BEFORE THE DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON, DC
) Notice of Proposed Rulemaking ) ) Slot Management and Transparency ) Docket FAA-2014-1073 for LaGuardia Airport, ) John F. Kennedy International Airport, ) International Airport ) ______and Newark Liberty )
COMMENTS OF FRONTIER AIRLINES, INC.
Communications with respect to this document should be addressed to:
Howard M. Diamond Stephen H. Lachter Senior Vice President, Mark W. Atwood General Counsel and Secretary Cozen O'Connor Frontier Airlines, Inc. The Army & Navy Club Building 7001 Tower Road 1627 I Street, NW Denver, CO 80249 Suite 1100 Washington, DC 20006 (202) 463-2513 [email protected] [email protected]
Counsel for FRONTIER AIRLINES, INC.
May 8, 2015 BEFORE THE DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON, DC
) Notice of Proposed Rulemaking ) ) Slot Management and Transparency ) Docket FAA-2014-1 073 for LaGuardia Airport, ) John F. Kennedy International Airport, ) ) ______and Newark Liberty International Airport )
COMMENTS OF FRONTIER AIRLINES, INC.
Frontier Airlines, Inc. ("Frontier'') submits the following comments on the Federal
Aviation Administration ("FAA") and Department of Transportation ("DOT") Notice of
Proposed Rulemaking ("NPRM"), issued January 8, 2015, to provide a longer-term and comprehensive approach to slot management at LaGuardia Airport ("LGA"), John F.
Kennedy International Airport ("JFK"), and Newark Liberty International Airport ("EWR")
(collectively, the "NYC Airports").1
SUMMARY
• For more than 40 years, and in order to address congestion and delays, the Federal Government has relied upon limitations, in the form of departure and arrival "slots," to allocate access to the New York City Area Airports, an admittedly scarce economic resource.
• On multiple occasions, attempts have been made by the FAA, DOT and Congress to accommodate new entry, particularly low fare entrants, that would benefit consumers of airline services originating and terminating at EWR, JFK
1 Slot Management and Transparency for LaGuardia Airport, John F. Kennedy International Airport, and Newark Liberty International Airport, Proposed Rule, Docket FAA-2014-1073, 80 Fed. Reg. 1274 (Jan. 8, 2015) ("NPRM"}. Comments of Frontier Airlines, Inc. Page 2
and LGA; unfortunately, very little new entry has occurred, and the airports have become almost entirely controlled by the largest carriers.
• While the latest proposal attempts to balance the interests of incumbents and new entrants. it is too modest. If enforced vigorously, the proposal would provide for a small measure of new entry, but it does not address sufficiently the needs of low fare and new entrant carriers and the traveling public.
• The increased concentration in the domestic airline industry, resulting from mergers and acquisitions, and the increased hoarding of a very large portion of the allocated NYC Airports slots in the hands of just three incumbent carriers, has severely and adversely affected the traveling public.
• The large incumbent carriers have underutilized their slots by providing inefficient schedules using smaller aircraft than is justifiable given the scarcity of the resource. Fully 69 percent of American and Delta flights from LGA are on sub- 100 seat aircraft. Their strategy is akin to building single family homes in midtown Manhattan.
• As a result of this approach consumers are paying higher fares. The average yield in 2014 on American and Delta from LGA was 19 percent higher than the average domestic yield for the year. In short, legacy incumbents have not provided the highest and best use for this limited resource and have rarely been required to return slots for reallocation.
• The FAA needs to prioritize new entry to ensure the most economic use of this scarce resource by increasing competition -- the over-arching mandate of the Airline Deregulation Act that governs DOT/FAA regulatory activities.
• Frontier Airlines, a new entrant carrier currently holding just two slot pairs at LGA, is prepared to offer immediately significant new service using 150-seat or larger aircraft from both JFK and LGA with very low fares, assuming slots were made available. Frontier's new low-fare service would provide enormous economic benefits to the traveling public by increasing competition, service options and frequencies.
• The NPRM does provide a small, incremental step to force incumbents to more effectively use their current slot holdings. The proposal does not, however, go nearly far enough to offer new entrants and the traveling public sufficient new service opportunities. Comments of Frontier Airlines, Inc. Page3
• Frontier supports that portion of the NPRM that tightens and more effectively enforces current slot utilization requirements, provides for a higher threshold definition of "new entrant" and proposes to create a transparent and robust secondary market -- actions that would limit the ability of incumbents to "game the system."
• Significant further action, however, is necessary to make sufficient slots available to new entrants and to require incumbent carriers to utilize their current slot holdings in a more efficient manner to achieve essential consumer benefits. At a minimum, ten percent of current slots should be made available to new entrants at the three airports, by tightening use regulations, reducing the number of slots held by large incumbent carriers, and/or creating new slots by exemption. Such action could be phased in over time so as not to result in the congestion problems experienced in the past when new slots were made available.
• As noted below, both the Department of Justice and the Government Accountability Office have issued reports that confirm Frontier's position that more significant action by the FAA is required, not the modest, incremental steps contained in the proposal at issue here.
INTRODUCTION
While the FAA has done a commendable job detailing the history and results of the
on-going slot allocation rules at NYC Airports, the solutions proposed for a longer-term,
comprehensive approach to slot management fall far short of the actions necessary to
make sufficient slots available to new entrants?
Frontier supports the proposal to the extent it tightens and more effectively enforces
slot utilization requirements, provides for priority slot allocation under a high threshold
definition of "new entrant," and proposes to create a transparent and robust secondary
market. However, in light of the extreme concentration that has occurred in the domestic
2 The NPRM would define a "new entrant" as "a U.S. or foreign air carrier that holds or operates fewer than 20 slots on any day of the week, in any combination during the slot-controlled hours, at the respective airport." 80 Fed. Reg. at 1286 and proposed 14 C.F.R. § 93.36. Comments of Frontier Airlines, Inc. Page 4 air transportation market and the ability of large incumbent carriers to hoard a large pool of slots at all three NYC Airports under the present, more flexible ru les, entry at these airports has been, and remains, severely inhibited. The result is that consumers in the New York
area pay much higher than necessary air fares, and are precluded from enjoying the
benefits of competitive entry by low-cost carriers ('' LCC 's").
Frontier, an ultra-low cost new entrant that now holds only two slot pairs at
LaGuardia, is prepared to offer significant new competitive seNice from both LGA and JFK
if it can obtain sufficient slots at reasonable or no cost. At the present time, in order to
enter these markets, Frontier would be forced to pay exorbitant sums to incumbents (many
of whom were "grandfathered" the majority of their slots), even if reasonably timed slots
were available. Previous government studies, however, show that slots are not available
to new entrants and that incumbents would not sell slots to low-fare carriers in any event.
Airport slots must be recognized for what they are - public resources - not the
private assets of incumbent carriers. The Department must ensure that they are
distributed and used for the maximum benefit of the public.
I. The Department and FAA have an Obligation to Administer the New York Area Airport Slot System to Achieve Maximum Competition for the Benefit of the Public.
The three New York area airports seNe the largest metropolitan area, and the most
valuable air trave l market, in the United States. However, these airports are unlike any
other airports in the United States (with the exception of Washington Reagan N ational
Airport ("DCA")) because of the regulatory limitation on operations known as the "slot rule."
In instituting these regulatory constraints, the Federal Government has created a very Comments of Frontier Airlines, Inc. Pqge 5 limited and very valuable cache of resources that have come to be held almost entirely by the three largest U.S. carriers- American, Delta ahd United.
As discussed in the NPRM, the original 1968 "High Density Rule" ("HDR'') has been through a number of permutations, including the 1985 amendment to permit buying and selling of slots. Subsequent to the demise of the HDR at all but DCA, capacity at the three
New York area airports was administered through FAA operating orders beginning in
2007. What did not change, however, was the stranglehold held by the major incumbent carriers on the vast majority of the slots. In fact, that concentration has grown even more extreme as the industry itself has grown more concentrated. The incumbent carriers continue to hold slots that were "grandfathered" to them -without charge - by the Federal
Government.
The Department's decision to allow the incumbents to continue to hold the slots they have operated historically is, in part, in recognition of the substantial economic investments made by these carriers in the services operated at the New York airports.
Frontier realizes that the carriers have expended a great amount of money in developing facilities and services at the airports. They have built up enormous bases of operations there, and have integrated these operations into their systems. They are understandably zealous to protect the value of their investments.
However, the grandfathering of the incumbents' slot base and the existing slot system go well beyond protecting carriers' investment: they create an enormously valuable trove of marketable assets, and more importantly, give those carriers the incentive, and ability, to stifle competition. Although the slots themselves are worth millions of dollars apiece, their real value to incumbents is the fact that they can use their slot holdings to bar Comments of Frontier Airlines, Inc. Page 6 entry, offer high fares and extract rents that would otherwise not be available in a competitive environment
For the Department to allow this situation at LGA, JFK and EWR to persist, while also permitting the U.S. air carrier industry to become extraordinarily concentrated, is inconsistent with the well-known statutory mandates that were adopted in the Airline
Deregulation Act of 1978. In the statute, Congress required the Secretary to administer his/her authority in light of the public interest, which was deemed to include:
(4) the availability of a variety of adequate, economic, efficient, and low-priced services without unreasonable discrimination or unfair or deceptive practices;
(6) placing maximum reliance on competitive market forces and on actual and potential competition:
(1 0) avoiding unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier unreasonably to increase prices, reduce services, or exclude competition in air transportation;
(12) encouraging, developing and maintaining an air transportation system relying on actual and potential competition (A) to provide efficiency, innovation, and low prices; and (B) to decide on the variety and quality of, and determine prices for, air transportation service; and
(13) encouraging entry into air transportation markets by new and existing air carriers ... to ensure a more effective and competitive airline industry.3
Further, it has long been understood that inauguration of service by new entrants, particularly low-cost carriers, stimulates the market and reduces airfares. The Department has encouraged entry by these carriers as a policy for many years. Congress emphasized the importance of such entry at the slot-controlled airports as early as 1994 by explicitly
3 49 US C. § 41712, cited in the NPRM at 1274. Comments of Frontier Airlines, Inc. Page 7
authorizing the Secretary to create slots by exemption at these airports. (49 U.S.C. §
41714(c)). While experiments in creating large numbers of slots by administrative
exemption have led to unacceptable levels of congestion and consequent delays, the
Department is nonetheless obligated to pursue ways to reverse the "excessive market
domination" of the existing incumbents at these airports and "encourage entry ... by new
and existing air carriers" into these markets.4 The proposed rule is unacceptable in that it
does so only at the margins.
II. The State of Competition at the New York Airports is Seriously Deficient.
Beyond question, the New York airports are exceptionally concentrated, and have
become more so over time. According to the most recent FAA data (Exhibit 1), the "Big
Three" carrier concentration ratio at these airports is 91% for Newark, 88% for LaGuardia,
and 63% for Kennedy. This represents a significant increase over time. In 2010, the
Justice Department noted that the top three airlines (US Airways, Delta and American)
held 81% of slots at LGA (86% including United), an increase from 27% in 1986 and 69%
in 2006. The attached summaries (Exhibit 2) drawn from FAA slot records show th is
drastic increase in greater detail. At LGA in 1986, 28 carriers held slots, with the top four
carriers holding 42 percent. The remainder was widely distributed among the remaining
24 carriers. In 2000, 15 carriers held slots, with the top four holding 79 percent. Currently,
only 10 carriers hold slots, with the top three accounting for 88 percent. At JFK, in 1986,
21 carriers held slots, with the top four holding 60 percent; in 2000, 10 carriers held slots,
4 ld. Comments of Frontier Airlines, Inc. Page 8 with the top four holding 91 percent; currently, 8 carriers hold slots, with the top four holding 96 percent. (See Exhibit 3.)
This increase in concentration is not what the Department, or Congress, envisioned when they permitted the buying and selling of slots or established slot exemptions. While there are other U.S. airports that are also extremely concentrated, and new low-cost entrants may have difficulty gaining entry there as well, there are no other airports with legal barriers to entry enforced by the Federal Government. While it may be difficult for the Department to directly address the competitive issues at other airports, the problem of new entry at the slot-controlled airports is directly within the Department's power.
The slot buy-sell rule was adopted under the belief that market forces would permit new entrants to acquire slots if they could put them to more efficient use than incumbents; another rule adopted contemporaneously provided for the withdrawal of slots from incumbents to provide a pool of slots for new entrants. Needless to say, things have not worked out as the FAA and the Department envisioned. Carriers other than the "Big
Three" hold a minimal proportion of the slots.5 The next-largest holder. Southwest, holds six percent at LGA and four percent at EWR; JetBiue holds three percent at EWR.
Below that, the largest holding is by Spirit at LGA (two percent) and Virgin America at
JFK (two percent). Carriers that would be considered "new entrants" under the proposed rule hold less than one percent of the slots - only 14 slots in aggregate at
LGA (Frontier holds four of these), 22 slots at EWR, and four slots at JFK.
5 The one exception is JetBiue at JFK, with 34% of the slots. Comments of Frontier Airlines, Inc. Page 9
While new entrants can , theoretically, purchase slots from the incumbents, in fact it is well recognized that the market value of these slots is enormous, rendering them cost-prohibitive to acquire; Frontier's own recent discussions with other carriers indicate that prices for a slot pair at LGA are above $5 million, and at JFK, above $3 million.
This pricing is simply out of the realm of possibility for a low-cost carrier; the very benefits that an LCC can bring to a mqrket like New York would be defeated by having to pay such a price.
In any event, even at such an outrageous cost, it is highly questionable that the large incumbents would be willing to part with a number of slots adequate for a new entrant, especially an LCCr to mount meaningful service. Th e threat of competition is a far greater concern for the large incumbents than the question of how to utilize the vast number of slots they hold. The Justice Department noted in 2010, "The disincentives to sell or lease to LCCs are particularly strong because their low fares - a substantial benefit to consumers - are a substantial threat. ... " 6
As a result, incumbents have developed vari'ous means of managing their slot holdings to avoid losing slots due to non-use. Despite the long-standing 80 percent use-or-lose requirement of the HDR and subsequent FAA Orders, the Government
Accountability Office in a 2012 report7 found numerous ways in which slots were being used inefficiently, including use of small aircraft, not scheduling all of the slots a carrier
6 Comments of the United States Department of Justice, Notice of Petffion for Waiver of the Terms of the Order Limiting Scheduled Operations at LaGuardia Airport and Solicitation of Comments on Grant of Petition with Conditions. Docket FAA-2010-0109, (" DOJ Comments") at 8. 7 ''Slot Controlled Airports: FAA's Rules Could be Improved to Enhance Competition and Use of Available Capacity," GA0-12-902 ("GAO 2012 Report''). Comments of Frontier Airlines, Inc. Page 10 is allocated, operating flights to the same destination at abnormally high frequencies, and operating flights with relatively low load factors.8 In addition, the Justice
Department noted the incumbents' practice of "babysitting" slots for one another, i.e.
"the short-term transfer of slots from a carrier incapable of meeting the use or lose requirement to another carrier capable of meeting the requirement, thereby protecting the slots from being returned to the FAA,"9 and using a number of flights to cover the utilization of more than one slot. These practices in general are characterized as "slot hoarding," and they are available only to carriers fortunate enough to have a critical mass of slots.
More specifically, GAO found that "the proportion of flights using small aircraft
[defined as 100 or fewer seats] at slot-controlled airports ranged from 36 percent at
LaGuardia to 25.8 percent at Newark, whereas the proportion of flights using small aircraft to and from large hub airports that are not slot-controlled was 16.4 percent."10
This means that at LGA, flights are 108 percent more likely to employ small aircraft than at non-slot controlled large hubs. Further, GAO "found instances when airlines scheduled flights to or from slot-controlled airports for the same destination at a more frequent rate than other large hub airports that are not slot-controlled," citing an example of flights to the same airport that were scheduled as little as 10 minutes apart.11 The NPRM itself indicated the FAA's awareness of "actions by some carriers that report a series of flights in different slots on various days during the reporting period
8 /d. at 30-49. 9 DOJ Comments, at 11 . 10 GAO 2012 Report at 41 , emphasis added. 1 1 /d at 45. Comments of Frontier Airlines, Inc, Page 11 to record usage on multiple slots with a single flight. [These actions] artificially allow carriers to meet the minimum usage rules without scheduling a flight for each slot."12
Frontier's review of scheduled flights at LGA for April 30, 2015, indicates that the use of small aircraft has become even more prevalent. Out of a total of 577 departures,
335 (or 58 percent) used aircraft of 100 seats or less. The most popular single capacity of aircraft used was 60-65 seats, which were operated on 105 departures (Exhibit 4). This is hardly an efficient use of such extremely scarce resources.
It may be argued that these aircraft are needed for service to smaller communities that otherwise would not be served. However, the schedules for April 30 reveal that the vast majority of these smaller aircraft flights serve large metropolitan areas. Only 15 percent of the smaller aircraft departures serve Metropolitan Statistical Areas ("MSA's") of less than one million population. In fact, 55 percent serve MSA's with populations above two million.13 Some examples are:
• Chicago, served by Delta with 14 daily departures with 76-seat aircraft; • Toronto, served by multiple carriers with 17 daily departures using aircraft under 100 seats; • Washington, D.C., served by multiple carriers with 31 daily departures using aircraft under 100 seats; • Boston, served by multiple carriers with 32 daily departures using aircraft of 11 0 or fewer seats.
Normal economic considerations would dictate that carriers use more appropria\e-sized aircraft where the density of the traffic warrants it, meaning that larger aircraft and fewer flights would be operated to these cities, freeing up slots for other
12 NPRM at 1288. 13 148 departures (41% of total) are operated by aircraft under 118 seats to MSA's above 4.5 million. See Exhibit 5. Comments of Frontier Airlines, Inc. Page 12 operations - including by other carriers. The incumbents' strategy, however, has nothing to do with supply and demand, but with holding as many slots as possible, by whatever means necessary (i.e. , hoarding).
It is difficult to imagine how anyone could describe this anti-competitive environment as acceptable. The penalty, of course, is ultimately paid by the travelling public, in the form of more limited choice and higher air fares. As the Justice
Department observed:
The small presence of LCC's at LGA. .. has deprived consumers of the vigorous competition and low fares that LCC's bring to the marketplace. Since airline deregulation began, it has become clear that open and fluid entry produces lower fares and better service. The effect of LCC entry on fares provides perhaps the most dramatic evidence. DOJ empirical work ... suggests that the presence of an LCC on a nonstop route reduces fares by roughly 25 percent. 14
This is consistent with a substantial body of research demonstrating that fares are higher at slot-constrained airports. The GAO found in 1996 that average fares at LGA were 35 percent higher than the average for 33 other airports,15 and that fares at slot- controlled airports were on average 7 percent higher.16 Similar findings were made in
1999 by the Transportation Research BoardY DOT data for 2014 shows that the average yield for American and Delta (which operate 76 percent of weekday departures at LGA) from LGA domestic passengers was 19 percent higher than that of the whole
US domestic market.
14 DOJ Comments at 7. 15 Airline Deregulation· Barriers to Entry Continue to Limit Competition in Several Key Domestic Markets. GAO/RCED 97-4, at 21. 16 Paul Stephen Dempsey, Airport Landing Slots: Barriers to Entry and Impediments to Competition, Journal of Air & Space Law, February 2001 , (''Dempsey") at 28. 17 TRB, Special Report 225: Entry and Competition In the U.S. Airline Industry (1999), Comments of Frontier Airlines, Inc. Page 13
On the other hand, permitting entry by non-incumbent carriers, especially low- cost carriers, usually has an immediate and salutary effect on fares in the market. A perfect example of this effect is exactly what happened at Memphis and Cincinnati in
2014, when Frontier itself began service from Denver:
Frontier entered the Denver-Memphis market in March 2014. In the second through fourth quarter of 2013, the Denver-Memphis market constituted 67 passengers daily each way ("PDEW") at an average fare of $251 . In the comparable second through fourth quarter of 2014, Frontier had stimulated the market 94% to 130 PDEW, while reducing the average fare by 34% from $251 to $166. Similarly, Frontier entered the Denver-Cincinnati market in May 2013, part way through the second quarter. lh the preceding year ending in the first quarter of 2013, the Denver-Cincinnati market size was 94.3 PDEW at an average fare of $212. During the four full quarters following Frontier's entry (year ending in the second quarter of 2014), the Denver-Cincinnati market had grown by 111% (105 PDEW), while the fare had declined by 21% from $212 to $167.
What Frontier seeks to do is to bring even more substantial fare reductions to the New
York City area markets where they are desperately needed.
Ill. Frontier, if Given the Opportunity, Will Bring Substantial Consumer Benefits to the New York Market.
Frontier operates as an "Ultra Low-Cost Carrier" (ULCC), and s1nce its new ownership and management took control last year it has operated very successfully in this mode, with a profit margin of 9.9 percent reported in 2014. Its motto is ''Low Fares
Done Right," and indeed its fares are remarkably lower than its competitors. For example, its stage-adjusted round-trip fares, including ancillary fees, for the year ended
December 31 , 2014, averaged $260, compared with $418 for Delta, $418 for United,
$401 for American/US Airways, $341 for Virgin America, $314 for Southwest, $323 for
Alaska, and $327 for JetBiue. Its fares are 33 percent lower than the Big Four average.
(See Exhibit 6.) Comments of Frontier Airlines, Inc. Page 14
Frontier is working hard to bring the benefits of these low fares to the travelling public. But, due to the current slot system, it is completely stymied at New York. It currently holds two slot pairs at LGA - barely enough for token service. There is no doubt that a more meaningful entry into the New York area market will lead to a significant increase in competition, stimulation of the air travel market, more efficient use of resources, and lowering of fares for consumers.
Frontier's plans call for the use of 33 slot pairs at LGA and 17 at JFK over the next 12 months, which will be used to schedule aircraft of 150 seats and above to a variety of destinations. The airline estimates, based on market stimulation and fare savings by consumers, that this new service would result in consumer savings of $416 million annually. Of course, having to purchase substantial slot holdings would make it impossible for the carrier to make these savings available to the public, as they would vastly increase the cost of the service, and in any event it is most unlikely that any of the incumbents would be willing to sell slots to Frontier at reasonable cost or perhaps at any price.
IV. The Department Should Take Direct Action to Increase Market Access for Low~Cos t Carriers at the New York Airports.
The NPRM proposes a number of specific steps that would improve the slot regime as it currently exists, and Frontier supports their adoption. However, due to the incumbents' strong disincentives to permit competition in the New York area, Frontier doubts that the proposed changes, if adopted, will significantly improve the situation for new entrants. The carrier's comments and suggestions regarding the specific proposals are as follows:. Comments of Frontier Airlines, Inc. Page 15
A. The slot utilization requirements should be substantially tightened and more effectively enforced.
Frontier agrees with the proposal to require the use/lose requirements be applied to each individual slot in order to end one of the more common means of slot-hoarding -the
use of multiple flights to cover the 80 percent utilization requirement for one slot. There
are, however, other steps that must be taken to end the misuse of these essential public resources. The GAO in its 2012 report identified a number of additional problems in the
FAA's administration of the slot rules that enabled incumbents to potentially evade the effects of the use-lose requirement. For example, it found:
FAA's current recordkeeping and process for reviewing airline slot usage data do no provide sufficient assurance that it can adequately identify when airlines do not meet the 80 percent usage requirement. Not requiring airlines to report usage data in a standard format or having management systems that can adequately compile data received in different formats, as well as its reliance on airlines' self-reported data and discrepancies in its slot allocation records, hinders FAA's ability to check compliance with the slot usage requirement. Moreover, because the FAA does not calculate the actual slot usage rates for airlines, the amount of capacity that goes unused is unknown .... 1s
GAO also noted that "although FAA requires the submission of certain records of all trades and leases between airlines, it does not require the submission of the information - such as the origin and destination that a lessee intends to use for the slot - that would allow
FAA or DOT to monitor the extent to which leases occur between nonpartner airlines."19
The GAO earlier this month stated that the Department "has not yet fully addressed" these recommendations. 2° Frontier strongly suggests that the FAA take all
1s GAO 2012 Report at 53-54. 19 1d . at 52. 20 "Airport Funding: Changes in Aviation ActiVIty are Reflected in Reduced Capacity Concerns," Testimony of Gerald L. Dillingham, Ph.D., GA0-15-498T, April 23, 2015. Comments of Frontier Airlines, Inc. Page 16 possible measures to increase the accuracy and transparency of its slot monitoring functions.
B. The Department should require a minimum aircraft size for utilization of slots.
The NPRM does not deal with one of the most egregious abuses of the slot regime by incumbents - the scheduling of small aircraft in slots, particularly at LGA, as described above (see pages 9-1 0). Allowing the use of small aircraft where airspace is so limited and so valuable is akin to city zoning commissioners permitting the building of single- family, single-story homes in midtown Manhattan. It is yet another means of hoarding slots and blocking competitive entry.
Frontier thus requests that the proposed rule be modified to include a requirement that a large holder of slots, at least at LGA, be required to use larger aircraft, over 100 seats, for example, unless the operator obtains a waiver from the FAA to serve a demonstrated public need. If this minimum size were mandated by the FAA under its authority under 49 U.S.C. § 40103 to regulate the efficient management of U.S. airspace,21 passenger capacity at LGA would increase by at least 19 percent, without any increase in airspace congestion.22
C. Frontier supports the proposed threshold definition of "new entrant."
The NPRM's proposal to define "new entrant" as a carrier holding fewer than 20 slots is the lowest number the Department should consider. Nineteen (assuming one is operated outside the slot-controlled hours) or perhaps 20 slots should give new entrants
21 See Congestion Management Rule for LaGuardia Airport, 71 Fed. Reg. 51360, 51367 (Aug. 29, 2006). 22 This estimate is based on the schedules for one day chosen at random, April 30, 2015. Frontier believes this is a reasonably representative sample, but the question obviously bears more thorough analysiS. Comments of Frontier Airlines, Inc. Page 17 sufficient "critical mass" to provide a competitive foothold, considering that the three large incumbents at LGA operate 543 (Delta), 326 (American) and 82 (United) slots.
A preferred right to slots as a new entrant, however, is meaningless if no slots are available for allocation. The NPRM proposes that ''after accommodating historic precedence slots," not less than 50% of remaining slots will be reserved for new entrants.23 It is highly unlikely that a significant number of slots will be available under this mechanism, but there is no reason to , in effect, reserve as much as 50 percent of slots that become available for incumbents, given the gross disparity in current slot holdings.
Thus, Frontier suggests that, at least for a substantial period of years, all slots that become ava ilable should be allocated to new entrants in order to at least slightly relieve the dramatic competitive imbalance. Incumbent carriers have a number of avenues for obtaining new slots if they need them , and in any event, they can always reallocate slots among their own operations and/or use larger aircraft if needed. New entrants, in contrast, have no realistic alternative.
D. A transparent and robust secondary market is a necessity.
It is clear that slot transactions between incumbents and new entrants are, and consistently have been, extremely rare, except where mandated in connection with some major transaction such as a merger. However, the lack of transparency in these transactions has made it even harder for new entrants to discover opportunities for acquiring slots, and has impeded the ability of competitors, the government, and
23 NPRM at 1301. Comments of Frontier Airlines, Inc. Page 18
Congress, to understand the extent and nature of the secondary market.24
Frontier urges the adoption of "Option 4'' of the five options laid out in the NPRM, the most transparent of the alternatives: Option 4 would require bidders to post their bids on the bulletin board during the bidding period. A carrier would submit a notice to the FAA that it intended to engage in a slot transaction; bidding carriers would post their bids, and any counterbids, on the bulletin board . Therefore, negotiations in the form of iterative bids would be available to all registered interested parties, This procedure should be applicable to all slot transactions, no matter how small.
E. The Depa rtment should monitor the competitive effects of stand-a lone slot transactions.
Frontier agrees that the Department should assert jurisdiction to review the effects on competition of transfers (including trades, sales and leases) of slots. The rulemaking correctly notes that the Department has authority under 49 U.S.C. 41712 to investigate, disapprove or condition the transfer of slots as potential "unfair methods of competition."
Indeed, it is essential that it do so, given the vastly increased concentration of the Industry, and particularly the concentration of market power at the New York airports. As Frontier has stated, slots are public resources, not private assets, and the Department is ob ligated to oversee their allocation and use for the benefit of the public. How these operating rights are used has an immense impact on how the public will be served in the largest and most important air transportation market in the country.
24 Under the currently effective FAA operating orders, transfer of slots is restricted in certain ways. Even when slots could be more freely exchanged while the Buy-Sell Rule was still effective, however, lack of transparency was an impediment, and it will continue to be under the new rules if the Depa rtment does not adopt a regulation that ensu res maximum transparency and open participation. Comments of Frontier Airlines, Inc. Page 19
Frontier endorses the Department's proposal so far as it pertains to transactions that will be reviewed on the Department's own initiative. However, transactions under eight slots should not be categorically excluded from review. While the Department cannot realistically review every single transaction, no matter how small, one of the purposes of instituting a fully transparent secondary market process is to enable private parties to view activity in the market. As with other sorts of potentially anticompetitive conduct, private parties may be in a position to bring to the Department's attention transactions that may otherwise evade review, but cou fd have competitive implications.
We urge that the proposed procedures be modified to permit outside parties to seek DOT review of particular transactions.
F. The Department should use its exemption authority to create a meaningful number of new slots specifically for new entrants.
The unfortunate thing about the proposed rule is that, even if adopted as published, it will have only marginal effect on the almost-insuperable barrier to new entry posed by the extreme concentration of slot holdings that now exists. Frontier believes that radical action is required if real competition is to be generated at the New York airports, particularly LGA.
The experience of creating slots by exemption under the AIR-21 legislation 15 years ago was problematic because of the sheer number of such exemptions that were granted. And while it did permit a limited amount of new entry at the time (such as the slots that allowed JetBiue to start service at JFK), not all of the exemptions were granted to new entrants, thus failing to alleviate or prevent the continuing increase 1n concentration. Further, the resulting congestion worked to no one's advantage. Comments of Frontier Airlines ~ Inc. Page 20
Thus, Frontier urges the Secretary, under the statutory authority he holds, to set aside a pool of slots reserved for new entrant carriers, consisting of slots created by exemption and/or withdrawn from incumbents. We suggest that this pool be not less than
10 percent of the total number of slots at each airport.
G. The Department should not extend slot-controlled hours at LGA.
Finally, Frontier opposes the extension of slot-controlled hours at LGA as proposed by the FAA for "consistency purposes." Retaining the current period during which slot- controls are not in effect provides a benefit to carriers like Frontier by offering them the flexibility to operate additional flights. For example, Frontier currently offers a third daily flight from LGA, which is operated outside the slot-controlled hours and , given the demonstrated need for additional slots, reducing current non-controlled hours would have a detrimental effect on Frontier. Comments of Frontier Airlines, Inc .. Page 21
CONCLUSION
Frontier appreciates the Department's and FAA's willingness to address some of the many structural problems of slot distribution and enforcement at the New York area airports. The carrier is convinced, however, that the Department must take more aggressive steps to open these critically concentrated airports to competition that will enable New York to enjoy the benefits of low-cost carrier transportation. We trust that it will take the carrier's views into account in considering these issues.
Cozen O'Connor The Army & Navy Club Building 1627 I Street, NW Suite 1100 Washington, DC 20006 (202) 463-2513
Counsel for Frontier Airlines, Inc.
Dated: May 8, 2015
LeGAL\22760654\1 EXHIBIT 1
New York Area Slot-Controlled Airports U.S. Passenger Carrier Slot Operators
Total Daily Percentage of U.S. U.S. Passenger Passenger Carrier U.S. Passenger Carriers Carrier Slots Slots Operated Operated John f. Kennedy International Airport (JfK) !:)78 100%
Major U.S. Carrier Incumbents Delta Air Lines 383 39% American Airlines (including US Airways) 214 22% United Airlines 23 2% Subtotal 620 63%
Other Incumbents (JetBiue, Virgin America) 354 36% All Incumbents Subtotal 974 99.6%
New Entrants (Hawaiian, Sun Country) 4 Less Than 1%
Newark International Airport (EWR) 1112 100%
Maior U.S. Carrier Incumbents United Airlines 880 79% American Airlines (including US Airways) 70 6% Delta Air Lines 63 6% Subtotal 1013 91%
Other Incumbents (Southwest, JetBlue) 77 7% AU Incumbents Subtotal 1090 98%
New Entrants (Virgin America, Alaska, Republic) 22 LessThan2% LaGuardia Airport (LGA) 1083 100%
Major U.S. Carriea· Incumbents Del ta Air Lines (including Endeavor Air) 543 50% Amer ican Airlines (including US Airways) 326 30% Unit ed Airlines 82 8% Subtotal 951 88% Other Incumbents (Southwest, JetBlue, Spirit) 118 11 % AU Incumbent s Subtotal 1069 99% New Entrants (Frontier, Virgin America, Republic)_ 14 1%
SOURCE : FAA Slot Operator Data for JFK, EWR and LGA, Summer 2014 Traffic Season, December 10,2014. Percent ages based on total number of U.S. passenger air carrier operations. New entrants include carriers holding less than 20 daily slots as defined in proposed 14 C.F.R. Section 93 .96. X
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G4
-
$252
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2014
AS
4Q
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$327 $323
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$450
$425
$400 Big
$375
$350
$325
$300
$275
$250
Sources:
.... tO
Q) tO Q.l Q) .... > on
~ <(
Note:
Data
* Frontier Saved Travelers $700M+ in 2014 w::JfL•lj.'iil=t:a. 22 YE JQ 2014 Haul Adjusted Yield in Major Markets ~ 21
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