OST-99-5521 / National Airlines / High Density Rule - Chicago O'Hare / April 7, 1999

Application of

NATIONAL AIRLINES, INC. / Docket OST-99-5521

for an exemption from 14 C.F.R. Part 93 Subparts K & S. pursuant to 49 U.S.C. § 41714

Pursuant to 49 U.S.C. § 41714(c), National Airlines, Inc. ("National") hereby applies for an exemption from the provisions of 14 C.F.R. Part 93, Subparts K & S, to enable National to conduct five flight operations every day during the slot-restricted hours at Chicago O'Hare Airport. As indicated in Exhibit NA-1 to this application. National proposes to provide three daily round-trip, nonstop flights in the O'Hare-Las Vegas market. National recognizes that the Federal Aviation Administration ("FAA") currently does not have O'Hare slots to distribute. Despite diligent efforts. National has been unable to purchase or lease O'Hare slots. Accordingly, National requests that the Department grant it five slot exemptions from the Few s high density rule, conditional on their being used solely to provide nonstop service between O'Hare and Las Vegas.

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As discussed in this application, the service proposal by National satisfies every applicable criterion for relief from the high density rule at O'Hare. offers improved transportation benefits for passengers. and affords the Department an opportunity to promote its procompetitive goals by reducing excessive market dominance at O'Hare and by enabling the initiation of economically viable and price competitive service by a nets entrant carrier in an underserved market.

National is a new entrant into the U.S. air transportation industry. Based in Las Vegas, the carrier plans to begin operations on May 27, 1999 with nonstop flights between its Las Vegas hub, on the one hand, and Chicago and Los Angeles, on the other, and to phase in service to New York and San Francisco over the following several weeks. National is well-positioned to enter the U.S. airline industry. The carrier's leadership is provided by a management team with vast experience in the air transport industry. Approximately $50 million was successfully raised for the carrier's start-up and initial operations.

The Department has already found National to be fit. willing, and able to provide interstate scheduled air transportation of passengers, property

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National's business plan calls for it to address a growing need for airline seats to and from its hub at McCarran International Airport in Las Vegas, the ninth busiest airport in the U.S. in terms of passenger enplanements. /3 Las Vegas currently has over 112,000 hotel rooms, and more

1 Among other things, for National's certificate authority to become effective, National must provide the Department with a copy of its operating authority from the FAA. Yesterday, the FAA advised the Department that it expects to grant National operating authority within 7 to 8 weeks.

3/ See Bureau of Transportation Statistics, Pocket Guide to Transportation: 1998 13 (Dec. 1998).

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than 20,000 additional rooms will be built over the next two years. /4 However, while businesses in Las Vegas are expanding their capacity to entertain visitors, host conventions, and otherwise promote the growth of their local economy, air carrier service levels between Las Vegas and many important passenger destinations have stagnated, and in some markets have even decreased. National estimates that a significant gap between the number of passengers traveling to Las Degas and the available airline seats supplied by existing carriers will widen.

National proposes to fill this anticipated shortfall in air transportation capacity by offering daily non-stop service between Las Vegas and major metropolitan areas in the U.S., including Chicago, at fare levels which will produce price-competition and will attract more price-sensitive travelers. The success of National's new service will be enhanced by the joint marketing agreement between National and two of its major investors, Harrah's

4/ According to a recent survey conducted by the U.S. Tour Operators Association, its members identified Las Vegas as the best-selling domestic tour destination and predicted that Las Vegas will be one of the two fastest growing destinations in the U.S. See Viva Las Vegas! USTOA Ranks City as Top Tour Destination, Travel Weekly, April 1, 1999, at 2.

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Entertainment, Inc. and Rio Hotel & Casino, Inc. which will stimulate travel on National to and from Las Vegas.

In 1969, the FAA imposed restrictions on the hourly number of instrument flight rule operations (by. take-offs and landings) that ma; be reserved for use by air carriers, commuter carriers, and other aircraft operators at four "high density traffic airports" in the U.S., including O'Hare (14 C.F.R. §§ 93.123 & 93.133). The objective of the high density rule was to ensure that growing aircraft operations would not overwhelm the air traffic control system at each airport, thereby jeopardizing safety or creating excessive delays. Today, safety and air traffic congestion concerns no longer justify the existence of these slot restrictions, which impose an exacting burden on the national air transportation system in the United States. /5 As the Department has noted in previous exemption orders, the General Accounting Office ("GAO") has found that the slot restrictions at O'Hare and

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the other high density traffic airports have hampered competition among airlines. /6 In its own study published in 1995, the Department similarly concluded that eliminating or substantially changing the high density rule would likely result in more competition. /7

Indeed, given the perceived need for additional competition at O'Hare and the other slot-restrained airports, several bills have been introduced in Congress that would greatly curtail the use of slot restrictions and expand the ability of carriers to introduce new service at O'Hare and other slot constrained airports. /8

7/ U.S. Department of Transportation, A Study of the High Density Rule 3-4 (May 1995) (concluding that eliminating or substantially changing the high density rule is likely to result in new air services and lower fares for passengers).

8/ See H.R. 1000, 106th Cong. § 201 (1999) (eliminate slot restrictions at O Hare, JFK, and LaGuardia by March 1, 2000); S. 82, 106th Cong. §§ D06 & 5()8 (1999) (additional Lot exemptions); H.R. 780. 106th Cong. § 201 (1999) [Footnote continued]

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As part of the Federal Aviation Administration Authorization Act of 1994.9 Congress expressly authorized the Department to grant air carriers exemptions from the slot restrictions placed on operations at O'Hare /9 JFK. and LaGuardia for: (a) essential air service Bights, (b) international air transportation. and (c) service by new entrant air carriers. /10 See 49 U.S.C. § 41714(a), (b), & (c). In the case of a "new entrant air carrier," such as National, 10 the Department may grant slot exemptions to enable the carrier to provide air transportation at a high density airport if it the Department "finds it to be in the public interest and the circumstances to be exceptional." 49 U.S.C. § 41714(c)(1).

[Footnote continued]

(redistribution of slots by auction); see also DOT Wants to Kill Slots at Three Airports; Raises Bar for $5 PFC, Airports, February 9, 1999, at 55 (Clinton Administration proposing passage of legislation that would eliminate slot restrictions at O'Hare, JFK, and LaGuardia by 2004).

9/ Pub. L. No. 103-305, § 206, 108 Stat. 1569, 1584-87 (1994).

10/ Under the slot exemption statute, the term "new entrant air carrier" is defined to include an air carrier such as National Airlines "that does not hold a slot at-the airport concerned and has never sold or given up a slot at that airport after December 16, 1985." 49 U.S.C. § 41714(h)(3).

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For the first few years after passage of the FAA Authorization Act of 1994. the Department held that "exceptional circumstances" justifying the award of slot exemptions existed only where there was a market that was demonstrably large enough to support nonstop service, but had no nonstop service. /11 The Department subsequently broadened its construction of the "exceptional circumstances" standard to include noncompetitive or underserved markets where customers would be able to obtain significantly: lower fares if a slot exemption were granted. /l2 Under this new approach, the Department determined that it would accord controlling weight to the following factors when ruling on a new entrant air carrier's slot exemption application. /13

11/ See Application of Reno Air. Inc., DOT Order 94-9-30 (granting slot exemptions); Application offer South Airlines, Inc., DOT Order 96-5-33 (granting slot exemptions); Application of Western Pacific Airlines, Inc., DOT Order 95-4-33 (denying slot exemptions); Application of Spirit Airlines. Inc., DOT Order 95-8-38 (denying slot exemptions).

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• The carrier's proposal must be based on the use of jet aircraft that meet Stage 3 noise requirements;

• There must be a reasonable expectation that the proposed service will be operationally and financially viable; and

• The carrier must propose to introduce (a) new nonstop service or (b) new competitive services (particularly if the carrier offers lower fares) where: (i) there is only single carrier service and the market could support entry, or (ii) existing services do not produce meaningful price competition.

In 1999 when the Department broadened its interpretation of "exceptional circumstances." it prepared an environmental assessment and adopted the benchmark of 60 slot exemptions as a limit on the total number of slot exemptions that it was willing to grant for operations at O'Hare. /14

On March 16, 1999, the Department again liberalized its policy on the award of slot exemptions by deciding on an experimental basis to award slot exemptions to communities, as opposed to air carriers, for nonstop service to O'Hare. /15

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National's proposed O'Hare-Las Vegas service satisfies the standards for the award of slot exemptions at O'Hare. It is in the public interest because it will provide a beneficial increase in capacity. help to lower average ticket prices in the market, reduce excessive market dominance by several incumbent carriers, create attractive service options for travelers, and foster the entry of a new carrier. /l6 National's proposed service also satisfies the Department's "exceptional circumstances" standard because: (1) the proposed service will be conducted solely with Stage 3 aircraft, /l7 (2) will be operationally and financially viable, /18 and (3) will introduce more competition in a market that is currently underserved and where existing services do not produce meaningful competition.

16/ See the definition of "public interest" in 49 U.S.C. § 40101.

17/ National intends to operate an all-Boeing 757 fleet. Each of these aircraft will meet the Stage 3 noise requirements.

18/ National has determined that it can profitably provide three daily roundtrips if it is granted five slot exemptions.

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On February 11, 1999, the Department determined that National would "have sufficient financial resources available to it to enable it to commence its proposed scheduled passenger operations without posing an undue risk to consumers or their funds." /l9 The Department also found that National possesses the requisite managerial and technical competence. Therefore, the viability of National's proposed service should not be in doubt. As a further safeguard, immediately prior to issuing effective certificate authority, the Department will review current financial information submitted by National to ensure the carrier's continued financial fitness.

Several facts indicate that the O'Hare-Las Vegas market is presently underserved and lacks meaningful price competition. As Exhibit NA-2 shows, the nonstop O'Hare-Las Vegas market is currently served by only three carriers, two of which have made O'Hare a fortress hub and have

19/ Order 99-1-13 at 6 (order to show cause); Order 99-2-10 (finalizing tentative conclusions in Order 99-1-13).

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substantial slot holdings at O'Hare. /20 Together these two carriers control over 86°/o of the available passenger seat capacity in the O'Hare-Las Vegas market. See Exhibit NA-2.

In addition, as Exhibit NA-3 shows, the three incumbent carriers in the O'Hare-Las Vegas market realize above-average load factors for their O'Hare-Las Vegas service compared to other markets. For instance, American's load factor for its O'Hare-Las Vegas service averaged slightly over 90% from October 1997 through September 1998. During that same period. its average load factor for all the markets it serves was only 70%. Similarly United's average load factor for its O'Hare-Las Vegas service was 86.5% while its average load factor for all markets was only 71.4%. America West s O'Hare-Las Vegas load factors are also significantly higher than its systemwide load factor (nearly 77% versus almost 68%). As the Department has

20/ According to FAA records, United Air Lines holds approximately 50% of the slots available for domestic air carrier service at O'Hare, and American Airlines-holds roughly 36.5% of such slots. FAA, Summary of Holdings by Carrier for Slots Held 5 or More Days (March 2, 1999).

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previously noted. these comparatively high load factors for O'Hare-Las Vegas are an indication that the existing service is inadequate. /21

National s proposed service will promote competition in the O'Hare-Las Vegas market by providing a needed increase in capacity. helping to lower average ticket prices. and creating better service options for travelers. With respect to capacity, National s proposed service will increase the number of available passenger seats in the market by 24%. See Exhibit NA-1

Importantly, National's proposed service also will provide a more passenger-friendly schedule. As indicated in Exhibit NA-1. all but one of National's proposed flights between O'Hare and Las Vegas will depart one airport between the hours of 8:00 a.m. and 9:00 p.m. and arrive at the other within that same daytime period. /21 In contrast, a significant number of the

21/ Order 98-4-21 at 13 (stating that the high load factors in the O'Hare-Las Vegas and O'Hare-Phoenix markets are an indication that both markets are underserved").

22/ Because passengers generally prefer to travel during the daytime, it is necessary that National's proposed service overlap the slot-restricted hours at O'Hare which extend from 6:45 a.m. to 9:15 p.m. If National were to provide O'Hare-Las Vegas service solely outside that window of time so that no slot exemptions would be needed, National's service would become significantly less attractive to passengers and would thereby become less competitive.

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flights operated by the incumbent carriers require passengers to travel before 8:00 a.m. or after 9:00 p.m. local time. See Exhibit NA-2 (such flight times shaded) All of America West's flights between O'Hare and Las Vegas do so. Four of American's eleven flights and six of United's ten flights also require passengers to travel before 8:00 a.m. or after 9:00 p.m. local time.

In addition, National's entrance into the O'Hare-Las Vegas market will ensure the availability of lower average ticket prices for passengers. For instance, National's estimated first c lass fare for nonstop transportation between O'Hare and Las Vegas will be approximately 38% of United's current first class fare of $1,240. /23 National also estimates that its lowest unrestricted fare for tourist class seating will be roughly 30% less than America West's current fare of $429. In fact, National's proposed fares will not only be lower than the fares currently being offered in the O'Hare-Las Vegas market, they will also be lower than the prevailing fares for service

23/ The-fares for United and America West used in this paragraph were derived from the Sabre reservations system today.

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between Chicago's Midway Airport, which is not slot-controlled, and Las Vegas./24

The benefits of the additional service and lower prices National will offer are also evidenced by National's estimate that over 145,000 incremental travelers would be attracted between O'Hare and Las Vegas during calendar year 1999. See Exhibit NA-1

There are currently five applicants for O'Hare slot exemptions. /25 Two are certificated U.S. air carriers (American Eagle and Atlantic Coast

24/ As evidenced by the fare premium that carriers at O'Hare are generally able to exact, Midway and O'Hare represent two distinct markets. See Applications of Accessair Holdings, Inc., et al., Order 98-4-22 at 17-18 (rejecting an argument to the contrary and stating that "[airport-specific routes can and do constitute separate markets if airlines serving such routes have some ability to disregard fares and services offered at other airports' ). Unlike O'Hare, Midway is not slot-controlled and is not the fortress hub of two major air carriers. Unfortunately, Midway also is not the airport preferred by many travelers and has a shortage of available gates to handle National's Boeing 757 aircraft. Nonetheless, Midway is still important to National's overall plan for providing service between Chicago and Las ~ egas. and National Airlines intends to serve both airports.

25/ See Order 99-3-12 at 2 n3 & 7-8 (noting existence of 8 applicants, granting relief to 2 applicants, and dismissing 2 applications without prejudice); see also Application of the Community of Sioux City, Iowa. filed in Docket OST-99-5475 on April 1, 1999.

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Airlines). two are Canadian carriers (Air Canada and Canadian Airlines). and one is a community (Sioux City Iowa). In total, the Department is being asked to issue more O'Hare slot exemptions than are available under the 60-slot exemption limitation that it adopted. Indeed, since it recently granted the Greenville/Spartanburg and Savannah/Hilton Head communities a total of six slot exemptions, the Department apparently has only one exemption available for other competing proposals. /26

The Department obviously cannot grant slot exemptions to National if the Department deems none are available. However, the Department should reconsider its self-imposed limit of 60 slot exemptions for service at O'Hare. The limitations that the Department places on its authority to grant slot exemptions at O'Hare and LaGuardia are derived solely from the assumptions used in the Departments 1997 environmental assessment. /27 Given the overriding importance of reducing barriers to competition at slot restricted airports, the Department should either abandon this limitation in

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its entirety or, if the Department finds it necessary, should conduct another environmental assessment on an expedited basis to evaluate the public benefits and costs of granting more than 60 slot exemptions at O'Hare to new entrants.

National Should Be Granted Slot Exemptions at O'Hare in Preference to the Other Applicants As discussed above, the Department's public interest assessment and application of its decisional guidelines should clearly weigh in favor of granting National the relief it seeks.

The two U.S. air carrier applicants, American Eagle and Atlantic Coast Airlines, have both already received a significant number of slot exemptions from the Department for service at O'Hare. /28 The Department should defer acting on these carriers' pending applications because each of them has already been enabled "to implement a significant portion of its aggregate plan as presented in its slot exemption applications." /29 and,

28/ See Order 98-9-24 (increasing the number of slot exemptions granted to American Eagle from 16 to 18); Order 98-4-21 (granting Atlantic Coast Airlines 16 slot exemptions).

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presumably, will serve as the operators of the new frequencies permitted by the recent slot exemptions awarded to the Greenville/Spartanburg and Savannah/Hilton Head communities. Indeed, both of these carriers have already received so many slot exemptions that their current status as new entrants is questionable. /30 Moreover, the slot authority granted to each has 'the secondary effect of adhering to the advantage of a large carrier such as American" and United. which already exert market dominance at O'Hare. /31

The clear legislative purpose in empowering the Department to issue slot exemptions to new entrants would be thwarted if the Department were to grant additional. scarce slot exemptions to carriers that already enjoy substantial slot exemptions at O'Hare, while denying National, a new entrant, an opportunity to introduce its first new competitive services to the slot-restricted airport.

As to the Canadian carriers, the Department should not grant their applications to the extent that such relief would be given under the "new entrant air carrier" exemption provisions of 49 U.S.C. § 41714(c), rather than

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The Department should defer acting on Air Canada's application for the additional reasons that its application for winter 1998/1999 slot exemptions has become moot by the passage of time /33 and that Air Canada's substantial O'Hare slot holdings /34 disqualify it from being considered a "new entrant air carrier" even if 49 U.S.C. § 41714(c) would otherwise apply to its request.

32/ Compare 49 U.S.C. 40102(2) & (21) (defining the mutually exclusive terms "air carrier" and foreign air carrier") with 49 U.S.C. § 41714(c) (authorizing slot exemptions for "new entrant air carriers"), 49 U.S.C. § 41714(h)(3) (a "new entrant air carrier" is an "air carrier" with no slots or a "limited incumbent carrier"), and 14 C.F.R. § 93.213(a)(5) (in relevant part "limited incumbent carrier" is an "air carrier" with less than 12 slots).

34/ According to FAA records, Air Canada holds 32 slots for service at O'Hare.

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Finally, the Department should defer acting on Sioux City s application because Sioux City does not qualify for slot exemptions under the express terms of 49 U.S.C. 41714 and its service proposal offers less certainty and fewer public benefits than National's.

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favor National s application for O'Hare slot exemptions to the extent that slot exemptions are not available to satisfy all applicants' requests.

First unlike the situation surrounding the applications of Greenville/Spartanburg and Savannah/Hilton Head, no air carrier has expressed a present interest in providing Sioux City-O'Hare service. Thus the Department lacks the assurance that the proposed service to O'Hare would be provided even if slots were granted to the community.

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definiteness /36 and is likely to attract significantly fewer new passengers for travel to and from O Hare. /37

37/ Indeed, the estimated number of new passengers that will be attracted by National's proposed service (145,440), taken alone, is more than twice the total number of passengers (4, existing O&D passengers plus new passengers) that Sioux City estimates will use its proposed service. See Application of the Community of Sioux City, Iowa, at 9 and Attachment B (respectively, identifying total passenger traffic of 68,580 and 57,650 as possible).

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WHEREFORE. National Airlines. Inc. requests that the Department grant it an exemption from the provisions of 14 C.F.R. Part 93, Subparts K & S, to enable National to conduct five flight operations a day (departures or arrivals) at Chicago O'Hare Airport during the slot-controlled hours of 6:45 a.m. to 9:15 p.m., for the purpose of providing nonstop service between Las Vegas, Nevada and Chicago O'Hare Airport.

Respectfully submitted,

George U. Carneal

Ronald P. Brower

Hogan & Hartson L.L.P.

Columbia Square

55a Thirteenth Street, N.W.

Washington, D.C. 20004-1109

Telephone: (202) 637-6546

Facsimile: (202) 637-5910

Counsel for National Airlines, Inc.

Dated: April 7, 1999