evidence in the record that Heathrow is 

constrained," id. at 24, and others that have commented in the case have also agreed 

with this finding. For example, BAA Limited (Heathrow's operator) has stated, 

"Heathrow airport is at 99% capacity all the time." VS Answer I at 19 (citation omitted). 

In addition, the U.K. Competition Commission has said, "Heathrow is characterised by 

capacity constraints and excess demand." Id. at 19-20 (citation omitted). ACL has 

made clear that the scheduling constraints at Heathrow are due primarily to lack of 

adequate runway capacity and an annual cap on the number of flight movements (one of 

the conditions placed on BAA's planning and opening of Terminal 5). ACL/BAA 

Response (Jan. 28, 2009) at 3. DOJ's findings confirm that sufficient entry to overcome 

lost competition is unlikely in the overlap markets because of the scarcity of slots, 

particularly at Heathrow. DOJ Comments (Dec. 21, 2009) at 18, 20-21. 
PUBLIC VERSION 

As a result of the airport's capacity constraints, no new transatlantic services 

have been started using pool slots in recent years. ACL/BAA Response at 1, 3. 

Moreover, ACL does not foresee an improvement in this situation, stating in the record: 

"[T]here will be no capacity increase at Heathrow to facilitate new transatlantic services 

before the opening of a 3rd runway in around 2015-2020." Id. at 4. The introduction of 

competitive services, therefore, is entirely reliant upon airlines reallocating their existing 

Heathrow slots to transatlantic service, seeking slots from alliance partners or obtaining 

slots on the secondary market. 

The options for competitive entry at London Heathrow being touted by the Joint 

Applicants are far less robust than advertised. Slots shifts and intra-alliance transfers 

unfairly discriminate in favor of airlines that have large slot holdings (like BA which, as a 

result of its days as a state-sponsored flag carrier, holds a lion's share—41.5% (VS 

Answer I at 25 fig.6.)—of Heathrow slots) or that participate in global alliances (which 

have substantial Heathrow slot holdings as compared to airlines, such as Virgin Atlantic, 

that do not participate in an alliance). Moreover, the Department suggests that that "slot 

shuffling" might address the scarcity of slots, SCO at 24, but ignores completely the 

importance of having the right slots—slots that are suitably timed for transatlantic 

services—which are much harder to come by. 

The Department also wholly fails to recognize the significant opportunity costs 

involved with reallocating slots to introduce competitive transatlantic services. This can 

be done, of course, only by reducing or stopping service on one or more other routes, 

due to capacity constraints at London Heathrow, but the Show Cause Order does not 

take into account this competitive harm. 

The Department also greatly overstates the likelihood of competitive entry, citing 

scenarios which range from the unlikely to fanciful. On the fanciful side of the spectrum, 
PUBLIC VERSION 

DOT posits that bmi could use the slots currently allocated for its Heathrow-Brussels and 

Heathrow-Amsterdam services for transatlantic services, id. at 24, ignoring completely 

the fact that bmi will soon have just one long-haul aircraft in its fleet and is in the process 

of drawing down its Brussels and Amsterdam services to focus on providing slots to 

Lufthansa and its related airlines for their Heathrow flights. For details about bmi's plans 

to end long-haul flying, see http://www.flybmi.com/bmi/en-qb/about-us/informationcentre/press-releases/20091125.aspx. Also, bmi ceased its service to Brussels on 

January 9th and shut down its Amsterdam route on March 27th. See "bmi Suspends 

Services," available at http://www.flybmi.com/trade/en-gb/press/tradenews/200911251200.aspx. Clearly, bmi is not planning to beef up its transatlantic fleet 

and introduce transatlantic services to compete with AA/BA. As to SkyTeam, those 

airlines need their morning arrival slots at Heathrow for existing short-haul services from 

Amsterdam, Paris and Milan, and are in no position to use them for transatlantic service. 

Note also that slot shuffling is either not an option or fails to solve the problem for new 

entrants. 

The last option propounded by DOT in the Show Cause Order—obtaining slots 

on the secondary market—is hardly a solution at all, since slots in the secondary market 

that are suitable for transatlantic service are scarce. ACL reports that the secondary 

market suffers from lack of liquidity, ACL/BAA Report at 1, and that its experience with 

the secondary market has been "that new entrant airlines still need to be flexible about 

the timing of slots and accept commercially suboptimai timings," id. at 2. On the rare 

occasions when slots become available on the secondary market, they command 

astronomical prices. See, e.g., VS Answer I at 21 (describing the $209 million price tag 

Continental paid to obtain just four daily Heathrow slot pairs). 
PUBLIC VERSION 

2. There is little chance of competitive entry in the U.S.-London 

Heathrow overlap markets served by BA and AA. 

The Show Cause Order contains very inconsistent observations about 

competition at Heathrow. On the one hand, DOT has openly acknowledged that the 

severe infrastructure constraints at London Heathrow, combined with the fact that BA 

and American will control nearly half of the slots at the airport after their virtual merger, 

will make new entry at Heathrow "even more difficult." SCO at 2-3. DOJ concluded that 

no truly new entry at Heathrow has occurred since Open Skies, and therefore the 

Department has no reason to assume that future new entry is likely to occur. See DOJ 

Comments at 22. The Department has placed too much emphasis on the introduction of 

Heathrow services that were formerly operated at Gatwick. SCO at 12. While some 

opportunities to obtain Heathrow slots through secondary trading existed immediately 

after Open Skies, the record makes clear that this option has been exhausted at this 

point. See discussion supra Part II.A.1. 

The Show Cause Order correctly concludes that, at this time, barriers to entry at 

Heathrow persist especially (and critically) for well-timed slots that are usable for 

transatlantic services. SCO at 24. This is important because new entry must be timely, 

likely and sufficient either to deter or to counteract the alliance's ability to exercise 

market power. Id. at 11. The Department correctly recognized that, without sufficient 

new entry, the alliance will have the run of transatlantic services at London Heathrow. 

See id. at 25. Combined, AA and BA will hold nearly half of all Heathrow slots (including 

a large share usable for transatlantic service). Id. 

Virgin Atlantic agrees wholeheartedly with the Department that the stranglehold 

BA and American have on Heathrow slots, more than any other factor, will cause the 

greatest competitive and consumer harm. Id. Imagine then, Virgin Atlantic's dismay that 

the Department's response to this great threat was the divestiture of a mere four slot 

10 
PUBLIC VERSION 

pairs. This half-hearted measure does little to address the lost competition or damage to 

the public interest threatened by this alliance. Moreover, the Department has proposed 

to grant ATI even though the record shows, and the Department has found, that new 

entry on some of the overlap routes is unlikely. For example, with respect to Dallas/Ft. 

Worth-Heathrow, the Department expects no new entry. Id. at 23. With respect to 

Chicago-Heathrow, the Department fails altogether to acknowledge evidence in the 

record that demonstrates the conditions on this route—oneworld dominance in both the 

point-to-point and connecting markets—make chances of new entry highly unlikely. The 

Show Cause Order makes no mention at all that, in the face of an immunized AA/BA, 

Virgin Atlantic would be hard-pressed to restore year-round service on its 

Chicago-Heathrow route and could very well be forced to withdraw the service 

altogether. Virgin Atlantic Reply (Jan. 20, 2010) at 8. (That would make 

Chicago-Heathrow a 3-to-2 rather than a 4-to-3 market.) Virgin Atlantic already has 

adjusted its schedule for this summer, so that it will operate its Chicago-Heathrow route 

only for a shortened season (May 27 to September 12). Quite simply, the DOT's own 

findings regarding the likelihood of competitive entry in the overlap markets do not 

support the conclusions drawn in the Show Cause Order. 

In a similar vein, DOT recognizes that approval of the alliance will create in New 

York a chasm between the market shares enjoyed by BA and American and that of its 

next largest competitor, Virgin Atlantic. As DOT observes, "Virgin Atlantic retains its 

second-place position in the market, but instead of an eight point gap .. . it would then 

face a 26 point gap .. . it could be difficult for competitors to match the frequency, 

scheduling, hubbing and capacity-share advantages of the oneworld alliance." SCO at 

23. 

11 
PUBLIC VERSION 

3. Services operated by other alliances via connecting points in 

Continental Europe offer no meaningful competition to the nonstop 

overlap services. 

Heathrow is unique not only because of its extraordinary infrastructure 

constraints, but also because of its geographic location. Because of its location in 

relation to the rest of Europe, connecting services via other European points provide no 

meaningful competition to the nonstop overlap services. VS Answer I at 8-9. The 

Department has agreed with this point. SCO at 16. While many travelers originating at 

other European hubs connect through Heathrow, very few originating in London, or at 

Heathrow, connect via another European hub. VS Answer I at 8-9. In fact, in the airport 

pair markets served directly from Heathrow, only 2% of Heathrow-U.S. passengers 

travel on an indirect service via a third country. Id. Thus, connecting services over other 

European points will provide no meaningful competition to the alliance at Heathrow. 

Astoundingly, despite agreeing with Virgin Atlantic that connecting services will not 

reduce the threat to competition in this case, the Department proposes to grant ATI to 

the alliance. 

The problems created by the lack of effective competitive discipline posed by 

connecting services operated via Europe are compounded by the fact that BA and 

American will not face much market discipline from U.S. hubs either. For example, DOT 

attempts to discount the severe consumer harm threatened by the BA-American 

stranglehold at Miami, noting that many Miami passengers choose to travel to London 

via New York. SCO at 23. However, the Department fails to acknowledge that BA and 

American will also dominate the New York-London Heathrow route once this alliance is 

approved. According to 2009 CAA survey data, at least 22% of all London HeathrowMiami passengers who travel on a one-stop basis flew on the services of either 

American or British Airways. Indeed, as noted earlier, DOT has acknowledged that if the 

12 
PUBLIC VERSION 

alliance were approved, "it could be difficult for competitors to match the frequency, 

scheduling, hubbing and capacity-share advantages of the oneworld alliance," in New 

York and other key markets. Id. at 23. 

B. The Department Ignored Critical DOJ Findings about the Risk to 

Consumers Posed by the Alliance. 

The Show Cause Order pays nothing more than lip service to the concerns DOJ 

has raised about the harm the alliance will cause to consumer welfare in the nonstop 

overlap U.S.-London Heathrow markets at issue in this case. Ignoring the unique 

conditions involved in this alliance (i.e., extraordinary market share and limited new entry 

at London Heathrow, and lack of meaningful competition from connecting services at 

other European hubs), the Department has concluded that the benefits observed in other 

alliances will materialize here. DOJ, however, has made clear that the Applicants have 

overstated the potential benefits of the alliance, see DOJ Comments at 23-28, and the 

Joint Applicants' own fleet plans would indicate that the possibility for service growth is 

not as great as stated. See Virgin Atlantic Answer (Sep. 17, 2009) ("VS Answer II") at 5. 

DOT posits that past alliances—such as Northwest/KLM, SkyTeam and Star— 

have yielded pro-consumer results. SCO at 22. The Show Cause Order also implies 

that consumer benefits will grow over time as AA and BA take advantage of immunity to 

deepen the integration of their networks. Id. at 22 (asserting past experience with other 

immunized alliances—e.g., United/Lufthansa, Delta/Air France and Northwest/KLM—as 

the basis for expecting oneworld to provide new direct routes, increased frequencies, 

greater capacity on hub-to-hub and other routes linking the airlines' networks and 

associated increases in passenger volumes). The record in this case, however, is 

completely devoid of any evidence to support these outcomes. 

As a preliminary matter, this alliance is quite different in nature and scope from 

the Star and SkyTeam alliances, as those alliances are centered at European hubs 

13 
PUBLIC VERSION 

which permit new entry, whereas Heathrow is effectively closed to new competition. 

DOT ignores the fact that Heathrow's slot constraints make it impossible to add 

significant new transatlantic frequency without at the same time reducing short-haul 

frequencies, thereby reducing connecting feed. See VS Answer II at 3-4. Without this 

connecting feed, the supposed consumer benefits that AA and BA claim will materialize 

are nothing more than a fiction. 

In addition, DOT has concluded that the alliance will increase capacity in order to 

accommodate connecting passengers and thereby provide consumer benefits in the 

form of competitive fares for both local and connecting passengers. SCO at 24. This 

conclusion, however, ignores unrebutted evidence in the record that shows BA intends 

to manage capacity downwards in the coming years. See VS Answer II at 5. Since BA's 

plans are to down-gauge and down-size its fleet rather than to grow it, the Department 

has no basis for its conclusion that the alliance will produce any of the consumer 

benefits for connecting passengers that the Joint Applicants claim. 

Moreover, as discussed more fully below, there is nothing in this record to show 

that the track record of Star and SkyTeam for creating new transatlantic capacity is in 

any way applicable here. In fact, the record contains evidence—in the form of provisions 

the JBA |^—tha t supports the 

counterargument. 

C. The Department Correctly Recognized Some of the Threats to 

Competition Posed by the JBA. 

In its Answer to the Joint Application, Virgin Atlantic noted that, despite the 

claims of the Joint Applicants to the contrary, the JBA does not create any meaningful 

incentive for the parties to expand capacity on routes covered by the joint venture. VS 

Answer I at 72. Indeed, Virgin Atlantic demonstrated that several of the provisions of the 

JBA created precisely the opposite incentive. Id. 

14 
PUBLIC VERSION 

Apparently the Department has agreed with the basic thrust of Virgin Atlantic's 

argument, and has tentatively determined that the "terms [of the JBA] permit a partner to 

act in its own economic interest, even if it means preventing the others from bringing 

new products and services to market if there is a demand." SCO at 33. Indeed, DOT 

goes on to observe that "the record does not yet show that the applicants have aligned 

their economic incentives and made their best efforts to achieve metal neutrality...." Id. 

Having gotten the first part of the analysis right, and having recognized that this 

entire arrangement is in place so that BA and AA can "warehouse" its largest competitor, 

DOT there draws the precisely wrong inference from these findings. The correct 

inference to be drawn is that the agreement as initially drafted reflects the clear intent to 

rein in the expansion of capacity and control pricing on key transatlantic routes. Instead 

of acknowledging the parties' true intentions and disapproving the application outright, 

the Department instead has given the Joint Applicants a "mulligan"—an opportunity to 

alter their agreement to properly align their commercial incentives. ("[W]e tentatively find 

that it is necessary for the applicants to make changes to the JBA to eliminate these 

concerns." Id. at 34.) 

With all due respect, the rewrites suggested by the Department are akin to 

recommending that a Band-Aid be placed on a gaping wound. While the Department 

would like to see the parties govern their alliance on the basis of "consensus," the fact is 

that the very structure of this alliance, which is defined by a high degree of overlap 

between heavily entrenched competitors, is entirely different from the largely end-to-end 

agreements that the Department previously has reviewed. Moreover, while the current 

Department's proposed requirement that the parties govern by "consensus" would 

15 
PUBLIC VERSION 

appear still to give 

In a similar vein, the Department has taken issue with provisions of the JBA 

require ^^^^^^^^^^^^HHHHHHBHBI^^^^Hi^ l 

note the H^^HI^^^^^^^^HHHHHiiliii^^^^H SCO 

(confidential). DOT notes that if 

Id. While the Department's observation here 

about the operation of the JBA is entirely correct, the fix to this most fundamental 

problem with the JBA that DOT proposes is entirely inadequate. Merely asking the 

to remove references to ^^HI^^Hil^^^^HHH^^^^^^^ H

 wi" 

not suddenly ensure that British Airways will permit the introduction of either new 

services or price discounting under a new "consensus" governance structure where all 

Given the fundamental nature of the concerns raised by the Department here, 

and the fact that the nature and structure of the JBA is absolutely dispositive of the 

question whether this proposed alliance will produce any alleged public benefits, the 

Department must require the Joint Applicants to re-submit their revised JBA under seal 

and give interested parties the opportunity to comment on the proposed revisions, as 

these materials will be critical to any decision by the Department to change its tentative 

view that the JBA actually inhibits the introduction of new services and the growth of 

capacity of Heathrow, which are the factual predicates for all of the alleged benefits that 

the Joint Applicants assert will be created as a result of the alliance. 

16 
PUBLIC VERSION 

D. The Remedies Proposed by DOT Are Clearly Inadequate to Counter the 

Severe Consumer Harm Threatened by The Alliance. 

The Department has proposed to apply only a single remedy in this case, which 

is the requirement that the Joint Applicants make just four daily U.S.-London Heathrow 

slot pairs available for lease by competitors. Two pairs of these slots would be 

earmarked for service in the Boston-London Heathrow market, and just two pairs could 

be used at other U.S. gateways. 

For reasons that will be explained below, the remedies proposed by the 

Department are flatly inadequate to remedy the acknowledged competitive and 

consumer harm that arises from approval of this alliance. As Virgin Atlantic argued in its 

Answer to this application, the Department should apply a wider spectrum of remedies in 

this case, such as the requirement that British Airways not unfairly restrict the access of 

its competitors to its beyond-Heathrow network, and that checks be placed on its 

considerable market power over corporate customers. VS Answer I at 67, 82. Virgin 

Atlantic is especially disappointed, however, that the Department declined to follow the 

recommendation of the Department of Justice to carve out from the grant of immunity 

the hub-to-hub nonstop overlap markets in which competitive entry is unlikely. 

Moreover, the fact that the Department has permitted the parties to enjoy immunity in 

these markets even before they implement their joint venture agreement is squarely at 

odds with settled precedent. While Virgin Atlantic took no position on the Star Alliance 

A++ application, Virgin Atlantic notes that DOT refused to release the parties in that case 

from their carve-outs until such time as they implemented their joint venture, Order 

2009-7-10, Docket OST-2008-0234 (July 10, 2009), at 27 & app. A n.18, which is 

inconsistent with the position the Department has taken here. 

17 
PUBLIC VERSION 

1. DOT'S Proposed Slot Remedy Lacks Any Teeth. 

The Department has determined that the Joint Applicants should be required to 

lease four pairs of slots to parties which wish to initiate or expand service in the 

U.S.-London Heathrow market. Two pairs of slots are earmarked for services between 

Boston and London Heathrow, and two pairs of slots can be used in any market a 

competitor or prospective competitor chooses. The only constraint on this award is that 

these slots cannot be leased to any member of the oneworld alliance. The slots may be 

leased for a ten-year term and must be for times that are suitable for U.S.-London 

Heathrow services. SCO at 27. 

As Virgin Atlantic has observed and as the Department has confirmed, access to 

London Heathrow remains highly constrained. See discussion supra Part II.A.1. 

Indeed, the combined BA/AA U.S.-London Heathrow market shares in this case remain 

virtually identical to where they were in 2002 (well before the conclusion of the U.S.-EU 

Open Skies Agreement), VS Answer I at 9-12, which underscores the lack of fluidity of 

this critical market. 

Given the almost completely static nature of BA and AA's share of U.S.-London 

Heathrow overlap markets, Virgin Atlantic is unable to understand how the Department 

can determine that the parties should only be requested to lease four daily pairs of 

Heathrow slots to competitors so that they can market competing services to alleviate 

the loss to competition posed by this alliance, when the Department determined that the 

divestiture of 16 daily pairs was required just a few years ago. See 2002 Order. The 

number of overlapping U.S.-London Heathrow city pairs is the same, and the degree of 

dominance of AA and BA on these routes has either remained static or grown. VS 

Answer I at 9-12. Yet the Department would turn a blind eye to these conditions, and 

offer only the barest of remedies to protect the consumer interest. 

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The proposed slot remedy is so small as to be virtually meaningless. The 

Department has determined that two pairs of slots to be divested must be used for 

Boston-London Heathrow service, noting that the "[u]nique structural, geographic and 

demographic factors raise competitive concerns in this market." SCO at 23. The 

Department correctly notes that there is almost no likely competitive discipline to be 

placed on BA and American in this market. Given this observation, Virgin Atlantic is 

puzzled why the Department then ignores the fact that BA and American would together 

offer sjx daily frequencies on the Boston-London Heathrow route, which would place any 

carrier which entered the market with only two frequencies at an automatic and severe 

frequency disadvantage. New entrants should be given the opportunity to compete 

effectively against their entrenched competitors if they are to have any chance of 

success at all. 

In a similar vein, earmarking only two pairs of slots to remedy "diffuse negative 

effects in the remaining U.S.-U.K. overlap markets," id. at 23, beggars belief, especially 

since there are five such markets other than Boston-London Heathrow, which means 

that in the event a new entrant carrier were inclined to compete against the BA-American 

combine in all of these markets, it would not have the slots to do so. Moreover, making 

"onesie" slot pairs available for use in large markets is not much of a remedy at all, since 

many of these markets are quite large, and will be served with multiple daily frequencies 

by the Joint Applicants. 

Indeed, DOT seems on certain levels to recognize that some of the harm 

threatened by this alliance is beyond remedy. For example, DOT recognizes that the 

combined BA/AA share on the Dallas-London Heathrow will be 100% if this alliance is 

approved, and that there is no likelihood of competitive entry in this market in the 

absence of hub competitors. Id. Instead of doing the proper thing and carving this 

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market out from the grant of immunity, the Department dismisses out-of-hand the threat 

this monopoly poses to consumers in the local DFW-London Heathrow market on the 

grounds that the market is relatively small and consumers have multiple connecting 

options. Id. The statute does not have a de minimis exception to its definition of 

consumer harm. 

Virgin Atlantic also disagrees with the Department's view that the small number 

of slots it proposes to make available will be sufficient to remedy "diffuse" competitive 

harm in other markets that it has noted. For example, Virgin Atlantic faces the threat of 

competing against a strong American-BA duopoly not only in Boston, but also in Miami, 

where Virgin Atlantic would be offering only a single frequency in this hub-to-hub market 

against the three daily frequencies operated by BA and American. Moreover, Virgin 

disagrees with DOT'S apparent view that the Chicago-London Heathrow market is not 

under competitive threat. As Virgin Atlantic previously has noted, it no longer is a 

year-round competitor in this key market, having found it very difficult to compete in a 

market with mega-hubs at each end of the route. Virgin Atlantic Reply at 7-8. Thus, if 

the de facto merger will be approved, there will be an effective duopoly in this market 

that Virgin Atlantic simply cannot challenge. 

The slot remedy proposed by DOT is inadequate not only because it fails to 

make a sufficient number of slots available to would-be or actual competitors, but also 

because the mechanics of the remedy may also be unworkable. Whilst the Department 

appears to indicate that some third party may be appointed to assist in the administration 

of the slot remedy, SCO at 27, the role this individual will play is far from clear. For 

example, what would happen if demand for the slots that may be used at any gateway 

were to exceed supply? For example, if three carriers each were to seek at least a pair 

of these slots, how would the trustee decide to allocate these slots? Would these slots 

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be allocated on a first-come first-served basis, be awarded to the highest bidder, or will 

some other type of criteria be applied? Would these slots be merely functionally usable 

or would they be commercially viable to compete with the services of BA and American? 

Will American and BA be aware of the markets for which these slots may be used, and 

will they be permitted to influence the trustee's decision? 

As the foregoing questions should help to make clear, the proposed remedy is 

both poorly defined and raises a very material risk that the public interest will be 

compromised. Simply put, the Department, not BA and American (or their appointee), 

should determine the party that would create the largest public benefits through the use 

of these slots. Along similar lines, what if demand for slots to serve Boston were to 

exceed supply? 

There are further problems with the proposed slot remedies. Although DOT says 

that the slots that are made available for lease should be for "times usable for 

transatlantic services," id. at 24, the Department made no effort to define this term. As 

Virgin Atlantic has noted in its pleadings to the Department, the window of time for a 

commercially attractive and viable U.S.-Heathrow service is rather narrow, with financial 

performance of the routes declining as flights are moved off that peak. See, e.g., VS 

Answer I at 21-24. Virgin Atlantic is troubled by the possible distinction between slot 

timings that are merely functional and those which are commercially desirable. 

Virgin Atlantic's concern on this score are supported by the DOJ comments filed 

in this case. DOJ expressly noted that "Heathrow arrival slots in the 6-10 am window 

are very important for attracting high yield business traffic, particularly for the East Coast 

markets." DOJ Comments at 21 n.58. In Virgin Atlantic's view, the critical window is 

even narrower. Accordingly, Virgin Atlantic would urge that slots made available by 

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British Airways and American be in the pre-8-20 a.m. period and in the slot hour 

requested by the applicant. 

Another question triggered by the Show Cause Order goes to the adequacy of 

the leasing remedy itself, and the amount that the Joint Applicants may charge for such 

leases. Virgin Atlantic's view is that a short-term lease of Heathrow slots is no remedy at 

all. Slots should be divested without compensation. The introduction of new 

transatlantic routes or frequencies involves costs and risks that are sufficiently high to 

call into question whether the service could be profitable before the expiration of the 

lease term. The Show Cause Order is silent on the question as to whether these leases 

must be renewed upon the expiration of their initial term. 

Recently, in response to a petition by Delta and US Airways to exchange slots at 

the highly constrained Washington Reagan National (DCA) and LaGuardia (LGA) 

Airports, the Federal Aviation Administration determined that the airlines would have to 

dispose of 14 pairs of slots at DCA and 20 pairs of slots at LGA, in order to remedy the 

anticompetitive effects of their request. 75 Fed. Reg. 7306, 7307 (Feb. 18, 2010). The 

FAA determined that complete divestiture, as opposed to mere leasing, was necessary 

in order to be an effective remedy against the dominance of the carriers at those 

airports. Id. at 7310. It is unclear why relatively short-term leasing of slots is a sufficient 

remedy in this proceeding, when the FAA has determined that only complete divestiture 

of slots is appropriate to counter a similar competitive threat elsewhere. 

DOT seems to justify its reliance on leasing in its apparent expectation that 

carriers will be able to adjust their LHR slot portfolios over time. SCO at 27. This 

expectation is misguided. Given that a new runway at Heathrow will not be built by 2020 

(the likely expiration date of a potential lease term), slots will continue to remain very 

scarce for the foreseeable future, which means that the ability to find acceptable 

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PUBLIC VERSION 

replacement slots for lease or purchase is by no means assured. Given this reality, 

might a carrier be reluctant to make the huge investment associated with mounting a 

new service to Heathrow when it knows it might be vulnerable to losing those slots just 

when its investment is beginning to bear fruit? The Department must address this clear 

deficiency. 

Likewise, the Show Cause Order is conspicuously silent on the price that the 

Joint Applicants might demand for their lease for slots to third parties. Virgin Atlantic 

strongly objects to the requirement that any quantum of compensation for these slots be 

paid at all. (After all, this was not the case in the 2002 Order.) Putting that aside, Virgin 

Atlantic also is concerned about the amount of compensation to be demanded for such 

leasehold interests. Whilst the Department states generally that "we expect the 

compensation to be at such a level so as to attract prospective new entrants by lowering 

the barriers to entry below where they are today," that standard is very vague and does 

not provide much guidance to the party who will be charged with administering the slot 

remedy, or to the parties seeking to lease such slots. In addition, this remedy is plainly 

inequitable, as it creates the opportunity for a windfall reward to Joint Applicants. Not 

only would a competing carrier have to bear the massive costs and risks associated with 

starting new service, but it would also have to pay compensation to the carriers whose 

dominance has created the competitive and consumer harm in the first place. 

Whilst Virgin Atlantic strongly believes that this Application should be 

disapproved outright, the Department simply cannot implement the slot remedy as 

proposed in the Show Cause Order. In addition to making more slots available, 

following are some minimum steps to mitigate the deficiencies of the proposed remedy: 

• Slots with grandfather rights should be divested by the Joint Applicants 

without compensation. Compensation would disincentivize carriers from 

applying for slots, and American and BA should not be placed at an 

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unreasonable advantage by competing against carriers which had to engage 

in a "bidding war" in order to do so. 

• Slots should be divested completely, as leasing—especially short-term 

leasing, as DOT has proposed—would not be sufficient because of the 

significant risks and costs involved in launching competitive service. 

• The process and procedures for selecting a new entrant or expanded 

competition from an existing operator to receive divested slots should be 

transparent and open to all non-oneworld airlines. 

• The process should follow a strict notification, application and decision 

procedure. The identity of the applicant and the route(s) on which they are 

applying for slots should remain anonymous. Otherwise, BA/AA/IB would 

have a longer time to consider its competitive reaction, and could potentially 

choose to release slots least useful to the specific competitor on a specific 

route. 

• When allocating rights on capacity constrained routes, the purpose of the 

process should be to ensure that a scarce essential resource is allocated in 

the most pro-competitive way. To achieve a competitive outcome, the 

criteria for any decision on the recipients of the slots should include the 

fitness (financial and operational) of the proposed operators, their existing 

competitiveness against the parties in areas such as frequency, capacity, 

product, service, distribution, ability to compete for time-sensitive travelers 

and their ability to introduce new services in an acceptable timeframe. 

III. CONCLUSION 

The Department has proposed to approve an agreement which threatens severe 

competitive and consumer harm. Although one of the primary justifications given for this 

decision is that it is needed to preserve "parity" amongst the various multicarrier airline 

alliances, the fact is that approval of this deal will distort competition, not restore it. 

There are critical distinctions between this alliance and those which have 

preceded it. None of the other alliance cases centered around an airport which is closed 

to new growth. Whilst DOT and DOJ reach different conclusions about the alliance, they 

agree on at least one thing—that entry at Heathrow can be very difficult and costly. As 

DOJ observed, "[e]ntry [in certain overlapping U.S.-London Heathrow routes] is unlikely 

because slots at Heathrow—the most attractive London airport for a potential entrantare difficult to obtain." DOJ Comments at 18. Similarly, DOT has determined that 

"[t]here is ample evidence in the record that Heathrow is constrained." SCO at 24. This 

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overwhelming barrier to entry was not a factor in either the Star or SkyTeam 

applications. 

In the event the Department were to adopt the view that approval of this alliance 

is required on aeropolitical grounds, or on the basis that alliance consolidation is 

somehow "inevitable," and must be fostered, it should come out and say so. DOT 

should then apply its new policy evenhandedly to all future applications that may follow 

this one. Whilst it is not clear that this position has previously been supported under the 

relevant statutes, at least everyone can be clear about the rules of the road moving 

forward. 

The Department has a statutory mandate not to maintain "parity" amongst 

alliances, but to preserve competition and approve only those alliances which provide 

tangible and important public benefits. While the Joint Applicants may argue to the 

contrary, this deal creates few (if any) of those benefits, and the threatened harm to 

consumers is quite clear. Indeed, the JBA—the very core of this alliance—was designed 

not to incentivize the expansion of capacity and the offering of discount fares, but to 

tightly clamp such activities. Given the very nature of this deal, the Joint Application 

must be denied. However, in the event the Department were to issue an approval of this 

Application, it must strengthen dramatically the remedies imposed to mitigate the severe 

threat to consumers posed by this alliance. 

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PUBLIC VERSION 

/ 

Reswectfiilly submitted, 

/ 

/ Anita M. Mosner 

Sophy Chen 

HOLLAND & KNIGHT LLP 

2099 Pennsylvania Avenue NW, Suite 100 

Washington, DC 20006-6801 

Phone:(202)419-2604 

Fax: (202) 955-5564 

Email: anita.mosner@hklaw.com 

Email: sophy.chen@hklaw.com 

Attorneys for 

VIRGIN ATLANTIC AIRWAYS LTD. 

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PUBLIC VERSION 

CERTIFICATE OF SERVICE 

I hereby certify that I have this date served the foregoing document on the persons 

identified below by causing a copy to be sent by electronic mail. 

anbird@fedex.com 

andrew.forman@cwt.com 

aserranzana @ geclaw.com 

benjamin.slocum@usairways.com 

bill@mietuslaw.com 

bkeiner@crowell.com 

blabow@omm.com 

bob.kneisley@wnco.com 

bruce.rabinovitz@wilmerhale.com 

byerlyjr@state.gov 

carl.nelson @ aa.com 

cdonley@ssd.com 

cgosain@steptoe.com 

cjsimpson@zsrlaw.com 

cwilson@omm.com 

david.heffernan@wilmerhale.com 

df isher® kelleydrye.com 

dhainbach@ggh-airlaw.com 

diarmuid.ryan@hammonds.com 

dkirstein@yklaw.com 

donna.kooperstein @ usdoj.gov 

dvaughan @ kelleydrye.com 

dwight.moore@ustranscom.mil 

ebailey@wileyrein.com 

efaberman@wileyrein.com 

gmurphy@crowell.com 

howard_kass@usairways.com 

james.garzia@apgnet.com 

jashetaylor@gibsondunn.com 

jeff.ogar@aa.com 

jeffrey.manley@united.com 

jennifer.trock@pillsburylaw.com 

jhill@dlalaw.com 

jill.ptacek@usdoj.gov 

jim.ballough@faa.gov 

jrichardson@johnlrichardson.com 

julie.oettinger@united.com 

jyoung@yklaw.com 

karine.faden@freshfields.com 

kevin.montgomery@polaraircargo.com 

konstantinos.adamantopoulos @ hammonds.com 

kquinn@pillsburylaw.com 

lachte r @ starpowe r. net 

leslie.abbott@wnco.com 

lhalloway@crowell.com 

libowd@sullcrom.com 

mamaila@airfrance.fr 

mchopra@jamhoff.com 

mcmillin@woa.com 

mgerchick@gerchickmurphy.com 

mgoldman@sgbdc.com 

mholland@condonlaw.com 

mroller® rollerbauer.com 

mrosia@crowell.com 

msinick@ssd.com 

npeterson@wileyrein.com 

paul.jasinski @ ba.com 

paul.yde@freshfields.com 

peter.irvine@dot.gov 

pmurphy@gerchickmurphy.com 

pmurphy@lopmurphy.com 

prrizzi@hhlaw.com 

pruden@asta.org 

rbkeiner@crowell.com 

rclayman@geclaw.com 

recohn@hhlaw.com 

rick.rule@cwt.com 

robert.land@jetblue.com 

rsilverberg@sgbdc.com 

russell.bailey@alpa.org 

sametta.c.barnett@delta.com 

sami.sarelius@finnair.fi 

sascha.vanderbellen @ delta.com 

scott.mcclain @ delta.com 

sllunsford@fedex.com 

thomas.bolling@coair.com 

tmuris@omm.com 

todd.homan@dot.gov 

wkaras @ steptoe.com 

Sophy Chen 

March 30, 2010 

#9245594_v13