As a grouping of eight major islands located near the center of the Pacific Ocean, Hawaii has a geography that bears significantly on the manner in which goods and people can move throughout the state. In addition, Hawaii’s relative lack of industry means that most finished goods must be imported from the mainland. Unlike much of the mainland—where transport relies on air, sea, rail, and highway—Hawaii must rely primarily on the first two means. For cargo customers, air shipment is the faster and more expensive option, and sea transport is the slower but less expensive option. Most cargo for which the speed of delivery is not critical moves by sea, both among the islands and between Hawaii and the mainland. However, other goods—particularly, perishable produce, mail, and time-sensitive items—move by air. The bulk of interisland cargo shipments moves among four islands—Oahu, Maui, Kauai, and the “Big Island” of Hawaii. Honolulu, Oahu’s urban center, is the largest city in the islands and the center of the state’s economic activity. Its airport, Honolulu International, is by far the busiest in the state. The island of Hawaii, the state’s second most populous, has two key airports, at Kona and Hilo, which serve distinct economic regions. The airport at Kona supports an active tourism trade and offers direct flights to the mainland. By contrast, the airport at Hilo supports no direct flights to the mainland but serves as a key distribution point for tropical plants and flowers, the cultivation of which is becoming increasingly important to Hawaii’s economy. The islands of Maui and Kauai also support scheduled commercial jet service. Figure 1 shows the major Hawaiian islands, their key communities, and their scheduled air cargo service; table 1 summarizes key operating statistics for Hawaii’s airports. Prior to AIC’s November 1995 entry into scheduled interisland service,Aloha Airlines and Hawaiian Airlines were the chief providers of air cargo transport throughout the state. Aloha began its service to Hawaii’s “outerisland” residential and commercial centers in 1946. In addition to over 180 daily jet flights among Oahu, Maui, Kauai, and the Big Island of Hawaii, Aloha operates a nighttime cargo service using some passenger aircraft with the seats removed. Aloha also operates an “Aloha Island Air” service using small propeller-driven aircraft to reach remote rural areas. Hawaiian Airlines, for its part, has provided air service among the islands since 1929. Hawaiian’s cargo service is conducted in conjunction with its passenger service; all cargo is carried below deck on more than 150 daily flights among the state’s major communities. In 1990, the federal government acted to reduce aviation noise. Specifically, the Congress passed the Airport Noise and Capacity Act, requiring the gradual phaseout on the U.S. mainland of Stage 2 aircraft weighing over 75,000 pounds by December 31, 1999. The law did not cover any aircraft operations in Hawaii. In October 1991, the act was amended in part to require that no airline operate a greater number of Stage 2 aircraft in the state of Hawaii than it had operated on November 5, 1990, when the act was first passed. According to the amendment’s legislative history, this amendment was included to ensure that Hawaii does not become a “dumping ground” for Stage 2 aircraft as these aircraft are phased out on the mainland. Thus, in order to use Stage 2 aircraft within Hawaii, an airline must have provided turnaround service on November 5, 1990. As long-standing incumbents, Aloha Airlines and Hawaiian Airlines meet this qualification and currently serve all major communities in Hawaii using Stage 2 aircraft. On May 25, 1995, in response to a formal request from AIC, FAA determined that AIC also had provided qualifying turnaround service during November 1990. As described, in November 1990, AIC was operating an air cargo service routed from Los Angeles to Honolulu to Hilo and then back to Los Angeles. In a subsequent letter to AIC, FAA explained that because the airline’s service involved at least one takeoff-and-landing cycle in Hawaii, the airline qualified to provide scheduled interisland service with Stage 2 aircraft between Honolulu and Hilo. However, in May 1996, FAA issued a revised interpretation of turnaround service. Earlier, in February 1996, FAA had received a complaint from Aloha Airlines in which this airline challenged AIC’s legal right to operate scheduled interisland service with Stage 2 aircraft in Hawaii. According to an FAA attorney, the agency reexamined its position on turnaround service because of comments submitted as part of a related rulemaking action begun on May 11, 1995. In its reinterpretation, FAA quoted language from the 1991 amendment’s legislative history, which described turnaround service as “local flights between two Hawaii cities and/or counties which also serve as the origin and destination. . . .” FAA cited further language from the legislative history, emphasizing that the 1991 amendment was designed to “ensure that Hawaii does not become a dumping ground for Stage 2 aircraft. . . .” On the basis of these statements, FAA concluded that the Congress had intended to preclude an airline from flying an aircraft from the mainland to Hawaii, and then flying that same aircraft between two points in Hawaii in order to qualify the latter segment as turnaround service. Although AIC argued to FAA that one takeoff and one landing constituted a flight, under the 1991 amendment a flight qualifying as turnaround service consists of operation among “two or more points, all of which are within the state of Hawaii.” Thus, the 1991 provision clearly contemplates that such a flight may consist of more than one takeoff and one landing. There is no indication either in the statute or in the legislative history that turnaround service may include points outside of Hawaii. The use of the word “local” in the Senate report also supports the assertion that only points within Hawaii may be considered to constitute turnaround service. According to AIC, the procompetition mandates of the Federal Aviation Act, as well as other public policy encouraging competition in air transportation, should also bear on any legal interpretation of turnaround service. AIC has maintained that two sections of the Airport Noise and Capacity Act direct the Secretary of Transportation to consider various competitive impacts of the requirements to phase out Stage 2 aircraft.However, these sections are not relevant for operations in Hawaii because the noise legislation’s mandatory phaseout of Stage 2 aircraft applies only in the contiguous 48 states on the U.S. mainland. As a result, from our own review of the statutory provision set forth in the act’s 1991 amendment and the relevant Senate committee report, we found that FAA’s most recent interpretation of the law is correct. We believe that a route from Los Angeles to two points in Hawaii and back to Los Angeles does not qualify as turnaround service within the meaning of the 1991 amendment. Because AIC did not provide turnaround service at the time the Airport Noise and Capacity Act was passed, under an October 1996 amendment it must either cease serving Hawaii’s interisland cargo markets after September 30, 1998, or provide service with Stage 3 aircraft, as a company official has indicated it may do. Alternatively, the Congress could pass legislation temporarily extending AIC’s right to operate Stage 2 aircraft, which would allow the airline to continue interisland service without modifying the single aircraft that provides it. AIC’s November 1995 entry has enhanced competition in Hawaii’s interisland air cargo markets, most markedly by offering new service options for some customers. For example, executives with a small-package delivery firm and a freight forwarding company told us that they have benefited primarily because AIC provides them with a daytime all-cargo service and convenient connections to the mainland. Additionally, many Big Island agricultural producers with whom we spoke consider certain specialized features of AIC’s service—such as its ability to handle large shipping containers and its ability to refrigerate cargo at Honolulu International Airport—as crucial to their immediate and long-term needs. We also found that many customers consider each of the three competing airlines’ interisland cargo rates when making shipping decisions but that they seldom select an airline on the basis of rate considerations alone. Three customers told us that they had observed a price decrease during the past 2 years and that they attribute this to AIC’s presence in interisland markets. We could not obtain sufficient data to draw broad, marketwide conclusions about the airline’s effect on interisland rates. Nevertheless, if AIC exits from interisland markets, the breadth of services provided would decrease discernibly unless one or more airlines were to initiate similar service. Since November 1995, when AIC began providing scheduled interisland cargo service, it has acquired nearly one-fifth of the total market. According to data from Hawaii’s Department of Transportation, this made AIC the second-largest cargo airline in the state during 1997, in terms of the volume of cargo shipped. AIC has achieved this rapid growth primarily by using one cargo-dedicated Boeing 727 aircraft. Although the B-727’s fuselage has virtually the same circumference as that of the Boeing 737s used by Aloha Airlines, the AIC aircraft’s interior space is larger because, as a cargo aircraft, it contains no overhead luggage bins. Consequently, AIC’s aircraft can accommodate the same basic type of cargo container used by Aloha and can also carry taller containers. At the time of our study, AIC provided twice-daily service to Maui, Kona, and Hilo—once during the day and once at night—with onward connections to the mainland. Some of AIC’s growth represents the provision of entirely new air transportation services. For example, some customers who had previously shipped by sea are now shipping by air with AIC.