**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **WASHINGTON, D.C.**

-------------------------------------------- Joint Application of: : : AMERICAN AIRLINES, INC. : BRITISH AIRWAYS PLC : FINNAIR OYJ : IBERIA LINEAS AÉREAS DE ESPAÑA, S.A. : DOT-OST-2008-0252 ROYAL JORDANIAN AIRLINES : : under 49 U.S.C. §§ 41308 and 41309 for : approval of and antitrust immunity for : alliance agreements :

-------------------------------------------- **JOINT APPLICANTS’ COMMENTS ON SHOW CAUSE ORDER 2010-2-8** Communications with respect to this document should be sent to: **For American Airlines : For British Airways**  **: F**  **or Iberia :**  WILLIAM K. RIS, JR. Senior Vice President – Government Affairs American Airlines, Inc. 1101 17th Street, Suite 600 Washington, DC 20036

VIRASB VAHIDI Senior Vice President – Planning American Airlines, Inc. P.O. Box 619616, MD 5628 DFW Airport, TX 75261

KENJI C. HASHIMOTO Vice President – Strategic Alliances American Airlines, Inc. P.O. Box 619616, MD 5635 DFW Airport, TX 75261

CARL B. NELSON, JR. Associate General Counsel American Airlines, Inc. 1101 17th Street, Suite 600 Washington, DC 20036

R. BRUCE WARK Associate General Counsel JEFFREY A. OGAR Senior Attorney American Airlines, Inc. P.O. Box 619616, MD 5675 DFW Airport, TX 75261 (817) 967-3478 jeff.ogar@aa.com TOM KING Executive Vice President - External Relations British Airways Plc Rue Wiertz 50 B-1050 Brussels

PAUL C. JASINSKI General Counsel, Americas JAMES B. BLANEY Senior Counsel, Americas British Airways Plc 75-20 Astoria Boulevard Jackson Heights, NY 11370 (347) 418-4250 paul.jasinski@ba.com

DARYL A. LIBOW Sullivan & Cromwell LLP 1701 Pennsylvania Ave., N.W. Washington, DC 20006 (202) 956-7500 libowd@sullcrom.com

DON H. HAINBACH Garofalo Goerlich Hainbach PC 1200 New Hampshire Ave., N.W. Washington, DC 20036 (202) 776-3970 dhainbach@ggh-airlaw.com ELVIRA HERRERO Senior Vice President - Int’l Relations & Alliances Iberia Líneas Aéreas de España, S.A. Velazquez, 130 28006 Madrid, Spain

WILLIAM KARAS CAROL GOASAIN Steptoe & Johnson LLP 1330 Connecticut Avenue, N.W. Washington, DC 20036 (202) 429-6223 wkaras@steptoe.com

**For Finnair :**  SAMI SARELIUS Vice President & General Counsel Finnair oyj Tietotie 11 A FI-01053, Finland +358 (9) 818-4070 sami.sarelius@finnair.fi **For Royal Jordanian :**  MICHAEL J. HOLLAND Condon & Forsyth LLP 7 Times Square New York, NY 10036 (212) 490-9100 mholland@condonlaw.com

March 30, 2010**BEFORE THE DEPARTMENT OF TRANSPORTATION**  **WASHINGTON, D.C.**

-------------------------------------------- Joint Application of: : : AMERICAN AIRLINES, INC. : BRITISH AIRWAYS PLC : FINNAIR OYJ : IBERIA LÍNEAS AÉREAS DE ESPAÑA, S.A. : DOT-OST-2008-0252 ROYAL JORDANIAN AIRLINES : : under 49 U.S.C. §§ 41308 and 41309 for : approval of and antitrust immunity for : alliance agreements :

-------------------------------------------- **JOINT APPLICANTS’ COMMENTS ON SHOW CAUSE ORDER 2010-2-8** The Joint Applicants applaud the Department for issuing show cause Order 2010-2-8, which tentatively grants approval for blanket codesharing authority and antitrust immunity for alliance agreements, including a Joint Business Agreement, among **one** world’s core transatlantic members. Once made final, this decision will allow the three major global alliances to compete on equal regulatory footing, and deliver consumers the maximum benefits of the U.S.-EU Open Skies Agreement. While we do not agree with every aspect of the Department’s tentative findings in Order 2010-2-8, we strongly support the issuance of a final order as quickly as possible after the comment period closes in order to allow **one** world members American, British Airways and Iberia to begin implementation of their fully integrated

metal neutral JBA.- 2 -

As explained below, the parties believe that Order 2010-2-8 is based on an overly narrow definition of the relevant market, which when coupled with the lack of recognition that a vibrant secondary market for Heathrow slots exists, leads the Department to the

erroneous conclusion that Heathrow slots need to be divested. Given the unprecedented level of new entry at Heathrow since the advent of U.S.-EU Open Skies, the availability of Heathrow slots for new entrants, and the fact that Heathrow is Europe’s most competitive hub, the record simply does not justify imposing remedies. The proposed alliance has also been subject to detailed review by the European Commission under European competition law. While the Joint Applicants do not agree with the Commission’s competitive analysis for the same reasons described above, American **,** British Airways and Iberia have offered formal commitments to the Commission in order to meet competition concerns and allow the Commission to conclude that there are no grounds for enforcement action. These commitments are now being formally market tested, and the Joint Applicants anticipate their being made final in the near future. The Joint Applicants request that the Department make one minor but important modification (discussed below) to its tentative decision in order to ensure that the two remedy packages are consistent. Finally, the Joint Applicants have made important changes to the governance provisions of the JBA that comply with Appendix B to the Show Cause Order. Given these changes, the Joint Applicants ask that the Department move promptly and issue a Final Order approving the proposed alliance and granting antitrust immunity.- 3 -

► **RELEVANT MARKETS IN PASSENGER AIR TRANSPORTATION** The Joint Applicants disagree that the only relevant market in an alliance case is the narrow airport-pair definition urged by the Department of Justice and Virgin Atlantic and largely adopted in Order 2010-2-8, rather than viewing city-pairs as a network aggregate. Consumers are increasingly buying networks – not individual flights between a city-pair – making alliances and network competition increasingly important. Even at the city-pair level, the Joint Applicants also take issue with the Department’s conclusion that Heathrow and Gatwick are in separate markets. The Department argues that “[b]usiness passengers exhibit a strong preference for using Heathrow” (p. 19), but the relevant question is substitutability , not mere preference. There is no evidence that consumers would not view Gatwick as a substitute in the event of a price increase at Heathrow, and fare data demonstrates the lack of any Heathrow premium. The Department concludes that because more U.S.-UK passengers fly to London through Heathrow than fly through Gatwick, the airports are in separate relevant markets (pp. 18-19). Yet this is largely because of alliance – not consumer – preference. Carriers such as American

and United choose Heathrow to create connections with their UK alliance partners. Nor does the shift of service by Continental, Delta, Northwest and US Airways from Gatwick to Heathrow after U.S.-EU Open Skies took effect in 2008 indicate the existence of separate relevant markets (although it does prove ease of entry in an Open Skies environment). The Joint Applicants believe the relevant market as tentatively established by Order 2010-2-8 is unduly narrow.- 4 -

► **INTRA-ALLIANCE TRANSFERS AND SECONDARY TRADING MAKE SLOT REMEDIES UNNECESSARY**  The Department acknowledges that “there is some scope for Heathrow incumbents and members of global alliances to introduce transatlantic services from existing holdings” (p. 24). 1 Likewise, “it is possible to acquire slots on the secondary market” (Id .). Nonetheless, the Department concludes that “infrastructure constraints at Heathrow could exacerbate the potential competitive harm” because

“ **one** world would hold 47.2% of Heathrow slots” (p. 25). 2 But this is

the smallest percentage of slots held by the largest carrier or by the other alliances at any major hub in Europe. Paris (CDG), Frankfurt and Amsterdam are all fully slot coordinated and have limited slot availability during peak transatlantic windows, and Star/SkyTeam have a far higher percentage of slots at those airports than **one** world has

at Heathrow. 3 Yet the Department found no need to order slotdivestitures in the recent Star (DOT-OST-2008-0234) and SkyTeam (DOTOST-2007-28644) antitrust immunity dockets even though those airports lack vibrant secondary trading like Heathrow.

1 In 2007, when arguing for the proposed merger of the SkyTeam and Wings alliances, Delta and its partners made note of “[a]dditional access to Heathrow Airport beyond the access available under the separate Delta/Air France and Northwest/KLM 2-way Joint Ventures (by linking Northwest with Air France and Delta with KLM), producing even more competition against Star and oneworld . . . . These significant public benefits are not illusory . . . but are very real” (SkyTeam Joint Reply, DOT-OST-2007-28644, 11/27/07, p. 9).

2 The Department claims that **one** world would hold a “large share of slots usable for transatlantic service” (p. 24), but in reality the Joint Applicants hold less than half of even that sub-category.

3 Star controls 80% of FRA peak hour slots, while SkyTeam controls 65% and 78% of CDG and AMS peak hour slots respectively.- 5 -

Despite its treatment of Star and SkyTeam, the Department seeks divestiture of four slot-pairs from the Joint Applicants in this proceeding: two for Boston-London and two “flex” slot-pairs that could be used on any route. We find the latter remedy to be particularly objectionable, because it does not address the purported competitive harm on the city-pair, but would instead effectuate a value transfer

from **one** world to its competitors. 4 The Department claims that: “Under this proposal, prospective new entrants would not be forced to compete where **one** world is strongest, such as in the Dallas/Ft. Worth-London market. Rather, they would be able to serve routes in which they have a greater chance of success and a greater opportunity to exert competitive discipline on the **one** world network” (p. 26). The Joint Applicants do not see how Star, SkyTeam or Virgin need any help competing against the **one** world network to London from cities

like Atlanta or New York. Star – with United and bmi – has an immunized hub operation in London and ample access to Heathrow slots. SkyTeam, anchored by the world’s two largest carriers, promised new entry in London as a public benefit of their 2007 application for expanded antitrust immunity (SkyTeam Joint Reply, DOT-OST-2007-28644, 11/27/07, p. 9) and should be expected to do so – without the need for slots from a competitor – once the economy recovers. Virgin servesHeathrow from eight North American gateways, and leases out to shorthaul carriers Heathrow slots it has used for transatlantic service in the past, proving that Virgin has no need for a slot remedy.

4 While the Department has allowed the Joint Applicants to lease slots, the amount of compensation available is “limited” (p. 27). Thus the remedy still needlessly transfers value to competing airlines that are larger and/or more profitable.- 6 -

In short, there is no basis for a slot divestiture remedy in this proceeding, and the Department should reach that conclusion consistent with what it found in the recent Star and SkyTeam antitrust immunity

dockets.

► **ANY SLOT REMEDIES SHOULD BE DRAFTED TO ACHIEVE CONSISTENCY WITH THE EUROPEAN COMMISSION’S REMEDIES**  If the Final Order includes slot remedies, the Department should work with the European Commission to ensure that the remedies are consistent and do not provide for double-penalizing the parties. The Department has long advocated a closer working relationship with the European Union on aviation issues with an eye towards convergence – thus avoiding inappropriately cumulative or inconsistent remedies. The Joint Applicants support these efforts and were the first to simultaneously seek antitrust immunity from the Department and Article 9 clearance from the European Commission. As a result, this case presents a unique opportunity to show that the Department can work effectively with its counterparts in Europe on aviation policies. The European Commission is in the process of formally market testing a set of commitments for the JBA. These commitments include a requirement for long-term leases of four Heathrow slot-pairs for three routes: Boston (two pairs), Dallas/Fort Worth (one pair) and Miami (one pair). Consistent with its precedents, the European Commission (which has adopted a definition of the relevant market similar to that contained in Order 2010-2-8) will require that the slot leases be used for nonstop service between the relevant city-pairs. Thus, with regard to Boston-Heathrow, the slot remedies in the Show Cause Order and EU commitments package are consistent.- 7 -

However, for Dallas/Fort Worth and Miami, the European Commission’s proposed remedies differ from Order 2010-2-8. While the Commission has encouraged the parties to table commitments that will facilitate new nonstop service on the impacted routes, Order 2010-2-8 allows two slot-pairs to be used on any route. The European Commission shares the Department’s concern that it is possible that no carrier will elect to enter these routes with nonstop service, in which case the proposed commitments provide that the slots may be used for other city-pairs beginning in the Summer 2013 slot season. The Joint Applicants urge the Department to modify its tentative decision by moving the date for leasing the “flex” slot-pairs to Summer 2013, and only if new entry had not occurred at Dallas/Fort Worth and/or Miami. Not only will this convergence eliminate the inconsistency between the two remedy packages, it will give consumers the best chance of seeing new entry on the DFW and MIA routes, while harmonizing the two slightly different approaches to a slot remedy.

► **THE GOVERNANCE PROVISIONS OF THE JBA PROMOTE EFFICIENCY** The Department raises concerns about the JBA’s governance provisions in Order 2010-2-8. Specifically, the Department states that “[c]ertain of the JBA’s terms described by Virgin Atlantic, for which they have sought confidential treatment, contain competitive restraints that divide the control over key functional areas on behalf of the alliance” (p. 33). The Department also claims that “[t]he terms permit a partner to act in its own economic interest, even if it means preventing the others from bringing new products and services to the market if there is a demand” (Id .).- 8 -

The Department’s concerns should not apply in the context of a joint venture where all the three parties share in the revenue from their combined transatlantic network. Given this revenue sharing, each of the three parties will have fully aligned individual economic incentives. Thus it should not matter which party ultimately makes decisions about pricing, capacity, or any other function, as the competitive decisions would be identical no matter which carrier takes the lead. In the case of the JBA, the lead carrier is the one with the most historical expertise in the marketplace – British Airways in the UK and London, Iberia in Spain, and American throughout the rest of Europe. However, rather than contest this issue, the Joint Applicants have complied with the terms of Confidential Appendix B by amending the JBA to provide that all decisions – including those regarding pricing and capacity – will be made by consensus. In addition, there are certain situations where a party can make the unilateral decision to add capacity. These changes fully comply with the requirements set forth in Appendix B, and the Joint Applicants are separately submitting the executed JBA amendment to the Department subject to

confidential treatment under 14 C.F.R. § 302.12.

* * *- 9 -

Accordingly, American, British Airways, Iberia, Finnair and Royal Jordanian urge that the Department swiftly grant final approval to the Joint Application and the JBA. Respectfully submitted,

CARL B. NELSON, JR. PAUL C. JASINSKI Associate General Counsel General Counsel, Americas R. BRUCE WARK JAMES B. BLANEY Associate General Counsel Senior Counsel, Americas JEFFREY A. OGAR British Airways plc Senior Attorney American Airlines, Inc. DARYL A. LIBOW Sullivan & Cromwell LLP ROGER W. FONES DON H. HAINBACH Morrison & Foerster LLP Garafalo Goerlich Hainbach PC ANDREW B. STEINBERG Attorneys for British Airways Jones Day Attorneys for American Airlines

WILLIAM KARAS SAMI SARELIUS CAROL GOSAIN Vice President & General Counsel Steptoe & Johnson LLP Finnair Oyj Attorneys for Iberia

MICHAEL J. HOLLAND Condon & Forsyth LLP Attorneys for Royal Jordanian March 30, 2010**CERTIFICATE OF SERVICE**

I hereby certify that I have this day served the foregoing document by e-mail on the following persons: sascha.vanderbellen@delta.com jhill@dlalaw.com scott.mcclain@delta.com bill@mietuslaw.com sametta.c.barnett@delta.com mgoldman@sgbdc.com kquinn@pillsburywinthrop.com rsilverberg@sgbdc.com bkeiner@crowell.com dhainbach@ggh-airlaw.com mrosia@crowell.com mcmillin@woa.com bruce.rabinovitz@wilmerhale.com eskraft@jamhoff.com jeffrey.manley@united.com dpdean@jamhoff.com bob.kneisley@wnco.com dkirstein@yklaw.com robert.land@jetblue.com jyoung@yklaw.com msinick@ssd.com donna.kooperstein@usdoj.gov cdonley@ssd.com dwight.moore@ustranscom.mil gbleopard@fedex.com jim.ballough@faa.gov dvaughan@kelleydrye.com byerlyjr@state.gov kevin.montgomery@polaraircargo.com recohn@hhlaw.com jrichardson@johnlrichardson.com cjsimpson@zsrlaw.com lhalloway@crowell.com pmurphy@lopmurphy.com efaberman@wileyrein.com lachter@starpower.net mroller@rollerbauer.com anita.mosner@hklaw.com howard.kass@usairways.com rpommer@atlasair.com benjamin.slocum@usairways.com gmurphy@crowell.com sophy.chen@hklaw.com russell.bailey@alpa.org david.heffernan@wilmerhale.com

______________________________ JEFFREY A. OGAR March 30, 2010