SERVED: August 29,1995
ORDER TO SHOW CAUSE
U.S.-Toronto Service Proceeding | Docket OST-95-206[1]
By this order, we tentatively grant the applications of Delta Air Lines and USAir to operate two daily round-trip scheduled combination frequencies each, Delta between Atlanta-Toronto and USAir between Pittsburgh-Toronto. We also tentatively grant backup authority to TWA (as backup to USAir) to operate two daily round-trip scheduled combination frequencies between St. Louis-Toronto, and Continental (as backup to Delta) to operate two daily round-trip scheduled combination frequencies between Newark-Toronto. Interested parties are directed to show cause why we should not make the grant of this authority final.
Background
This proceeding arises from the new air services agreement between the United States and Canada ("Agreement") signed in Ottawa on February 24, 1995. The Agreement provides for expanded economic opportunities in the U.S.-Canada aviation market, including new service to Toronto that is to be phased in over a three-year period. In the U.S.-Toronto market, during each of the first two years of the Agreement, the U.S. is able to select up to two additional carriers, with each carrier able to operate up to two daily round-trip frequencies. For the third year, the U.S. is able to select up to four more carriers, with each carrier able to operate up to two daily round-trip frequencies.[2] With the exception of Washington National Airport, which is subject to separate provisions, any U.S. points and carriers can be selected, including existing gateways and incumbent carriers.
In light of the expanded economic opportunities available under the Agreement, on February 28, 1995, the Department instituted this proceeding to select two carriers to provide scheduled combination service in the U.S.-Toronto market during the first year.[3] We invited applications for the new U.S.-Canada route opportunities in anticipation of the Agreement by Notice dated December 22, 1994. In the instituting order we consolidated the applications to serve the U.S.-Toronto market beginning in the first year into this proceeding. In the instituting order we also stated our intent to process these applications using expedited show-cause procedures under Subpart Q of our regulations. No party has raised objections to these procedures.
As we indicated in Order 95-2-57, in selecting carriers to provide the service at issue, our principle objective is to maximize the public benefits that can be expected to result from awarding this new authority. In this regard, we will place primary emphasis on the effects of the applicants' service proposals on the overall market structure and the level of competition both between U.S. and Canadian flag carriers and among U.S. flag carriers in the U.S.-Toronto market, and any other market(s) shown to be relevant, in order to promote an air transportation environment that will sustain the greatest public benefits. We will also consider which carriers will be most likely to offer and maintain service that provides the maximum benefits to the traveling and shipping public. Finally, we will consider the applicants' fare proposals, and other factors historically considered in carrier selection where they are relevant.[4]
Applications and Pleadings
Five certificate applications were filed for the two available new service opportunities between the U.S. and Toronto during the first year of the Agreement Continental for Newark-Toronto, Delta for Atlanta-Toronto, Northwest for Minneapolis/St. Paul-Toronto, TWA for St. Louis-Toronto, and USAir for Pittsburgh-Toronto. Each applicant proposed to operate the authorized maximum of two round-trip nonstop flights per day in its market. A table summarizing the basic service proposals is attached to this order.
Each of the applicant carriers filed Direct and Rebuttal Exhibits in support of its application,[5] including, where relevant, self-diversion revenue data. Briefs in support of the applications were also filed by each of the applicant carriers, as well as by the Georgia and Atlanta parties, which filed in support of Delta, and the Regional Business Partnership of the Metro Newark Chamber of Commerce, which filed in support of Continental.[6]
Position of the Parties
Continental
Continental proposes to operate two daily roundtrip Newark-Toronto nonstop flights with 128-seat 737-300 aircraft, providing single-plane service to Orlando and Ft. Lauderdale. It also proposes to place its code on Air Canada's numerous Newark-Toronto and La Guardia-Toronto flights.[7] In support of its application, Continental argues that (1) it would be a new entrant in the Toronto market, making use of a strong U.S. hub; (2) by gaining the ability to implement fully its code share alliance with Air Canada, it would provide meaningful intragateway competition with American Airlines and its code-share partner, Canadian International, in the largest U.S.-Canada market without two U.S. carriers; (3) this ability to code share with Air Canada over Newark and Toronto would provide significantly greater benefits than would two flights in a smaller market, including better on-line connecting service and intercarrier competition at its behind-gateway points, and full code share access to Canadian points; and (4) its two flights alone would carry 126,000 non-code-share passengers during the forecast year, even by conservative estimates.
In response, the other applicants contend that (1) New York/Newark is already the best served Toronto market, with 128 nonstop flights per week provided by three carriers; (2) Continental would provide few service benefits not otherwise available under the Agreement through Air Canada's immediate ability to code share on all of Continental's domestic flights; (3) Continental code shares on Air Canada would largely benefit the Canadian carrier; (4) Continental's on-line connecting service would effectively benefit far fewer cities and passengers than claimed, and would not adequately serve the west; and (5) Continental would incur substantial startup costs at Toronto.
Delta
Delta proposes to operate two daily roundtrip Atlanta-Toronto nonstop flights with 180-seat B-757 aircraft. In support of its application, Delta argues that (1) Atlanta is Delta's principle hub, the country's largest hub, and the largest U.S.-Toronto market without nonstop service; (2) Delta would incur the fewest startup costs because it already serves Toronto over various gateways, including Atlanta-Toronto over Pittsburgh; (3) Delta would carry the most local O&D and the most total traffic, and will provide improved online service to the greatest number of behind points; (4) Delta would compete directly against Air Canada's new nonstop service at Atlanta and against both U.S. and Canadian carriers at other gateways; and (5) Delta would serve the populous and underserved southeast.
In reply, the other carriers argue that (1) Atlanta would provide only highly circuitous service to most western points, and most of Delta's existing one-stop online connections over its various northern gateways are just as convenient; (2) Delta also overstates its traffic forecast by including numerous behind-gateway points that already have nonstop service; (3) Delta would not be adding net capacity to Toronto since it plans to drop two of its four existing daily roundtrip Atlanta-Pittsburgh-Toronto flights; and (4) Delta has the largest number of existing Toronto gateways, and its selection would increase industry concentration at Toronto, where American, Delta and USAir would together have over 75% of the U.S. carrier market share.
Northwest
Northwest proposes to operate two daily roundtrip Minneapolis/St. Paul-Toronto nonstop flights with a 100-seat DC-9-30 aircraft, providing single-plane service to Boise and Salt Lake City. In support of its application, Northwest argues that (1) Minneapolis is a large Northwest hub with substantial local O&D traffic that would also provide the least circuitous connecting service for the largest number of western points; (2) the west is underserved, with only 4 of 11 nonstop gateways to Toronto and 10% of the nonstop flights; (3) Northwest's Minneapolis service would create intergateway and intercarrier competition with American and United at Chicago; (4) Northwest would incur only incremental marketing costs because it already has a station at Toronto; and (5) Northwest is the Toronto incumbent with the fewest gateways and the least access to Toronto traffic.
In reply, the other applicants argue that (1) Northwest's proposal largely duplicates existing service over Chicago by American and United, and its own service over its larger Detroit hub, both of which serve western points with nearly equal circuity; (2) Minneapolis is a relatively small local O&D market, and most of Northwest's online connections would serve points with few Toronto passengers; and (3) Northwest would provide the fewest seats and projects the least total traffic of the proposals.
TWA
TWA proposes to operate two daily roundtrip St. Louis-Toronto nonstop flights with 132-seat MD-80 aircraft, providing single-plane service to Phoenix and San Diego. In support of its application, TWA argues that (1) it is the only major hub carrier with no authority to serve Canada, and St. Louis is the largest eastern or midwest city with no convenient service to Toronto; (2) TWA would provide major service benefits to the underserved west through extensive online connecting services; and (3) TWA would maximize intergateway and intercarrier competition to Toronto, and reduce industry concentration.
In response, the other applicants argue that (1) St. Louis is a small local O&D market, while TWA's behind-gateway online connecting services largely duplicate service over Detroit and Chicago; (2) TWA would produce relatively few nonstop seats, and its behind-gateway services would benefit relatively few single-plane or online connecting passengers, mostly in the southwest; (3) TWA's traffic projections are highly optimistic; and (4) as a new entrant without Toronto facilities, TWA would have substantial startup costs, most of which it failed to estimate.
USAir
USAir proposes to operate two daily roundtrip Pittsburgh-Toronto nonstop flights with 182-seat B-757-200 aircraft, providing single-plane service to Seattle and San Diego in the summer and to Orlando and Phoenix in the winter. In support of its application, USAir argues that (1) Pittsburgh is USAir's largest hub and closest gateway to Toronto, permitting the carrier to easily adjust connecting schedules and to offer nonstop connecting service to 84 behind points; (2) Pittsburgh is well positioned to offer convenient, low-circuity connections to most U.S.-Toronto points; (3) the Pittsburgh gateway would enable USAir to compete effectively and maintain overall U.S. market share at Toronto in the face of the advantages enjoyed by Canadian carriers; and (4) because of USAir's substantial operations and presence at Toronto, it would incur few additional costs.
In response, the other applicants argue that (1) Pittsburgh already has nonstop Toronto service by Delta, and USAir's service would merely replace two of its flights; (2) USAir is a major incumbent carrier with ample Toronto access through seven unrestricted eastern gateways, and most of its projected online service benefits are already provided over them; (3) USAir's traffic projections rely heavily on cities which are themselves nonstop gateways or cities with substantial circuity over Pittsburgh; and (4) selection of USAir would increase industry concentration in the Toronto market.
Tentative Decision
This proceeding offers us the choice of two of five carriers and gateway points. We have tentatively decided that the selection of Delta and USAir most effectively achieves the most public interest benefits meeting the selection criteria of this proceeding. More specifically, we tentatively find that the proposals of Delta and USAir will offer the strongest competition to foreign-flag carriers in the U.S.-Toronto market. In addition, the selection of Delta and USAir will benefit the maximum number of passengers and shippers in the U.S.-Toronto market, even net of self-diversion, and will provide the maximum capacity in the market.
Toronto is by far the largest Canadian market from the U.S., accounting for 45 percent of total U.S.-Canada nonstop segment and onflight O&D traffic. It is about two-and-a-half times the size of Montreal and Vancouver, the next-largest markets. The recent Agreement with Canada provides for immediate, complete free entry to the U.S. market for all Canadian carriers. U.S. carriers, however, are restricted in their operations at Toronto during the initial three-year phase, as well as at Montreal and Vancouver for two years. These restrictions are especially severe at Toronto, where the U.S. may designate only two new routes for each of the next two years, and four new routes in the third year, with frequencies on the new routes limited to twice-daily round-trip service.
Because of the enormous relative size of the Toronto market, with nearly 5 million nonstop segment passengers per year to and from U.S. gateways, and because of the advantage accruing to Canadian carriers in the first year of the Agreement, it is imperative that the U.S. select the carriers that will serve the largest number of U.S.-Canada passengers and that will offer the strongest head-to-head competition with Canadian carriers in the Toronto market. Delta and USAir are the clear winners under these criteria. Although each of the other applicants has strong points in its favor, those factors do not outweigh the decisive advantage of Delta and USAir in terms of overall benefits to passengers and of competition offered to Canadian carriers in the Toronto market.
As we stated in Order 95-2-57, the primary emphasis in this proceeding is on the effects of the applicants' service proposals on the overall market structure and the level of competition both between U.S. and Canadian flag carriers and among U.S. flag carriers in the U.S.-Toronto market. It is critically important in shaping the developing competitive environment that we select the carriers that will be the strongest competitors in the market if we are to maximize the use of these valuable U.S.-Toronto bilateral rights. The selection of Delta and USAir will result in the greatest level of competition with both Canadian and other U.S. flag carriers, while having a positive effect on the overall U.S.-Toronto market structure.
Competitive Issues
In assessing the competitive impact of each carrier's proposal, we were compelled to balance the issue of competition among U.S. carriers and of competition between U.S. carriers as a class and their foreign competitors. In this case, selection of Delta and USAir will maximize competition between U.S. and Canadian flag carriers in the U.S.-Toronto market. The competition that Delta and USAir will offer to Canadian flag carriers is an especially important consideration in the interim period when U.S. carriers remain restricted but Canadian carriers do not.
Under the terms of the Agreement, Canadian carriers are able to enter any U.S. city-pair market they choose, free of capacity and frequency limitations. While this fact is true for U.S. carriers in markets other than U.S.-Toronto, U.S.-Montreal, and U.S.-Vancouver, the temporary limitations on U.S. carriers in these restricted markets, both in terms of designations and frequencies, puts U.S. flag carriers at a marked competitive disadvantage with Canadian flag carriers. As we select which carriers will be able to serve the U.S.-Toronto market during this critical phase-in period, primary importance must be given to the level of competition that these carriers will provide Canadian flag carriers if we are to avoid giving a further advantage beyond free entry to our foreign competitors.
Continental, Northwest and TWA argue that most of the existing Toronto gateways are in the east, and that Delta and USAir have authority from more of them than other U.S. carriers. Delta and USAir argue, however, that some of these gateways exist for reasons other than efficient hub and spoke network development. In addition, many are either restricted to small aircraft service or are otherwise inefficient for convenient service and large traffic volumes. It is indisputable that the historical development of economic opportunities in the aviation market between the United States and Toronto has resulted in a market structure in which the two governments, rather than the forces of a free market, determined which gateways would provide what levels of service. The resulting route structure has forced traffic over some perverse gateways. We tentatively find that the selection of Delta and USAir in this proceeding will provide the best overall market structure in the United States-Toronto market pending the full liberalization of the market, which will be phased in incrementally, and will be completed in less than three years.
In the interim, the substantial limitations on U.S. carriers in the U.S.-Toronto market, combined with the unlimited opportunity for Canadian carriers to enter all U.S.-Toronto markets immediately, make it in the public interest for the U.S. carriers selected in this proceeding to be able to rationalize traffic flows over their proposed gateways to improve service for many passengers and to enhance competition among U.S. and Canadian carriers at a large number of the major U.S.-Toronto traffic points. We tentatively find that Delta and USAir, proposing to use their significant hub structures to route traffic over major gateways at Atlanta and Pittsburgh, are in the best position among the applicants to do just this.
The other applicants argue that the selection of Delta and USAir will increase the concentration of U.S. carrier service at Toronto, placing nearly 75% of U.S. carrier traffic in the hands of three U.S. carriers: American, Delta and USAir. While industry concentration is an important consideration in many carrier selection cases where the choices are for the long term, the fact that at least one more carrier will be able to enter the U.S.-Toronto market in February 1996, four more carriers will be able to enter the market in February 1997, and an unlimited number of carriers will be free to enter the market in February 1998, makes us less concerned that these carriers will be able to dominate the market over the medium- or long-term. In the short term, however, the U.S.-Toronto market will benefit most from Delta's and USAir's strength and resulting ability to challenge Canadian carriers in the market.
On balance, we tentatively find that, under the peculiar circumstances of this case, any industry concentration that would result during the first year is outweighed by the competition with the newly unrestricted Canadian carriers that the selection of Delta and USAir will provide. As we have previously stated, this competition with Canadian flag carriers is critical if we are to avoid handicapping the U.S.-flag position in the U.S.-Toronto market.
We tentatively find that the selection of Delta and USAir will further intergateway and intragateway competition. Each carrier, by offering attractive service options to passengers and shippers with its developed hub structure and significant online connecting services, will provide considerable competition against both U.S. and Canadian carriers at other gateways. In addition, Delta will provide head-to-head competition against Air Canada's new nonstop Toronto service at Atlanta, while USAir will offer increased competition against Delta at Pittsburgh.
Service Benefits
In selecting the carriers that will provide the maximum benefits to the traveling and shipping public in the United States-Toronto market, we have tentatively determined to look to the greatest number of passengers and shippers receiving the greatest qualitative service benefits. This approach ensures that the scarce bilateral rights available in this market under the Agreement will be used to the fullest extent possible. It requires a balancing of the benefits to the local O&D market with the benefits to the behind gateway markets, in addition to an analysis of the net improvement in service.
By selecting Delta at Atlanta and USAir at Pittsburgh, we will be providing for new, nonstop Toronto service by the two carriers proposing to use the largest aircraft and therefore offering the largest number of new, nonstop seats. In addition, Delta and USAir provide the largest number of online connecting city services, with Delta serving 54 cities with single-connection, round-trip service, and with USAir serving 84, thus providing significant online service benefits for U.S.-Toronto passengers and shippers from a large number of cities throughout the United States.
With over 90,000 base-year O&D passengers, Atlanta is the largest local market in issue that does not receive nonstop U.S. flag service to Toronto. In addition, Delta's hub operations serve a large catchment area. Delta's hub operations at Atlanta are the largest in the U.S., with Delta currently offering nonstop service to 99 U.S. cities and 1000 total daily departures and arrivals with large aircraft alone. Annually, Delta's hub operations in Atlanta account for over 20 million enplanements. Delta's proposed Atlanta-Toronto service will create the shortest elapsed travel time in 25 Toronto city-pairs, which generated over 152,000 base year O&D passengers.[8] In the local Atlanta-Toronto market, travelers will save an average of one hour and fifteen minutes each way on the nonstop flights.[9]
Although Pittsburgh is already a relatively well served O&D market, USAir's hub at Pittsburgh serves a large catchment area with minimal circuity to Toronto. Pittsburgh's location, just 222 miles south of Toronto, makes it well suited as a gateway hub for non-circuitous through and connecting service from a large number of cities, while the size of USAir's hub enables USAir to take full advantage of Pittsburgh's ideal location. USAir provides nonstop, connecting or through service from Pittsburgh to 84 U.S. cities with approximately 507 total daily departures and arrivals with large aircraft alone.
The proposals of Delta and USAir forecast the highest total traffic. Delta projects 182,879 passengers, of which 79,453 would be local Atlanta-Toronto passengers and 103,426 would be behind-gateway online connecting passengers.[10] USAir projects 158,000 passengers, of which 15,559 would be local Pittsburgh-Toronto passengers and 142,441 would be online connecting passengers.[11] In contrast, Continental, Northwest and TWA project significantly less total traffic, therefore making less intensive use of limited bilateral authority in the U.S.-Toronto market. Even net of self-diversion, Delta forecasts 166,372 passengers, substantially more than any other applicant, and USAir forecasts 125,553 passengers, essentially the same as Continental, but substantially more than Northwest or TWA.
Continental, Northwest and TWA variously argue that Delta's service to most western points would be highly circuitous and that most of Delta's existing one-stop online connections over Delta's northern gateways are just as convenient. They also argue that USAir's projected on-line service benefits are already provided over USAir's eastern gateways and that Pittsburgh already has nonstop Toronto service by Delta. These arguments, however, are outweighed in the circumstances of this case by the advantages to aviation consumers of efficient, rationalized service over highly developed hub structures, even where slightly more circuitous or available as an interline connection, in providing service to Toronto during the transition period to open entry.
The other applicants do not match the connecting opportunities that Delta's and USAir's hub operations at Atlanta and Pittsburgh offer. The strength of their hub operations lends credibility to the traffic forecasts of Delta and USAir, which are the highest among the applicant carriers. We tentatively find that by selecting Delta and USAir in this proceeding, the benefits to passengers and shippers in the U.S.-Toronto market will be maximized.
Backup authority
Having tentatively selected Delta to serve Atlanta-Toronto and USAir to serve Pittsburgh-Toronto, we must now address the issue of backup authority. With applications from Continental to serve Newark-Toronto, Northwest to serve Minneapolis/St. Paul-Toronto, and TWA to serve St. Louis-Toronto, the issue before us is whether to select one carrier to serve behind both of the primary routes awarded here or to select separate carriers to serve behind the two primary carriers selected. We have tentatively determined to award backup authority to Continental as backup to Delta and TWA as backup to USAir.[12] Continental would operate two daily round-trip scheduled combination frequencies between Newark-Toronto, and TWA would operate two daily round-trip scheduled combination frequencies between St. Louis-Toronto.
The service proposals of Continental, Northwest and TWA offer significant public interest benefits. Our tentative decision in the award of primary route authority is only that these benefits are less in magnitude than the benefits offered by the proposals of Delta and USAir. Selecting Continental to serve Newark-Toronto as a backup to Delta offers the potential of extending the benefits of a Toronto gateway to a new entrant in the Toronto market with a strong U.S. hub. In addition, it would provide intragateway competition with American Airlines, while adding 126,032 new nonstop seats in the largest local U.S-Toronto market.
Selecting TWA to serve St. Louis-Toronto as a backup to USAir offers the potential of introducing the benefits of the carrier's first Toronto gateway at its major hub. Additionally, St. Louis is geographically well situated to enable TWA to compete with United and American at Chicago. At the same time, TWA would provide online connecting service to a number of western points, while bringing 105,170 new nonstop seats to the U.S.-Toronto market.
Although the selection of Northwest would introduce convenient nonstop service between Minneapolis/St. Paul and Toronto, we tentatively find that the public interest benefits of the other carriers' proposals, on balance, outweigh the benefits that selection of Northwest would provide.
Dormancy Provisions
As we noted in Order 95-2-57, United and Continental recommended that, in order to maximize the use of scarce bilateral route authority, we issue the temporary, experimental certificates with 45-day dormancy provisions. The dormancy provisions would act to cause the authority to expire automatically and therefore be available for award to another carrier if service is not provided for a 45-day period. No carrier opposed the suggestion, and we therefore indicated that we anticipated imposing such a dormancy provision. Although we specifically invited comment on the duration of the dormancy provisions, no carrier chose to address the issue in the presentation of its case. We have therefore tentatively decided to include a 45-day dormancy provision in the certificates that will be issued pursuant to a final order in this case.
Accordingly,
PATRICK V. MURPHY
Deputy Assistant Secretary for
Aviation and International Affairs
(SEAL)