UNITED STATES OF AMERICA
DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY
WASHINGTON, D.C.

Served: Aug 23 1995

1996 U.S.-ITALY SERVICE PROCEEDING      |       Docket OST-95-422

Summary

By this order we institute the 1996 U.S.-Italy Service Proceeding, to select one primary and one backup carrier to provide scheduled combination service between a point or points in the United States and the coterminal points Milan and Rome, Italy.

Background

Four carriers, Trans World Airlines, American Airlines, United Air Lines and Delta Air Lines, currently provide scheduled combination service between the United States and Italy.[1] In addition, Continental Airlines provides service in the U.S.-Italy market on a code-share basis with Alitalia, the flag carrier of Italy by placing Continental's designator code on Alitalia's flights. Continental's services have been approved by the Italian government on an extrabilateral basis.

Under the terms of the 1990 United States-Italy ad referendum agreement, amended December 23, 1991, a fifth route opportunity is available effective April 1, 1996, for service by a U.S. carrier between any point in the United States (except New York/Newark and Chicago) and the coterminal points Milan and Rome, Italy.[2] Such service is subject to frequency limitations depending on the size of aircraft used. Specifically, as a result of an informal agreement in May 1993, which is not yet ratified but has been provisionally applied, the carrier designated for this fifth route opportunity may operate a total of six weekly frequencies with aircraft up to and including 300 seats or a total of five weekly frequencies using aircraft with more than 300 seats. After one year's operation, the airline may operate seven weekly frequencies using aircraft with up to and including 300 seats or six weekly frequencies using aircraft with more than 300 seats. In the third year, services may be increased to seven weekly frequencies using any type of aircraft.

Decision

To ensure that the selected carrier can institute service when the route rights are available in April 1996, we have decided to institute the 1996 U.S.-Italy Service Proceeding to certificate one primary and one backup carrier to provide scheduled combination service between the United States and Rome/Milan, Italy.

We invite all U.S. carriers interested in serving the U.S.-Italy market to file certificate applications for the authority at issue in this proceeding. Such applications should be filed directly into the newly established proceeding docket.[3] Carriers not currently serving Italy as well as designated carriers currently serving Italy are eligible to apply for the route opportunity at issue. Under the terms of the U.S.-Italy aviation agreement, an award of the available route opportunity is necessary not only for a new entrant but also for a carrier currently designated to serve a gateway not specifically named in the 1970 agreement.[4] Whether a new entrant or a currently designated carrier seeking to serve a new gateway should be selected for the award is a matter that bears on the merits of the selection and will be determined based on the record in this proceeding.

Whether certificating carriers for this service is consistent with the public convenience and necessity will not be at issue. The traffic right involved constitutes a valuable resource obtained in exchange for granting Italy route opportunities for its airlines to serve the United States. The introduction of additional U.S. carrier service will provide new service options to travellers and shippers and will enhance competition in the U.S.-Italy market. In these circumstances, we find that the public interest clearly calls for use of this traffic right.

Consistent with our established policy (section 399.120 of our regulations), we will award this authority in the form of temporary, experimental certificates of public convenience and necessity under 49 U.S.C. section 41102(c). The duration of the authority will be five years for the primary carrier and one year for the backup carrier, unless the latter authority is activated during that time, in which case, it will continue in effect for five years.

In determining which carrier/gateway will receive primary and backup authority for this route , our principal objective will be to maximize the public benefits that will result from award of this authority. In this regard, we will consider which applicant will be most likely to offer and maintain the best service for the travelling and shipping public. We will also consider the effects of the applicants' service proposals on the overall market structure and level of competition in the U.S.-Italy market, and any other market shown to be relevant, in order to promote an air transportation environment that will sustain the greatest public benefits. While the applicants' service proposals remain the primary element of consideration in the selection process, we recognize that frequency levels are governed by the terms of the amended aviation agreement. Such frequency limitations will be taken into consideration in making our decision. Finally, we will consider other factors historically used by the Department, such as competitive public service benefits of carriers' fare proposals, for carrier selection where they are relevant.[5]

It is possible that carriers will propose service from different gateway cities. We conclude that the backup authority awarded here need not be limited to the gateway where primary service is awarded. The considerations that lead to the selection of a carrier and gateway are entirely interrelated, and a gateway's selection for primary service by a particular carrier does not mean that a different carrier at the same city would necessarily represent the next best alternative. Our primary focus here in awarding backup authority is to maximize effective use of the available route rights in the event that the primary carrier does not institute service or discontinues service in the first year, not to ensure the continuation of service from any particular gateway.

Procedures and Timetable for Decision

It is our policy to tailor our procedures to the scope and complexity of the issues before us. We believe that written, non-oral, show-cause procedures under Rule 1750 of our regulations (14 CFR 302.1750) are appropriate and that by using these procedures we can establish a complete evidentiary record and make a selection with the least possible delay and without unnecessary costs to the applicants. We find no material issues of fact that would warrant an oral evidentiary hearing in this case.

To assist in the conduct of this proceeding and in the interest of a complete and adequate record, we have attached as an appendix to this order an evidence request setting forth additional information to be submitted by the Department, the incumbent(s), and the applicants. Applicants are also free to provide any additional information that they believe would be useful in helping us make our decision.

In addition, we will require American, Continental, Delta, TWA, and United, the U.S. carriers currently providing service in the U.S.-Italy market, whether or not they participate in this proceeding, to file the fare and service data set forth in the attached Appendix (Appendix at 2, Section III A.2). We believe that such data are necessary for a complete record in this case, and therefore, we are exercising our power under 49 U.S.C. 41708 to require these carriers to file these data.

We anticipate that these carriers will seek confidential treatment pursuant to Rule 39 of our regulations (14 CFR 302.39) for the fare data we are requiring here. In the interest of saving time in this proceeding, we have decided to grant such confidential treatment a priori to the fare data submitted by these carriers under the attached evidence request.

We find that the information responses of these five incumbent carriers will contain confidential business information and that they will fall within the Freedom of Information Act's exemption for disclosure of trade secrets and commercial or financial information that are obtained from a person and are privileged and confidential. These information responses shall be available only to persons who submit affidavits in this proceeding promising not to disclose them and to use them only in connection with this proceeding. Notwithstanding this a priori grant of confidential treatment, the Acting Assistant Secretary for Aviation and International Affairs shall have the discretion, if he wishes, to limit or avoid a separate confidential record, and to revoke confidential treatment to the extent that information contained in these responses is used in the parties' submissions or in decisions or orders in this proceeding.

Procedural Schedule

The additional route opportunity is available April 1, 1996. It is our intent that the selected carrier be in a position to begin its service on that date. With this goal in mind, we establish the following procedural schedule for submissions in this case:

   Petitions for Reconsideration:       August 31, 1995

   Answers to Petitions:                September 7, 1995
   DOT/Incumbent Carrier Information    September 14, 1995
          Responses:
   Applications/Motions to Consolidate: September 18, 1995
   Answers to Applications:             September 25, 1995
   Direct Exhibits:                     October 5, 1995
   Rebuttal Exhibits:                   October 26, 1995
   Briefs:                              November 16, 1995

ACCORDINGLY,

1. We institute the 1996 U.S.-Italy Service Proceeding, which will be decided using non-oral hearing procedures under Rule 1750 of our regulations (14 CFR 302.1750);

2. The proceeding instituted in ordering paragraph 1, above, will consider which primary and which backup carrier should be authorized to serve the U.S.-Italy market using the available frequencies for this service, and what terms, conditions, and limitations, if any, should be placed on any authority awarded in this proceeding;

3. Pursuant to 49 U.S.C. 41708, we require American Airlines, Continental Airlines, Delta Air Lines, Trans World Airlines, and United Air Lines to comply with the fare and service data filing requirements as set forth in section III.A.2 of the Appendix to this order;

4. We grant confidential treatment pursuant to Rule 39 of the Department's Regulations (14 CFR 302.39) to the incumbent carrier data submitted to this order. The Acting Assistant Secretary for Aviation and International Affairs may revoke such confidential treatment to permit its use in the parties' submissions or in decisions or orders in this proceeding; and

5. We will serve this order on all U.S. certificated air carriers; the Ambassador of Italy in Washington, D.C.; and the U.S. Department of State (Office of Aviation Negotiations).

                   MARK L. GERCHICK
                         Acting Assistant Secretary for
                         Aviation and International Affairs

(SEAL)

I. Public Disclosure of Data

Pursuant to sections 241.196 and 399.100 of the Department's regulations, it is determined that the Department's T100 data for the period January 1, 1992, through final Department decision in this proceeding, and the Origin & Destination Survey Data (Data Bank 2-A) for the period January 1, 1989, through final Department decision in this proceeding, for operations between the United States and Italy, are material and relevant to a final determination of the issues in this case. Those data have been released to the U.S. carriers and U.S. nonairline civic and governmental parties to this proceeding, who will be free to use those data to the extent they deem necessary.

II. Procedures and Ground Rules

In the interest of a complete and adequate record, the parties should submit the following information in the form of exhibits. The exhibits should contain sufficient detail, including sources, bases, all assumptions, and methodology, so that, without further clarification, any party can derive the final results from the basic data.

III. Request for Information and Evidence

A. Information Responses[7]

1. DOT Data

The Economic & Financial Analysis Division of the Office of Aviation Analysis will make available to the parties the following data in the form of information responses:

(a) T100 nonstop segment data, by month, beginning January 1, 1992, through the latest available month, between the United States, on the one hand, and Italy, on the other.

(b) T-100 on-flight market data, by month, beginning January 1, 1992, through the latest available month, between the United States, on the one hand, and Italy, on the other.

(c) For the Calendar Years 1989 through 1994 and thru the twelve-months ended March 31, 1995, O&D traffic from Table 15 of the Department's O&D Survey between all U.S. points, on the one hand, and Italy, on the other.

(d) For the 12 months ended March 31, 1995, from the Department's O&D Survey between all U.S. points, on the one hand, and Milan and Rome, Italy, on the other, that used the following gateways: Chicago, New York and Washington DC, and "all others."

2. Incumbent Carrier Data
a. Using the format on page 5 of this Appendix, provide the passenger distribution by fare category, and weighted average fare, for the 12 months ended March 31, 1995, between the carrier's U.S. gateway(s) and gateways in Italy, by city-pair.

b. As of July 1, 1995, show all weekly online arriving and departing connecting flights for the first week in July sorted by arrival/departure time and for each flight give the full flight itinerary, flight number and arrival/departure times for each U.S. gateway served by the incumbent in U.S.-Italy service.

The applicant carriers are directed to provide the sources, in exhibit form, for their traffic forecast. This information shall be set forth in such a manner that any other party could construct a traffic forecast from the exhibits without the necessity of having the actual source document at hand, particularly if the source is other than the Department's O&D Survey. Indicate growth rates, stimulation rates, and participation rates, as well as the bases for such rates.[8]

The source data for traffic forecasts made by any party shall be (1) the O&D Survey and/or (2) the U.S. International Air Travel Statistics (commonly referred to as INS Data), or (3) a combination of these data sources. Any party may provide a separate, additional forecast based on other source data (e.g., T100 data) if it wishes, but if so, that party should clearly explain the differences between its data source and the two specified above (e.g., differences in collection methods, or adjustments made to raw data).

1. Applicant Carriers

Submit, at a minimum, the following:

(a) Firm date for instituting service in the market, a breakdown for peak and off-peak seasons, and single-plane and nonstop-to-nonstop connecting schedules proposed to be operated in the forecast year (12 months ending March 31, 1997). Schedules should contain flight numbers, complete routings from origin to destination (including behind-gateway and beyond-gateway points), departure and arrival times, equipment types (including seat configuration by class of service), days scheduled, classes of service offered, and the limitations, if any, on the number of seats available for each class of service;

(b) Estimated startup costs, including a description of what such costs include;

(c) Separate passenger traffic forecasts on an O&D market-by-market (city-pair) basis (single-plane and online connecting and, to the extent possible, interline connecting) for the 12 months ending March 31, 1997. The forecasts should be based upon the applicant's proposed schedules and should detail specifically the data sources of all traffic. Include any anticipated traffic changes in other markets on the applicant's existing system in which service will be altered as a result of the proposal in this case, including self-diversion. The basis for any forecasting technique used should be clearly explained. Indicate any anticipated seasonal fluctuations;

(d) Proposed fares in U.S. dollars in markets in which single-plane service is proposed (by fare type and with a description of all fare conditions/restrictions), including a breakdown for peak, off-peak, and shoulder season, and by direction.[9] All proposed fares should be those which the carrier would have offered on October 1, 1994, had it been offering service in the U.S.-Italy market on that date.[10] (Do not allow for inflation, SFFL fare adjustments, or any upward fare flexibility to the forecast year.) Include a percentage distribution of passengers forecast for each fare type proposed for each market and explain the basis for the distribution by fare type. Show the weighted average fare including first and business class, and, separately, without first and business class. Separately indicate the dilution from joint fares or other factors not directly related to discount fare offerings. (See page 5 of this appendix for summary format.) Explain the basis for any fare stimulation estimate;

(e) The net revenue anticipated from the proposed service for the forecast year. This estimate is to be based on: (1) the traffic forecast in paragraph (c) above; and (2) the fares proposed in paragraph (d) above. Explain the derivation of all dilution factors used in each revenue estimate;

(f) A pro forma profit and loss statement for the forecast year based on the above traffic and revenue projections. All expense estimates should be based on the Form 41 functional account method, and all unit costs should be for the 12 months ended March 31, 1995, and should be the carrier's Atlantic Entity unit costs. (Do not allow for inflation to the forecast year.)[11] Foreign currency conversion values for the estimates, where applicable, should be based on the exchange rates of US $1.00 = Italian Lira 1,560.62 (the exchange rate for September 30, 1994, as stated in the October 3, 1994, Wall Street Journal);

(g) An indication whether or not the aircraft to be used in the proposed schedules are on hand or on order. If on hand, indicate where and to the extent to which those aircraft are currently being used. If on order by purchase or lease, indicate when they will be delivered and how the aircraft will be financed. Indicate whether the aircraft to be used comply with FAR36. If not, indicate plans for achieving compliance;

(h) Estimated number of gallons of fuel to be consumed by aircraft type in the forecast year as a result of the proposed service;

(i) A description of any code-sharing agreements with foreign carriers providing for the applicant's proposed service to be marketed under the foreign carrier's codes, or for U.S.-Italy service operated by the foreign carrier to be marketed under the applicant's code, including a description of integrated connecting services to be provided by the applicant's code-sharing partner(s).[12]

(j) A map showing how the applicant's existing route structure would feed into its proposed service; and

(k) Responses to the following interrogatories:[13]

(1) Will the carrier selected agree to accept the following condition in its certificate:

"The holder shall file initial tariffs at levels no higher than those stipulated in Exhibit ( ) submitted in Docket OST-95-422"?

(2) Will the carrier, if selected as backup, accept a condition in its certificate which (a) permits it to implement authority within the first year should the primary carrier withdraw from the market, and (b) expires at the end of one year should the authority not be activated?

(3) Will the carrier selected for primary authority accept a condition in the certificate requiring institution of service by a date specified by the Department? What date should the Department specify?

1. Delta and TWA each provides daily nonstop service between New York and Milan and New York and Rome. American provides daily nonstop service between Chicago and Milan, and United provides daily nonstop service between Washington, D.C., and Rome, with continuing service to Milan.

2. In accordance with the September 27, 1990 Memorandum of Understanding, no new U.S. carrier may enter the New York-Italy market in addition to the current incumbents, Delta and TWA. Since service to New York is deemed to include Newark, the exclusion of New York as an eligible point also covers Newark. See, Order 91-8-50. Also, in accordance with the 1990 MOU, no new U.S. carrier may enter the Chicago-Italy market in addition to American prior to April 1, 1998, without Italy's consent. After April 1, 1998, the United States is limited to two U.S. carrier designations in the Chicago-Italy market. In addition, paragraph 5 of the 1990 MOU limits service to two U.S. carriers at the following points: Boston, New York, Philadelphia, Baltimore, Los Angeles, San Francisco, Portland, Seattle and San Juan. Gateway points not authorized for service by the 1970 agreement are limited to not more than one U.S. carrier designation at any one time.

3. All applications should include all information requested in Part 302, Subpart Q, and in the evidence request attached as an Appendix to this order in accordance with the procedural schedule established. Applicants that have pending applications on file for U.S.-Italy authority may file motions to consolidate those applications into this proceeding. New entrants to the Italy market should file applications for a new certificate. Currently designated carriers holding certificate authority to serve Italy may file applications to amend their existing authority to add any new route requested. Should applicants only need to apply for designation, such applications are due by the date specified in the order for applications.

4. For carriers designated under the 1990 MOU (i.e. American and United), an award of authority would also be necessary even to serve a named gateway in the 1970 agreement.
5. The U.S.-Italy aviation agreement provides for a country-of-origin pricing regime.

6. The Department will provide its information responses on computer diskette. Applicants should provide the Department with a computer diskette of all exhibits and briefs prepared using electronic spreadsheet or word processing programs. Such diskettes should be filed with the Department's Office of Aviation Analysis, Room 6401, 400 Seventh Street, SW, Washington, DC 20590. Diskettes should be DOS-formatted. Exhibits and Briefs prepared with Microsoft Excel (version 5.x or earlier), Lotus 1-2-3 (version 3.x or earlier), Microsoft Word (6.x or earlier), or WordPerfect (version 5.2 or earlier) should be filed in their native formats. Parties may also file exhibits or briefs via e-mail to our Internet address:dot_dockets@postmaster.dot.gov. Files sent via e-mail should be ASCII (text only) format. Parties using other software may either (1) file exhibits and briefs in the foregoing formats, or (2) contact Bill McCamant, (202)-366-1041 for format compatibility information or to seek a waiver, which will be considered on an ad hoc basis. Submissions in electronic form will assist the Department in quickly analyzing the record and preparing its decision. The paper copy, however, will be the official record.

7. Due to the volume of this material, we will be unable to print and distribute copies to the parties. One copy of these materials will be made available for the parties' use in Room 4201, 400 Seventh Street, S.W., Washington, D.C. In addition, the Department will issue on request copies of the information responses on computer diskettes. Parties who wish to receive diskette versions of the information responses, should contact the Economic & Financial Analysis Division, at (202)366-2344. The Department will make this material available no later than September 14, 1995.

   Use of the data contained in the Department's Information Responses (either from hard-copy or computer diskette) is restricted to representatives of applicant carriers and interested U.S. parties (i.e., those that have filed applications or comments) in this proceeding.

8. The base year for traffic forecasting purposes should be 12 months ended March 31, 1995, and the forecast year should be the 12 months ended March 31, 1997.

9. Also show similar fare data for on line connecting markets (city pairs) where those markets account for 10 percent or more of the applicant's forecast traffic.

10. Separately show the dollar and percent reduction, if any, of all proposed fares, by category and by market, from the fares in effect on October 1, 1994. The October 1, 1994, date is the mid point of the cost year (12 months ended March 31, 1995).

11. To the extent any cost estimates differ from costs shown in the carrier's Form 41 Reports (Atlantic entity) for the 12 months ended March 31, 1995, those differences should be fully explained. If any applicant in this proceeding does not (a) have Form 41 Reports on file with the Department, (b) have the type of aircraft proposed to be operated in its current fleet, or (c) report data for the Atlantic entity, all expense estimates should nonetheless be based on DOT Form 41 functional methods, and the bases for those estimates should be fully explained.

12. Traffic forecasts under III.B.1(c), supra, should separately show connecting feed from the applicant's foreign-flag code-sharing partner(s).

13. Any certificate issued in this case for primary authority will be for five years' duration, and any backup certificate issued will be for one year.