Petition for Waiver of the Terms of the Order Limiting Scheduled Operations at LaGuardia Airport, 7306-7312 [2010-3109]

Agencies

• Federal Aviation Administration
• DEPARTMENT OF TRANSPORTATION

[Federal Register Volume 75, Number 32 (Thursday, February 18, 2010)]
[Notices]
[Pages 7306-7312]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-3109]


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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

[Docket No. FAA-2010-0109]


Petition for Waiver of the Terms of the Order Limiting Scheduled 
Operations at LaGuardia Airport

ACTION: Notice of a petition for waiver and solicitation of comments on 
grant of petition with conditions.

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SUMMARY: Delta Air Lines and US Airways submitted a joint waiver 
request from the prohibition on purchasing operating authorizations 
(``slots'' or ``slot interests'') at LaGuardia Airport (LGA). The 
carriers requested the waiver to allow them to consummate a transaction 
in which Delta would transfer 42 pairs of slot interests to US Airways 
at Ronald Reagan Washington National Airport (DCA), international route 
authorities to S[atilde]o Paulo and Tokyo; and terminal space at the 
Marine Air Terminal at LGA. US Airways would transfer 125 pairs of slot 
interests to Delta at LGA, and would lease an additional 15 pairs of 
LGA slot interests with a purchase option, together with terminal space 
in LGA's Terminal C. We have evaluated the proposed transaction and 
tentatively determined that, while the proposed transaction has a 
number of benefits, a grant of the waiver in its entirety would result 
in a substantial increase in market concentration that would harm 
consumers. Accordingly, while we have tentatively decided to grant 
Delta Air Lines' and US Airways' joint waiver request in part, we have 
tentatively determined that the public interest would best be served by 
creating new and additional competition at the airports to 
counterbalance the potential harm to consumers. To achieve that goal, 
our proposed waiver would require the divestiture of 14 pairs of slot 
interests at DCA and 20 pairs of slot interests at LGA to new entrant 
and limited incumbent carriers.

DATES: Comments on the FAA's proposed grant of the petition for waiver 
with conditions must clearly identify the docket number and must be 
received on or before March 22, 2010.

ADDRESSES: You may send comments identified by Docket Number FAA-2010-
0109 using any of the following methods:
     Government-wide docketing system: Go to https://www.regulations.gov and follow the instructions for sending your 
comments electronically.
     Mail: Send comments to the Docket Management Facility; US 
Department of Transportation, 1200 New Jersey Avenue, SE., West 
Building Ground Floor, Room W12-140, Washington, DC 20590.
     Fax: Fax comments to the Docket Management Facility at 
(202) 493-2251.
     Hand Delivery: Bring comments to the Docket Management 
Facility in Room W12-140 of the West Building Ground Floor at 1200 New 
Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday 
through Friday, except Federal holidays.
    Privacy Considerations: We will post all comments we receive, 
without change, to https://www.regulations.gov, including any personal 
information you provide. Using the search function of our docket Web 
site, anyone can find and read the comments received into any of our 
dockets, including the name of the individual sending the comment (or 
signing the comment for an association, business, labor union, etc). 
You may review the Department of Transportation's complete Privacy Act 
Statement in the Federal Register at 65 FR 19,477-78 (Apr. 11, 2000).
    Reviewing the Docket: To read background documents or comments 
received in this matter, go to https://www.regulations.gov at any time 
or go to the Docket Management Facility in Room W12-140 on the ground 
floor of the West Building at 1200 New Jersey Avenue, SE., Washington, 
DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal 
holidays.

FOR FURTHER INFORMATION CONTACT: Rebecca MacPherson, Assistant Chief 
Counsel for Regulations, by telephone at (202) 267-3073 or by 
electronic mail at Rebecca.macpherson@faa.gov.

SUPPLEMENTARY INFORMATION: The FAA currently limits the number of 
scheduled and unscheduled operations during peak hours at LaGuardia 
Airport by virtue of an order that the FAA published in December 2006 
and subsequently amended (Order).\1\ The High Density Rule (HDR) \2\ 
limits scheduled and unscheduled operations at Ronald Reagan Washington 
National Airport. Because of the operating limitations, slots at 
LaGuardia and at Reagan National Airports are a scarce resource.
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    \1\ Operating Limitations at New York LaGuardia Airport, 71 FR 
77,854 (Dec. 27, 2006); 72 FR 63,224 (Nov. 8, 2007) (transfer, 
minimum usage, and withdrawal amendments); 72 FR 48,428 (Aug. 19, 
2008) (reducing the reservations available for unscheduled 
operations); 74 FR 845 (Jan. 8, 2009) (extending the expiration date 
through Oct. 24, 2009); 74 FR 2,646 (Jan. 15, 2009) (reducing the 
peak-hour cap on scheduled operations to 71); 74 FR. 51,653 (Oct. 7, 
2009) (extending the expiration date through Oct. 29, 2011).
    \2\ 14 CFR part 93, subparts K and S.
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    Two air carriers, Delta and US Airways, have proposed an exchange 
of slot interests at these two airports.\3\ This exchange, which could 
potentially impact as many as 182 round-trip operations \4\ at the two 
airports, would qualify as a purchase under both the Order and the 
HDR.\5\ The carriers consider the slot interest exchanges to be part of 
an integrated transaction because the sale of US Airways' slot 
interests to Delta at LGA is conditioned upon the purchase by US 
Airways of Delta's slot interests at DCA.
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    \3\ The parties would also exchange terminal facilities at 
LaGuardia, and Delta would transfer two foreign route authorities to 
US Airways.
    \4\ 280 operating authorizations at LaGuardia and 84 slots at 
Reagan National.
    \5\ 14 CFR Section 93.221.
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    The Order currently does not allow for the purchase and sale of 
slot interests at LaGuardia. Instead, it contains a provision that 
limits carriers

[[Page 7307]]

to leases and trades to another carrier for the duration of the Order, 
which presently expires October 29, 2011.\6\ The only way for a carrier 
to sell or purchase a slot interest at LaGuardia is through a waiver of 
the Order.
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    \6\ 74 FR at 51,654 (ordering paragraph A.5).
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    We reviewed this transaction as a result of the request by the 
parties for a waiver to the Order. Our ultimate decision with respect 
to the waiver request will be limited in scope. Our proposed grant of 
the waiver would transfer to Delta the same interests in the 
transferred US Airways' slots at LaGuardia that US Airways currently 
holds, under the terms of the Order. The waiver will not grant either 
carrier, or any transferee of divested slots, an interest in the slots 
that will extend beyond the term of the existing Order. Our proposed 
waiver does not limit the existing rights of any other carrier to 
dispose of its interests in slots at either affected airport.
    The proposed transaction is unique in scope and scale. We have 
evaluated the competitive impact of the transaction in this case 
because of its size and scope and its anticipated impact on two of our 
country's most congested and prominent airports. We are proposing 
conditional divestitures in this case because of the unusual size of 
the transaction, which dramatically enhances the respective market 
position of Delta at LaGuardia and US Airways at Reagan National 
Airport, the reduced competitive incentives that the carriers would 
have at the respective airports, and the potential for use of the 
transferred slot interests in an anticompetitive manner. We have not 
determined that an analysis of the impact of a transaction on 
competition or the imposition of targeted remedies is appropriate or 
necessary for future transfers of slot interests, and our tentative 
conclusions in this matter should not be interpreted to impose such a 
requirement. Our tentative waiver should not be read to prejudice or 
predetermine any long-term policy decisions relating to congestion 
management at either of the affected airports.
    The FAA is authorized to grant an exemption from the Order when the 
Administrator determines the ``exemption is in the public interest.'' 
49 U.S.C. 40109. See Starr v. Federal Aviation Administration, 589 F.2d 
307, 311 (7th Cir. 1978). The Order (as well as the HDR) was issued 
pursuant to the FAA's authority to ``develop plans for the use of the 
navigable airspace'' and ``assign by regulation or order the use of the 
airspace necessary to ensure the safety of aircraft and the efficient 
use of airspace.'' 49 U.S.C. 40103(b)(1). Further, the Administrator is 
authorized to ``modify or revoke an assignment when required in the 
public interest.'' Id. The FAA has tentatively decided to grant the 
carriers' waiver request, subject to the conditions described in this 
Notice.
    In considering what is in the public interest in this instance, the 
FAA is guided by the policy goals prescribed for the Secretary in 49 
U.S.C. 40101(a)(4), (6), (10-13) and the pro-competition policies 
followed by Congress in adopting legislation on matters such as slot 
exemptions and airport grant programs. See, e.g., Delta Air Lines v. 
CAB, 674 F2d 1 (D.C. Cir. 1982); Congestion and Delay Reduction Rule at 
Chicago O'Hare International Airport, 71 FR 51,382, 51,388-90 (Aug. 29, 
2006) (O'Hare Rule). These pro-competitive policies derive from the 
Airline Deregulation Act of 1978 and direct the Secretary to consider, 
as in the public interest, placing maximum reliance on airline 
competition and opportunities for new entrant airlines. In our O'Hare 
Rule, we relied on these pro-competitive policies in granting 
preferential treatment to new entrant and limited incumbent airlines in 
assigning new or withdrawn slots (termed ``arrival authorizations''). 
Id.; 14 CFR 93.30. We noted that the ``courts have approved the 
Secretary's reliance on the pro-competition policies in allocating 
slots under the HDR. Northwest Airlines v. Goldschmidt, 645 F.2d 1309, 
1315 (8th Cir. 1980).'' And, in response to the congestion caused by 
AIR-21 slot exemptions at LaGuardia, we issued orders that allocated 
those slot exemptions and ``took into account the need to promote 
competition.'' See 66 FR 41,294 (Aug. 7, 2001) and 67 FR 65,826 (Oct. 
28, 2002).
    The pro-competitive policies of the Airline Deregulation Act 
emphasize the interests of the traveling public in having available 
``low-priced services,'' ``entry into air transportation markets by new 
and existing air carriers,'' ``actual and potential competition,'' and 
in avoiding ``unfair * * * or anticompetitive practices in air 
transportation,'' and ``unreasonable industry concentration, excessive 
market domination [or] monopoly powers * * * in air transportation,'' 
49 U.S.C. 40101(a)(4), (6), (9), (10), (11), (12) and (13). See Morales 
v. Trans World Airlines, Inc., 504 U.S. 374, 378 (1992) (Congress 
enacted the Airline Deregulation Act in 1978, which loosened its 
economic regulation of the airline industry after determining that `` 
maximum reliance on competitive market forces' would best further 
`efficiency, innovation, and low prices' as well as `variety [and] 
quality * * * of air transportation.' ''); American Airlines v. Wolens, 
513 U.S. 219, 230 (1995); Air Transport Ass'n of America, Inc. v. 
Cuomo, 520 F.3d 218, 222 (2d Cir. 2008).
    In addition to the pro-competitive policies of the Airline 
Deregulation Act, Congress also directed the Secretary to consider, as 
being in the public interest, matters that maintain and improve the 
health of the aviation industry such as ``[encouraging] efficient and 
well-managed air carriers to earn adequate profits and attract 
capital,'' ``developing and maintaining a sound regulatory system that 
is responsive to the needs of the public,'' and ``promoting, 
encouraging, and developing civil aeronautics and a viable, privately-
owned United States air transport industry.'' 49 U.S.C. 40101(a)(6)(B), 
(7), and (14). Furthermore, service to small communities is another 
important public interest factor. 49 U.S.C. 40101(a)(11) and (16).
    The carriers assert that their petition should be granted because 
it would benefit each of the carriers (e.g., it would facilitate Delta 
building a domestic hub at LGA and US Airways enhancing its network at 
DCA), would produce more efficiencies at LGA (e.g., Delta plans to use 
jet aircraft in place of US Airways' turboprops), would provide new and 
enhanced service to small communities, and would benefit consumers 
through enhanced network connectivity by Delta at LGA and US Airways at 
DCA. The FAA has evaluated the potential impact on air traffic 
operations at the respective airports, and it believes there will be 
little to no impact on the agency's ability to manage traffic at either 
airport. Based on our review of the petition, we tentatively find that 
much of the request meets the public interest standards of ensuring the 
efficiency of use of the navigable airspace and warrants a waiver. 
Additionally, the transaction would satisfy the public interest 
objectives related to promoting a viable domestic airline industry, 
encouraging well-managed carriers, and attracting capital and 
protecting service to small communities.
    We also tentatively find that it would further the pro-competitive 
public interest factors to condition the waiver on making certain slot 
interests available to new entrant and limited incumbent carriers, as 
explained more fully below. Our waiver would require Delta and US 
Airways, respectively, to divest 14 pairs of slot interests at DCA and 
20 pairs of slot interests at LGA.

[[Page 7308]]

The divestiture of the respective DCA and LGA slot interests would 
occur through sales to U.S. or Canadian carriers that have, as of the 
date of any final decision granting a waiver, less than five percent of 
the total slot interest holdings at DCA or LGA respectively, do not 
code share on flights to or from DCA or LGA with any carrier that has 
five percent or more slot interest holdings, and are not subsidiaries, 
either partially or wholly-owned, of a company whose combined slot 
interest holdings are equal to or greater than five percent at DCA or 
LGA, respectively. Thus, a carrier having less than five percent of 
slot interest holdings at DCA and not involved in a code-share 
relationship at DCA with a carrier holding five percent or more of the 
DCA slot interests as of the date of any final decision granting a 
waiver would be eligible to purchase divested DCA slots, even though 
that carrier has five percent or more of the LGA slot interest 
holdings, and vice versa.
    We are including both Canadian and U.S. air carriers in the class 
of new entrant and limited incumbent carriers eligible to purchase the 
divested slots. The Air Transport Agreement between the U.S. and Canada 
provides generally that the U.S. Government treats Canadian airlines in 
the same way as it treats U.S. airlines, for purposes of slot 
allocation at slot-regulated airports.
    The ``public interest'' standard provides the Administrator with 
broad powers to condition waivers. The Administrator is expressly 
authorized to ``take action [he] considers necessary to carry out [the 
Air Commerce and Safety part of Title 49 U.S.C.]'' and to prescribe 
orders as appropriate. 49 U.S.C. 40113(a), 46105(a). It is not uncommon 
for federal agencies to condition grants of waivers or exemptions upon 
meeting certain public interest requirements. Winter v. Natural 
Resources Defense Council, 129 S.Ct. 365, 371 (2008) (Navy granted an 
exemption from the Marine Mammal Protection Act for training exercises 
conditioned on adopting mitigation procedures); Clifford v. 
Pe[ntilde]a, 77 F.3d 1414, 1416 (D.C. Cir. 1996) (waiver of Merchant 
Marine Act for domestic ship operator to operate new foreign flag 
vessels conditioned on certain operating requirements); National Small 
Shipments Traffic Conference, Inc. v. C.A.B., 618 F.2d 819 (D.C. Cir. 
1980) (CAB has broad discretion to grant exemptions to promote price 
competition).
    Furthermore, in carrying out the Secretary's airline economic 
regulatory oversight, the Department previously has found that the 
public interest may require conditions upon the approval of a 
transaction, including divestitures of slots and/or other assets, such 
as route authority. See, e.g., U.S.-U.K. Alliance Case, DOT Order 2002-
1-12 (January 25, 2002) (tentative grant of conditional approval and 
antitrust immunity to an alliance of domestic and foreign air carriers, 
based in part on a finding that the divestiture by American Airlines 
and British Airways of London Heathrow Airport slots and access to 
necessary ground facilities to U.S. competitors, was required in the 
``public interest''); Joint Application of American Airlines, Inc. and 
Trans World Airlines, Inc. for Approval of Transfer of Certificates 
(U.S.-London Routes), DOT Order 91-4-46 (April 24, 1991) (finding that 
the ``public interest'' permits the approval of the transfer of certain 
TWA route authority, by sale, to American and requires the disapproval 
of other route authority transfers contemplated by TWA's agreement with 
American); Pacific Division Transfer Case, DOT Order 85-11-67 (October 
31, 1985) (approval of United's acquisition of Pan American's Pacific 
route authority on the condition that the ``public interest'' may 
require that United surrender its Seattle/Portland-Tokyo/Osaka 
authority should the Department so order in a future proceeding).
    Further, the Department has amended route certificates to delete 
authority upon a finding that the ``public convenience and necessity'' 
so requires. See Central Zone-Caracas/Maracaibo Venezuela Service Case, 
DOT Order 83-4-49 (March 9, 1983); American-Eastern/Continental Route 
Transfer, DOT Order 90-5-5 (April 26, 1990). The conditions we 
tentatively adopt on our waiver of the slot transaction are based on 
our concerns that approving the waiver in full would hinder competition 
at the two airports and disadvantage the traveling public.
    Entry is constrained at both DCA and LGA. The HDR adopted at DCA 
limits hourly instrument flight operations by air carriers, commuters 
and other airlines, as prescribed in 14 CFR part 93, subpart K; 
allocation of DCA slots is governed by 14 CFR part 93, subpart S; and 
nonstop flight operations at DCA are limited by a 1,250 mile perimeter 
under 49 U.S.C. 49109 and 14 CFR part 93, subpart T. See City of 
Houston v. Federal Aviation Administration, et al., 679 F.2d 1184 (5th 
Cir. 1982). The HDR notes that ``slots do not represent a property 
right but represent an operating privilege subject to absolute FAA 
control. Slots may be withdrawn at any time to fulfill the Department's 
operational needs * * *.'' 14 CFR 93.223. As noted, the FAA Order 
addressing congestion at LGA also caps flights at that airport; 
LaGuardia is also constrained by a locally imposed 1,500 mile 
perimeter. See Western Air Lines v. Port Authority of N.Y. and N.J., 
817 F.2d 222 (2d Cir. 1987).
    It is well-accepted that the secondary slot market at the slot-
controlled airports has not resulted in robust entry by new entrants or 
expansion by limited incumbents. See Airport Business Practices and 
Their Impact on Airline Competition, FAA/OST Task Force Study, at 32 
(Oct. 1999); Secretary's Task Force on Competition in the U.S. Domestic 
Airline Industry (1990) at 2-27 noting incumbent carriers have the 
potential to exert market power in slot pricing, creating a barrier to 
entry. The Government Accountability Office (GAO) also found that new 
entrant air carriers were unable to gain access to the slot-controlled 
airports in a predictable manner and with sufficient slots to provide 
meaningful competitive service and that incumbent carriers tended to 
hoard excess slots which they may lease to related airlines. Airline 
Competition: Industry Operating and Marketing Practices Limit Market 
Entry, GAO/RCED-90-147 (Aug. 29, 1990). The congressionally-created 
National Commission to Ensure a Strong Competitive Airline Industry 
also found that the HDR limited competition. A Report to the President: 
Change, Challenge and Competition (Aug. 1993). Congress attempted to 
redress the problems faced by new entrants in accessing slots at 
reasonable prices by directing the Department to grant exemptions from 
the HDR (but not at DCA) to new entrant airlines and only ``when in the 
public interest, and the circumstances exceptional.'' 49 U.S.C. 
41714(c). The GAO subsequently expressed concern that the HDR limited 
competition and erected barriers to entry, even given the ``exceptional 
circumstances'' criteria for slot exemptions. Barriers to Entry 
Continue to Limit Competition in Several Key Domestic Markets (GAO/RCED 
97-4, Oct. 1996). Congress directed a study by the National Academy of 
Sciences, National Research Council's Transportation Research Board 
that found ``many fundamental concerns'' with the slot rules including 
slot-hoarding by incumbent airlines (who use the slots to build 
networks and realize economies of scope) to restrict entry and 
expansion by competitors, and it found that the slot-controlled 
airports are among the highest-priced in the country. Entry and 
Competition in the U.S. Airline Industry: Issues and Opportunities at 
11, 113 (TRB, 1999). In 2000, Congress directed a multi-year

[[Page 7309]]

phase out of the HDR at John F. Kennedy International, LaGuardia, and 
O'Hare International Airports. 49 U.S.C. 41715. It found that the HDR 
constituted a barrier to improved service particularly by new entrant 
airlines and for service to smaller airports, harmed the traveling 
public by reducing competition, and inflated prices. H.R. Rep. No. 106-
167 (1999). However, as noted in the LGA Order, it was necessary to 
impose quotas on flights there to reduce delays and congestion. And, 
although Congress, in 2000 and 2003, loosened the slot controls 
slightly at DCA (by directing the Secretary to grant ``beyond-
perimeter'' and ``within-perimeter'' exemptions, 49 U.S.C. 41718), the 
number of slot exemptions operated by new entrant low-cost carriers 
pales in comparison to those operated by the dominant incumbent 
airlines.
    If the proposed transaction were approved as presented to the 
Department, the transaction would lead to significantly increased 
concentration at DCA for US Airways and at LGA for Delta, regardless of 
whether the measure is calculated in numbers of departures or slots. 
Based on February 2010 schedules, US Airways would raise its share of 
departures at DCA from 47 to 58 percent. US Airways' share of slot 
interests at DCA (including regional affiliates) would increase from 44 
percent to 54 percent, making it by far the dominant carrier. American, 
with its affiliates, would be a distant second at 14.5 percent.
    As a result of the transaction, Delta would ascend to a dominant 
position at LGA, raising its share of departures from 26 percent to 51 
percent. Delta's share of slot interests at LGA would more than double, 
growing from 24 percent to 49 percent.\7\ LGA would transition from an 
airport with three competing carriers of similar size to one dominant 
carrier (Delta).
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    \7\ Includes Northwest and Comair.
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    Stated another way, US Airways and its affiliates at DCA and Delta 
at LGA would become three times, and almost two-and-one-half times, 
respectively, the size of their closest competitor, a factor that 
limits the extent to which other incumbent competitors can exert 
competitive pressure and discipline fares. That limitation is further 
compounded here by the fact that low-cost carriers--those creating the 
most competitive impact--have only a 3.3 percent share of slot interest 
holdings at DCA and a 6.8 percent share of slot interest holdings at 
LGA. Studies of the domestic U.S. airline industry demonstrate that 
entry by low-fare carriers dramatically lowers fares and increases the 
volume of passengers carried in a market.\8\
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    \8\ See, e.g., Oster, Jr., Clinton V. & Strong, John S. (2001) 
at 24. ``Predatory practices in the U.S. Airline Industry.'' Working 
Paper, US DOT.
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    Overall, consumers at these airports may be harmed by the loss of 
nonstop service, the loss of a nonstop competitor, or the transfer of 
nonstop monopoly service to a more dominant carrier. While the carriers 
have made public some of their new intended services, including new 
service to small communities, they have not released all intended 
service changes.
    However, it is apparent that if the proposed transaction is 
approved, the carriers will increase the number of markets they serve 
on a monopoly or dominant basis. As the two carriers reposition at LGA 
and DCA, there is no assurance that all markets currently being served 
by the departing carrier will be maintained by the new carrier. 
Further, in a number of instances the departing carrier served a market 
on a monopoly or dominant basis--so that if the new carrier opts to 
serve that market it will similarly be on a monopoly or dominant basis. 
Here, to argue that simply replacing one carrier in a specific market 
with another has a neutral overall impact ignores the greater economic 
dominance that would result from the transaction.
    The Department tentatively concludes that the proposed transaction 
is likely to result in higher fares for consumers in certain domestic 
markets subject to the perimeter rules at both DCA and LGA. Numerous 
economic studies of the domestic U.S. airline industry have shown that 
reducing the number of nonstop carriers in a market, especially in 
short-haul markets like those here, directly affects the level of 
fares.\9\ If the slot transaction was to be approved as proposed and US 
Airways and Delta were to increase their presence at DCA and LGA 
respectively, the competitive environment would become significantly 
more concentrated. The carriers would likely rely on their increased 
dominance to maintain or enhance their premium fare structure in 
markets served at both airports. Furthermore, slot restrictions at both 
airports substantially hinder proportional increases in competition by 
other carriers, and higher fares will be sustainable due to the 
carriers' increased market power at both airports. This tentative 
conclusion is supported by an analysis of the carriers' past behavior 
in similar markets at both airports.
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    \9\ See, e.g., Kamita, ``Analyzing the Effects of Temporary 
Antitrust Immunity: The Aloha-Hawaiian Immunity Agreement,'' Journal 
of Law and Economics (2009); Peters, ``Evaluating the Performance of 
Merger Simulation: Evidence from the U.S. Airline Industry,'' 49 
Journal of Law and Economics at 627 (2006); Joskow, Werden, and 
Johnson, ``Entry, Exit and Performance in Airline Markets, 12 
International Journal of Industrial Organization at 457 (1994); 
Borenstein, ``The Evolution of U.S. Airline Competition,'' 6 Journal 
of Economic Perspectives at 45 (1992); Borenstein, ``Hubs and High 
Fares: Airport Dominance and Market Power in the U.S. Airline 
Industry,'' 20 Rand Journal of Economics at 344 (1989); Brueckner, 
Dyer and Spiller, ``Fare Determination in Hub and Spoke Networks,'' 
23 Rand Journal of Economics at 309 (1992); Morrison and Winston, 
``Enhancing Performance in the Deregulated Air Transportation 
System,'' 1989 Brookings Papers: Microeconomics at 61 (1989); Oster, 
Jr., Clinton V. & Strong, John S., ``Predatory practices in the U.S. 
Airline Industry.'' At Working Paper, US DOT at 6 (January 2001); 
Gimeno, 20(2) ``Reciprocal Threats in Multimarket Rivalry: Staking 
out `Spheres of Influence' in the U.S. Airline Industry,'' Strategic 
Management Journal 101 at 110.
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    Even today, before the transaction is implemented, US Airways and 
Delta charge higher relative fares where they operate monopoly or 
dominant routes from airports where they have a strong presence. This 
is especially true at DCA and LGA. US Airways, holding the highest 
current share of slot interests and departures at DCA, charged on 
average 124 percent of the Standard Industry Fare Level (SIFL), a cost-
based index that the Department has used historically to assist in its 
evaluation of pricing. However, in markets where it held a 95 to 100 
percent share of nonstop departures, US Airways charged substantially 
more. Delta, having a less strong position at LGA than US Airways at 
DCA, tends to price more competitively, averaging only 89 percent of 
the index figures with its current slot interest holdings. While we 
anticipate that Delta's increased market share after the transaction 
would permit it to increase the percent of SIFL associated with its 
service at LGA, our findings of relatively higher existing levels of 
competition at LGA influenced our tentative determination to require 
fewer divestitures proportionately at LGA than at DCA.
    In comparison, at Washington Dulles International Airport (IAD), 
the average of all carriers' fares vs. SIFL is 77 percent, and at 
Thurgood Marshall Baltimore-Washington Airport (BWI) the figure is 65 
percent. The fares of the largest carrier at IAD, United Airlines, 
average 90 percent of SIFL, while those of the largest carrier at BWI, 
Southwest Airlines, average 65 percent.
    At Newark Liberty International (EWR), the average of all carriers' 
fares vs. SIFL is 71 percent, and at JFK the figure is 57 percent. The 
fares of the largest carrier at EWR, Continental Airlines, average 71 
percent of SIFL, while those of the largest carrier at JFK, JetBlue, 
average 57 percent. The NYC/

[[Page 7310]]

Washington airports that have the largest proportion of low-cost 
carriers consistently provide lower fares.
    The Department also considered whether the three airports in the 
New York area, and the three in the Washington area, effectively 
constitute the same market for all passengers, such that if fares are 
perceived to be rising too high at one airport, the harm would be 
mitigated by consumers simply shifting to the other two. Department 
analysts, evaluating passenger ticket data that contained actual fare 
information, looked at whether the three airports at New York and the 
three in Washington were effective substitutes for each other, and 
concluded that they were not. In analyzing both overlap and all markets 
at the airports, they found that yields (i.e., revenue per passenger 
mile) were substantially different among the airports. Specifically, 
they found that the average yield in all markets at BWI is 48 percent 
less than DCA, and the average yield in all markets at Dulles is 37 
percent less than DCA. (Yield at DCA is 27 cents per mile, vs.17 cents 
at Dulles and 14 cents at BWI.) Similarly, the average yield at JFK is 
28 percent less than at LGA, and Newark is 9 percent less than at LGA. 
(Yield at LGA is 20.5 cents per mile, vs. 18.7 cents at EWR and 14.7 
cents at JFK.) If the airports were effective economic substitutes for 
all passengers, we would expect to see a greater self-equalizing of 
yields and the yield spreads would not differ so significantly.
    The Department also found that the differences in the level of 
yields at area airports tended to correlate with the level of low cost 
carrier operations. Thus, passengers pay more for nonstop service of 
equivalent distance at DCA and LGA than at alternative airports that 
have sizable LCC competition. For example, for trips out to 1000 miles, 
passengers at LGA pay 23% more on average than those at JFK ($147 vs. 
$120 each way). Passengers at DCA pay 64% on average more than those at 
BWI ($184 vs. $113 each way).
    Under their proposal, Delta and US Airways are not committing to 
any particular markets for defined periods. They would be free, as is 
any other carrier, to discontinue routes that are being proposed and to 
initiate new routes elsewhere. Thus, they could, if they so chose, use 
their added slot interests to target smaller competitors, for example 
by increasing their roundtrips in competitive markets and 
``sandwiching'' competitor flights. With relatively few slot interests 
of their own, competitors--especially the low-cost carriers at DCA that 
are tied to specific markets through slot exemption awards--may be 
unable to successfully respond.
    The competitive harm resulting from this transaction as proposed 
would occur not just at the city-pair level, but at the network or 
airport level as well, especially given our conclusion that alternative 
airports are not perfect substitutes for service at DCA and LGA. An 
appropriate remedy for this transaction must address this broader 
competitive harm, given (1) that Delta and US Airways are currently the 
number one and number two competitors at DCA and that Delta is the most 
likely potential carrier to compete with US Airways in any market out 
of DCA; (2) the absolute regulatory cap on operations/entry at both 
airports; and (3) the dramatic increase in dominance of US Airways at 
DCA and Delta at LGA that would result from the transaction.
    The combination of increased airport concentration, an increase in 
the number of monopoly or dominant markets in which increased pricing 
power can be exercised, and the potential for use of transferred slot 
interests in an anticompetitive manner underlie our proposal here for a 
limited number of divestitures.
    At DCA, we are proposing to require a divestiture of 14 pairs of 
slot interests. We project that, in the ``bundles'' (that is, pairs of 
slot interests) proposed, this would enable new entrant/limited 
incumbent competitors to initiate and/or increase service in one large 
market or multiple smaller markets. It would limit the increase in US 
Airways' share of slot interests at DCA to a total of 50.8 percent, and 
increase the new entrant/limited incumbent share to 6.5 percent.
    At LGA, we are proposing that 20 pairs of slot interests be 
divested. With the authorization bundles as proposed, we project that 
these would enable limited incumbents to strengthen their existing 
presence in up to three markets and/or allow new entrants to initiate 
new service in up to four new markets. Such a divestiture would limit 
the increase in Delta's share of slot interests to 45.3 percent, and 
increase the new entrant/limited incumbent share to 10.3 percent. The 
proposed slot interest divestitures at LGA and at DCA would allow the 
parties to realize almost all of their purported benefits while 
providing opportunities for greater competition at those airports and 
reducing the likelihood that increased concentration of slot interests 
will reduce competition at those airports.
    Our proposed divestiture of 14 pairs of slot interests at DCA would 
be a condition of our waiver of the LGA Order and is not an amendment 
to the HDR that is effective at DCA. We are tentatively requiring this 
divestiture to address our concerns with the merits of the waiver 
application before us. The waiver application itself conditions a sale 
of Delta's DCA slot interests with a sale of US Airways' LGA slot 
interests. The waiver request states:

    The transfer of the [280 LaGuardia Operating Authorizations to 
Delta] is an integral part of a beneficial and efficiency-enhancing 
transaction * * *. For its part, US Airways will acquire 84 Delta 
slots at DCA * * *. (at 1).

Proposed Remedies

    The FAA proposes to remedy the anticompetitive effects of the 
proposed slot interest exchange waiver request by requiring Delta and 
US Airways to dispose of 14 pairs of slot interests at DCA and 20 pairs 
of slot interests at LGA to U.S. or Canadian air carriers having fewer 
than five percent of total slot holdings at DCA and/or LGA, do not code 
share to or from DCA or LGA with any carrier that has five percent or 
more slot holdings, and are not subsidiaries, either partially or 
wholly-owned, of a company whose combined slot interest holdings are 
equal to or greater than five percent at LGA and/or DCA. Carriers that 
would not qualify include those who are involved in a code-share 
relationship at DCA/LGA with carrier(s) that also would not qualify as 
of the date of the Notice.
    Use of a five percent standard for purposes of this transaction is 
proposed because carriers having slot interest holding shares above 
that point have a minimum level of competitive service sufficient to 
affect pricing in the market.\10\ Restricting eligibility to these 
``less than 5 percent'' carriers would assist new or small non-aligned 
carriers in defending themselves against increasingly dominant 
competitors, which, with the benefit of additional slot interests, 
could pursue anticompetitive strategies such as significantly 
increasing existing services in any new entrant/limited incumbent/low-
cost/non-aligned carrier market. These new or limited incumbent 
carriers offer the prospect of increased efficiencies and innovations 
to the markets, such as through better utilization of ground staff, 
equipment, and facilities. They could also increase throughput at these 
constrained airports by adding more seats per departure than proposed 
by US Airways and Delta, which are relying on regional affiliates for a 
large proportion of their proposed new flying at DCA and LGA. Moreover,

[[Page 7311]]

new entrants and those limited incumbents at the respective airports 
could bring alternative business models and new competition to the slot 
constrained airports so long as they have a sufficient number of slot 
interests to establish sustainable patterns of service.\11\
---------------------------------------------------------------------------

    \10\ See, e.g., Gimeno, 20(2) ``Reciprocal Threats in 
Multimarket Rivalry: Staking out `Spheres of Influence' in the U.S. 
Airline Industry,'' Strategic Management Journal 101 at 110.
    \11\ See, e.g., Oster, Jr., Clinton V. & Strong, John S. (2001). 
``Predatory practices in the U.S. Airline Industry.'' Working Paper, 
US DOT.
---------------------------------------------------------------------------

    Based on FAA slot holding data, incumbent carriers at DCA that 
would qualify under these limitations are AirTran and Spirit. At LGA, 
incumbent carriers that would qualify are AirTran, JetBlue, Southwest, 
and Spirit. In addition, of course, any U.S. or Canadian carrier not 
currently holding slot interests at the respective airports and 
otherwise meeting the criteria would be eligible under our proposal.
    We propose that the slot interests be sold by the carriers and that 
the proceeds of the sales be collected and retained by the carriers. We 
are tentatively selecting this method, rather than one whereby the FAA 
would withdraw the slots and reallocate them by lottery (or similar 
means) to new entrant and limited incumbent carriers. Through a sale, 
the petitioning carriers may maximize the value of the slot interests 
as they initially intended. The carriers at LGA hold a possessory slot 
interest that may be leased in a secondary market for a period of time, 
and at DCA they may sell their slot interests also in the secondary 
market. By proposing to allow divestitures of the slot interests 
through sales, we are permitting the carriers to monetize their 
interests.
    In order to achieve our goal of affording consumers the opportunity 
to realize new competitive service at LGA and DCA, we propose to place 
a 60-day time limit on US Airways' and Delta's sales of the slot 
interests. Should the carriers not succeed in selling those slot 
interests within the 60-day time period, we propose to withdraw them 
from Delta and US Airways and hold them in abeyance while we consider 
options for their future use.
    We also propose precluding the carriers purchasing the slot 
interests acquired pursuant to this proceeding from re-selling, or 
leasing, them to any carriers that are not eligible under the terms of 
the final action we take in this proceeding. This restriction will help 
to ensure that the traveling public will receive the benefits of the 
service and price competition provided by the new entrant/limited 
incumbent carrier that purchased the slot interests. Additionally, 
these slot interests will be subject to the same minimum usage 
requirements as provided in the LGA Order and HDR, however, we propose 
to waive the use or lose requirements for a period of up to six months 
in order for the new entrant/limited incumbent to start up service at 
new markets or add service to existing markets. Our waiver would assure 
an eligible purchaser of a slot interest at LGA that we would waive the 
LGA Order prohibition against a purchase of a slot interest at the time 
of the sale, in order to facilitate the completion of the transaction. 
We would entertain requests by the purchaser to accommodate slides to 
assist the carrier's schedule. We seek comment on the conditions 
described above.
    We also seek comment on the means by which the carriers may sell 
the slot interests to the new entrant/limited incumbent carriers 
described above. One option is for the carriers to engage in private 
sales of the slot interests. Under this option, the FAA would require 
biweekly reports of the efforts to sell the slot interests, the 
identity of carriers contacted, the prices offered, and the terms (if 
any) reached.
    Another option would be to permit the sale of the slot interests to 
the new entrant/limited incumbent carriers on a cash-only basis, 
through a website managed by the FAA, in which the FAA would specify a 
bid closing date and time and the purchasers' identities would not be 
revealed. The FAA would forward the highest qualifying bid to the 
selling carrier. The FAA would require the selling carrier to accept 
the forwarded bid or to reject it within three business days.
    A third option would allow the carriers to provide notice of the 
availability of the slot interests to the new entrant/limited incumbent 
carriers through a website managed by the FAA. The FAA would provide an 
opening date, closing date and time by which offers for the slot 
interests must be received. US Airways and Delta would be able to 
negotiate the consideration and other terms of the sale with the 
eligible purchaser. Once the sale was consummated, the carriers would 
provide the FAA with information concerning the terms of the sale as 
well as other offers received and names of bidders.
    We request comments on these variations of the ``bulletin board'' 
approach.
    We also propose to bundle the package of slot interests for sale so 
as to enable an eligible carrier to purchase sufficient slots to 
operate competitive service, with times spread across the day. The slot 
interests to be divested must be air carrier slot interests, and slot 
times at DCA were chosen based on the divested slot interests as a 
total percentage relative to the transaction. Fourteen pairs of slot 
interests constitute 33.3 percent of slots involved in the transaction, 
and that percentage was spread amongst Delta's planned slot 
divestitures (by hour) to US Airways as evenly as possible across the 
hours between 0700 and 2159. Slot interests in the 0600, 2200, and 2300 
hours are currently available from the FAA and therefore were not 
included in the list of slots to be divested. At DCA, we propose that 
the carriers bundle the pairs of slot interests as follows:

------------------------------------------------------------------------
                  Bundle                           Number of slots
------------------------------------------------------------------------
A.........................................  8 pairs.
------------------------------------------------------------------------
Bundle A slot times: 0700 (2), 0800 (1), 1000 (2), 1100 (1), 1200 (1),
 1300 (1), 1400 (2), 1500 (1), 1600 (2), 1900 (1), 2000 (1) 2100 (1)
------------------------------------------------------------------------
B.........................................  6 pairs.
------------------------------------------------------------------------
Bundle B slot times: 0700 (1), 0900 (2), 1100 (1), 1200 (1), 1300 (2),
 1700 (1), 1800 (1) 1900 (1); 2000 (1), 2100 (1)
------------------------------------------------------------------------

    Slot interest times at LGA were chosen based on the divested slot 
interests as a total percentage relative to the transaction. Twenty 
pairs of slot interests constitute 14.29 percent of slots involved in 
the transaction, and that percentage was spread across US Airways' 
planned slot divestitures (by hour) to Delta as evenly as possible 
across the hours between 0600 and 2159.
    At LGA we propose the following bundling of 20 pairs of slot 
interests:

------------------------------------------------------------------------
                  Bundle                           Number of slots
------------------------------------------------------------------------
A.........................................  8 pairs.
------------------------------------------------------------------------
Bundle A slot interests: 0600D (1), 0700D (1), 0800A, 0800D (total of 2
 in 0800), 0900A (1), 1000D (1), 1100A (1), 1200D (1), 1300A (1), 1400D
 (1), 1500A (1), 1600D (1), 1700A (1), 1800D (1), 2000A (1), 2100A (1)
------------------------------------------------------------------------
B.........................................  4 pairs.
------------------------------------------------------------------------
Bundle B slot interests: 0700D (1); 0900A (1); 1000D (1); 1300A (1),
 1400D (1), 1700A, 1700D (total of 2 in 1700), 2000A
------------------------------------------------------------------------
C.........................................  4 pairs.
------------------------------------------------------------------------
Bundle C slot interests: 0600D (1), 0800A (1), 0900D (1), 1100A (1),
 1200D (1), 1500A (1), 1600D (1), and 2000A (1)
------------------------------------------------------------------------
D.........................................  4 pairs.
------------------------------------------------------------------------

[[Page 7312]]

 
Bundle D slot interests: 0700D (1), 1000A (1), 1100D (1), 1300A (1),
 1400D (1), 1800A (1), 1900D (1), and 2100A (1)
------------------------------------------------------------------------
Operating authorizations at LGA are designated as arrivals (A) or
 departures (D), and defined on the half hour at LGA (e.g., 0700 to
 0729; 0730 to 0759), but information on the transaction provided by
 Delta was specific only to hourly increments.
------------------------------------------------------------------------

    The bundles are structured so as to permit eligible carriers to 
enter or add frequencies in markets with sufficient operations to 
effectively compete. We do not propose to require the purchasers of the 
slot interests to operate in specific markets or types of markets, as 
this would deprive the acquiring carriers of the flexibility to deploy 
their assets based on prevailing market conditions. However, we would 
propose to prohibit purchasers from alienating slot interests acquired 
pursuant to this proceeding to any carriers who are not eligible under 
the terms of our final action in this proceeding.
    The agency has placed a copy of the waiver request and the January 
29, 2010 letter from Delta's senior vice president and general counsel 
in the docket along with other public correspondence on this matter. 
The FAA invites all interested members of the public to comment on the 
waiver request, the proposed grant of the waiver, the proposed 
conditions to the waiver, and the proposed divestiture remedies. We 
also seek comment on alternative divestiture remedies to ensure value 
to the selling carriers and expedited sale so that the traveling public 
may realize the benefits of the competition to be produced by the new 
entrant/limited incumbent carriers.

    Issued in Washington, DC, on February 9th, 2010.
James W. Whitlow,
Acting Chief Counsel.
[FR Doc. 2010-3109 Filed 2-12-10; 4:15 pm]
BILLING CODE 4910-13-P