REPLY AND SURREBUTTAL EXHIBITS OF AMERICAN AIRLINES 2016 Los Angeles-Beijing Frequency Allocation Proceeding Docket DOT-OST-2016-0076 June 6, 2016 Only an Award to American of LAX-PEK Authority Will Enhance Competition and Maximize the Public Benefits DELTA at SEA DELTA at DTW Delta and United have AMERICAN at ORD services to PEK from the UNITED at SFO U.S. West Coast – UNITED at ORD UNITED at EWR only American does not UNITED at IAD DL, UA and AA all have No Delta, services to PEK from the No American, U.S. Midwest Only United LAX AMERICAN at DFW CONTENTS Reply of American Airlines, Inc. Letter of Support from Eric Garcetti, Mayor of Los Angeles Surrebuttal Exhibits • Series 100: Delta Pretends Not to Understand the Department’s Consistent View of the Meaning of Intra-Gateway Competition • Series 200: American Needs a U.S. West Coast Gateway Serving Both Beijing and Shanghai to Attract an Alliance Partner in China • Series 300: Delta’s Portrayal of LAX-Asia Is Highly Misleading • Series 400: Delta Pretends Not to Understand that Hong Kong is Separate and Distinct from China for Aviation Purposes • Series 500: Delta Pretends Not to Understand that Third Country Codesharing to China Between Any Hong Kong Airline and Any U.S. Airline Is Verboten • Series 600: Delta Pretends Not to Understand that There Is No Ability to Third- Country Codeshare Between Japan and China as a Matter of Right • Series 700: Delta Pretends Not to Understand that Hainan Is Not a Member of oneworld, in Contrast to Delta’s Three SkyTeam Alliance Partners • Series 800: Delta’s “Promises,” Not American’s, About Aircraft Type and Change of Gauge are “Inconsistent” • Series 900: Delta and Its SkyTeam Alliance Partners Are Larger than American in U.S.-China Service • Series 1000: Delta’s Focus Is on Seattle, Not Los Angeles • Series 1100: As American Has Demonstrated, If Delta Wants to Serve LAX-PEK, It Already Possesses the Means and Authority to Do So • Series 1200: American Is Deeply Invested in the Los Angeles Community • Series 1300: Delta Continues Its Exclusionary Strategy by Trying to Block American from Serving LAX-PEK BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ____________________________________ ) Application of ) ) AMERICAN AIRLINES, INC. ) ) Docket DOT-OST-2016-0076 in the matter of 2016 Los Angeles-Beijing ) Frequency Allocation Proceeding ) ____________________________________) REPLY OF AMERICAN AIRLINES, INC. Communications with respect to this document should be addressed to: Howard Kass Paul T. Denis Vice President Steven G. Bradbury Regulatory Affairs William B. Sohn Thomas J. Miller Robert A. Wirick Managing Director DECHERT LLP Regulatory and International Affairs 1900 K Street NW Washington, D.C. 20006 John B. Williams (202) 261-3300 Senior Analyst [email protected] Regulatory and International Affairs [email protected] [email protected] AMERICAN AIRLINES, INC. [email protected] 1101 17th Street, NW Washington, D.C. 20036 (202) 326-5153 [email protected] [email protected] [email protected] June 6, 2016 TABLE OF CONTENTS Executive Summary...................................................................................................................... 1 Discussion....................................................................................................................................... 3 I. Contrary to Delta’s Claims, Only an Award to American Will Maximize LAX-PEK Intra-Gateway Competition and Introduce New Inter-Gateway Competition for Service to Beijing and All of Asia from the Western United States .................................................................................................................................. 3 A. Delta’s Answer Is Based on a False Concept of Intra-Gateway Competition, and Delta Ignores the Fact that It Can Serve LAX-PEK Today Without an Award of New Frequencies in this Proceeding..................................................... 3 B. Delta’s Claim that American “Controls Half” of LAX-Asia Service Is False and Undermines Delta’s Entire Answer ............................................................... 7 C. LAX-PEK Service Is Critical to American’s Ability to Grow Its West Coast Gateway to Compete Effectively with Delta’s SEA Gateway and United’s SFO Gateway in Service to Beijing and Other Points in Asia ........................... 10 II. American’s Proposed LAX-PEK Service Will Enhance Competition in the U.S.-China Market and Produce Superior Public Benefits for U.S.-China Passengers........................................................................................................................ 13 A. Delta’s Entire Analysis of the U.S.-China Market Rests on the False Premise that Hainan is American’s “Alliance Partner”.................................... 15 B. U.S.-Hong Kong Service Is Irrelevant to U.S.-China Competition Because of Differing Bilateral Agreements, and Delta’s Attempt to Combine the Two Contradicts Delta’s Own Supplemental Application and Other Filings ........... 16 C. Delta’s Claim of Superior Connectivity Beyond Beijing Is Misleading and Overstated............................................................................................................. 18 D. Delta Persists in Pushing the Myth that American Can Serve China Effectively through JAL at Tokyo, an Option Foreclosed to American under the U.S.-China Bilateral Agreement and Existing Codeshare Relationships........................................................................................................ 20 E. Delta Ignores Its Own Alliance Partners’ Ability to Introduce New U.S.- Beijing Service...................................................................................................... 21 F. Delta Attacks American’s Aircraft Improvements in U.S.-China Service while Forgetting Its Own Broken Promises in Service Commitments............... 22 Conclusion ................................................................................................................................... 24 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ____________________________________ ) Application of ) ) AMERICAN AIRLINES, INC. ) ) Docket DOT-OST-2016-0076 in the matter of 2016 Los Angeles-Beijing ) Frequency Allocation Proceeding ) ____________________________________) REPLY OF AMERICAN AIRLINES, INC. American Airlines, Inc. (“American” or “AA”) submits this Reply in response to the Answer of Delta Air Lines, Inc. (“Delta” or “DL”) filed in this proceeding on May 31, 2016. Executive Summary The award of LAX-PEK frequencies to American will maximize public benefits in every relevant respect. Unable to rebut this reality and desperate to head off new competition from American, Delta resorts to misrepresentations and distortions: • First, rather than address “competition in the U.S.-China market” as required by the Department’s Instituting Order,1 Delta relies on an erroneous notion of “intra- gateway competition” for service to Asia from LAX. True intra-gateway competition is route-specific, and only American’s proposal has the potential to achieve three-way, inter-alliance, intra-gateway competition on the LAX-PEK route. • With these frequencies, American will introduce new service to compete with the existing LAX-PEK service offered today by United’s alliance partner Air China. Meanwhile, even without an award of these new frequencies, Delta, unlike American, is free to inaugurate LAX-PEK service at any time, without reducing any of its current U.S.-China nonstop service, by repatriating its existing U.S.- China Zone 1 frequencies from the NRT-PVG route back home to LAX. The Department should insist on that scenario by awarding the new LAX-PEK frequencies to American. 1 Instituting Order at 2. Reply of American Airlines, Inc. Page 2 of 24 • Indeed, in a recent promotional flyer distributed to travel agents in Los Angeles, Delta announced that it will begin LAX-PEK service on December 16, 2016 without mentioning the pendency of this proceeding—clearly implying that it intends to fly the route whether or not it receives the frequencies at issue here.2 This announcement, which may be a violation of the Department’s regulations, serves to confirm that the true purpose of Delta’s Supplemental Application is to block American from growing its West Coast gateway and from competing more effectively in the U.S.-China market and on all routes to Asia from the Western United States. • Even within its own self-defined “market” of “LAX-Asia” service, Delta flatly misrepresents the competitive structure at LAX by conveniently omitting non-U.S. carriers, ignoring alliances, and manipulating statistics. Just as Delta/SkyTeam and United/Star dwarf American/oneworld in the U.S.-China market, American’s share of service to Asia from LAX is small and roughly comparable to Delta’s when all carriers are included and correct data used, and American/oneworld stands in third place in LAX-Asia service, well behind United/Star and Delta/SkyTeam. • Delta distorts the competitive landscape even further by wrongly treating Hainan Airlines (“Hainan”) as American’s “alliance partner”3 and by falsely grouping Hong Kong with mainland China. Hainan is not a member of oneworld, and American currently has only a limited codeshare arrangement with Hainan on a few routes (in sharp contrast to Delta’s three-headed dragon alliance with China Eastern and China Southern). American will be in a strong position to attract an alliance partner in China only if it