As the Federal Aviation Administration (FAA) wrestles with suggestions as to how to best control the congestion at Chicago O'Hare International Airport, regional jets are again being blamed as a contributing cause to the congested runways.

Last August, the FAA convinced the airlines to limit arrivals during the peak hours of 7 a.m. to 9 p.m. to 88 flights per hour. The airport's two dominant carriers, American Airlines [AMR] and United Airlines [UALAQ], reduced their flights so that the goal of 88 arrivals per hour was obtained. The FAA has extended the order until October while at the same proposing that a similar order stay in effect until April 2008.

Not surprisingly, the comments filed on the proposal by the May 24 deadline break down into two camps - those supporting American's and United's position and those from smaller carriers who may benefit from the change. In addition, there is a separate debate under way on a different level - one side wants to scrap any FAA-imposed cap and let the free market again guide the airport, and the other side says the FAA should impose its full control with slot auctions.

The FAA is now reviewing the comments before imposing a new rule. The agency faces an Oct. 31 deadline if it wants to act before the current rule expires. However, as a practical matter, the agency needs to act before the airlines set their fall schedules.

"Regional airlines and their code-share partners have already reduced their flights at O'Hare as a result of the FAA's August 2004 order and carrier agreements, while other carriers have not," said Deborah McElroy, president of the Regional Airline Association (RAA), in her comments. "The RAA believes the regional frequencies should be restored before other carriers are allowed to increase their O'Hare operations further."

One clause of the propose rule gives new carriers or those with a few flights at O'Hare the first crack at obtaining a new arrival slot should the number of hourly slots be increased to 90, or if a carrier returns a slot.

McElroy noted that by giving carriers other than United or American the first chance to use these new slots, the FAA is limiting competition and service to smaller markets that depend on regional aircraft. Regional airlines provide the only access to O'Hare from 21 non-hub cities, 24 small hubs and four medium hubs. In addition, by using RJs the carriers have been able to increase the frequency of services to 11 small hubs and 16 medium hubs, McElroy noted. RAA's position is that if the FAA adopts the proposed "favoritism" clauses, then fewer of these regional flights would be available. Overall, RAA wants the current rules extended without the various alternatives that the FAA has proposed.

Daniel Kaplan at LECG, in a technical paper prepared for United, takes issue with the FAA's premise. "Although it offers no competitive analysis, the FAA seems to imply that United is somehow operating inefficiently. United's O'Hare operation is consistent with the operations of other carriers that do not face capacity restrictions at their hubs. Moreover, United provides valuable service to small and medium size communities and in recent years it has increased the proportion of its O'Hare flights to those markets. By favoring one class of carriers over another, the FAA is essentially favoring service to one type of community over other types.

"The FAA takes United and American to task for their increasing use of regional jets," Kaplan noted. "As a percentage of total flights, however, United's use of small planes is not out of line with the operations of hub airlines at other airports. Moreover, its increased use of regional jets represents an efficient response to competitive challenges it now faces."

United in its filing suggests that the proposed favoritism rule would shut out United and American from recouping arrival slots that they voluntarily surrendered in the 2004. Denied an opportunity to obtain additional slots, United said the rule would "discourage" the carrier from making any future flight reductions.

While the entire burden of the 2004 schedule reduction orders fell on American and United, American in its filing noted that: "the entire benefit of any potential increase would be reserved for other carriers."

In the suggested changes to the rule, the FAA "effectively allows the government to re-regulate the market - a far cry from the FAA's stated goal of 'placing maximum reliance' on competitive market forces," American said in its filing.

The U.S. Department of Justice (DOJ) is urging the FAA to use the rulemaking process to adopt an auction system to allocate O'Hare's capacity. "Rather than continuing a system of administratively-set allocations, the DOJ recommends that the FAA adopt market-based rules for allocating arrival capacity as soon as possible. A well-designed slot auction would both assign prices to allocate efficiently scarce airport resources and limit the maintenance or accumulation of market power by individual carriers."

O'Hare is owned and operated by the city of Chicago. While the city does not go so far as DOJ in advocating a slot auction, it does want the authority to control future congestion using locally devised market solutions. Chicago wants the FAA to lift the order. However, if the FAA insists on maintaining the caps, then the city doesn't want any differentiation among the carriers for any open slots. The city also contends that because of procedural changes implemented since last August, the airport can now handle 92 flights per hour.

In its filing, Chicago repeatedly reminds the FAA that the congestion would not be a problem if the agency would have approved the construction of additional runways at O'Hare. The agency has not acted on Chicago's application submitted more than a year ago.

"Should the FAA continue the current capacity cap at O'Hare, America West [AWAC] opposes using a payment based auction instead of a non-payment lottery to reallocate [arrival slots]," the carrier said. "It vigorously opposes any payment going to the airline selling or leasing [slots]." The carrier said that if the FAA insists on allowing airlines to sell their slots, then the proceeds should be retained by the FAA to improve O'Hare's capacity.

>>Docket: FAA-05-20704. Contacts: Deborah McElroy, RAA, (202) 367-1170; Daniel Kaplan, LECG, (617) 252-9994; Bruce Rabinovitz (United), Wilmer, Cutler, (202) 663-6960; Carl Nelson, AMR, (202) 496-5647; R. Hewitt Pate, DOJ, (202) 514-2401; James Szczesniak, Chicago, (773) 686-3531; Joanne Young (America West), Baker & Hostetler, (202) 861-1532.<<