Issued by the Department of Transportation
on the 27th day of June, 1995
Served July 3, 1995
Joint Application of: |
|
FEDERAL EXPRESS CORPORATION |
and | Docket 50173
EVERGREEN INTERNATIONAL |
AIRLINES, INC. |
|
for approval of transfer of route |
authority pursuant to 49 U.S.C. §41105 |
(U.S.-China All-Cargo) |
I. Summary
By this order, we tentatively approve the transfer to Federal Express Corporation ("Fed Ex" or "Federal Express") of the authority held by Evergreen International Airlines ("Evergreen") to transport property and mail between points in the United States and points in the People's Republic of China, pursuant to Evergreen's Experimental Certificate of Public Convenience and Necessity for Route 638 and related exemptions and frequency allocations.
II. Background
On March 1, 1995, Federal Express and Evergreen jointly filed an application seeking approval under 49 U.S.C. §41105 of the transfer of Evergreen's operating authority (certificate and exemption) to Federal Express. On March 29, 1995, DHL Airways, Inc. ("DHL") filed an answer to the application. The applicants supplemented the joint application on March 31, 1995. By notice dated April 3, 1995, the Department found the application to be substantially complete and set dates for answers and replies. On April 17, 1995, the City of Memphis, the County of Shelby, and the Memphis-Shelby County Authority ("the Memphis Parties") filed an consolidated answer, and DHL filed a supplemental answer. The Joint Applicants filed a reply on April 20, 1995. On May 10, 1995, Federal Express and Evergreen filed a second supplement to their joint application. By notice dated May 12, 1995, the Department provided interested parties the opportunity to supplement their answers to the joint application, and on May 17, 1995, DHL filed a second supplemental answer.
This matter has also been reviewed by the Department of Justice, pursuant to its responsibility for administering the antitrust laws. On March 24, 1995, the Justice Department issued a notice of termination of its review.
III. Pleadings
A. Joint Application
The Joint Applicants request the approval of the transfer to Federal Express of the authority held by Evergreen to transport property and mail between points in the United States and points in the People's Republic of China, pursuant to Evergreen's Experimental Certificate of Public Convenience and Necessity for Route 638 and related exemptions and frequency allocations. The Joint Applicants request that the Department act expeditiously under non-oral show cause procedures.
The Joint Applicants state that transfer of Evergreen's authority to Federal Express satisfies the standards of 49 U.S.C. §41105. The Joint Applicants declare that Federal Express' service proposal will maximize the valuable all-cargo opportunity under the U.S.-China Air Transport Agreement, enhance U.S. flag competitive presence in the market, support U.S. trade and help balance the route's directional traffic flows.
The Joint Applicants cite previous cases where the Department, in analyzing a proposed route transfer, assumed that the aviation marketplace had functioned properly to allocate routes in an economically efficient manner. The Joint Applicants submit that their route transfer agreement represents the proper functioning of the market place.
Federal Express plans to significantly improve cargo service for U.S. shippers between the U.S. and China by connecting the two major international gateways in China with Federal Express' vast hub and spoke network in the U.S., which allows it to reach 99 percent of the U.S. population. Federal Express plans to provide a broad range of cargo services from express small-package door-to-door services to general air cargo services for consolidated shipments using a wide-body B-747 freighter aircraft. Federal Express plans to integrate the China service into its worldwide scheduled network coordinating with its existing Asia operations with an over-Japan routing. Federal Express states that it plans to switch to a non-stop service once U.S.-China demand can support such a service. Under the terms of the agreement, Evergreen plans to continue to operate that U.S.-China service as a wet lease until Federal Express has received the necessary Chinese government permits so that U.S. shippers will not suffer any break in U.S. flag all-cargo service.
Additionally, the Joint Applicants note that approval of the transfer will have no adverse impact on any employees of Evergreen and will provide increased employment opportunities in flight and ground operations of Federal Express.
The Joint Applicants argue that the proposed route transfer is fully consistent with 49 U.S.C. §41105, and has a positive effect on: (a) the viability of each carrier, (b) competition in the domestic airline industry, and (c) the trade position of the United States in the international air transportation market. The Joint Applicants argue that the route transfer will enable Federal Express to expand its international service and add direct service to a potentially significant market, China. In addition, the Joint Applicants state that approval of the transfer will have a substantial and positive effect on the viability of Evergreen by relieving it of the responsibility of operating a marginally profitable route, and the cash infusion from the purchase will be used to pay down Evergreen's debt owed to creditors and obtain necessary working capital for its charter and wet-lease business.
The Joint Applicants also assert that the transfer will enhance market competition by allowing Evergreen to devote more of its resources to its core contract air transportation business, thereby strengthening Evergreen as a competitor. The Joint Applicants argue that the route transfer will enhance the trade position of the United States by providing a broad range of cargo service between China and over 99 percent of the U.S. population. Finally, the user-friendly nature of Federal Express' service will make exporting to China easier and thus this market will be more accessible for U.S. companies.
Lastly, the Joint Applicants also argue that the proposed transfer is consistent with the objectives set forth in the Department's new International Aviation Policy Statement, including increased variety of price and service options available to consumers, and enhanced access of U.S. cities to the international transportation system.
B. Answers
1. DHL
DHL states that the transfer can only be found to be consistent with the public interest if the Department imposes conditions that will: (1) ensure that all U.S. all-cargo carriers have access to the China market on fair terms; and (2) prevent the acquiring carrier, Federal Express, from exercising monopoly controls that would be adverse to other U.S. all-cargo carriers. DHL argues that Federal Express will be in "virtually a monopoly position" in the U.S.-China air express all-cargo services market as a result of being the only designated U.S. all-cargo carrier and the limited competition from U.S. and Chinese combination carriers. DHL further states that other express all-cargo carriers and forwarders unable to find service on combination carriers compatible with their express needs will have to apply to Federal Express to carry their shipments. DHL also argues that the competitive balance among U.S. all-cargo carriers will be adversely affected because of the possibility that when they use Fed Ex's services, they will be required to pay discriminatory rates, be denied space, or required to disclose their confidential information regarding customers.
In support of its request that the Department impose conditions on the route transfer, DHL argues that the public interest standard under 49 U.S.C. §41105(a) requires the Department to consider among other things the factors relating to anticompetitive practices and antitrust considerations set forth in 49 U.S.C. §40101 (a) (9) and (10). DHL further argues that 49 U.S.C. 41712 empowers the Department to forbid anticompetitive practices before they rise to the level of an antitrust violation.
DHL requests that the Department require Federal Express to provide nondiscriminatory access to other non-designated all-cargo carriers, including the requirement that shipments may be tendered to and accepted by Fed Ex at any point on any routing that Federal Express might operate, now or in the future. DHL requests that: access be provided at geographically feasible points; the timing of access for competitors of Fed Ex be no more restricted than the timing of access afforded to Fed Ex's own customers or shippers; and the timing of delivery of competitors' shipments not be given any lesser boarding or unloading priority than Fed Ex gives its own shipments. A second proposed condition relates to nondiscriminatory reasonable terms of payment. The third proposed condition would require Federal Express to allow its competitors to use their own (not Fed Ex's) airbills and other shipping and customs documentation. DHL further requests that competitors be permitted to tender shipments in sealed unit load devices, containers, or other forms of bulk delivery. Finally, DHL would require some mandated form of blocked-space arrangement for competitors to ensure space availability and the methodology of a typical interline agreement. DHL ends its answer by providing several procedural options by which the Department could formulate and impose the recommended conditions.
In its Supplemental Answer, DHL asserts that the Joint Applicants' statement that the U.S.-China air cargo market is intensely competitive because of the belly space offered by the combination carriers and by the foreign combination carriers providing sixth freedom service is unconvincing because they do not address the nature of express air cargo services. DHL argues that the timing of departures and arrivals, and the ability to have cargo cleared expeditiously is critical. Therefore, DHL reasons that those express carriers that utilize combination services will inevitably suffer competitive consequences as the U.S.-China market grows. DHL again calls for the Department to impose conditions on Federal Express' operations. This request is again confirmed in DHL's Second Supplemental Answer filed May 17, 1995.
2. The Memphis Parties
The Memphis Parties support approval of the route transfer to Federal Express. The Memphis Parties state that approval will contribute to the ability of Memphis and the State of Tennessee to foster further growth in the U.S.-Asia air express and freight markets. The Memphis Parties also argue that Federal Express' route network will enable it to provide service between China and the entire U.S., and to develop expanded U.S. exports to China to counterbalance traditionally heavy eastbound traffic flowing from China to the United States.
C. Reply of Joint Applicants
Federal Express and Evergreen in their joint reply emphasize that DHL has not objected to the route transfer itself, but has only requested that conditions be placed on the route authority when it is transferred to Federal Express. Therefore, the Joint Applicants argue that the only issue before the Department is whether conditions should be imposed upon the route authority after transfer to Federal Express. The Joint Applicants claim that DHL has misconstrued the situation and that transfer of Evergreen's route authority to Federal Express will not put Fed Ex in "virtually a monopoly position." To support this position, the Joint Applicants note that United and Northwest, the two designated U.S. combination carriers, offer freight services between U.S. and China that exceed the total capacity offered currently by Evergreen. In addition, they point out that Air China and China Eastern Airlines operate combination services and at least three weekly freighters, and that there is third-flag capacity available, including Japanese and other Asian carriers operating on a Sixth Freedom basis.
The Joint Applicants also assert that DHL's implication that it is a small U.S. carrier that needs protection from Federal Express is misleading in that DHL/US is part of the global network DHL Worldwide Express which is a major force in international express air services. The Joint Applicants argue that the DHL-brand service is well established in China by a joint venture between DHL Worldwide Express and the Chinese state-owned transportation corporation, Sinotrans, with the joint venture currently holding 35 percent of the total China national air express market. The Joint Applicants further argue that DHL/US is in an advantageous position to influence carriers operating between U.S. and China to accommodate DHL's operating needs because of its relationship with DHL Worldwide Express and its two significant shareholders (Japan Air Lines, Lufthansa) that are major providers of transpacific services or have cargo affiliations with such carriers. In light of the above, the Joint Applicants argue that Federal Express should not be forced to sell space to DHL/US or anyone else on terms set by the government.
In addition, the Joint Applicants argue that the Department should not accept DHL's speculative and ungrounded allegation that the transfer of route authority to Federal Express will create an automatic monopoly. The Joint Applicants initially argue that the Department no longer has jurisdiction over competition issues in route transfer cases due to the sunset of old section 408 of the Federal Aviation Act. Second, the Joint Applicants note that the Department rejected arguments similar to those raised by DHL in this case, in the Joint Application of Federal Express Corporation and The Flying Tiger Line, Inc., Order 89-5-10, April 28, 1989 (hereinafter "Flying Tiger") decision. The Joint Applicants state that the transaction was submitted to the Department of Justice (DOJ) for review pursuant to its authority under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and that DOJ issued a notice of early termination of its review on March 24, 1995, thus allowing the transaction to proceed without objection. Therefore, the Joint Applicants argue that DOJ's action should represent the final word on competition issues.
The Joint Applicants further argue that DHL presumes that Federal Express will operate in an anticompetitive manner and requests the Department to conclude that prospectively before Federal Express has an opportunity to operate in any manner. Joint Applicants assert that DHL's argument regarding future behavior by Federal Express is speculative and should be rejected. As precedent, the Joint Applicants cite the Flying Tiger decision, where the Department rejected a similar prediction of abuse as speculative and noted that if such abuse did take place, the Department could take appropriate enforcement action.
Lastly, the Joint Applicants argue that the conditions proposed by DHL are an attempt to relieve it from the responsibility of competing in the U.S.-China air express market. The Joint Applicants assert that imposition of the proposed conditions would be contrary to the current deregulated statutory environment for air transportation services. The Joint Applicants further argue that DHL's comparison of its proposed conditions to labor protective provisions ("LPPs") is inappropriate, since LPPs do not affect the rates and services of air transportation. The Joint Applicants also question the authority of the Department to reconstruct Federal Express' services to meet the particular needs of its competitors. Finally, the Joint Applicants argue that the conditions proposed by DHL, including forcing Federal Express into a joint venture with its competitor, would not increase competition, but instead, would reduce price and service competition.
IV. Tentative Decision
A. Scope of Review
The statute authorizing certificate transfers, 49 U.S.C. § 41105, provides that no certificate may be transferred unless the Department approves the transfer as being consistent with the public interest. The Department has adopted as its public interest standard in such cases a policy of allowing proposed transfers provided that they do not conflict with important international aviation policy objectives and are not otherwise inconsistent with the public interest. In determining whether a transfer of route authority is consistent with the public interest, we must consider three specific criteria - the effect of the transfer on: the viability of each of the carriers involved; competition in the domestic airline industry; and the trade position of the United States in the international air transportation market. In addition, the Department has stated that it will carefully examine the impact on airline workers when reviewing proposed sales of route authority, consistent with the Administration's Initiative to Promote a Strong Competitive Aviation Industry announced in January 1994.
B. International Aviation Policy Objectives
In our recent International Air Transportation Policy Statement, we noted several goals or objectives, including increasing the variety of price and service options available to consumers and enhancing the access of U.S. cities to the international transportation system. We tentatively find that the proposed route transfer is consistent with the goals set forth in the International Air Transportation Policy Statement. Federal Express' proposal for all-cargo service in the U.S.-China market incorporates a wide variety of services options ranging from the small package express delivery service, for which Federal Express is noted, to airport-to-airport, express freight and general cargo options as well. The type and price of each service has been tailored to meet the wide and disparate needs of consumers and shippers. It appears that Federal Express' service proposal will provide new and unique all-cargo service options in the U.S.-China market beyond what is currently provided by U.S. and Chinese carriers, and thus should be a significant benefit to U.S. consumers and shippers.
Second, Federal Express proposes to substantially increase the access of U.S. cities to the U.S.-China cargo market. Through Federal Express' well developed domestic hub and spoke network, Fed Ex intends to provide services to all major and secondary U.S. cities and 99 percent of U.S. addresses. Federal Express' domestic network should allow it to maximize usage of the China all-cargo rights by permitting the flow of traffic to and from a large number of on-line points within the United States. In addition, Federal Express' ground operations with a contractor can extend the reach of the service to 32 interior cities within China. This wide breath of coverage should give smaller U.S. cities, as well as larger cities, the opportunity to explore and develop the China market for U.S. products and services.
C. Public Interest Analysis
Reviewing the three public interest factors specified in 49 U.S.C. §41105, we tentatively find that the proposed route transfer will have a positive effect on the viability of both carriers and enhance competition in the domestic airline industry. Federal Express will be able to expand its international service and its service in the Asian market by adding direct service to a potentially significant market, China. In addition, Evergreen will no longer have the financial responsibility of operating a marginally profitable route. Instead, Evergreen will be able to focus on the charter and wet-lease business and use the cash infusion from the purchase to pay down debt owed to creditors and obtain working capital. Thus, the viability of both carriers should be enhanced by the transfer, Moreover, from its newly strengthened financial position, Evergreen should be a stronger competitor in the domestic airline industry while Fed Ex's position will likely be unchanged. We also tentatively believe that the route transfer will enhance the trade position of the United States by providing a broad range of cargo services between China and over 99 percent of the U.S. population. Federal Express' operation will also have extensive coverage in China. The scope and nature of the Federal Express service will make exporting to China easier and, thus, this market will be more accessible for U.S. companies.
We also tentatively find that the proposed transfer should benefit American workers. Federal Express will add additional flight and ground personnel, while there will be no loss of personnel at Evergreen which intends to shift its personnel to its charter and wet-lease operations.
Finally, DHL argues that, because of its competitive implications, the proposed route transfer can only be found to be in the public interest if certain conditions are imposed on Federal Express' operations. We note, however, that the transaction was submitted to DOJ for review pursuant to its authority under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and that DOJ issued a notice of early termination of its review on March 24, 1995, thus allowing the transaction to proceed without objection. DHL, nevertheless, argues that the proposed route transfer will place Fed Ex in "virtually a monopoly position" and adversely affect the competitive balance amongst U.S. all-cargo carriers. We tentatively find DHL's arguments regarding competition issues unpersuasive.
DHL argues that the grant of a sole all-cargo route to Fed Ex is similar to the grant of an exclusive franchise which creates the presumption of economic power. DHL cites the United States v. Ohio Oil Co., 234 U.S. 548, 34 S.Ct. 956, 58 L.Ed. 1459 (1914) for the proposition that control of a transportation facility is recognized as having a tendency to create a monopoly. In Ohio Oil Co., Standard Oil Company had a monopoly on interstate crude oil pipelines. Standard refused to carry any oil from potential competitors unless the oil was sold to it or to its subsidiaries on terms dictated by Standard. The court found that the lack of alternative means of transportation and Standard's behavior allowed it to dominate the oil fields without owning them. We tentatively find that this case is not on point.
Unlike in Ohio Oil Co., in this case, the factors of (1) lack of alternative means of transportation and (2) monopolistic behavior are not present. First, the proposed transfer will not give Federal Express a monopoly in the small package delivery market because there are alternative means of transportation. A case more appropriately on point is the Japan Small Package Service Proceeding, Order 87-12-1, served November 16, 1987, (hereinafter "Japan Small Package Case"). There an applicant for the route argued that, absent equal access to the line-haul service by more than one forwarder, Federal Express as the designated carrier would be able to exert monopoly power in the U.S.-Japan small package delivery market. Because there was alternative lift available to other applicant small package service providers, the Administrative Law Judge found, and the Department affirmed that Federal Express' single entity service would not be in a position to monopolize the U.S.-Japan small package delivery market.
In this case, there is also a variety of alternatives available to DHL and other small package express providers in the form of U.S.-flag and Chinese-flag lift and third-country carrier lift. DHL is well aware of these alternatives, as it is currently using them as part of its joint venture with Sinotrans in the China air express services market. In light of the alternatives available, we tentatively find that approval of the route transfer will not result in Federal Express gaining "virtual monopoly power" in the U.S.-China small package delivery market. Similar to our findings in the Japan Small Package Case, we tentatively find that approval of the route transfer will inject new competition into the U.S.-China market by increasing public awareness of the benefits of an integrated small package operation, developing the market and stimulating other carriers and forwarders to strengthen their activities.
We also find that the second factor of the Ohio Oil Co. case, monopolistic behavior, is not present. In Ohio Oil Co., the Standard Oil Company was actively engaging in anticompetitive behavior. However, in this instance, the proposed route transfer has not yet been approved and Federal Express has yet to engage in any behavior. We decline to give credence to DHL's speculations regarding the future behavior of Federal Express. DHL cites United Air Lines, Inc. v. Civil Aeronautics Board, 766 F.2d 1107 (7th Cir. 1985) for the proposition that 49 U.S.C. § 41712 (formerly § 411 of the Federal Aviation Act) gives the Department the power similar to that of the Federal Trade Commission to forbid anticompetitive practices before they rise to the level of an antitrust violation. Again, we find tentatively that the cited case is not relevant to the instant circumstances, since there is no evidence presented by any party in this case that demonstrates that Federal Express has engaged or intends to engage in anticompetitive practices.
The other cases cited by DHL in support of its argument on competition issues are similarly not on point as they either concern situations involving: (1) monopoly in a particular market; or (2) abusive monopolistic behavior. Neither of these factors is present in this case. In addition, as DHL has noted, the Department has the statutory authority to address anticompetitive practices if at some point in the future such practices should occur. Based on the above, we need not address the issues of whether the Department has the authority to impose the conditions proposed by DHL or whether imposition of such conditions would be desirable.
V. Conclusion
The Department tentatively approves under 49 U.S.C. § 41105, the transfer of the Experimental Certificate of Public Convenience and Necessity for Route 638 and related exemptions and frequency allocations of Evergreen International Airlines to Federal Express Corporation to transport property and mail between points in the United States and points in the People's Republic of China.
ACCORDINGLY:
1. We direct all interested persons to show cause why we should not issue an order making final our tentative findings and conclusions;
2. We direct interested persons wishing to comment on our tentative findings and conclusions, or objecting to the issuance of the order described in paragraph 1, to file an original and 5 copies in Docket 50173, and serve on all persons on the service list in that docket, a statement of such objections, together with any supporting evidence the objector wishes the Department to consider, not later than seven days from the date of issuance of this order. Answers to objections shall be due three days afterwards;
3. If timely and properly supported objections are filed, we will afford full consideration to the matters or issues raised by the objections before we take further action. If no objections are filed, we will deem all further procedural steps to have been waived, and proceed to enter a final order subject to Presidential review under 49 U.S.C. § 41307; and
4. We shall serve this order on all persons on the service list in this docket.
By:
PATRICK V. MURPHY, JR.
Assistant Secretary for Aviation
and International Affairs
(SEAL)