UNITED STATES OF AMERICA,                                     Plaintiff,                   v. AMR CORPORATION, AMERICAN AIRLINES, INC., and AMR EAGLE HOLDING CORPORATION,                                               Defendants.

| | | | | | | | | | | | | |

No. 99-1180-JTM

TABLE OF CONTENTS

1. INTRODUCTION
2. FINDINGS OF FACT
1. SUMMARY JUDGMENT STANDARD
2. THE PLAINTIFF'S ALLEGATIONS
3. COMPETITION IN THE DALLAS - FORT WORTH AREA
4. LCC COSTS
5. NEW ENTRANT AIRLINE COMPETITION
6. AMERICAN'S COMPETITIVE EXPERIENCE WITH LCCs
7. HOW AMERICAN COMPETED ON THE ROUTES AT ISSUE
1. DFW-MCI
2. DFW-ICT (Wichita)
3. DFW-COS
4. DFW-LGB (Long Beach)
5. DFW-EWR (Newark)
6. DFW-TPA (Tampa)
7. DFW-OAK (Oakland)
8. DFW-PHX (Phoenix)
9. OTHER ALLEGED MARKETS
8. LCCs AND PRICE COMPETITION
9. ALLEGED PREDATORY PRICING
10. COMPETITIVE PRACTICES
11. REPUTATION ISSUES
12. SPECIFIC CARRIERS

1. Air Tran Airlines
2. American Trans Air
3. Big Sky Airlines
4. Braniff Airlines
5. Frontier (DFW-DEN)
6. Great Plains (DFW-ICT)
7. JetBlue (DFW-JFK)
8. Legend Airlines
9. National Airlines (DFW-LAS)
10. Ryan International Air (DFW-ICT)
11. Ozark Airlines
12. Sun Country Airlines
13. Vanguard (DFW-CVG)
13. NEW ENTRY AT DFW
14. FACTS RELEVANT TO MEETING COMPETITION
15. IN-MARKET RECOUPMENT
3. CONCLUSIONS OF LAW

1. THE GOVERNMENT'S ALLEGATIONS
2. ELEMENTS OF LIABILITY
3. AMERICAN'S COSTS
4. MEETING COMPETITION
5. RECOUPMENT
6. MONOPOLIZATION BY REPUTATION
7. ADDITIONAL ROUTES
8. CONCLUSION

APPENDIX

A. INTRODUCTION

The present action arises from competition between American Airlines and several smaller low cost carriers on various airline routes centered on Dallas - Fort Worth Airport (DFW) from 1995 to 1997. During this period, these low cost carriers created a new market dynamic, charging markedly lower fares on certain routes. For a certain period (of differing length in each market) consumers of air travel on these routes enjoyed lower prices. The number of passengers also substantially increased. American responded to the low cost carriers by reducing some of its own fares, and increasing the number of flights serving the routes. In each instance, the low fare carrier failed to establish itself as a durable market presence, and eventually moved its operations, or ceased its separate existence entirely. After the low fare carrier ceased operations, American generally resumed its prior marketing strategy, and in certain markets reduced the number of flights and raised its prices, roughly to levels comparable to those prior to the period of low fare competition.

In the present action the plaintiff United States alleges that the defendants AMR Corporation, American Airlines, Inc., and AMR Eagle Holding Company, (all hereafter "American"), participated in a scheme of predatory pricing against the low cost carriers in violation of Section 2 of the Sherman Act. The government alleges that American's pricing and capacity decisions on the routes in question resulted in pricing its product below cost, and that it intended to subsequently recoup these costs by supra-competitive pricing by monopolizing or attempting to monopolize these routes. It further alleges that, in addition to these routes, American has violated Section 2 in a large number of additional airline routes, contending that American has monopolized or attempted to monopolize by means of the "reputation for predation" it allegedly gained in its successful competition against low fare carriers in the core markets.

American has moved for summary judgment on the outstanding claims, arguing that its competition against the low cost carriers was competition on the merits, and not conduct unlawful within the terms of the Sherman Act. Having reviewed the arguments of the parties and the evidence submitted in connection with the motion for summary judgment, the court finds that summary judgment is appropriate.⁽¹⁾

B. FINDINGS OF FACT

1. SUMMARY JUDGMENT STANDARD

Summary judgment is proper where the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). In considering a motion for summary judgment, the court must examine all evidence in a light most favorable to the opposing party. McKenzie v. Mercy Hospital, 854 F.2d 365, 367 (10th Cir. 1988). The party moving for summary judgment must demonstrate its entitlement to summary judgment beyond a reasonable doubt. Ellis v. El Paso Natural Gas Co., 754 F.2d 884, 885 (10th Cir. 1985). The moving party need not disprove plaintiff's claim; it need only establish that the factual allegations have no legal significance. Dayton Hudson Corp. v. Macerich Real Estate Co., 812 F.2d 1319, 1323 (10th Cir. 1987).

In resisting a motion for summary judgment, the opposing party may not rely upon mere allegations or denials contained in its pleadings or briefs. Rather, the nonmoving party must come forward with specific facts showing the presence of a genuine issue of material fact for trial and significant probative evidence supporting the allegation. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has carried its burden under Rule 56(c), the party opposing summary judgment must do more than simply show there is some metaphysical doubt as to the material facts. "In the language of the Rule, the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting Fed.R.Civ.P. 56(e)) (emphasis in Matsushita). One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and the rule should be interpreted in a way that allows it to accomplish this purpose. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).⁽²⁾

2. THE PLAINTIFF'S ALLEGATIONS

The plaintiff alleges that American monopolized or attempted to monopolize through predatory pricing and by the resulting reputation for predatory pricing in the following seven markets: DFW-MCI (Kansas City), DFW-ICT (Wichita), DFW-COS (Colorado Springs), DFW-LGB (Long Beach), DFW-PHX (Phoenix), DFW-TPA (Tampa), and DFW-OAK (Oakland).

In addition, the plaintiff alleges that American monopolized or attempted to monopolize the following markets through the reputation that it earned for predatory pricing on other routes: DFW-BDL (Hartford), DFW-BHM (Birmingham), DFW-BNA (Nashville), DFW-BOS (Boston), DFW-BWI (Baltimore), DFW-CLE (Cleveland), DFW-CMH (Columbus), DFW-DCA (DC Reagan), DFW-FLL (Ft. Lauderdale), DFW-HSV (Hunstville, AL), DFW-IAD (DC Dulles), DFW-IND (Indianapolis), DFW-LAX (Los Angeles), DFW-LGA (NY LaGuardia), DFW-MIA (Miami), DFW-OMA (Omaha), DFW-ONT (Ontario, California), DFW-ORD (Chicago O'Hare), DFW-PDX (Portland, Washington), DFW-PHL (Philadelphia), DFW-RDU (Raleigh-Durham), DFW-SAN (San Diego), DFW-SEA (Seattle), DFW-SFO (San Francisco International), DFW-SGF (Springfield, Missouri), DFW-SJC (San Jose, California), DFW-SJU (San Juan, Puerto Rico), DFW-SNA (Orange City, California), and DFW-TUS (Tucson).

The plaintiff alleges that the following five markets felt effects from American's actions, without alleging that American monopolized or attempted to monopolize the markets: DFW-CLT (Charlotte, NC), DFW-DTW (Detroit), DFW-MCO (Orlando), DFW-MEM (Memphis International), and DFW-PIT (Pittsburgh). The plaintiff alleges that, without monopolizing or attempting to monopolize them, American engaged in predatory conduct in the following four markets: DFW-ATL (Atlanta), DFW-CVG (Cincinnati), DFW-DEN (Denver), DFW-EWR (Newark), DFW-MDW (Chicago Midway).

Finally, in addition to the preceding airport pair markets, the plaintiff also alleges that American monopolized or attempted to monopolize through its reputation for predatory pricing, the ten markets for airline service between DFW and the following metropolitan areas: metropolitan Chicago (reflecting DFW service to both ORD and Midway Airports), the District of Columbia (service to IAD and DCA), the DC-Baltimore area (BWI, DCA, and IAD), metropolitan Los Angeles (LAX, LGB, Burbank, Orange City, Ontario), metropolitan New York (JFK, LGA), metropolitan New York-New Jersey (JFK, LGA, EWR), metropolitan Miami (MIA, FLL), metropolitan Tampa (TPA, St. Petersburg), metropolitan San Francisco (SFO, OAK), and the greater Bay area (SFO, OAK, SJC).

3. COMPETITION IN THE DALLAS - FORT WORTH AREA

The predominant form of organization among airlines is a hub and spoke system, where many passengers leave their origin city for an intermediate hub airport. At the hub, passengers switch to different planes that take them to their desired destination city. This system puts "local" passengers (who specifically desire to travel to or from the hub) on the same plane with connecting or "flow" passengers (who are only passing through the hub).

Economists have noted that passengers tend to pay higher fares on average on routes from concentrated hubs than on otherwise comparable routes that do not include a concentrated hub as an endpoint. This is called the hub premium. The hub premium exists in part because the economies of scale enjoyed by the hubbing carrier drive marginal costs of service down, while the product differentiation advantages available to the hubbing carrier increase prices.

American's operation of its large Dallas/Fort Worth International Airport ("DFW") hub provides significant economies of scope and scale on DFW routes. Operation of a hub, like American's at DFW, provides economies of traffic density that lowers the costs on a per-passenger basis and/or permits the hub operator to increase frequency.

Entrants considering entry into hub routes have to anticipate operating losses during initial periods of operation. None of the hubbing major airlines, other than Delta and American, provide non-stop service from DFW to any point that is not one of its own hubs.

DFW is located between the cities of Dallas and Fort Worth, Texas. American's total market share at DFW has decreased over the last three years due to a dramatic increase in low-fare carriers, DFW's success in attracting foreign flag airlines, and dramatic growth by other major airlines at DFW.

The plaintiff challenges this portrait of increased low fare competition at DFW by evidence that, in May 2000, American's share of all passengers boarded at DFW increased (by 3.1%) over that for May of 1999. There are several problems with this. First, the cited evidence looks at all DFW passengers, including those merely passing through the airport. As a result, it directly overstates the market share of American, which operates at DFW as a hub. Second, while American's market share may have increased over this time period, the number of passengers carried by low fare airlines at DFW increased even faster (30.7%).

Delta Air Lines also maintains a hub operation at DFW, although its hub is smaller than American's. Delta reduced its flights during the mid-1990s at DFW, but in the last year has increased them again. As of the end of 2000, Delta (along with its affiliated carrier, Atlantic Southeast Airlines) offered scheduled nonstop service from DFW to 62 destinations with 209 daily flights. According to U.S. Department of Transportation T-100 data, Delta boarded more passengers at DFW in 1999 (4.6 million) than many hub airlines boarded at hubs where they were the primary hub airline (such as Northwest at Memphis or Continental at Cleveland). All major domestic airlines serve DFW, including Northwest Airlines, US Airways, Delta Air Lines, United Airlines, Continental Airlines, America West, and TWA.

New entrant airlines serving DFW as of mid-2000 include Frontier, AirTran, National, Vanguard, American Trans Air, Ozark, and Sun Country. DFW, with seven low fare airlines, has more low fare airlines than any other hub airport. Low fare airlines serve at least 31 of DFW's top 50 destinations on either a nonstop or connecting basis.

A DFW official has stated that new entrant airlines "continue to thrive" at DFW, with a 25% year-over-year increase in passenger share in May 2000. The airport's Carrier Support program provides cooperative advertising funds to new entrants. Five new low cost airlines have started service at DFW in the last three years (American Trans Air, Frontier, National, Sun Country, and Ozark). There are gates and other ground facilities available at DFW for entry by low fare or other domestic airlines. Airport authorities control eight gates at DFW which are "common use" gates that DFW makes available to new entrants and other airlines.

As of the third quarter of 2000, American served 79 domestic U.S. destinations non-stop from DFW, with 467 daily flights. Delta served 40 destinations non-stop from DFW with 120 daily flights. American's commuter airline affiliate, American Eagle, served 40 destinations non-stop with 237 daily flights and Delta's commuter airline affiliate, Atlantic Southeast Airways, served 19 destinations with 72 daily flights.

Delta had attempted to enlarge its DFW hub in the early 1990s but was unsuccessful and instead decreased its DFW presence. American had responded vigorously to Delta's attempt to grow at DFW. Delta suffered operating losses of approximately $560 million at DFW during the period from 1992-1994. From July 1993 to July 1996, Delta reduced its daily jet departures from DFW from 249 to 145 and its commuter affiliate reduced its turboprop departures from DFW from 97 to 88, while American increased its jet departures from 499 to 518 and increased its commuter affiliate turboprop departures from 169 to 257. In 1995, Delta's and its commuter affiliate, Atlantic Southwest Airways', total spokes decreased by 14 to 65, with 223 flights per day between the carriers.

Delta's DFW market share, measured by passengers boarded, decreased over the period July 1993 to July 1996 from 28.4% to 19.2%, while American's increased over the same period from 64.7% to 71.8%. After its downsizing at DFW, Delta's primary remaining strength was in hub-to-hub routes (from DFW-ATL, DFW-CVG, and DFW-SLC (Salt Lake City)) and in Florida and leisure markets. In 1999, Delta's DFW hub ranked 21st of 23 in a ranking of the number of passengers boarded by major airlines at their domestic hubs. By comparison, American's DFW hub ranked third; American's Chicago hub ranked 10th, and American's Miami hub ranked 18th. In June 1996, American flew 67% of the total available seat miles ("ASMs") flown by airlines operating to and from DFW Airport and Dallas-Love Field Airport. From 1993 to 2000, American's share of DFW ASMs increased from 61.7% to 69.8%, while Delta's share of DFW ASMs decreased from 31.5% to 18.1%.

In 1998, Delta felt that there was limited potential for growth at DFW. However, it has recently increased its presence there. Avenues for Delta growth include regional jet use, Gulf Coast flying, and adding capacity in existing flow markets.

Love Field is an airport located within the Dallas city limits that is therefore closer geographically to the origin or destination point of many Dallas travelers than DFW. From the time the "Wright Amendment" was passed in 1979 until October 1997, jet operations at Love Field were legally restricted to service within Texas and between Texas and New Mexico, Oklahoma, Arkansas, and Louisiana. Beginning in October 1997, when the "Wright Amendment" was amended by the "Shelby Amendment," jet operations at Love Field were permitted within Texas and between Texas and New Mexico, Oklahoma, Arkansas, Kansas, Alabama, Mississippi, and Louisiana. Beginning in February 2000, legal challenges to Love Field service to any destination by aircraft (jet or propeller) configured to carry 56 passengers or less were set aside. International Air Transportation Competition Act of 1979, Pub. L. No. 96-192, 94 Stat. 36 (1980); Department of Transportation & Related Agencies Appropriations Act of 1998, Pub. L. No. 105-66, 111 Stat. 1425 (1997); American Airlines, Inc. v. U.S. Dep't of Transportation, 202 F.3d 788, 793-95 (5th Cir. 2000), cert. denied, __ U.S. __, 147 L. Ed. 2d 1005, 147 L. Ed. 2d 1022 (June 29, 2000).

Since late 1997, federal law permits scheduled airline passenger service from Love Field as follows:

1. Non-stop scheduled passenger service using aircraft with a seating capacity of greater than 56 seats may only be provided within the Wright Amendment Territory plus the states of Kansas, Alabama and Mississippi (the "Shelby Amendment Territory").

2. Airlines operating from Love Field with aircraft having a seating capacity of greater than 56 seats are prohibited from holding out non-stop or connecting air transportation to points beyond the Shelby Amendment Territory.

3. Scheduled passenger service may be provided between Love Field and points beyond the Shelby Amendment Territory, but only so long as such service is provided on aircraft with fewer than 57 seats.

Love Field is a major base of operations for Southwest Airlines, which currently serves 13 nonstop destinations from that airport with 139 daily flights. Southwest is a large and successful low cost carrier. Southwest is prohibited by statute from expanding its service from Love Field to points beyond a limited geographical area, and there is no likelihood that Southwest will begin service from DFW Airport. Southwest does not operate any aircraft with fewer than 57 seats and has no plans to acquire any such aircraft. Southwest is unlikely to enter the DFW-Wichita market.

On a number of nonstop routes from DFW, American had market shares ranging from 60% to 100%, based on shares of non-stop origin and destination ("O&D") revenue, for the period from 1990 to 1999. It had market shares ranging from 61% to 100% for these routes for the year 1999. The United States' expert Professor Berry determined that on these non-stop routes, the Herfindahl-Hirschman Index⁽³⁾ ranged from 5150 to 9939, for the year 1999.

On other routes for all airline service, American had market shares ranging from 60% to 95%, based on share of O&D revenue, for the period from 1990 to 1999. In 1999, American's market share for these routes ranged from 61% to 92%. Professor Berry determined that the Herfindahl-Hirschman Index on these routes ranged from 4368 to 8539 for the year 1999.

According to data maintained by the DFW airport, American's share of passengers boarded at the DFW airport was 70.2% as of May 2000, while the LCC share as of the same date was 2.4%.

American's prices in Southwest and LCC-competitive markets may be used as proxies for competitive prices that still permit American to earn a profit and maintain service on the routes.

The government compares the price of tickets on four sets of two routes, one in which American faces competition from Southwest Airlines or another LCC, and one in which American is free from such competition. The comparison is illustrated in the following table, which lists DFW routes to various cities, with American's average one-way fare to that city. In each case, the first of the listed cities is a route in which American faces LCC competition.

The court finds such comparisons of limited usefulness, based as they are on an absence of any accompanying evidence that the cities being compared are indeed equal in terms of distance, costs, and market density.

As the airline with the largest scope of operations at DFW, American has significant advantages over other competitors or potential competitors in DFW routes in attracting passengers and charging higher prices. This advantage has variously been called "origin point presence" advantage, "OPP" advantage, "origin point dominance" or "frequency dominance" by American, and has been described by American as follows: "a carrier which achieves substantial advantage over its competition in terms of frequency and scope of service at any airport, hub or spoke, . . . will invariably obtain a disproportionate share of the traffic and revenues for the flights originating at that airport."

Frequency dominance or origin point presence advantages are reinforced by marketing programs including frequent flyer programs and travel agent commission overrides. American's investment in establishing its DFW hub involved a large sunk investment, and another airline with similar cost structure would also have to make large investments to build a similar hub at DFW.

American generally enjoys higher margins where it does not face low fare competition. American's internal analyses recognize that fares and yields in Southwest and LCC-competitive markets are significantly lower than fares and yields where American does not compete with Southwest or other LCCs. Thus, American calculated that its revenue per available seat mile in DFW-ATL increased by 14% after the 1996 ValuJet crash caused that LCC to exit.

The government alleges that American "conducted itself in a manner demonstrating that it believed it could set prices without considering the existence of potential competitors." (Plf. SOF, at 3.1). However, the only evidence cited in support of this generalization is an internal American memo stating that, following Midway Airlines' departure from the DFW-MDW route, American should raise prices slowly to avoid "sticker shock," but did not worry about competitor reactions. In fact, the same document (Plf. Exh. 189) expresses concern about such a reaction, stating that "connect carriers continue to offer discounted fares, and our experience during the past year has demonstrated that these carriers possess strong potential to capture share in markets where large fare differentials exist."

During 1996, flights to and from American's DFW hub for the previous 12 months made up between 40% to 58% of American's total domestic capacity (ASMs), but accounted for between 60% to 86% of its domestic fully allocated earnings.

As noted earlier, American's price-average variable cost margins are higher on its flights to and from DFW than on other flights in its system. The company's internal documents recognize that this higher market share correlates to higher local yields. Fares on routes where American competes with other hubbing major airlines are generally higher than on comparable routes where American competes with LCCs or Southwest.

Over the time period 1994-1999, American has maintained higher price-average variable cost margins for local passengers in routes the government claims as monopolized than it has maintained in routes which are competitive with Southwest Airlines or LCCs. In routes for all airline service from DFW in which United States' expert Professor Berry claims are American monopolies, American earned price-cost margins ranging from 24% to 57% for the period from 1994 through 1999. In 1999, for these routes American earned price-cost margins ranging from 28% to 59%. In non-stop routes so characterized by Berry, American earned price-cost margins ranging from 28% to 60% for the year 1999.

Considering all non-stop routes from DFW (whether or not these have been claimed as monopolies by Berry) in which it does not compete with Southwest Airlines or an LCC, American earned a price-cost margin of 44.3% in 1994, 46.6% in 1996, and 50.7% in 1998. In all non-stop routes from DFW in which American competes with Southwest Airlines or an LCC, American earned a price-cost margin of 9.7% in 1994, 19.1% in 1996, and 20.5% in 1998, calculated in the same manner as the price-cost margins in Berry Exh. 1.

In the 36 airport pairs from DFW in which United States' expert Professor Berry has claimed American has monopoly power over non-stop service, there were seven episodes of entry by LCCs during the 10-year period from 1990 through 1999, and 14 episodes of entry by major airlines. In the 26 airport pairs from DFW in which United States' expert Professor Berry has claimed that American has monopoly power over all airline service, there were six episodes of entry by LCCs during this period, and 11 episodes of entry by major airlines.

There were 44 total episodes of entry by any airline into any route from DFW during the 10-year period from 1990 through 1999. That number of entry episodes translates into 4.7% of DFW routes being entered per year, on average.

Routes from major airline hub airports other than DFW were entered by any airline at a rate of 7.7% of the hub routes per year during the 10-year period from 1990 through 1999. DFW routes were entered by LCCs, from their own hubs, at a rate of 1.0% per year during the 10-year period from 1990 through 1999. Routes from major airline hub airports other than DFW were entered by an LCC from its hub at a rate of 2.2% of the hub routes per year during the 10-year period from 1990 through 1999. Such figures, however, tend to unfairly minimize the market presence of LCCs, since they focus only on nonstop service from DFW and fail to consider LCC connecting service.

The government notes that New York, including LGA, JFK, and EWR, was served by nine LCCs with 9.7% market share, as of the third quarter of 2000. Chicago, including ORD and MDW, was served by six LCCs and Southwest, for a total LCC market share of 12.3%, as of the third quarter of 2000. Denver had an LCC market share of 15.3%; Atlanta had an LCC market share of 16.8%; and Detroit had an LCC market share of 9.19%, as of the third quarter of 2000. LCC's market share for all Dallas (both Dallas-Love Field and DFW Airport,) with service from all LCCs (including Southwest) was 26.4%.

In 1995, Midway Airlines exited DFW-MDW after a period of price cutting by American, and American's prices increased quickly. After the entry of American Trans Air in 1998, average fares on the route decreased by 20%.

On average, for local passengers on the DFW-ICT, DFW-LGB, and DFW-COS routes, American's price cost margins were 28%, 41%, and 36% respectively in 1999.

4. LCC COSTS

In 1994, American calculated ValuJet's stage length adjusted cost per ASM to be 4.32 cents, and American's cost per available seat mile to be 8.54 cents.

American's Executive Vice President of Marketing and Planning, Michael Gunn, testified that Southwest's costs were 30% lower than American's.

An internal American document discussed the cost advantages of low cost airlines, stating that one of the "fundamental problems in the [airline] industry" in 1994 was that "consumer values (price) and the high cost structures of incumbent airlines have encouraged new competitors," that in 1993 Southwest's labor costs/ASM were 45.8% lower than American's, and that "today's low-cost airlines have a cost advantage primarily because they are not burdened with inefficient work rules."

5. NEW ENTRANT AIRLINE COMPETITION

It is uncontroverted that new entrant airlines with low fare strategies, including Vanguard, Western Pacific, Frontier, National, and JetBlue, expect existing competitors to match those fares. Officers of these airlines do not believe matching another carrier's fare is anti-competitive conduct, so long as the pricing is not below cost. Further, an airline that does not match fares is likely to lose business to its lower-priced rivals.

6. AMERICAN'S COMPETITIVE EXPERIENCE WITH LCCs

In the early 1990s, several LCCs were affecting a significant portion of the ASMs of each of the seven major airlines (defined to be AA, CO, DL, NW, UA, US, and TWA). LCCs by definition charge lower airfares, in part because they may have low operating costs, and in some cases provided less than the full service quality offered by the major hub carriers.

As of May 1994, MarkAir flew 10 non-stop spokes out of United's Denver hub, affecting 35.9% of the Denver hub ASMs. American observed ValuJet establishing a successful hub in Atlanta. American specifically noted ValuJet's success, and used ValuJet as an example of a hubbing LCC that could do very well at DFW. In just over its first two years of operation, ValuJet had grown, by February 1996, to an operation with 41 aircraft, serving 28 cities, including a hub and spoke operation at Atlanta with 22 spokes. American observed that ValuJet expanded while Delta was pursuing a short term, non-aggressive pricing strategy.

In a March 3, 1995, document entitled "Financial Impact of Low Cost Carriers," American made an assessment of the degree to which its routes, system-wide, were "at risk" to additional incursion by low cost carriers, and concluded that LCC entry into American's DFW markets posed a serious threat to American's revenues. American studied the impact of ValuJet's Atlanta hub on Delta, stating that "[f]or the 2nd Q93, on a pure share basis, DL has lost $232M in annual revenue. Clearly we don't want this to happen to AA at DFW." In other words, American calculated that ValuJet's success in forming an ATL hub cost Delta $232 million per year in revenues.

American believed that Delta encouraged ValuJet's development of an ATL hub through its lack of response to ValuJet's entry. A second study conducted by American, entitled "DFW Vulnerability to Low Cost Carrier Competition" ("DFW Vulnerability Study"), considered the attractiveness of DFW markets to entry by a hubbing low cost carrier and the negative effects on American's fares and traffic that would result if such entry occurred at DFW.

American believed that it had the ability to compete with LCC service from DFW by implementing strategies of capacity additions in select markets and strong matching on price and availability. In a document dated May 23, 1995, American discussed its strategy of matching price and availability against Midway Airlines in DFW-MDW, which enabled American to capture more than the share lost when Midway first entered the market. American observed that "it is very difficult to say exactly what strategy on AA's part translates into a new entrant's inability to achieve their QSI share - that strategy would definitely be very expensive in terms of AA's short term profitability." Delta and Southwest had both also lost share to Midway but did not regain their lost share by May of 1995.

As noted above, American thought that lack of responses by Delta was the reason for success of ValuJet, and that "ced[ing] parts of the market to [the LCC] . . . was not the proper way to respond." American also observed that when Delta did begin more aggressive matching of ValuJet in July 1995, erosion of Delta's market share stopped.

Shortly after the DFW Vulnerability Study was completed, in mid-1995, American formed a working group to develop a strategy for dealing with LCCs at DFW ("Strategy Working Group"). Barbara Caldas, at the time a senior analyst in American's Yield Management Department, was the coordinator of the Strategy Working Group. The DFW LCC Strategy Working Group involved representatives from American's Pricing and Yield Management Department, Capacity Planning Department, Sales Planning Department, Marketing Planning Department, Airline Profitability Analysis Department, and Eagle Pricing and Yield Management Department. In a document memorializing notes from a January 31, 1996, meeting, called the "DFW LCC Meeting," an American employee wrote that a strategic objective should be formed regarding an LCC response. The employee also wrote expressing the need to "[d]emonstrate that a failure to defend our business versus LCC could be very damaging."

American asked Tom Cook, at the time the President of Sabre Decision Technologies ("Sabre"), then a subsidiary of American, to analyze how American could more effectively operate by integrating Pricing, Yield Management and Capacity Planning. American's then-President, Donald Carty, and American's then-CEO, Robert Crandall, were involved in Sabre's project. The goal of the Sabre project was to "[i]dentify profit improvement for AA through the integrations of Capacity Planning, Pricing, and Yield Management." The Sabre project was coordinated by a steering committee, formed in late 1995, and made up of Mr. Cook and American executives Mel Olsen, Tom Bacon, and Craig Kreeger. Sabre employees interviewed employees of American in American's Finance, Capacity Planning, Pricing and Yield Management departments, including high-level American executives. At the interviews, American executives discussed American's coordinated project for dealing with LCCs, including discussing the Strategy Working Group, referred to as the "DFW Strategy Task Force."

American produced a document, entitled "DFW Low Cost Carrier Strategy," ("LCC Strategy Package") which was presented to American's senior management at a February 27, 1996, meeting. At the February 27 meeting where the LCC Strategy Package was presented, Diana Block, at the time a manager of Domestic Yield Management at American, and a member of the Strategy Working Group, took notes on a copy of the document. Ms. Block recorded a statement made by American's then-CEO, Robert Crandall to the effect that: "If you are not going to get them out then no point to diminish profit."

Ms. Block used two colors of handwriting on her copy of the LCC Strategy Package: notes written in blue ink were written at the February 27, 1996, meeting, and notes in red handwriting were written before the meeting. The note reflecting Mr. Crandall's statement is written in blue.

At the February 27 meeting, Ms. Caldas took notes of comments made at the meeting on a copy of the LCC Strategy Package. The presentation was met with approval by American's senior officers.

In developing recommendations for its DFW LCC Strategy, American considered the effect of the strategy on the profitability of both American and the LCCs. American's planners sought to use American's capacity planning models to "simulate effect of pricing/capacity actions to estimate impact on AA and LCC performance" and to research the financial condition, "balance sheets," break-even load factors, and "tolerance" of the LCCs.

In the LCC Strategy Package, the American analysts calculated the costs of two different strategy "scenarios" for responses to SunJet. American has generally studied competitors' break-even load factors and balance sheets. In implementing its plans with regard to LCCs, American reviewed LCC profitability, load factors, and market share.

American had meetings "approximately once per month" over the period of at least two years after the LCC Strategy Meeting, attended by representatives from American's Domestic Yield Management, Sales, Pricing, Capacity Planning, and Finance departments, to discuss markets with low cost carrier competition. American also measured the effects of its responses on its competitor, including producing a report entitled "Impact of LCC Response on DFW Rev/ASM," which considered the year-over-year effect on American's RASM,Yield, and Load Factor, of American's implementation of its LCC Strategy.

The DFW LCC Strategy Working Group used American's experience competing against Midway Airlines in DFW-Midway as a case study for understanding the magnitude of the investment that would result from taking action against LCCs at DFW.

In late May 1994, American operated 21 daily flights between DFW and Chicago's O'Hare Airport. Midway Airlines, a low cost carrier, operated only three daily flights between DFW and Chicago's Midway Airport.

In late May 1994, American adopted an inventory parity strategy against Midway Airlines' service in DFW-Midway Airport. The strategy involved tracking the availability of Midway's fares on computer reservation systems and keeping the comparable American fares available for sale so long as Midway's fare remained available. In September 1994 American offered matching fares on more of its flights. Midway Airlines exited DFW-Chicago in March 1995.

The government stresses that American examined the balance sheets and break-even load factors of several LCCs, and infers that the purpose of this was to drive them out of business. But the evidence does nothing more than indicate American monitored how its LCC competitors were performing. The evidence establishes that American monitors the financial performance of all its competitors, generally.

From an early point, American's planners did pay particular attention to LCCs which might develop hubbing operations at DFW. Early in the LCC Strategy discussion, American perceived SunJet as one of its biggest LCC concerns because of SunJet's potential for hubbing at DFW. After considering possible responses to SunJet's service from DFW, American decided not to escalate its response at the time because the cost would outweigh the benefit. American's staff recommended continuing the company's "moderate" approach, but reevaluating it if "[SunJet] adds frequencies on existing routes or adds new DFW spokes."

American viewed its DFW LCC Strategy as an investment. In response to a December 1994 memorandum by Tom Bacon concerning responses to poor profitability in the ORD-SFO market and Bacon's comment that stronger American pricing action would not fix the problem caused by LCC competition from American Trans Air, American's then-CEO Robert Crandall responded to a comment that "more aggressive pricing [by American] probably would not fix [American's] profitability problem on the route [ORD-SFO]," by observing: "It will when [American Trans Air] is gone!" and that this was "a clear example of a place where we should match straight up to get them out."

American believes its long-term profit success depends on defending its DFW hub and defending its network out of DFW. Its concern that an LCC could hub successfully at DFW was plausible. AirTran in Atlanta and Frontier in Denver are successful in routes from their respective hubs that compare in the amount of traffic to many routes from DFW.

In other circumstances where American has considered aggressive responses to competitors that entered DFW routes, it has weighed the cost of short-term profit loss against "benefits" that include both reduction of competition from current competitors and discouragement of future entrants.

7. HOW AMERICAN COMPETED ON THE ROUTES AT ISSUE

a. DFW-MCI

Vanguard Airlines began flying in December of 1994. In choosing its routes, Vanguard chose to stay away from routes that Southwest was serving because in those markets fares were already low and another low cost carrier would not have much to offer.

Vanguard initiated nonstop DFW-MCI jet service with three daily round trips on January 30, 1995. Vanguard reported in its business plan that entry with low fares and a simple fare structure increases demand dramatically on a route, even doubling or tripling it, and it assumed that it would typically fill its seats "primarily with travelers who cannot be accommodated on the traditional airline," particularly "business travelers [who] often plan their trips at the last minute."

Vanguard carried approximately 25% of DFW-MCI origin and destination passengers in the first quarter of 1995. As of January 1995, American was serving DFW-MCI with eight daily nonstop flights each way and Delta with six daily nonstop flights each way. After Vanguard's entry, the total daily nonstop DFW-MCI service totaled 17 daily round trips.

After Vanguard filed fares in anticipation of its commencement of DFW-MCI service in January 1995, American matched Vanguard's regular low, unrestricted fares with fares at the same fare level but with a penalty for refunds. In keeping with its strategy to "capture the best revenue mix possible with limited capacity," American limited the number of low fare tickets it made available on those flights. However, American's Domestic Yield Management Department studied ramp count data suggesting that Vanguard was "making headway" in DFW-MCI with load factors between 58% and 62%.

By February 1995, Delta had announced its intention to cease DFW-MCI nonstop service on May 1, 1995. In March, Vanguard announced that it would increase its frequency of service on DFW-MCI from three to five daily nonstop flights each way and in fact increased to four during that month. In April, Vanguard began two daily one-stop DFW-MCI flights through Wichita. However, Vanguard decreased its nonstop DFW-MCI flights to three daily flights each way in April 1995 and to one by May 1995. In the second quarter of 1995, as Vanguard was reducing its nonstop DFW-MCI schedule, it had approximately 27% of origin and destination passengers on the route. Meanwhile, American determined that it would have to choose between a "share" strategy versus a "revenue" strategy. For the revenue strategy, one (among several) of the listed "pros" was "short term revenue gain," with one con being "Share loss in a dominant market." American added four DFW-MCI daily nonstop flights each way in June of 1995 and two more on July 1, 1995, in order to "stand up against Vanguard's service in the market."

American realized that its June and July 1995 capacity additions in DFW-MCI could have a negative impact on profitability. In the fall of 1995, American's prediction that the capacity added in DFW-MCI in June and July might impact profitability proved to be correct.

American's 14 daily nonstop flights and Vanguard's one daily nonstop flight during the second half of 1995 were, at 15 daily flights, fewer than the 17 daily flights that had served DFW-MCI earlier in 1995.

Vanguard ceased nonstop DFW-MCI service in December 1995, but continued to serve the route with two one-stop flights daily through Wichita. In the fourth quarter of 1995, Vanguard carried approximately 16% of the origin and destination DFW-MCI passengers.

After Vanguard ceased its nonstop DFW-MCI service, American's service dropped to ten daily flights.

During the first six months of 1996, Vanguard's share of origin and destination passengers on DFW-MCI was approximately 17%.

By March 1996, American found that Vanguard's one-stop DFW-MCI service (via Wichita) was carrying significant traffic. At the end of April 1996, American lowered some of its DFW-MCI fares to respond to Vanguard's one-stop fares.

In August, 1996, American decided to add two daily DFW-MCI round trips as of November 1996. Vanguard announced on September 9, 1996 that it was resuming nonstop DFW-MCI service as of October with two daily nonstop flights each way and "low fares."

American accelerated the two already planned additional DFW-MCI flights scheduled to begin in November so that they would start as of October 1, 1996. American was able to advance the commencement of these DFW-MCI flights in the fall of 1996 due to the availability of pilot hours.

American decided to add a third additional DFW-MCI round trip effective November 1, 1996. After Vanguard filed fares in anticipation of its re-commencing DFW-MCI nonstop service in October 1996, American went to a full availability yield management strategy and responded to Vanguard's fare levels on all American flights.

Vanguard increased its daily DFW-MCI flights from two to three in April 1997, and from three to four in September 1997. By the end of 2000, Vanguard served DFW-MCI with three nonstop flights daily; by the fourth quarter of 1999, it had approximately an 18% share of origin and destination passengers.

American at the end of 2000 offered 12 flights daily on DFW-MCI, one fewer than in November 1996.

The government does not contend that American is currently monopolizing DFW-MCI:

I excluded the DFW/MCI route from those in which I conclude that American currently has monopoly power, because Vanguard has continued to operate in this market. . . . Eventually, both American and Vanguard increased their prices in late 1998. . ., so that the prices ceased to be predatory and became more like those that American maintains in routes where it competes with Southwest. Accordingly, I believe that the DFW-MCI market is one in which American had monopoly power at one time, and which it attempted to monopolize but did not succeed.

(Defs.' Exh. 8, Berry Final Report ¶ 182 & n. 95.)

Nor has the plaintiff identified any instances in which American undercut the published DFW-MCI fare of Vanguard with a published American fare during the relevant time periods. American's average fares throughout the period of Vanguard's DFW-MCI service were higher than Vanguard's average fares.

The government contends that American engaged in unlawful below-cost pricing on DFW-MCI during the periods July-December 1995 and October 1996-May 1998.

b. DFW-ICT (Wichita)

As of May 1993, American served the DFW-ICT route with five daily nonstop jet flights each way. American began converting its jet service to turboprop service on DFW-ICT during the 1992-94 period when, as part of its "transition plan" during financial difficulties, it was discontinuing service to many cities and substituting turboprop service for jet service in nearby cities.

When Delta removed the last of its DFW-ICT jet service in favor of turboprop aircraft service in September 1993, American did so as well, removing the final jet trip in June 1994. Prior to October 1996, American's Eagle subsidiary was serving DFW-ICT with nine daily nonstop turboprop flights each way.

On March 24, 1995, Vanguard announced it would initiate nonstop DFW-ICT service on April 11, 1995 with two nonstop jet flights each way. Vanguard converted two of its daily non-stop DFW-MCI flights into one-stops through Wichita, which it would be serving on a non-stop basis from DFW, giving it two non-stops DFW-MCI and two one-stops DFW-MCI over Wichita. When Vanguard began DFW-ICT service, it was the only airline offering nonstop jet service. At this time, Delta's commuter affiliate was offering six daily turboprop DFW-ICT flights each way. Vanguard's management felt that there was a "primary opportunity" to serve DFW-ICT because no other airline offered jet service.

When it began service, Vanguard's one-way DFW-ICT unrestricted fares (that is, without advance purchase, round trip purchase, or minimum stay) were $69 for peak period travel, and $39 off-peak.

Previously, after American had announced that it would be canceling jet service, the City of Wichita had approached American about continuing to fly jets on DFW-ICT. In February 1994, American had told the Wichita Airport Authority that it would provide three daily jet flights only if the Authority provided a minimum revenue guarantee to American of $13,500 per round-trip. The Minimum Revenue Guarantee is a contract by which American Airlines serves cities that are a profitability risk. Wichita rejected the minimum revenue guarantee program with American. In early 1995, the City of Wichita, the Wichita Airport Authority, and Wichita's business leaders had approached Vanguard to introduce jet service from Wichita to DFW in April 1995.

After Vanguard initiated DFW-ICT service in April 1995, American responded with one-way fares at a $20 premium over Vanguard's one-way fares, and round trip fares equal to twice Vanguard's one-way fares. American initially made no changes to its standard yield management response for DFW-ICT after Vanguard entered the route in the spring of 1995.

After Vanguard started serving DFW-Wichita, the number of people who flew that route nearly doubled, and the average price for the trip went from $105 in 1994 to $70 in 1995. By the second quarter of 1995, Vanguard had gone from a zero share to a 46% share of DFW-ICT origin and destination passengers. In contrast, American's share of origin and destination passengers on this route dropped from approximately 70% in the first quarter of 1995 to approximately 44% in the second quarter of 1995.

Vanguard announced in September 1995 that it was adding a third daily jet flight on DFW-ICT effective October 3, 1995.

After Vanguard's December 1995 exit from the DFW-MCI non-stop market, American began to reduce its service to ten flights per day. Local average fares on the route increased $75 to $100. The DFW-MCI market went from being one of American's worst-performing routes during the first predation period to the "best in the West" in early 1996, after Vanguard's exit from non-stop service in the market. By May 1996, American had eliminated the $20 premium on its one-way DFW-ICT fares.

Vanguard announced on July 16, 1996 that it was increasing its daily DFW-ICT jet service from three flights to four, effective August 9, 1996. In August, Vanguard's chief executive characterized Vanguard's DFW-ICT position as "dominant" because Vanguard "ha[d] the only jets."

By the fall of 1996, American's yield management strategy on DFW-ICT was to ensure that, in light of the low fare environment, its yield management computer system was not assuming more high fare demand than there was likely to be. Although Vanguard was no longer serving DFW-MCI on a non-stop basis, in the spring of 1996, American noticed that Vanguard was nevertheless carrying a significant share of DFW-MCI passengers on a connect basis over Wichita. American believed that the reason for Vanguard's significant share, despite its "inferior service," was that American had raised fares, restricted lower bucket availability, and cut capacity.

At an earlier meeting of senior management, American staff cited the response to Vanguard in DFW-MCI as a model of a successful strategy against an LCC. Subsequently, American began to match Vanguard's fares on DFW-ICT flights with an "open availability" yield management strategy, which significantly expanded the number of low fare seats available. In May 1996, American began matching Vanguard's zero to seven-day advance purchase one-way fares on all of its DFW-MCI non-stop flights and matched Vanguard's fourteen-day advance purchase one-way fares on five of its ten non-stop flights. Over the next few months, American monitored the impact of this match to assess whether to step up its fare, capacity and availability responses on DFW-MCI as necessary. By August of 1996, American determined that it needed additional capacity in DFW-Kansas City to address what it termed "competitive issues," and decided to increase frequency from ten to twelve round-trips effective November 1996.

American had found in a previous (1993) experiment with low "Southwest-type fares" on this route had caused it to "lose money" with fares that were "below variable cost." In a letter dated March 16, 1993, American's CEO Robert Crandall had written to Congressman Dan Glickman, "We really do not want to deny our friends in Kansas low fares -- on the other hand, when we sell tickets at Southwest's prices, we lose lots of money." In a letter dated April 5, 1993, American's Senior Vice President for Marketing, Michael Gunn, had written to Congressman Dan Glickman and explained that American's 1992-1993 "low-fare pricing test in the Dallas/Fort Worth-Wichita market" caused "revenues in this market [then $93 or $94 per passenger] [to] drop below variable costs."

From October 1995 to September 1996, American Eagle's turboprop service in DFW-ICT had been performing positively. American's Managing Director of Capacity Planning could recall no other instance where American made a decision to add capacity as rapidly as it did in Wichita, Kansas City, and Phoenix during this time period. American's re-introduction of five daily jet flights to the DFW-Wichita route expanded its seating capacity by 35%, in addition to making many more seats available at the lowest fares.

On September 11, 1996, American decided to respond to Vanguard's route restructure by accelerating the dates of its planned addition of capacity in DFW-Phoenix from November to October 1, 1996. In response to Vanguard entry into DFW-PHX, American matched Vanguard's fares on five of its DFW-PHX flights and opened up seat availability. Its average fare in DFW-PHX fell from $193.90 in September 1996 to $137.38 in November 1996.

In September 1996, Vanguard announced a route restructuring that would considerably expand its DFW service, including the reintroduction of DFW-Kansas City non-stop service, and the introduction of service from DFW to Phoenix and from DFW to Cincinnati. Vanguard's then-CEO, Robert McAdoo, modeled the route restructuring on a strategy that had been effective for Morris Air, a successful LCC that had operated out of Salt Lake City, which was to enter relatively large markets on a modest scale (one flight a day) so that the major airlines would not react in some extremely vigorous manner. On September 9, 1996, Vanguard announced that it would begin daily service between Kansas City and Cincinnati (CVG), with continuing service to DFW, among other destinations. Vanguard also announced that it would be serving DFW-Phoenix (PHX) with one daily flight to commence on October 1, 1996.

On September 10, 1996, American began gathering data on Vanguard and the DFW-MCI market in order to determine "what we should do in response." The next day, it decided to move up to October its planned November addition of two round-trips and to add a third new frequency to begin in November for a total of 13 daily flights. It decided that it would substitute five jet trips daily for four of the existing DFW-ICT turboprop flights. The new jet service for DFW-ICT in the fall of 1996 was funded with aircraft sitting idle due to pilot actions. It also began matching Vanguard's fares on all of its ten daily DFW-MCI flights, and decided to return jets to Wichita.

On September 27, 1996, three days after American learned that Vanguard was planning to serve Cincinnati-DFW-Phoenix, American decided to re-initiate service on DFW-Cincinnati with three daily flights effective December 2. In 1994, American had abandoned the DFW-Cincinnati (CVG) market as unprofitable. And in August 1996, American had reviewed the DFW-CVG market and decided not to add service in that market at that time, delaying the decision until the spring of 1997. The desire to respond to Vanguard's entry was a major reason for American's entry into DFW-CVG. American's Decision FAUDNC⁽⁴⁾ was negative in DFW-CVG for December 1996 through March 1997.

In September of 1996, American also began to compete in markets where Vanguard offered through or connect service against American's non-stop service, for example in DFW-CHI (Chicago), where American matched Vanguard on three flights with expanded availability, and DFW-DSM, where American matched Vanguard on two flight with full availability.

Thus, as of the fall of 1996, American's five DFW-ICT jet trips competed with Vanguard's four jet trips. Once American substituted five jet flights for four turboprop flights on DFW-ICT, its total nonstop daily service was ten flights.

American returned jets to Wichita to respond to Vanguard's announcement of its expansion. This return of jet service to Wichita in September of 1996 was not pursuant to a minimum revenue guarantee program with the City of Wichita. This increase of capacity from ten to twelve round-trips effective November 1996 required an override of its capacity planning model. American continued to match Vanguard's fares and maintained full availability with its restored jet service on DFW-ICT.

Vanguard's share of Dallas/Fort Worth-Wichita origin and destination passengers in the fourth quarter of 1996 was approximately 29%.

In the face of American's actions between DFW and both Wichita and Kansas City, Vanguard decided to retreat somewhat by pulling its new southbound Kansas City-DFW non-stop flight and one of its existing northbound DFW-Wichita non-stops, leaving its existing southbound one-stop flight (via Wichita) and two northbound non-stop flights between Kansas City and DFW.

Mr. McAdoo concluded that his limited entry strategy had not succeeded in the context of the competitive environment. Vanguard believed that it was virtually impossible to generate the loads and revenue required to achieve profitability on the DFW-ICT route in light of American's competition.

After asking Robert McAdoo to resign, Vanguard's board of directors hired a new CEO, John Tague, who took over on November 1, 1996. Tague assessed Vanguard's existing route structure, which included an evaluation of competitive conditions in each of the routes and of the potential reactions of those competitors. Tague observed that in many respects, Vanguard was "functioning pretty well." However, he also felt that Vanguard's route structure when he took over was "excessively dissipated," "lacked focus," and, given the size of its fleet, "needed to be in a more concentrated geographic area."

Tague restructured Vanguard's routes into a Kansas City hub and spoke system in November, 1996, and canceled Vanguard's service from Phoenix and Cincinnati that had been introduced as part of Mr. McAdoo's strategy (including the routes to DFW), along with the DFW-ICT route.

On November 8, 1996, Vanguard announced that it was leaving the DFW-CVG route after only eight trips. At the same time, it announced that it was leaving the DFW-PHX route altogether, and that it would be leaving the DFW-Wichita route altogether in December. Vanguard ceased DFW-ICT service in December 1996. By April 1997, Vanguard had eliminated all non-Kansas City hub service except for a profitable Midway-Minneapolis route. Vanguard continued to deploy its aircraft after April 1997 primarily on routes from Kansas City.

American's FAUDNC performance in DFW-PHX declined significantly in November 1996. However, as American notes, while FAUDNC declined, it nonetheless remained positive. Moreover, FAUDNC increased three-fold between October, 1996 and January, 1997, even after further increases in seat capacity.

In mid-December of 1996, Senator Brownback of Kansas complained to American's then-CEO, Robert Crandall about the recent fare increases on DFW-ICT. On January 2, 1997, Mr. Crandall drafted a response to Senator Brownback that included the point "[i]n recent weeks, fares between Wichita and DFW have been below cost." The letter American actually sent to Senator Brownback contained the following language: "fares were too low. . . to allow us to earn a reasonable rate of return."

After Vanguard's November exit, American's fares increased, although they remained below the fare charged prior to Vanguard's market entry. American eliminated three turboprop flights in April of 1997, thereby bringing the monthly seat capacity back to American's September 1996 level. American as of the end of 2000 served DFW-ICT with five jet trips and four turboprop trips daily. Delta as of the end of 2000 was serving DFW-ICT with five daily turboprop nonstops.

After Vanguard's exit, fares on the DFW-Wichita rose from $70 to $117, higher than the period when Vanguard operated in Wichita, but lower than the period 1990 to 1992. The number of passengers who traveled on the route rose from 60,000 in 1993, to 147,000 in 1996, and fell to approximately 76,000 in 1999.

Vanguard has maintained DFW service out of its Kansas City hub, and continues to serve the route to this day. Kansas City is Vanguard's only non-stop destination served from DFW. Eventually, fares of both American and Vanguard increased on the DFW-MCI route. In 1997 and 1998, American continued to monitor and take actions, such as fare matching on a flight specific basis or flight bracketing, of Vanguard's through or connect service, which included at various times DFW-Chicago, DFW-Minneapolis, DFW-Des Moines, DFW-Denver, DFW-New York (JFK) and DFW-San Francisco.

The government has not identified any instances in which American undercut the published DFW-ICT fare of Vanguard with a published American fare during the relevant time periods.

American's average fares throughout the period of Vanguard's nonstop DFW-ICT service were equal to or higher than Vanguard's average fares.

The government and its expert witnesses contend that American engaged in unlawful below-cost pricing in DFW-ICT during the October-December 1996 period -- that is, between the time that American re-introduced jet service to DFW-ICT and Vanguard withdrew its service.

c. DFW-COS

The plaintiff and its experts contend that American engaged in unlawful below-cost pricing during the September 1996-October 1997 period.

Western Pacific opened a hub at COS in April 1995, and began DFW-COS service in June 1995 with two daily nonstop 737 flights each way. In the second quarter of 1995 Western Pacific had approximately a 28% share of DFW-COS origin and destination passengers. When Western Pacific began DFW-COS service, that route was the only nonstop route on which Western Pacific and American competed against one another.

DFW-COS is a seasonal route, with typically higher service in the summer. In 1994, American had added a fifth F-100 jet to the route, and continued to serve the route with five flights through the end of the summer season. In May of 1995, it had added yet another flight to the route. Thus, at the time Western Pacific began DFW-COS service, American had five DFW-COS round trips. Delta had three round trips.

For the first month after Western Pacific began DFW-COS service, American did not add more flights but reduced prices, responding to Western Pacific's low, unrestricted fares with ones of the same dollar value, but with advance purchase and round trip ticketing requirements that Western Pacific's fares did not have. During this time, American's average revenue fell from about $124 to about $106.

In July 1995, American added two DFW-COS flights. After American's fare reductions and capacity increases, average revenue fell below $100, in contrast to its Summer 1994 average revenue of approximately $120. In the fourth quarter of 1995, Western Pacific's share of DFW-COS passengers was approximately 38% and American's was approximately 45%.

In December 1995, American briefly withdrew one F-100 flight per day from DFW-COS. In part because of the reduction of service on DFW-COS in December 1995, American's profits for the month increased.

In November 1995, Western Pacific announced that it was reducing service on DFW-COS to one round-trip per day. On January 8, 1996, it did so to redeploy the airplane to commence COS-ATL (Atlanta) service. Western Pacific's general strategy was to redeploy aircraft to commence service on new routes, due to inadequate aircraft availability and to make more money. In May 1996, its single DFW-COS route was one of Western Pacific's top five contributing routes.

Notes taken during a February 1996 DFW LCC strategy meeting indicated that a recommendation was made by some person that American should get Western Pacific "out" of DFW before Western Pacific added back the second flight it had withdrawn. In March 1996, American made plans to "protect DFW" by adding one round-trip flight to DFW-COS and upgrading all round trips to MD-80s. A month later, it broadened availability of low fares on DFW-COS. Between May and July 1996, American replaced its seven F-100 flights per day on DFW-COS with eight MD-80s, causing a 43% increase in capacity over June 1996 and more than a 100% increase in capacity over the five F-100s that American flew during the summer of 1994 (before Western Pacific entered). After the end of the 1996 peak summer season, American's Capacity Planning Department planned to make a normal seasonal frequency reduction on DFW-COS. However, American's Yield Management Department intervened and American continued to deploy eight MD-80 round-trips. From September 1996 through October 1997, American increased its capacity on DFW-COS.

From September 1996 to October 1997, American's capacity additions and associated price and yield management actions caused American's profitability on the DFW-Colorado Springs route, as measured by American's FAUDNC, to decline substantially, and indeed to become negative. However, VAUDNS, VAUDNC and VAUDNC-AC⁽⁵⁾ were all positive during throughout this period.

Western Pacific's one flight garnered from 16 to 23% of the DFW-COS traffic in the first three quarters of 1996.

American monitored Western Pacific's beyond service from at least early 1996. In March, 1996, American notes that Western Pacific's bookings in DFW-SEA have decreased, prompting it to state: "It appears our strategy towards Western Pacific may be working." In the Spring of 1996, American's LCC team undertook the task of determining whether American should match Western Pacific in additional DFW flow markets.

In May, 1996, American's LCC team had concluded that Western Pacific's reduction to one flight in January resulted in poor connections over COS and did not present a viable threat to American. American subsequently canceled the matching fare on its DFW-SEA non-stop. In October 1996, American stated that it "will continue to monitor W7 flow traffic over COS." In late 1996, Western Pacific changed chief executives and the new management shifted Western Pacific's strategy to high frequency service on a more limited number of routes. At the end of December 1996, Western Pacific added a second DFW-COS round trip daily and announced that it would add a third as of February 1997.

In January 1997, American decided to add a ninth DFW-COS round trip and to upgrade three aircraft to Boeing 757s effective March 1997. It also began a "massive incentive program" which increased the number of travel agencies in Colorado Springs eligible for special incentives to book their clients on American. It also provided free first class upgrades to MCI corporate customers and frequent fliers on the DFW-COS route. American noted that Western Pacific's additional DFW-COS flights produced for Western Pacific "a substantial increase in market share for many of its flow markets." In early 1997, American's list of "wait and see" markets expanded to include 14 total Western Pacific markets. During the Spring and Summer of 1997, American continued to monitor closely Western Pacific's activities in its flow markets.

In March 1997, American added three 757s and withdrew two MD-80s, increasing service to four MD-80s, three 757s, and two F-100s flights per day on DFW-COS.

At times during the period of June to December 1996, American used inefficient banking operations on some flights, and flights from Colorado Springs to DFW sometimes met outgoing west-bound banks taking passengers west of DFW. It is unusual that American used 757 aircraft on DFW-COS.

As American and other airlines increased their capacity, it became increasingly difficult for Western Pacific to stimulate additional demand at acceptable fare levels in Colorado Springs.

At the end of April 1997, Western Pacific announced that it was moving more than half of its flights from COS to Denver (DEN), effective at the end of June. Colorado Springs and Denver are approximately 50 miles apart. In the second quarter of 1997, when Western Pacific moved significant operations from COS to DEN, it carried approximately 21% of the DFW-COS passengers.

Western Pacific's new DFW-Denver service was met with strong pricing and yield management initiatives by American. Company memos show that, in the summer of 1997, American contemplated a response including matching fares and providing full availability on 6 of 12 flights.

In June 1997, Western Pacific announced that it would merge with Frontier Airlines. Frontier Airlines is an LCC that operates a hub in Denver. On June 29, 1997, Western Pacific withdrew two 737 flights from DFW-COS, reducing service to one flight per day. On July 1, 1997, American down-gauged the 757 aircraft on the DFW-COS route.

In July 1997, Western Pacific reduced daily service on DFW-COS to one-half round-trip per day. In August, American withdrew two daily MD-80s flights from DFW-COS and added one F-100, serving DFW-COS with four MD-80s and three F-100s round-trips per day. The same month, Western Pacific resumed daily service on DFW-COS with two 737 flights per day.

On September 9, 1997, American conducted a financial analysis of Western Pacific that calculated its break-even load factor. During this same period, American "add[ed] back" two additional flights per day on DFW-COS, and decided to change its strategy from matching on 6 of 12 flights on DFW-DEN, to fully matching on all 12 daily round-trip flights.

An October 1997 System Results package shows that DFW-DEN (along with DFW-ATL) "posted the largest FAUDNC declines." "Both are low cost carrier competitive markets. In DFW DEN, AA was at 13 RT in October and W7 at 4." The same month, American planned to adjust its winter schedule to add two additional DC-10 aircraft to DFW-DEN, in part by downgrading LAX-EWR to "fund" the additional aircraft.

The Western Pacific/Frontier merger was called off in late September, 1997. Frontier withdrew from the proposed merger with Western Pacific because of concerns about the valuation of Western Pacific stock. In October, Western Pacific ceased all nonstop DFW-COS service , but continued to serve DFW-DEN with four flights per day with connecting service to COS.

Western Pacific filed for bankruptcy on October 5, 1997 and ceased all operations in February 1998.

American's average local fare in DFW-DEN decreased from $180 in June 1997 to $129 in July 1997 and then decreased further in October 1997 to $108. After Western Pacific's withdrawal from DFW-Colorado Springs, American reduced capacity. Average revenue rose to $119.

In 1998, American continued to monitor Western Pacific's flow markets and to match Western Pacific on a flight-specific basis in numerous flow markets.

At the end of 2000, American offered six daily nonstop DFW-COS flights, while Delta offered two daily nonstop flights. United, Frontier, American, and Delta also offered nonstop DFW-DEN service as of the end of 2000.

The government has not identified any instances in which American undercut the published DFW-COS fare of Western Pacific with a published American fare during the relevant time periods. American's average fares were higher than Western Pacific's average fares during the entire period that Western Pacific was offering DFW-COS service.

d. DFW-LGB (Long Beach)

The plaintiff and its experts contend that American engaged in unlawful below-cost pricing in DFW-LGB during the January 1997-January 1998 period -- that is, from the start of American's service until its LCC competitor withdrew its service.

In August 1993, SunJet International received DOT authorization to operate as a "supplemental" carrier. By October 1993, SunJet commenced operation with two MD-80 jets, one flying between Fort Lauderdale and Newark, one between Newark and St. Petersburg. SunJet intended to serve the Tampa Bay area by offering service out of the St. Petersburg/Clearwater International Airport (PIE). SunJet, by setting its prices lower than fares regularly offered by major carriers, attracted price-sensitive passengers who might otherwise have chosen not to fly.

Although SunJet was not a "scheduled carrier," as that term is used in the airline industry, SunJet offered regularly scheduled flights on the city-pairs it served. SunJet entered into agreements with contractors to provide certain services, including reservations and ticketing, marketing, aircraft maintenance, and baggage handling. SunJet also entered into an agreement with World Technology Systems (WTS) under which WTS provided financial backing and reservation and revenue accounting support for SunJet. WTS also selected routes for SunJet.

In June of 1994, American had "abandoned" its efforts to serve DFW-Long Beach due to lack of traffic. In the same month, SunJet entered DFW with limited service to Newark (EWR) and Long Beach (LGB), resulting in one-stop service between Newark and Long Beach. SunJet added non-stop service between DFW and St. Petersburg, and one-stop service between St. Petersburg and Long Beach in February of 1995. SunJet wanted to serve the Los Angeles market from its service cities (EWR and PIE) on the east coast. The company viewed the Long Beach airport as an ancillary or secondary airport serving the Los Angeles area, the use of which provided significant cost savings in landing fees compared to Los Angeles International (LAX). SunJet learned about American's withdrawal of DFW-LGB service after it had decided to start serving DFW-LGB.

No scheduled airline offered DFW-LGB nonstop service from June 1994 to January 1997. America West had offered connecting DFW-LGB service (through its Phoenix hub) since 1994.

SunJet offered a third DFW-LGB nonstop flight daily from September 26-December 6, 1996.

American referenced SunJet's DFW-EWR/LGB service in a June 1994 presentation entitled "Start-up/Low Cost Carriers." It also noted that SunJet's entry into the DFW-DWR market in June 1994 "resulted in $198 round-trip DFW-EWR fares and the first instance of a low-cost carrier connecting passengers in DFW." American reduced fares in the DFW-FPA market in December 1994.

By December of 1995, American recognized that SunJet's route structure presented opportunities for SunJet to create a DFW hub. American noted that SunJet enplaned more passengers per day than any other LCC at DFW in September of 1995, and was a major concern for American. SunJet's initiation of DFW-LGB service was one factor which led American to consider re-entering the DFW-LGB route as early as December of 1995. American anticipated capital start-up expenditures of from $100,000 to $120,000, with "worst-case" start-up costs of $171,000.

In February of 1996, American decided to continue its strategy of matching SunJet on a limited basis and not to pursue a stronger approach unless SunJet increased its frequency or added additional DFW routes. In late 1995 or early 1996, American expanded its limited match of SunJet fares to four flights into EWR and three flights into TPA. As of May 16, 1996, American matched SunJet's fares on six DFW-EWR flights, and three flights in PIE (TPA).

David Banmiller became CEO and President of SunJet in May of 1996. He was hired by John Mansour, who purchased SunJet from its original owner in September of 1995. SunJet's new management made plans to add an additional DFW-LGB flight in August of 1996. WTS and SunJet personnel advised SunJet management against adding the third DFW-LGB flight, recognizing that SunJet was currently flying below the "radar" and that adding capacity might lead to a strong response from American.

SunJet's former management had avoided flying more than two frequencies on any single route to assist in avoiding a response by major carriers. However, SunJet initiated a third DFW-LGB non-stop daily flight on September 26, 1996. In November, it began advertising plans to begin DFW-OAK service.

American responded to SunJet's announcements of new and expanded DFW service with a variety of actions. On November 25, 1996, American announced it would enter DFW-LGB and increase frequency in DFW-OAK. SunJet discontinued its third DFW-LGB flight in December of 1996.

SunJet canceled plans to enter DFW-OAK. There is a fact dispute as to the reason for the cancellation. WTS felt that it was due to insufficient customer response. There is other evidence that the cancellation occurred because SunJet failed to secure the necessary aircraft.

On January 3, 1997, American announced that it was resuming nonstop DFW-LGB service effective January 31, 1997 with three daily round trips. American began DFW-LGB service in January 1997 with fares of an equal value to what it believed were SunJet's lowest fares, but with greater restrictions than SunJet's, specifically a 3-day advance purchase requirement and round trip ticketing only.

SunJet had financial difficulties for at least nine months prior to March 1997. WTS, which provided marketing services to SunJet, assumed control of all financial risk related to passenger sales and SunJet's sales and route selection functions in March 1997. Prior to this, SunJet decided where and when it would fly, and WTS provided reservation and revenue accounting support. After "reviewing conditions within [its] industry, including competitive factors and [its] internal challenges, SunJet agreed to turn over all scheduling, pricing and marketing functions to WTS." SunJet retained financial responsibility for aircraft, crew, maintenance and insurance, and WTS assumed financial responsibility for and direct supervision of other aspects of flight operations. WTS discontinued its PIE-DFW service and reduced DFW-LGB service to one flight in March 1997 in order to use the second airplane on another route. SunJet suspended all flight operations on June 17, 1997 and filed for bankruptcy protection the next day, telling its shareholders that this failure was due to"significant aircraft down time as a result of non-routine maintenance issues."

After SunJet's bankruptcy, WTS contracted with other carriers to continue operating SunJet's routes (doing business as SunJet). WTS added a second DFW-LGB round trip from July to September 1997. WTS' profits on its DFW-LGB route went from $175,040 in July 1997 to $41,284 in September 1997, after American added a fourth DFW-LGB flight in August 1997. Overall, during the period that WTS operated the DFW-LGB route, it earned more than $1 million in profits on it.

American added a fourth DFW-LGB flight in August 1997. WTS discontinued SunJet's DFW-LGB service in January 1998, stating that it was having difficulty obtaining a long term commitment for aircraft which would meet LGB's noise ordinances, and it was unable to secure replacement lift services. WTS personnel have subsequently also attributed this decision to other reasons, including competition by American. WTS ceased operations in June 1999.

After SunJet exited DFW-EWR, American withdrew capacity.

As of the end of 2000, American was continuing to offer four DFW-LGB nonstop flights daily. United was offering nonstop DFW-LAX service as well as of the end of 2000. Delta as of the end of 2000 offered nonstop DFW-LAX service, as well as nonstop service between DFW and Orange County (SNA) and Ontario (ONT) airports in the Los Angeles Basin. According to DOT data, Southwest as of the end of 2000 carried connect traffic between Dallas Love Field and the Los Angeles Basin. Other airlines, including Frontier and National, offered service between Dallas/Fort Worth and the Los Angeles Basin on a connecting basis as of the end of 2000. The government has failed to identify any instances in which American undercut the published DFW-LGB fare of SunJet with a published American fare during the relevant time periods.

American frequently experiences negative results for the first few months of service on a new route. The plaintiff's expert Professor Berry agrees that "losses often accompany entry of a new route." (Defs.' Exh. 8, Berry Final Report ¶ 318.)

e. DFW-EWR (Newark)

The government alleges that American engaged in predatory conduct on DFW-EWR against SunJet by adding flights in May 1996 and removing some restrictions from its SunJet responsive fares in November 1996. The government's expert, Professor Berry, does not list DFW-EWR as a route on which American currently has monopoly power. The government has contended that American monopolized and attempted to monopolize DFW-EWR only during the June 1994-December 1997 period when the route was served by SunJet or WTS.

SunJet began DFW-EWR service in June 1994 with low, unrestricted (no advance or round trip purchase requirement) fares. American and Delta were offering nonstop DFW-EWR service in June 1994. In May 1995, American began offering a DFW-EWR fare designed to respond to (but not undercut) SunJet's, but with advance purchase and round trip travel requirements that SunJet did not impose, and offered its responsive fare only on a limited number of American flights.

Continental Airlines, which operates a hub at Newark, began DFW-EWR service effective May 1, 1996.

American increased its DFW-EWR service by three flights by June 1996, after Continental began DFW-EWR service with three daily flights.

In November 1996, American removed a Saturday night stay requirement on its "matching" SunJet DFW-EWR fares but continued to maintain the advance purchase and round trip restriction, and offer its "matching" fares only on a limited number of its flights.

SunJet ceased operations in June 1997; WTS ceased serving DFW-EWR at the end of 1997.

At the end of 2000, American (ten daily flights) and Continental (seven daily flights) continued to offer nonstop DFW-EWR service; Delta offered nonstop service to the New York Metropolitan area at LGA and JFK; and other airlines (including Vanguard and AirTran) offered connecting service between DFW and EWR, and numerous other airlines were offering connecting service between DFW and LGA and JFK.

f. DFW-TPA (Tampa)

The government has alleged that American engaged in predatory conduct on DFW-TPA against SunJet by becoming more aggressive against SunJet in November 1996 by removing restrictions from its "matching" fares.

SunJet began DFW-PIE (St. Petersburg) service in early 1995 with low, unrestricted (no advanced purchase or round trip required) fares.

American has never served PIE, but served (and still serves) Tampa International Airport, 15 miles from PIE. In January 1995, American responded to (but did not undercut) what it believed to be SunJet's lowest DFW-PIE fares on DFW-TPA on a round-trip basis, and with a 7-day advance purchase requirement that SunJet did not impose, and only on a limited number of its DFW-TPA flights.

In November 1996, American reduced the advance purchase requirement on its responding DFW-TPA fares to three days and removed a Saturday night stay requirement but continued to maintain the round-trip restriction, and to offer these fares on only some of its DFW-TPA flights..) In March, 1997, SunJet assigned route decisions to WTS, which decided to exit this route. In sworn responses to a Department of Justice Civil Investigative Demand dated April 23, 1998, WTS attributed its decision to stop DFW-PIE service to "lack of passenger demand and aircraft unavailability," and did not mention any American conduct.

American (six daily flights) and Delta (three daily flights) offered nonstop DFW-TPA service as of the end of 2000; connecting service was provided by AirTran and others.

g. DFW-OAK (Oakland)

The government has alleged that American engaged in predatory conduct in DFW-OAK by "substantially matching" SunJet's DFW-OAK fares.

Sun Jet announced in November 1996 that it would initiate DFW-OAK service in December with low, unrestricted (no advance purchase or round trip purchase required) fares. When SunJet made this announcement in November 1996, American and Delta were already offering nonstop DFW-OAK service.

American filed DFW-OAK fares in November 1996 effective on SunJet's starting date responding to (but not undercutting) SunJet's fare levels, but with a round trip and three-day advance purchase requirement that SunJet did not impose.

SunJet did not begin DFW-OAK, in part because it was unable to secure the additional aircraft necessary to operate the route. As of the end of 2000, American (four daily flights) and Delta (three daily flights) served DFW-OAK nonstop, while other airlines offered service between Dallas/Fort Worth and Oakland, San Francisco, and San Jose on a nonstop or connecting basis.

h. DFW-PHX (Phoenix)

The government contends that American engaged in unlawful below-cost pricing from October 1996 through November 1996. The government's expert, Professor Berry, contends that American now has monopoly power in DFW-PHX only for nonstop flights.

Vanguard announced on September 9, 1996 that it would introduce DFW-PHX service on October 1, 1996 at "low fares." On September 24 and October 9, 1996, Vanguard announced service between Phoenix and Cincinnati, Denver, Wichita, and Minneapolis beginning in October or November.

At the time Vanguard announced DFW-PHX service, DFW-PHX was already served by Delta, American and America West on a nonstop basis. Phoenix is a hub for America West airlines and has been since 1994. Vanguard began one daily round trip DFW-PHX service in October 1996.

Prior to Vanguard announcing its DFW-PHX service, American had published its plan to add four DFW-PHX flights (in addition to American's then nine daily round trips) over the September-December 1996 period.

After Vanguard's announcement of DFW-PHX service, American accelerated the start dates on some of its four additional flights. American matched Vanguard's fare level and offered the matching fares on five of American's DFW-PHX flights.

After Vanguard hired a new CEO, Vanguard announced on November 8, 1996 that it was canceling DFW-PHX (and other PHX) service, eliminating PHX entirely from its route structure. Vanguard's DFW-PHX service operated only from October to November 1996.

At the end of 2000, American continued to serve DFW-PHX (with 11 daily nonstop flights constituting more service than it offered during 1996), as did America West (five daily flights) and Delta (three daily flights) on a nonstop basis. Moreover, according to DOT data, as of the end of 2000, Southwest carried connect traffic between Dallas Love Field and Phoenix.

i. OTHER ALLEGED MARKETS

The government does not contend that American monopolized or attempted to monopolize DFW-CLT (Charlotte), DFW-DTW (Detroit), DFW-MEM (Memphis), DFW-MCO (Orlando), and DFW-PIT (Pittsburgh), but that the effects of American's alleged predatory conduct in certain other markets were "felt" there. Nor does the government contend that American monopolized or attempted to monopolize DFW-ATL (Atlanta), DFW-CVG (Cincinnati), DFW-MDW (Midway, Chicago), or DFW-DEN (Denver), but that American engaged in anti-competitive conduct in these city-pairs as part of its alleged scheme of predation. The government contends that American has market power, but not monopoly power, in DFW-CLT (Charlotte), DFW-DTW (Detroit), DFW-MEM (Memphis), DFW-MCO (Orlando), and DFW-PIT (Pittsburgh). The government contends that American monopolized and attempted to monopolize DFW-CHI (Chicago, consisting of Midway and O'Hare airports) during certain periods, but not that American currently possesses monopoly power in that city-pair.

8. LCCs AND PRICE COMPETITION

During the twelve months preceding Vanguard's April 1995 entry into the DFW-ICT market (April 1994-March 1995), American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the four quarters preceding Vanguard's April 1995 entry into the DFW - ICT market (2Q 1994 - 1Q 1995), the total number of local passengers traveling in that market ranged from 16,420 to 19,390 per quarter. The average market fare ranged from $105 to $115 during that period.

During the period from June 1995 through September 1996, while Vanguard served the DFW - ICT market but before the United States alleges that American engaged in predatory acts in that market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During that same period, the total number of local passengers traveling in that market ranged from 35,140 to 37,460 per quarter. The average market fare ranged from $60 to $68.

During the period from October 1996 through December 1996, when the United States alleges that American engaged in predatory acts in the DFW-ICT market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During that same October 1996 through December 1996 period, the total number of local passengers traveling in that market 38,650 for the quarter. The average market fare was $55.

During the twelve - month period beginning six months after Vanguard's exit (July 1997 - June 1998) from the DFW-ICT market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same twelve-month period, the total number of local passengers traveling in that market ranged from 20,840 to 24,590 per quarter. The average market fare ranged from $94 to $99.

During the second twelve-month period beginning six months after Vanguard's exit (July 1998-June 1999) from the DFW-ICT market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same twelve-month period, the total number of local passengers traveling in that market ranged from 19,610 to 23,200 per quarter. The average market fare ranged from $105 to $120.

During the period from January 1994 to December 1994, before Vanguard entered the DFW-MCI market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same period, the total number of local passengers traveling in that market ranged from 66,190 to 71,860 per quarter. The average market fare ranged from $108 to $115.

During the period from February 1995 through December 1995, while Vanguard served the DFW-MCI market on a non-stop basis, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same February 1995 through December 1995 time period, the total number of local passengers traveling in that market ranged from 94,520 to 103,610 per quarter. The average market fare ranged from $79 to $88.

During the period from January 1996 to September 1996, when Vanguard did not serve the DFW-MCI market on a non-stop basis, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same January 1996 to September 1996 period, the total number of local passengers traveling in that market ranged from 83,740 to 98,900 per quarter. The average market fare ranged from $110 to $128.

During the period from October 1996 to May 1998, while Vanguard served the DFW-MCI market and the United States claims American was engaged in predation in that market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During that same October 1996 to May 1998 time period, the total number of local passengers traveling in that market ranged from 104,870 to 128,850 per quarter. The average market fare ranged from $74 to $96.

After the end of the period when the United States claims American engaged in predation in DFW-MCI, from June 1998 through September 1999, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

After the end of the same period, the total number of local passengers traveling in that market ranged from 110,690 to 126,430 per quarter. The average market fare ranged from $96 to $113.

During the period from June 1994 to May 1995, the one-year period preceding Western Pacific's entry into the DFW-COS market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the period from June 1994 to May 1995 (3Q 1994- 2Q 1995), the one-year period preceding Western Pacific's entry into the DFW-COS market, the total number of local passengers traveling in that market ranged from 11,490 to 22,310 per quarter. The average market fare ranged from $114 to $158.

During the period from July 1995 through October 1997, while Western Pacific served the DFW-COS market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the period from July 1995 through October 1997 (3Q 1995- 3Q 1997), while Western Pacific served the DFW-COS market, the total number of local passengers traveling in that market ranged from 45,800 to 86,090 per quarter. The average market fare ranged from $75 to $102.

During the period from during the twelve-month period beginning six months after Western Pacific's exit from the DFW-COS market (April 1998 through March 1999), American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During that same period, the total number of local passengers traveling in that market ranged from 25,550 to 40,120 per quarter. The average market fare ranged from $131 to $139.

During the period from February 1997 through January 1998, while both American and SunJet served the DFW-LGB market, American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same February 1997 through January 1998 period, the total number of local passengers traveling in that market ranged from 59,210-75,000 per quarter, excluding passengers carried by SunJet. The average market fare ranged from $94 to $107.

During the twelve-month period beginning six months after SunJet's exit (July 1998 through June 1999), American's average fare, local passengers carried, and total seats, on a monthly basis, were within the following ranges:

During the same twelve-month period, the total number of local passengers traveling in that market ranged from 60,200-77,360 per quarter. The average market fare ranged from $141 to $164.

The following table shows the monthly ranges for American's monthly average fare, the local passengers carried, and the total number of seats allocated to various routes. In addition, the table shows the total number of passengers in the market (shown per quarter rather than by month) and the average fare during the period. The first section, dealing with the Dallas - Wichita route, uses five time periods: the 12 months preceding Vanguard's market entry, the period after entry but before any "predation," the period of the alleged predation, and the two successive 12-month periods following Vanguard's departure from the market. The second Dallas - Kansas City, uses periods representing the period prior to Vanguard's entry, the period of Vanguard's non-stop service, the period of Vanguard's connect-only service, the period of the alleged predation, and the subsequent 16 months. The third section, Dallas - Colorado Springs, shows three periods: the year prior to Western Pacific's entry in the market, the period Western Pacific operated in the market, and the twelve month period commencing six months after Western Pacific's departure from the market. The final section, Dallas - Long Beach, has two periods: that during which American and SunJet were both in the market, and the twelve-month period commencing six months after SunJet's exit.

	American			Market
	Average Fare	Local Passengers	Total Seats	Average Fare	Passengers/Quarter
DFW - ICT
06/1994 - 05/1995	$ 99 - 108	3932 - 5557	21,314 - 32,109	$ 105-115	16,420 - 19,390
06/1995 - 09/1996	52 - 75	5166 - 7578	30,528 - 34,664	60 - 68	35,140 - 37,460
10/1996 - 12/1996	58 - 61	10,076 - 11,041	44,798 - 47,588	55	38,650
07/1997 - 06/1998	88 - 102	7019 - 8373	29,939 - 33,790	94 - 99	20,840 - 24,590
07/1998 - 06/1999	100 - 123	5744 - 8257	25,891 - 33,651	105 - 120	19,610 - 23,200
DFW - MCI
01/1994 - 12/1994	107 - 117	14,831-19,306	61,489 - 69,092	108 - 115	66,190 - 71,860
02/1995 - 12/1995	77 - 98	19,269-34,528	58,903 - 106,996	79 - 88	94,520 - 103,610
01/1996 - 09/1996	108 - 147	24,435 - 31,568	74,404 - 92,534	110 - 128	83,740 - 98,900
10/1996 - 05/1998	76 - 102	29,312 - 43,303	85,890-106,992	74 - 96	104,870 - 128,580
06/1998 - 09/1999	93 - 126	27,222 - 40,026	72,644 - 100,503	96 - 113	110,690 - 126,430
DFW - COS
06/1994 - 05/1995	141 - 178	2,740 - 4,373	21,533 - 29,479	114 - 158	11,490 - 22,310
07/1995 - 10/1997	73 - 110	9,088 - 24,673	36,385 - 80,304	75 - 102	45,800 - 86,090
04/1998 - 03/1999	120 - 156	7,536 - 12,487	32,607 - 41,334	131 - 139	25,550 - 40,120
DFW - LGB
02/1997 - 01/1998	83 - 118	6,615 - 24,997	21,128 - 34,472	94 - 107	59,210 - 75,000
07/1998 - 06/1999	142 - 177	13,513 - 25,309	21,866 - 33,739	141 - 164	60,200 - 77,3600

9. ALLEGED PREDATORY PRICING

American's Performance Measures And Related Facts

Marginal cost is the incremental cost of a very small change in output. Marginal cost is difficult to measure directly. Incremental cost is the amount by which costs change when output changes. Incremental cost is an extension of the concept of marginal cost.

In its memorandum submitted to Magistrate Judge Humphreys on May 4, 2000, the government asserted that "the core of American's monopolistic strategy was that American deployed additional capacity and took pricing and yield management actions in DFW routes in response to LCC competition; the cost of these actions was greater than the revenues that came from carrying additional passengers." (Defs.' Exh. 113). In the same memorandum, the government agreed that in judging the legality of American's core "monopolistic strategy," the court must conduct the cost and recoupment inquiries outlined in the predatory pricing standards of Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993). The government alleges that "American pursued its strategy [of adding capacity and lowering fares], however, because it knew that once LCCs were driven out of DFW routes, it could reduce its service and raise its fares, thereby recouping its short-term losses through future supracompetitive fares." (Complaint ¶¶ 5, 6.)

The government's expert, Professor Stiglitz, states that "output and pricing decisions should be viewed as occurring simultaneously." (Stiglitz Final Report ¶¶ 66, 144.)

American has developed a number of internal measures that address, among other things, route performance. Some of these measures are referred to as "decision measures" because they are used for decision making rather than financial reporting. Certain of American's decision measures, such as Decision FAUDNC, primarily measure the relative performance of routes. The company employs two basic categories of flight and route performance measures: fully allocated earnings measures (including the Decision FAUDNC and Decision FAUDNS measures) and variable earnings measures (including the Decision VAUDNC and Decision VAUDNS measures).

American's fully-allocated earnings measures, such as Decision FAUDNC, reflect revenues minus all categories of costs within American's decision accounting system, including variable expenses, aircraft ownership, fixed overhead, interest, equity and income taxes.

American's variable earnings measures of flight and route performance, such as Decision VAUDNC, reflect revenues minus the variable expense categories of costs within American's decision accounting system. The company's variable earnings measures of flight and route performance are known as "Decision VAUDNC" and "Decision VAUDNS." VAUDNC refers to VAriable earnings plus Upline/Downline contribution Net of Costs. Decision VAUDNC attempts to capture the net upline/downline revenues generated from connecting passengers and then subtracts the variable costs associated with those passengers as well as an estimated incremental flight cost assigned to every connecting passenger.

VAUDNS refers to VAriable earnings plus Upline/Downline contribution Net of Spill. Decision VAUDNS attempts to capture the upline/downline revenues from connecting passengers net of spill. "Spill" reflects the likelihood that accommodating an additional passenger on an upline/downline flight would result in the loss of some other passenger that was "spilled" to a competitor's flight.

VAUDNC and VAUDNS are calculated using costs categorized as variable over an 18-month planning horizon. The costs included in the VAUDNC/VAUDNS measures represent more than 72% of the total costs included in American's decision accounting system for the DFW-MCI, DFW-ICT, DFW-COS, and DFW-LGB routes over the relevant time periods. VAUDNC reflects onboard revenues minus the categories of expense labeled by American as "decision variable expense" and adds the incremental contribution of upline/downline passengers. VAUDNC and VAUDNS are measures of variable earnings of a route within American's 18-month planning horizon.

The government has proposed its own measure of American's variable earnings (which it has labeled "VAUDNC-AC"). The cost component of VAUDNC-AC includes American's VAUDNC costs plus costs of aircraft ownership. Thus, VAUDNC-AC treats aircraft ownership costs as a variable expense, thereby reducing the apparent performance of the route. VAUDNC-AC includes over 79% of the total costs included in American's decision accounting system for the DFW-MCI, DFW-ICT, DFW-COS, and DFW-LGB routes over the relevant time periods.

Aircraft ownership costs are properly considered fixed costs in the industry, and are not an avoidable cost of changing capacity in a route.

The government's expert, Professor Berry, testified that the cost component of VAUDNC-AC is a measure of "short run average variable cost at the route level." Another government expert, Professor Stiglitz, testified that VAUDNC-AC is a measure of short run average variable cost. Professor Stiglitz testified that a rival will want to continue operating in the market so long as its price exceeds average variable cost.

Under each of the VAUDNC, VAUDNS, and VAUDNC-AC measures, over the alleged predation periods, American's revenues exceeded its average variable costs at the route level on the following routes: DFW-MCI (Kansas City), DFW-ICT (Wichita), DFW-COS (Colorado Springs), and DFW-LGB (Long Beach). With respect to the DFW-PHX (Phoenix), DFW-EWR (Newark), DFW-TPA (Tampa), and DFW-OAK (Oakland) routes, the government's experts offer no evidence that American's revenues were below any measure of costs.

Professor Hovenkamp, a consultant to the government in this matter, wrote to the Department of Justice:

The biggest advantage that the AVC test has going for it is a high degree of general acceptance (at least as a presumptive standard) by all circuits except the Eleventh. I think it will be far easier to get a court to agree to adhere to the AVC test but take some care as to how costs are classified, rather than abandon it in favor of any test that uses 'failure to maximize in the short run' or average total cost as a standard. Such an AVC standard would also give the court a more manageable set of numbers to work with and limit the amount of speculation.

(Defs.' Exh. 123).

As noted above, American's decision accounting system has a measure termed FAUDNC. This was a part of a number of profitability measures intended to reflect the economic value of operating a flight, a segment, a hub or the entire system. The company expended a substantial amount of time and money investigating its accounting systems, and in developing decision FAUDNC. Since its development of FAUDNC in 1995, American has continued to modify its methodology to improve route profitability reporting.

Professor Berry states that "FAUDNC cost is conceptually close to long-run average route level variable cost." (Berry Final Report ¶ 237.) Decision FAUDNC stands for Fully-Allocated earnings plus Upline/Downline contribution Net of Costs. Decision FAUDNC is a fully allocated earnings measure. American developed FAUDNC to compare the performance of its various routes against each other using a benchmark that reflected its fully allocated earnings (and thus its fully allocated costs of operation).

Decision FAUDNC attempts to capture the upline/downline revenues generated from connecting passengers and then subtracts the costs associated with those passengers as well as an estimated incremental flight cost assigned to every connecting passenger. Beyond the upline/downline revenues generated from connecting passengers, FAUDNC does not capture the system benefits to American of operating particular routes and flights. Such benefits arise from the fact that serving certain routes can provide enhanced regional presence or origin point presence to American's route network, thereby making its entire system more attractive to travelers. But these system benefits are not captured in the performance measures for individual routes and flights because the benefits accrue on other routes and flights.

Although the percentage can change slightly from year to year, FAUDNC captures approximately 97-99% of American's total costs. The only costs excluded from FAUDNC are certain corporate general and administrative expenses, such as legal expenses and certain corporate officer salaries, long term leases for space that cannot be subleased, and certain fixed maintenance expenses. And, again although the percentage can vary slightly from year to year, expenses excluded from FAUDNC represent approximately 1-3% of American's total operating costs. Professor Maher has stated that, for 1995, the costs excluded from FAUDNC were "in the range of three percent of total costs." (Maher Final Report ¶ 47.)

In generating FAUDNC, American allocates or assigns all of the operating expenses within its decision accounting system down to the level of individual nonstop flights. American's methodology for calculating route expenses is simply to aggregate the expenses that were allocated to each flight operated on that route. While there are certain types of expenses in FAUDNC, such as fuel or landing fees, that are directly caused by a particular flight or route, there are many other costs in FAUDNC that constitute the overhead or general operating expenses incurred in running an airline, particularly one with a complex hub-and-spoke network, that are not driven (or may not be driven depending on the specific circumstances presented) by operating or not operating a particular flight or route. Examples of such expenses at American include dispatch, city ticket offices, certain station expenses, a portion of pilot pay and other labor costs, certain maintenance expenses, American's flight academy, flight simulator maintenance, investments in yield management and other computerized systems, and sales and advertising. FAUDNC includes certain costs that would not be entirely avoided if American were to abandon service on a particular DFW route, but rather all or a portion of which would be reallocated to other routes.

In generating FAUDNC, American allocates certain general operating expenses among its various flights and routes on an arbitrary basis, such as takeoffs and landings, flight hours, or passenger enplanements. The cost accounts incorporated in FAUDNC include such fixed overhead expenses as aircraft-related overhead and system-related overhead.

American's aircraft-related overhead expenses consist mainly of fixed expenses for American's maintenance facilities in Tulsa and Fort Worth, including rent (covering the retirement of long-term facility bonds), computer systems, communications and utilities. These fixed maintenance expenses are allocated to American's aircraft on the basis of either departures or flight-hours. Also included in aircraft-related overhead is the exterior cleaning of airplanes (as distinguished from the interior cabin cleaning done after each flight). Each airplane exterior is cleaned on a periodic basis and the overall expense of this activity is allocated across the fleet based on departures. American's system-related overhead expenses consist of a wide range of activities required to operate a large hub-and-spoke airline. These include management, supervision and administrative expenses associated with aircraft load and clearance (the weight and balance of aircraft), as well as flight attendant staffing. In addition, this category includes functions such as headquarters marketing and sales, capacity planning, corporate communications, pricing and yield management, flight operations and safety, cabin design and crew scheduling. Passenger advertising is also part of this category, including media advertising (newspapers, magazines, radio and television) and timetable production costs.

While American's aircraft-related and system-related overhead expenses are not driven by the operation of any particular route or flight, in order to generate FAUDNC, these expenses are allocated arbitrarily over American's entire fleet. FAUDNC includes a target return on American's capital, including imputed interest and returns to equity for flight assets, station assets and system assets. FAUDNC includes an assumed income tax on profits for both the route at issue and for all upline/downline revenues.

While American tries to include in Decision FAUDNC all cost categories that could be impacted or affected by anticipated changes in overall system capacity or traffic over an 18-month planning horizon, this means if American anticipated a downturn in its business 18 months hence and decided to scale down its operations in response, it could reduce some of the costs in its "fixed" categories over an 18-month period. Not all costs in FAUDNC could be eliminated over 18 months, or scaled down proportionately with a planned reduction in activity levels.

Although the government's expert, Professor Berry, assumes that "FAUDNC captures those costs that are avoidable over 18 months and not sunk for the route," (Berry Final Report ¶ 233), other than seeking to understand the cost assignment and allocation methodologies that underlie American's Decision measures, no government expert, including Professor Berry, has identified the actual costs in FAUDNC that are incremental or avoidable costs of serving a route or of expanding or contracting capacity on a route, whe