BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.

U.S. -Japan Alliance Case ) ) ) Docket DOT -OST-2010-0059

June 29, 2010 PUBLIC ANSWER OF AIR LINE PILOTS ASSOCIATION, INTERNATIONAL

Communications with respect to this document should be served on: Russell Bailey David Semanchik Air Line Pilots Association, International 1625 Massachusetts Avenue NW, Suite 800 Washington, DC 20036 202-797-4086 Russell.Bailey@alpa.org David.Semanchik@alpa.orgPublic Version Confidential Portion Redacted
BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.
U.S.-Japan Alliance Case ) ) ) Docket DOT -OST-2010-0059

PUBLIC ANSWER OF AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
Continental Airlines, Inc., United Air Lines, Inc., and All Nippon Airways Co., Ltd. (collectively, "theJoint Applicants") have applied for a grant of antitrust immunity ("ATI") so that they may implement a number of alliance agreements between the three carriers, including"a highly integrated, metal-neutraljoint venture agreement for the carriage of transpacific traffic (the 'Pacific JV Agreement')." (Application at 2.)' The Air Line Pilots Association ("ALPA"), the designated collective bargaining representative of the nearly 5,000 Continental pilots and the 7,700 United pilots, would support the grant of the requested immunity, if that grantincludes a condition that Continental and United (either separately or together should they merge2) operate a share of the alliance flights over the transpacific and transpolar routes covered by the Pacific

### JV Agreement

1 OnMarch 11, 2010, by Order 2010-3-10, the DOT consolidated the separate applications of All Nippon/Continental/United (Docket DOT-OST-2009-035) and AmericanlJapan Airlines (Docket DOT-OST-2010-0034) into this docket. 2 On May 3, 2010, Continental and United announced an agreement to merge the two airlines. The proposed merger is undergoing reviewby the Department ofJustice.Public Version Confidential Portion Redacted that closely correlates to the share of revenue generated by those flights that they receive under that agreement. DISCUSSION At the heart of the alliance agreements for which the Joint Applicants seek ATI is the Pacific 

### JV Agreement. The Joint Applicants assert that implementation of this agreementwill provide an array ofpublic interest benefits by facilitating an open skies agreement withJapan, and allowing the applicants to become more efficient and effective competitors in the international marketplace. More specifically, the Joint Applicants claim that, among other things, they would be able to benefit consumers by providing lower and more varied fares, adding and improving route and service options, and upgrading their frequent flier and corporate travel agency incentive programs. Some or all of these asserted benefits may indeed result from implementation of the alliance agreements. However, as the Joint Applicants point out, theirjoint venture will foster "metal neutrality," which they define as "a commercial environmentin whichjoint venture partners share common economic incentives to promote the interest of their alliance over their individual corporate interests." (Application at 12). "By pooling resources to improve the overall service offering and sharing the resulting gains and losses, the Joint Applicants will harmonize theirjoint network and become indifferent as to which partner collects the revenue and operates the aircraft on a given 2Public Version Confidential Portion Redacted itinerary
... because metal neutrality eliminates the incentive for a carrier to channel passengers onits own aircraft." (Id.). This aspect of the Pacific

### JV Agreement is a major concern for the pilots of Continental and United. Iftheir employers are indifferent as to whichjoint venture partner operates an aircraft over the routes covered by the Pacific 

### JV Agreement, they might well be indifferent as to which employees operate those services. Taken to its practical end point, this indifference could result in a U.s. carrier party to a revenue sharing arrangement deciding to participate in that arrangement by providing nonflying services such as marketing and doing little or none of the flying. That, in fact, appears to be precisely what United has done in its recently inauguratedjoint venture arrangement with Aer Lingus, where only Aer Lingus operates aircraft over thejOint venture's routes and United derives a significant percentage of the venture's revenue by virtue of the non-revenue services itprovides. United and Aer Lingus Extend TransAtlantic Partnership. The Wall StreetJournal Online, January 23,2009 (Attachment A). "Metal neutral" revenue sharing arrangements are different in a fundamental respect from the traditional code share arrangements that have served as the cornerstone of most alliances to date. Inthe usual code share arrangement, when a carrier places its code on another carrier's flight then sells a ticket on that flight, it only receives modest fees for selling the ticket, such as interline service charges and off-line distribution fees. The vast majority of the revenue derived from the passenger, 3Public Version Confidential Portion Redacted however, goes to the operating airline. Thus, the economic incentive is for an airline to operate and book passengers on (or at least connect to) its own aircraft where it can. With revenue sharing or pooling of the kind proposed here, however, this incentive is eliminated as a participating airline could receive a substantial portion ofrevenue whether it operates the aircraft on a particular route or not. The metal neutraljointventure has become the preferred model for international airline alliances. 

### In fact, the Department appears to be encouraging, if not actually requiring, metal neutrality as a condition of receiving antitrust immunity.3 Yet these arrangements could result in a significant shift ofjobs from U.s. airlines to their foreign alliance partners. The Joint Applicants have not substantively addressed the potential for such a shift. While they state that they"do not anticipate that implementation of the Pacific JV Agreement will have any adverse impact on Continental's and United's employees, or those of ANA", they "have not evaluated potential compensation or protection for such employees." (Application, Appendix B at 16). Despite the Joint Applicants' assertions

3 Order 2008-4-17 at 15 (Show Cause Order in SkyTeam II proceeding); Order 2009-7-10 at 12, 15 (Final Order in Star Alliance proceeding); Order 2010-2-8 at 32-34 (Show Cause Order in oneworld proceeding) (tentatively finding that the oneworld partners had not sufficiently"aligned their economic interests and made theirbest efforts to achieve metal neutrality" and tentatively requiring that they make changes to theirjoint venture arrangement to eliminate this concern). 4Public Version Confidential Portion Redacted that the Pacific

## JV Agreement "should mean more and betterjobs for employees," id., there is no assurance thatjobs will notbe shifted among the alliance partners. In these circumstances, and certainly until there is more experience with how metal neutral arrangements work in practice,' the Department should take steps to

4 The final revenue sharing arrangementbetween the Joint Applicants has notyetbeen developed and can only be developed if the Department grants the requested antitrust immunity. However, in their public interrogatory responses, the Joint Applicants note that they "intend to consider more formal cost sharing arrangements after their initial objectives have been met and they have developed solid 10rL2'-1:errn ""orking PP"llUIX B at

Accordingly, DOT should require the Joint Applicants to request prior approval, on the record, in a public docketed proceeding, of any amendments that would move theirjoint venture towards a cost sharing model, and all interested persons should be provided a reasonable opportunity to comment on that request. 5Public Version Confidential Portion Redacted
ensure that the U.s. carrier participants in metalneutral arrangements perform, at minimum, a reasonable share of the flying covered by the arrangement. The Departmenthas ample authority to do this. The Joint Application is made pursuant to 49 U.s.c. §§ 41308 and 41309. Under Section 41309(b) the Department shall approve an agreement if the agreement "is not adverse to the public interest" and meets other standards in that section. Under Section 41308 the Department, as part of an order under Section 41309, may exempt a person affected by the order from the antitrust laws to the extentnecessary to allow the person to proceed with the transaction approved by the order if such exemption "is required by the public interest." Sections 41308 and 41309 appear in Subpart II ("Economic Regulation") of Subtitle VII ("Aviation Programs") ofTitle 49 of the U.s. Code. In carrying outits duties under Subpart II, DOT is to consider a range of matters as being in the public interest. 49 U.s.c. § 40101. Among these is "encouraging fair wages and working conditions." 49 U.S.c. § 40101(a)(5). For many years the Department and its regulatory predecessor, the Civil Aeronautics Board, used this provision as a basis for placing labor-related conditions on approval of airline business transactions. See, g,g" ALP A v. DOT. 838 F.2d 563, 565 (D.C. Cir. 1988). The purpose of these conditions was to ensure that the public benefits of a particular business transaction were not achieved at the expense ofthe airline workers: 6Public Version Confidential Portion Redacted "[An airline business transaction] presumably involves benefits to the stockholders of the companies that are a party to it. Onbalance, it must also benefit the public as a whole; otherwise we would disapprove it. Very often these benefits to the stockholders and to the public will be at the expense of some of the employees of the companies involved. We think it is only equitable that in such circumstances the hardships borneby adversely affected employees should be mitigated by provisions for their benefit. United-Western, Acquisition of Air Carrier Property, 11 C.A.B. 701, 708 (1950), af£'d, sub nom.. Western Airlines v. CAB, 194 F.2d 211, 213-15 (9th Cir. 1952). ALPA is not proposing that the Department establish a labor protective program in connection with all airline business transactions that might adversely affect U.s. airline employees. However, metal neutral revenue or cost sharing arrangements pose unique and not clearly understood threats to the wages and working conditions of U.S. airline employees. By eliminating the economic incentive for U.s. airlines to fly the routes covered by the revenue- or cost-sharing arrangement, these types ofjoint ventures raise the real possibility that U.S. flying can be seamlessly shifted to foreign airlines to the detriment of U.s. airline workers. In the pastDOT has directed airline workers to resort to collective bargaining to attempt to achieve contractual protections against the consequences of airline business transactions. See,**~.,** Order 86-10-2. But collective bargaining is not a sufficient alternative. Apart from the fact that a novel business transaction may be developed at a time when a collective bargaining agreement is closed and the carrier has no obligation

7Public Version Confidential Portion Redacted to bargain, the collective bargaining agreements that have been set aside or modified in bankruptcyproceedings are legion.5 Here, DOT can only exempt the transaction from the antitrust laws ifrequired to do so by the public interest. In ALP

### A's view the Departmentis required to give meaning to an importantpublic interest factor

-- the encouragement of fair wages and working conditions

-- in order to ensure that whatever consumer or other benefits that maybe derived from metal neutral alliances are not realized at the expense of U.s. airline workers. Attempting to ensure that Continental's and United's employees participate in anyjob growth generated by the Pacific JV Agreement would also be consistent with the principles contained in thejust-signed amendments to the U.s.

- European Union Air Transport Agreement ("the ATA"). The new Article 17 

### bis of the ATA states, among other things, that: The Parties recognize the importance of the social dimension of the Agreement and the benefits that arise when open markets are accompanied byhigh labour standards. The opportunities created by the Agreement are not intended to undermine labour standards or the labourrelated rights and principles contained in the Parties respective laws.

5 For a description ofbankruptcy-induced collective bargaining agreement set-asides or modifications, see,**~** In re Northwest Airlines Corp
.. 483 F.3d 160, 168-75 (2d Cir. 2007); Inre UAL Corp
.. 443 F.3d 565, 568 (7th Cir. 2006); Inre Continental Airlines Corp
.. 901 F.2d 1259,1260-61 (5th Cir. 1990); Teamsters Airline Div. v. Frontier Airlines. Inc.. 2009 WL 2168851 at *8, *9 (S.D.N.Y. July 20, 2009); In re Delta Air Lines. Inc., 359 B.R. 468, 476, 488-89 (Bankr. S.D.N.Y. 2006); In re Mesaba Aviation. Inc.. 341 B.R. 693, 726-27,742-43 (Bankr. D. Minn 2006). 8Public Version Confidential Portion Redacted
The U.s.-Japan Civil Air Transport Agreement does not contain such a provision. However, the objective of ensuring that airline business opportunities created by liberalized agreements notbe used to undermine labor rights and standards should apply with equal force here. Grants of antitrust immunity are predicated on the existence of an open skies agreementbetween the U.s. and the home country of the foreign airline party or parties to the business arrangement for which immunity is sought. See,**~** Order 2010-2-8 at 3. 6 In other words, absent the open access environment created by such agreements, broad revenue/profit/cost pooling or sharing agreements cannot go forward. In the labor article in the U.S-EU ATA, the U.S. has signaled that the effects of airline business activities that are permitted by virtue of liberal agreements on airline labor are an appropriate matter of government concern and, ifnecessary, action.

6 The link between antitrust immunity and an appropriate liberal agreement is inextricable. During the negotiations that led to the December 11, 2009 initialed draft Memorandum of Understanding to liberalize the U.S.-Japan Civil Air Transport Agreement, the Japanese delegation informed the U.S. that "signature on and entry into force of that MOU would need to be precededby a grant of antitrust immunity from the United States for anticipatedjoint application(s) for such immunitybyJapanese airlines(s) and their partner U.s. airlines." Letter from Keiji Takeguchi, Deputy Director-General, Japan Civil AviationBureau, to John Byerly, Deputy Assistant Secretary of State for Transportation Affairs, U.S. Department of State (December 11, 2009). So, in the U.s.-Japan context, a liberal agreement is a prerequisite for AT! and 

### vice versa. 9Public Version Confidential Portion Redacted Accordingly, should DOT approve the Joint Applicants' request for antitrust immunity the Department should place the following condition on that approval: The Joint Applicants will ensure that each U.s. air carrier party's share of the pooled or shared revenues or profits (whichever share is larger) contributed by the nonstop carriage ofpassengers under the Pacific 

### IV Agreement on "Transpacific Routes" as defined in the agreement (Le., between a point in the United States and a point outside the United States on trans-Pacific and transpolar routes), not exceed 130 percent of that party's share of the available seat

. miles operatedby all the air carrier parties over the Transpacific Routes that

contribute to the pooled revenues or profits from such operations over any 12 consecutive months. Finally, as discussed infootnote 4, the possible conversion of the Pacific 

### IV Agreement to a cost-sharing arrangement raises a host ofpublic interest concerns, none of which DOT has addressed in its prior AIl cases or can meaningfully address here in advance of such an arrangementbeing presented to the Department. IfDOT does grant approval of the Joint Applicants' request for antitrust immunity for their proposed revenue-sharing arrangement, the Department should require that the participants in that arrangement seek separate approval, onthe record in a docketed proceeding, with
an opportunity for interested persons to comment, for any new or revised agreement that includes cost sharing.

10CONCLUSION Public Version Confidential Portion Redacted

For the foregoing reasons, the Department should make any approval of the Joint Applicants' request for antitrust immunity subject to the conditions described above.

Dated: June 29, 2010 Respectfully submitted,

# R=i~~7 David Semanchik Air Line Pilots Association, International 1625 Massachusetts Avenue N.W., Suite 800 Washington, D.C. 20036 Russell.Bailey@alpa.org David.Semanchik@alpa.org Counsel for Air Line Pilots Association, Int'l

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# ATTACHMENT A.United and Aer Lingus Extend Trans-Atlantic Partnership

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JANUARY 23, 2009. 3:26 AM. ET 

## United and Aer Lingus Extend Trans-Atlantic Partnership ByQUENTIN FOTTRELLand DANIEL MICHAELS DUBLIN

- UAL Corp.'s United Airlines and Irishflag carrierAerLingus Group PLC Thursday announced anunusual linkupfortrans-Atlanticflights betweentheU.S. andEuropean destinations outside Ireland. The airJiries, which already cooperate on flightsbetweentheU.S. and Ireland, plantobeginwithflightsbetween MadridandWashington, startingin March 2010. Both carrierswill marketthefiights andhave theirflight numbers on theroute. ButAer Lingns will operatetheplanes andwill beprimarilyresponsible for costs, while United willtaketbe lead onmarketingtickets andgeneratingrevenue for the operation. 'l'he arrangement ispossiblebecause oftherecentderegulation ofairline marketing betweentbe U.S. and the European Union, andmarks oneofthefirst times thattwo carriers have allied to target a counttyoutside theirhome markets. Traditionally, airlines were limitedtoflying internationallyonlyfrom theirhomecountty. The U.S.-EU "openskies" treaty, which tookeffectinMarch, allows EU camersto fly to any airportintbe U.S. from any airport intheEU andviceversa. Aer Lingus ChiefExecutive DermotMannion said that, shouldthepartoershipbe successful, United andAer Lingus willform a separatejointventurebasedinEurope within twoyears, withAer Lingus holding a 51% stake. ''These deals areAerLingus'sversion ofconsolidation," Mr. Mannion told a news conferenceinDublin, referring to the

. plannedjointventurewifu United anditsprevious code-sharing arrangementwith JetBlueAirways Corp. inthe U.S.

Afew carriershave tried to take advantage ofthe open-&des treatyon alimitedbasis: BritishAirways PLC has established a subsidiaryiliatnow flies from Paris andAmsterdamto NewYork, andAirFrance-KLM SAbriefly operated flights from London to Los Angeles. Buthathoffuese operationsfacedbeadwindsbecausetbe carriers neededto selltickets inmarketswhere theylacked significantbrandrecoguition or customer allegiance. Mrlingus andUnited aimto overcome iliatproblembyusingUnited's marketingheft inthe U.S. United is America's third-largest airlinebypassengertraffic after DeltaAirLines Inc. andAMRCorp.'s American Airlines. Aer Lingus will use anexisting $350 million orderwith Airbus to supplythreeA330-200Sfor fue partoership

- which includes theroutefrom Washington to Madrid

- as well astwo aircraftfortwo future routes, Mr. Mannion said. Analysts saidthetiming offue deal couldhave been aneffortbyAer Lingus to help thwart a €748million**(~973-7** http://onJine.wsj .comfartic1e/SB123262737933505919 .html?mod=yahoo
_hs&ru=yahoo 1123/2009 

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# I· United and Aer Lingus Extend Trans-Atlantic Partnership

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million) takeover attemptfrom Irish rival Ryanair Holdings PLC. The IrishgovernmentThursday effectively endedthe bidwhen, asAer Lingus's second-biggest shareholder after Ryanair with a 25.1% stake, itrejected Ryanair's bidfor undervaluing Aer Lingus and threatenmg competition inthe Irish aviation market. Ryanair said itthoughtthe governmenthad made thewrong decision, butthat itwould abide bythedecision andfocus ongrowing its existingoperations. Writeto Quentin Fottrell at quentin.fottrell@dowjones.comandDanielMichaelsatdaniel.michaels@wsj.com

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http://onIine.wsj.comiarticlelSB123262737933505919.html?mod=yahoo_hs&ru=yahoo 1123/2009 

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# ICERTIFICATE OF SERVICE I hereby certify that on this day 29th day ofJune, 2010, the foregoing Public Answer of Air Line Pilots Association, International was servedby email on the following persons: sametta.c.barnett@delta.com kquinn@pillsburywinthrop.com bruce.rabinovitz@wilmerhale.com jeffrey.manley@United.com dkirstein@yklaw.com jyoung@yklaw.com donna.kooperstein@Usdoj.gov byerlyjr@state.gov pmurphy@lopmurphy.com anita.mosner@hklaw.com rpommer@atlasair.com gmurphy@crowell.com robert.wirick@aa.com mattwood@sherblackwell.com slachter@lachter-clements.com horanaviation@gmail.com john.allen@faa.gov ldwasko@erols.com tom.fosko@airtransport.cc sascha.vanderbellen@delta.com scott.mcclain@delta.com rbkeiner@crowell.com mrosia@crowelLcom david.heffernan@wilmerhale.com recohn@hhlaw.com carl.nelson@aa.com wkaras@steptoe.com cjsimpson@zsrlaw.com dmendersbee@zsrlaw.com dwight.moore@Ustranscom.mil cgosain@steptoe.com jhill@dlalaw.com bill@mietuslaw.com rsilverberg@sgbdc.com dhainbach@ggh-airlaw.com mcmillin@Woa.com bob.kneisley@Wnco.com robert.land@jetblue.com msinick@ssd.com cdonley@ssd.com anbird@fedex.com dvaughan@kelleydrye.com kevin.montgomery@polaraircargo.com jrichardson@johnlrichardson.com efaberman@Wileyrein.com mroller@rollerbauer.com sophy.chen@hklaw.com nssparks@fedex.com absteinberg@jonesday.com agoerlich@ggh-airlaw.com mgoldman@sgbdc.com lhalloway@crowell.com howard.kass@usairways.com benjamin.slocum@usairways.com jeff.ogar@aa.com prrizzi@hhlaw.com eskraft@jamhoff.com ejames@jamhoff.com mlbenge@zsrlaw.com jim.ballough@faa.gov charters@evergreenairlines.com