2. American earns a substantial hub premium in DFW city pairs. American's dominance of DFW is demonstrated by the following:
a. American carries 70% of all passengers who travel nonstop in DFW city pairs;
b. American carries 58% of all passengers who travel in DFW city pairs;
c. American carries 77% of all passengers originating in DFW who travel nonstop in DFW city pairs; and
d. American carries 65% of all passengers originating in DFW who travel in DFW city pairs.
The next largest carrier serving DFW is Delta Air Lines, Inc. ("Delta"), which carries 16% of all passengers who travel nonstop in DFW city pairs. No other carrier accounts for more than 4% of such passengers.
3. American's operations at DFW present substantial barriers to entry to any other airline that might try to enter or expand operations there. American operates many more flights at DFW than all other carriers combined, attracts a disproportionate share of DFW originating passengers, offers a frequent flyer program to passengers and commission incentives to local travel agents, and has entered into numerous contracts with local businesses.
4. No major airlines are positioned to challenge American's dominant market position in DFW city pairs. Delta operates a small hub at DFW but does not prevent American from exercising market power on DFW city pairs. Moreover, Delta has gradually decreased the size and scope of its DFW operations over time and is unlikely to expand them. Southwest Airlines, Inc. ("Southwest") offers service from Dallas Love Field in some Wright Amendment city pairs, but is not likely to provide service in DFW city pairs.
5. American has monopoly power in most of its DFW city pairs and faces little current competition and little prospect of entry on those routes. Its monopoly power allows it to charge supracompetitive fares. American's fares on DFW city pairs are substantially higher than its fares on otherwise comparable routes where it faces competition. American also can restrict output in DFW city pairs: it can limit the number of seats it makes available at low fares, making far fewer available than consumers would be willing to purchase.
AMERICAN'S RESPONSE TO LCCs
6. The only airlines that might be in a position to undercut American's monopoly power in DFW city pairs are LCCs. These small, start-up airlines have much lower operating costs than major hub carriers, such as American. American recognized the threat posed by LCCs and adopted a predatory strategy designed to preserve its monopoly in DFW city pairs.
7. American identified the LCC threat to its monopoly power in 1993. At that time, several LCCs were entering the airline industry, using their relatively low operating costs to charge substantially lower fares than the hub carrier on some routes. Although LCCs typically sought to carry a large number of low-fare passengers -- the kind of passengers often turned away by American -- American recognized that LCCs had the potential to expand their operations, become even more efficient, and set up a competing "mini hub." This could endanger American's market power and hub premium in DFW city pairs. Indeed, in 1993, American determined that $3.6 billion in "AA revenue was . . . at risk" annually because of LCCs, and it estimated potential annual systemwide revenue losses due to LCCs in the range of $586 million to $1.47 billion.
8. The growth during 1994 and 1995 of ValuJet, an LCC based at the Atlanta airport, Delta's largest hub, confirmed American's worst fears about LCCs. In response to ValuJet's entry, Delta initially sought to retain higher fare local and connecting passengers. ValuJet successfully attracted enough traffic with its low fares to operate at profitable "load factors" (i.e., the number of passengers carried on a flight, expressed as a percentage of the total available seats). Over time, ValuJet expanded, gradually eroding Delta's ability to charge high fares in many Atlanta spoke markets. However, the 1996 crash of a ValuJet plane in the Everglades and the subsequent grounding of all ValuJet aircraft halted ValuJet's expansion.
9. Estimating the impact of ValuJet's growth on Delta to be $232 million in lost annual revenue, American concluded that "clearly we don't want that to happen to [American] at DFW." To that end, American employees devoted substantial effort to studying the LCC threat to American's DFW profits, culminating in a presentation of a "DFW LCC Strategy" in February 1996.
10. At that meeting, American's senior management reviewed, revised, and approved the strategy that the company had gradually developed over the preceding several years: when an LCC entered a DFW route and it appeared that the LCC would be economically viable if American simply followed a profit-maximizing business strategy, American would instead saturate the route with enough additional capacity at low fares to keep the entrant from operating profitably. American also would take further steps, such as matching the LCC's connecting fares with its own nonstop fares, to keep traffic away from the LCC. To evaluate the success of its strategy and determine whether to intensify its response, American would investigate the financial resources of LCCs, determine their break-even load factors, and conduct head counts at the departure gate to monitor their passenger loads.
11. This DFW LCC Strategy differed markedly from American's strategy in city pairs where it competes with Southwest, which has the low costs of an LCC but is large, financially secure, and has a substantial scale of operations at its Dallas Love Field base. Knowing that Southwest was too well-established to be driven out of those city pairs, American did not saturate the routes with capacity or match the lowest Southwest fares for all of its available seats. Instead, American set fares and capacity so as to maximize its profits on the assumption that it would have to compete with Southwest over the long term.
12. In applying its DFW LCC Strategy, American deliberately disregarded its usual standard for evaluating route performance -- a profitability measure it calls "FAUDNC" -- as well as its usual practice of seldom tolerating FAUDNC losses on DFW routes for extended periods of time. The vast majority of American's DFW routes are FAUDNC "positive," that is, profitable, on an annual basis. Each month, American's senior management reviews the small number of its routes that are FAUDNC "negative" for the prior twelve-month period and typically prescribes operational, pricing, or marketing changes, which may include reducing service or exiting the route altogether, in order to improve performance. With respect to routes served by LCCs, however, American was willing to add flights and/or reduce fares even though the effect would be to reduce FAUDNC profitability substantially or even to turn a FAUDNC positive route into a FAUDNC negative route.
13. American recognized that its DFW LCC Strategy could prove unprofitable in the short run. It concluded, however, that "[t]he short term cost, or impact on revenue [of the LCC strategy] can be viewed as the investment necessary to achieve the desired effect on market share." Both the purpose and the effect of American's DFW LCC strategy were to drive LCCs out of DFW markets so that American could subsequently recoup its "investment" and preserve its monopoly fares. This recoupment strategy was at the heart of American's response to LCCs. As its then chairman and CEO stated, "[i]f you are not going to get them [LCCs] out then no point to diminish profit."