Order 20 10

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- 8

UNITED STATES OF AMERICA DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY WASHINGTON, D.C.
Issued by the Department of Transportation on the 7 th day of May , 20 10

Served: May 7, 2010

ORDER TO SHOW CAUSE

Summary

By this show

- cause order, we tentatively award Kalitta Air, L.L.C. (Kalitta) economic authority to provide all

- cargo services in the U.S.

- China market and allocate to Kalitta six weekly all

- cargo frequencies for its proposed services.

Background

The amended U.S.

- PRC aviation agreement (“U.S.

- PRC Aviation Agreement”) , signed July 9, 2007, expands opportunities for air carriers of both countries. The agreement provides for annual increases in service opportunities, including all

- cargo opportunities, effective March 25 of each year through 2010. Under the terms of the U.S.

- PRC Aviation Agreement, all frequency and designation limitations will no longer be applicable to scheduled all

- cargo operations effective March 25, 2011. We instituted this procee ding to award the expanded rights available to U.S. air carriers effective March 25, 2010

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Specifically, we note that one additional U.S. air carrier may be designated to operate either scheduled combination or all

- cargo services between the United Sta tes and China. As we explained in the instituting order, we determined that we would use the 2010 designation

1 There are currently five incumbent carriers designated to provide all

- cargo services in the U.S.

- China market: FedEx Express Corporation (FedEx Express)

- 37 weekly frequencies; United Parcel Service Co. (UPS)

- 41 weekly frequencies; Delta Air Lines, Inc. (Delta)

- 17 weekly frequencies; Polar Air Cargo Inc. and Polar Air Cargo Worldwide, Inc. (Polar)

- 12 weekly frequencies; and Evergreen International Airlines, Inc. (Evergreen)

– 8 frequencies. In the Matter of

2010 U.S.

- CHINA ALL

- CARGO DESIGNATION AND FREQUENCY ALLOCATION PROCEEDING Docket DOT

- OST

- 2010

- 00172 opportunity for all

- cargo services, as there is a designation opportunity currently available for a combination carrier. 2 frequencies are newly available to U.S. carriers to serve points in China Zone 1 or China Also, 21 weekly combination frequencies and 15 weekly all

- cargo

Zone 2. 3 4

By Order 2010

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- 6, dated February 4, 2010, the Department instituted the 2010 U.S.

- China All

- Cargo Designation and Frequency Allocation Proceeding and invited the applicants, Kalitta Air and Southern Air, Inc. (Southern)

, to supplement and/or amend their applications

. The order included an attached evidence request and a procedural schedule

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In instituting the proceeding, we said that in awarding the rights available, our principal objective will be to maximize the public benefits that will result from the various awards of authority in this case. In this regard, we will consider which applic ant will be most likely to offer and maintain the best service for the shipping public. We will consider the effects of the applicants’ service proposals on the overall market structure and level of competition in the U.S.

- China market, and any other mark et shown to be relevant, in order to promote an air transportation environment that will sustain the greatest public benefits. In addition, we will consider other factors historically used for carrier selection where relevant.

Summary of Applications a nd Responsive Pleadings

Below, is a chart summarizing the applications, followed by a narrative summary of the pleadings

.

2 See Order 2010

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- 6 at 3.
3 As defined by the amended agreement, China Zone 1 consists of Beijing, Shan ghai, and Guangzhou. China Zone 2 consists of Fujian, Guangdong (except Guangzhou), Hebei, Jiangsu, Shandong, Tianjin, and Zhejiang.
4 In addition to the frequencies that became available March 2010, t here are seven unallocated frequencies available for combination and/or all

- cargo services specifically limited to serving points in China Zone 2 , and six unallocated all

- cargo frequencies available for services to points in China Zone 1 or China Zone 2.
5 Both carriers supplemented their initial application and filed an answer. Neither carrier filed a reply. Air Carrier Frequencies Routings Aircraft Type Capacity Kalitta 6 Route 1 : Shanghai

- Anchorage

- Chicago

- New York

Anchorage

- Shanghai (3x a week)

Route 2 : Guangzhou

- K habarovsk *

- Anchorage

- Los Angeles

- Anchorage

- Khabarovsk *

- Guangzhou (3x a week)

*

- fuel stop Route 1 B747

- 400BCF 249,876 lbs

Route 2 B747

- 400F 249,876 lbs

B747

- 200F 245,547 lbs Southern 6 Route 1 : Shanghai

- Anchorage*

- Chicago

- Shanghai (3x a week)

Route 2 : Shanghai

- Los Angeles

- Shanghai (3x a week)

*

- fuel stop Route s 1 and 2 B777

- 200LRF 225,000 lbs3 Kalitta and Southern each requested six frequencies for their proposed U.S.

- China service. Each applicant proposes year

- round service. Also, each applicant intends to carry general freight and a small percentage of express packages and/or mail. Kalitta states that it has no current or proposed cooperative arrangements, code

- share arrangements or Aircraft, Crew, Maintenance, and Insurance (ACMI)/charter arrangements with any carrier. Southern states that it has operated long

- term wet

- lease services for t wo major Chinese operators, China Cargo Airlines and Shanghai Airlines. Kalitta and Southern operate U.S.

- China charter service.

Kalitta propose s to operate two different U.S.

- China routings three times a week each

. Specifically, i t would serve Shanghai from Chicago/New York and serve Guangzhou from Los Angeles

. However, because both westbound flights would transit Anchorage at the same time, Kalitta proposes to cross

- load cargo between the aircraft so that, in essence

, it would provide service to both Shanghai and Guangzhou from Los Angeles, Chicago, and New York . The carrier intends to utilize B747

- 400 BCF aircraft for the Chicago

- New York

- Shanghai route and will initially operate B747

- 400F and

- 200F aircraft for the Los Angeles

- Guangzhou route

, trans itioning to all B747

- 400F aircraft as more of this series aircraft are added to the fleet

. Southern proposes to serve Shanghai from two U.S. points. Southern proposes to operate three weekly roundtrips between Los Angeles and Shanghai, and three weekly r oundtrips between Chicago and Shanghai. The Chicago

- Shanghai service includes a technical stop in Anchorage. Southern states that it will utilize B777

- 200 LFR aircraft. The carrier states that

, should the need arise, it will utilize one or more of its B 747 freighter aircraft.

Position of the Parties

Kalitta maintains that its proposal offers the broadest market coverage in the United States and China, the most aircraft capacity , and an experienced team of scheduled sales and customer support personnel. Kalitta notes that Shanghai is the primary air freight gateway for a broad area of Eastern China and that there are opportunities in Guangzhou, as Northwest Airline s Inc.’s (Northwest) withdrawal in 2008 left a gap in U.S. flag service for those shippers who tender consolidated freight

- of

- all

- kind traffic. 6 Kalitta states that its proposal to cross

- load cargo on its westbound flights in Anchorage gives it the ability to offer export shippers at three large U.S. gateways timely service to both Central and Southern Chin a

. Kalitta questions the availability of the aircraft that Southern proposes for its U.S.

- China operations

, not ing Southern’s recently signed block ed space agreement with Thai Airways Internat ional to utilize Southern’s two B777 aircraft. Kalitta also c hallenges the viability of Southern’s traffic schedule, flight times and the payload capacity of the aircraft.

Southern argues that selection of Southern would add competition in the transpaci fic scheduled all

- cargo market whereas an award to Kalitta would not, as Kalitta now serv es Hong Kong. The carrier states that new competition would lead to more service and pricing options for the shipping public on both sides of the Pacific. Specifical ly, Southern asserts that its scheduled service would provide shippers with greater regularity of service in major markets and a degree of certainty that cannot be achieved by continued charter service due to the restrictive,

6 At the time of the withdrawal, Northwest had not yet merged with Delta Air Lines, Inc. Subsequently, the Department issued an order transferring frequencies and all route authority held by Northwest to Delta ( see Order 2009

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- 8).4 bilaterally

- agreed frequency l imitations on charters that compete with Chinese carriers’ scheduled flights.

Southern maintains that

, as an existing cargo carrier with worldwide operations, U.S.

- China scheduled service is well within its established capabilities and scope of operations. Southern states that it has considerable experience operating in the U.S.

- China market, as it has operated under long term wet

- lease contracts for two major Chinese operators. Southern further states that it has completed over 1,300 rotations to and from China, especially Shanghai. In response to questions regarding its experience in scheduled service sales and air craft availability , Southern states that it has adopted a company strategy of moving into regularly scheduled operations in selected markets including the U.S.

- China market

. In addition, Southern asserts that it intends to acquire additional B777 aircraft and that

, with a fleet of 17 B747 freighters, it has more than sufficient back

- up capacity and flexibility to provide U.S.

- China and Thailand

- based service.

Tentative Decision

W e have tentatively decided to award Kalitta economic authority to provide sc heduled all

- cargo services in the U.S.

- China market and to allocate it six weekly frequencies for its proposed U.S.

- China service. We tentatively find that Kalitta’s proposal to serve two Chinese gateways, Shanghai and Guangzhou

, and its proposal to cr oss

- load its westbound China traffic , effectively providing service to two China gateways from three major U.S. gateways

, would provide benefit s that Southern’s proposal would not offer.

We tentatively find that Kalitta’s proposed Los Angeles

- Guangzhou s ervice would provide shippers with an alternate shipping option to those being offered by other U .S. air carriers at Guangzhou. We note that under Kalitta’s proposal, traffic originating in Chicago and New York may be destined for Shanghai or Guangzhou

, and traffic originating in Los Angeles may be destined for Guangzhou or Shanghai. W e tentatively find that Kalitta’s proposal to cross

- load its westbound traffic from three major U.S. gateways (Los Angeles, Chicago, and New York) at Anchorage would not on ly enhance the use of the available frequencies but would provide more
op tions for U.S. shippers. Against this background, we tentatively find that the selection of Kalitta would best serve the public interest

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Southern cites the “fresh approach and unique perspective” it would bring as a new transpacific scheduled all

- cargo competitor. However, based on the totality of the record before us, w e tentatively see the significant attributes of Kalitta’s proposal, notably including the greater number of p oints it would serve both in the United States and China and thus the greater number of options it would offer shippers as opposed to Southern, as representing meaningful benefits that should clearly enhance Kalitta’s ability to compete in the U.S.

- China a ll

- cargo market.

7 We note that in less than a year, effective March 25, 2011, under the terms of the U.S.

- PRC Aviation Agreement

, all frequency and designation limitations will no longer be applicable to scheduled all

- cargo operations, and Southern, along with other U.S. carriers , will have the ability to enter the U.S.

- PRC scheduled all

- cargo market.5 Economic Authority

W e propose to issue to Kalitta two

- year exemption authority effective upon issuance of a final order in this proceeding

. 8 9 Consistent with our standard practice, the frequencies allocated in this proceeding would be subject to a start

- up condition and our sta ndard 90

- day dormancy condition. We would require that Kalitta begin service within 90 days of the issue date of the final order. For any frequency not operated for a period of 90 days (once inaugurated and f or any reason other than seasonal use) the frequency w ould be deemed dormant and the allocation as to that frequency w ould expire automatically and the unused frequency w ould revert to the Department for reallocation. 10

We tentatively defer action on Kalitta’s request for certificate authority, as the limitations on scheduled all

- cargo carrier designations and frequencies will be removed effective March 25, 2011. 11

Sale/Transfer Condition

We tentatively find that the public interest calls for imposing a restriction on the sale or transfer of newly

- awarded U.S.

- China all

- cargo route rights. We thus tentatively impose the following condition on the economic authority to be awarded in this proceeding: the selected carrie r must operate newly

- awarded U.S.

- China all

- cargo routes until March 25, 2011, before that carrier may be permitted to sell or transfer the route in question. 12

DOT

- OST

- 2008

- 0127. Our tentative action here is consistent with the no sale/no transfer condition that was applied to new route authority and frequencies in the 2009 U.S.

- China All

- Cargo Designation and Frequency Allocation Proceeding in Docket

ACCORDINGLY,

1. We tentatively select Kalitta Air, L.L.C. for award of exemption authority to engage in scheduled foreign air transportation of property and mail between a point or points in the United States, on the one hand, and a point or points in the People’s Republic of China, on the other hand, via intermediate poin ts, and beyond China, s ubject to the attached conditions ;

8 We note that once the limitations on scheduled all

- cargo carrier designatio ns and frequencies are removed, Kalitta’s exemption authority, te ntatively granted here

, would be subsumed by its blanket open

- skies certificate ( see Order 2007

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- 4).
9 We tentatively find that Kalitta is fit to provide the authorized service. The carrier has been found to be a citizen of the United States, and fit, wi lling, and able to provide scheduled foreign air transportation of property and mail as a certificated air carrier under section 41102 of Title 49 U.S.C. ( see Order 2007

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- 4 ). We further tentatively find that issuance of the exemption authority granted wi ll result in a near term increase of annual fuel consumption in excess of ten million gallons. As a result, our action constitutes a “major regulatory action” under the Energy Policy and Conservation Act of 1975, as defined by Section 313.4(a)(1) of the D epartment’s regulations. We tentatively find, however, that the service provided under the authority granted and resulting public benefits outweigh any adverse effects that may be caused by the increased fuel consumption.
10 We remind the selected carrier that the frequencies awarded are for weekly operations. A scheduled carrier may not bank frequencies from one week to the next. Failure to use the subject frequency on a weekly basis would result in the forfeiture of the unused frequency for that particu lar week

. 11 We would be prepared to act on the certificate portion of Kalitta’s request should it become necessary to grant longer

- term authority.
12 We note that the no sale/no transfer condition will no longer be necessary when designation and frequency limits no longer apply to scheduled U.S.

- China all

- cargo services.6 2. We tentatively allocate Kalitta Air, L.L.C. six weekly frequencies to perform its proposed Los Angeles

- Guangzhou and Chicago/New York

- Shanghai service s;

3. W e tentatively deny the application of Southern Air, Inc. for its p roposed U.S.

- China service;

4. We tentatively defer action on the request of Kalitta Air, L.L.C. for certificate authority for its proposed U.S.

- China service;

5. We tentatively impose a restriction until March 25, 2011, on the sale or transfer of the route ri ghts awarded in ordering paragraphs 1 and 2 by Kalitta Air, L.L.C. ;

6. We direct any interested parties having objections to our tentative findings and conclusions set forth in this order and in ordering paragraphs 1 through 5 , a bove, to file their objection s, in the above

- captioned docket, with the Department’s Docket section, U.S. Department of Transportation, Docket Operations, M

- 30, West Building Ground Floor, Room W12

- 140, 1200 New Jersey Avenue, SE, Washington, D.C., 20590, no later than 10 days from th e date of service of this order; answers thereto shall be filed no later than seven calendar days thereafter; 13

7. If timely and properly supported objections are filed, we will afford full consideration to the matters or issues raised by the objections before we take further action; 14 if no objections are filed, we will deem all further procedural steps to be waived and will proceed to enter a final order awarding the authority proposed in this order;

8. To the extent not granted, we deny all motions and re quests in the captioned dockets; and

9. We will serve this order on the parties to the captioned docket of the order, the U.S. Department of State (Office of Aviation Negotiations), the Federal Aviation Administration (AFS

- 200), and the Ambassador of the People’s Republic of China in Washington, D.C.

By:

Susan L. Kurland Assistant Secretary for Aviation and International Affairs

(SEAL) An electronic version of this document is available on the World Wide Web at: http://www.regulations.gov

13 Filers are encouraged to use the electronic submission capability available through the Dockets’ FDMS system following the instructions on the web site: www.regulations.gov . You should also provide courtesy e

- mail copies of your submissions to the U.S. Carrier Licensing Division at: esta.rosenberg@dot.gov and thuy.cooper@dot.gov

. In the alternative, all filings should be on 8

- 1/2” X 11” white paper using dark ink (not green) and be unbound without tabs, which will expedite use of our docket imaging system.
14 As we are providing for the filing of objections to this tentative decision, we will not entertain petitions for reconsideration of this show

- cause order.1 ATTACHMENT
U.S. Carrier Exemption Conditions

In the conduct of the operations authorized, the U.S. carrier applicant(s) shall:

(1) Hold at all times effective operating authority from the government of each country served;

(2) Comply with applicable requirements concerning oversales contained in 14 CFR 250 (for scheduled operations, if authorized);

(3) Comply with the requirements for reporting data contained in 14 CFR 241;

(4) Co mply with requirements for minimum insurance coverage, and for certifying that coverage to the Department, contained in 14 CFR 205;

(5) Except as specifically exempted or otherwise provided for in a Department Order, comply with the requirements of 14 CF R 203, concerning waiver of Warsaw Convention liability limits and defenses;

(6) Comply with all applicable requirements of the Federal Aviation Administration, the Transportation Security Administration, and with all applicable U.S. Government requireme nts concerning security, including, but not limited to, 49 CFR Part 1544. To assure compliance with all applicable U.S. Government requirements concerning security, the holder shall, before commencing any new service (including charter flights) to or from a foreign airport, contact its Principal Security Inspector (PSI) to advise the PSI of its plans and to find out whether the Transportation Security Administration has determined that security is adequate to allow such airport(s) to be served;

(7) Compl y with such other reasonable terms, conditions, and limitations required by the public interest as may be prescribed by the Department of Transportation, with all applicable orders and regulations of other U.S. agencies and courts, and with all applicable laws of the United States.

The authority granted shall be effective only during the period when the holder is in compliance with the conditions imposed above.

1/2008