BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.
) Application of ) ) AVIATION SERVICES, LTD. ) DOCKET DOT-OST-2010-0190* (d/b/a FREEDOM AIR (Guam)) ) ) for a Certificate of Public Convenience ) and Necessity (Interstate ) Scheduled Service) )

REPLY OF AVIATION SERVICES, LTD. (d/b/a FREEDOM AIR (Guam)) TO ANSWER OF AIR LINE PILOTS ASSOCIATION AND MOTION TO STRIKE

Communications with respect to th is document should be sent to: Gregory P. Cirillo Wiley Rein LLP 7925 Jones Branch Drive McLean, Virginia 22102 Ph: 703-905-2800 Fx: 703-905-6701 E: GCirillo@wileyrein.com

November 2, 2010
* A substantively identical Reply and Motion to Strike has been filed in the related docket DOT-OST-2010-0153.1 BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C.
) Application of ) ) AVIATION SERVICES, LTD. ) DOCKET DOT-OST-2010-0190 (d/b/a FREEDOM AIR (Guam)) ) ) for a Certificate of Public Convenience ) and Necessity (Interstate ) Scheduled Service) ) )
REPLY OF AVIATION SERVICES, LTD. (d/b/a FREEDOM AIR (Guam)) TO ANSWER OF AIR LINE PILOTS ASSOCIATION AND MOTION TO STRIKE
On October 22, 2010, the Air Line Pilots Association (“ALPA”) filed a Motion for Leave and Answer to the application of Aviation Services, Lt d. (d/b/a/ Freedom Air (Guam)) (“Freedom Air”) in the above-cap tioned matter. Freedom Air filed its application for Certificate of Public Convenience and Necessity on July 28, 2010 (nearly three months prior to ALPA’s answer) seeki ng a determination of its fitness to conduct interstate scheduled air transportation. 1 In connection with its foreign and interstate applications, on September 13, 2010, Freedom Air received an Information Request (the “DOT-IR”) from Vanessa R. Balgobin of the Department’s Air Carrie r Fitness Division. Freedom Air filed a response to the DOT-IR on October 4, 2010. Freedom Air herein responds to ALPA’s answer, and moves to strike ALPA’s answer as untimely. Pursuant to the Depart ment’s procedural re gulations, interested

1 On June 14, 2010, Freedom Air filed a parallel appli cation for a determination of its fitness to conduct foreign charter air transportation. See Docket DOT-OST-2010-0153.2 persons have 21 days from the filing date of an application to submit answers in support of or in opposition to authority requested. See 14 CFR § 302.204(a). To the extent that interested parties may respond to amended ap plications, Freedom Air argues that it did not amend its application on October 4, 2010, but rather provided the Department with an answer to its information request. As such, ALPA’s October 22, 2010 answer was submitted well past the 21 day window that it had to respond to Freedom Air’s July 28, 2010 application and should not be accepted by the Department in this proceeding. Freedom Air believes that the issues ha ve been adequately briefed and supported by its application and responses to Department inquiry, but feels co mpelled to reinforce its positions in response to AL PA’s answer. In short, based on the following points, and applying the governing law, we see no basis to conclude that the proposed two-aircraft charter operations somehow alters the citizenship of Freedom Air.

1. All Objective Ownership, Management and Voting Control Standards are Met

. Freedom Air is 100% owned by U.S. citizens and nothing in the pending applications will change that. Senior manage ment and the entire board of directors is comprised of U.S. citizens. There are no actual or potential equity or debt instruments in play that will or could affect any change in ownership or voting c ontrol. Thus the only remaining analysis, for citizenship purposes, is that of “actual control.” The absence of any ownership, voting power and management con cerns is, itself, a relevant consideration and part of the “totality of the circumstances ” to be viewed in the Department’s “actual control” analysis. 2

2 Fly Micronesia, Ltd. is an entity formed in Hong Kong making it ineligible to be a U.S. citizen. However, it is 80% owned by a single individual who is a U.S. citizen. Fly Micronesia prefers to maintain flexibility3 2. Freedom Air is a Successful, Free-Standi ng Airline and will Remain so After this Process is Concluded

. The specific operations in question (chart er operations with two 737 aircraft) will represent only a portion of Fr eedom Air’s overall operations, and merely an addition to those operations. Freedom Air has operated ai rcraft in scheduled service under Part 121 and those airline operations will continue regardless of the disposition of the pending application. The 737 charter operations have been structured such that the existing operations of Freedom Air will remain in place and viable without regard to the 737 operations. Any analysis of how the propos ed charter operations might influence the citizenship of Freedom Air must assess the entire, resul ting operation.
3. The Financial and Operational Role of Fly Micronesia, Ltd. does not Constitute Actual Control

. The operational and financia l role of Fly Micronesia doe s not rise to the level of “actual control” of Freedom Air and it, in fact , represents a rare opportunity for a U.S. air carrier to employ the passive capital of a nominally “foreign” investor to increase the U.S. carrier’s operating capabilities in a geographic area in need of additional transportation and poised for substantial growth, perhaps explaining the unusual competitive resistance on this docket. a. The operational relationship be tween Freedom Air and Fly Micronesia (which is solely with respect to the 737 charters) is entirely consistent with DOT interpretations on citizenship, and comparab le to the relationshi p between a network

to raise capital from non-U.S. sour ces to expand operations. If the Department determines that the citizenship of the shareholders of Fly Micronesia is re levant to its determination, Freedom Air is willing to accept reasonable conditions relating thereto and w ill provide supplemental information as needed.4 airline and its regional partners, or a public charter direct ai r carrier and the public charter operator, and is essentially an ACMI (air craft, crew, maintenance and insurance) relationship as assessed in the citizenship examination of DHL Airways, Inc. (Astar). 3 The allocation of marketing, sales and sc heduling responsibilities does not cede operational or strategic control of flight operations. The Depa rtment faced this issue in the Astar decision and found that the ability of a non-U.S.-citizen to control as much as 90% of the airline’s workload, revenue base and schedule does not ri se to the level of actual control. Astar at 23-24. Similarly, in its citizensh ip review of Virgin America, the Department was not convinced that the ove rarching role of Virgin Group (a non-U.S. entity) compelled a fi nding of actual control. 4 The Agreement governing the relation ship between Freedom Air and Fly Micronesia was prepared and negotiated with a complete understanding of the citizenship requirements. Section 2.4 of the Agreemen t reads: “Notwithstanding anything herein implicitly or explicitly to the contrary, [Freed om Air] shall have and shall retain sole and exclusive control and authority over all flight operations, maintenance, repair and security relating to the Proj ect [the 737 operations], to the fullest extent required by applicable law, as interpreted by [F reedom Air] in its sole discretion.” 5 By its own terms, this clause supersedes anything implicitly or explicitly to the contrary, and gives Freedom Air sole discretion to make that determin ation. The laundry list of Fly Micronesia

3 Recommended Decision of Administ rative Law Judge, DHL Ai rways, Inc. (Astar), December 19, 2003, Docket No. OST-2002-13089-594 (“Astar ”).

4 Final Order, Application of Virgin America for ce rtificate of public convenience and necessity, May 18, 2007, Docket No. OST-2005-23307-15160 (“Virgin America ”).

5 A copy of the Agreement between Freedom Air and Fly Micronesia wa s provided to the Department as Exhibit C of Freedom Air’s Response to the DOT-IR, dated October 4, 2010.5 responsibilities cited by ALPA do not individually or coll ectively alter th e actual control of Freedom Air; but to the extent that any of those points could be misconstrued as doing so, it is expressly superseded by Section 2.4 of the Agreement. The role of Fly Micronesia in the 737 charters is well within the parameters established by the Department in Astar and Virgin America , and that is without further considering the remaining and pre-existing airline operations of Freedom Air that are completely unassociated with Fly Micronesia. b. The financial relationship does not support a finding that Fly Micronesia exercises actual control over Freedom Air. Indeed, Fly Micronesia bears substantially all of the marginal cost of Freedom Air’s expanded operations and expressed in the Agreement. However, the arrangement is an arm’s length transaction beneficial to both parties, with each party playing an essentia l role. Unlike Astar, the carrier and the foreign interest here are i ndependent and utterly unrelate d entities, and as such the business relationship is undoubtedly arm’ s length and commercially viable. 6 There is nothing in the economic arrangement that coul d suggest the ability of Fly Micronesia to influence the operations of Freedom Air. Even if Fly Micronesia were to withhold all performance, thus preventing all 737 operations, Freedom Air would continue opera tions as it does today, without material financial exposure to the cessa tion of 737 operations. The Depa rtment was quite clear in
Astar that the proper analysis of financial influence is to ask whether the right of termination or audit by the foreign interest pr ovides some leverage that could control the

6 In Astar , the ALJ was required to examine and dismiss suggestions that the restated relationship between the carrier and the foreign interest established an in curable continuum of contro l or that the commercial terms were so unnatural as to suggest control. Astar at 12-16. No such concern exists here.6 carrier’s activities or operations. 7 The ALJ cited the practical and financial impediments to termination, as well as the financial conseq uences (many being positive) if the foreign interest was to terminate. 8 By all measures the economic leverage exercisable in Astar far exceeds the leverage exercisable by Fly Mi cronesia (and that leverage was acceptable in Astar ). Fly Micronesia’s termination (or breach resulting in effective termination), in the worst case, would leave Freedom Air w ith an expanded operating certificate and economic authority, and no re sidual material liability.

4. Freedom Air Deserves Prompt Action

. Freedom Air’s applications have been be fore the Department for six months (and the facts and circumstances were presen ted to the Department well before the applications were filed), 9 and operationally Freedom Air a nd Fly Micronesia continue to invest funds and resources in the Federal Av iation Administration ce rtification process, staff retention and related prep arations. Freedom Air is surprised that a two aircraft charter proposal would engender so much commercial resistance, and that the Department would take so long to reach a conclusion on the few issues within its purview.

7 Astar at 17.

8 Id . at 20.

9 Freedom Air sought informal guidance from the Department in writing in March 2010 (before filing the applications) with the express intent of securing an und erstanding on the citizenship issue prior to filing our application; and the Department declined to engage in informal discussions and instead asked that Freedom Air file an application. The procedural requirements, while important, have given third parties the ability to defer Freedom Air’s business plan by months.