C;Jl-\s{t AM ~Il. C~\At_cl'~;!i (:. )bj'~\:y~f'" ZUCKERT SCOUTT [y RASENBERGER. L.L.P..3.'18 ~e\'enteenth StrFet.,"1'1 v\~lshjr1:j,ton, DC 20(XJ6-33,19 Tdephone 1202J 208-R';(,() F,LX [202J 7,42-U6W, \, W\." zsria,'vcom LONNIE ANNE PERA DIRECT DIAL (202) 973-7913 lapera@zsriaw.com BY EMAIL AND BY HAND Chief, Special Authorities Division, X-46 Office oflntemational Aviation U.S. Department of Transportation 1200 New Jersey Avenue, S.E., 8 th Floor Room W86-445 Washington, D.C. 20590 Re: Gulfstream Air Charter, Inc. Objection to Spirit Request for Waiver Dear Ms. Archer: Gulfstream Air Charter, Inc. ("Gulfstream" or the "Company") hereby responds to the March 29, 2011 request by Spirit Airlines for a waiver of the Department of Transportation's Part 212 and 380 financial security requirements (the "Spirit Request"). As is discussed in more detail below, Spirit Airlines has made incorrect statements about the Cuba charter market in general and about the Company in particular. Gulfstream respectfully urges the Department to not grant a blanket waiver to Spirit Airlines based upon these statements. According to the Request, Spirit will provide charter air transportation services between Hollywood Fort Lauderdale International Airport ("FLL") and Havana, Cuba ("HA V") for travelers, who are licensed by the Office of Foreign Assets Control ("OF AC") to engage in travel related transactions with respect to Cuba (hereinafter "Licensed Travelers"). It appears that Spirit proposes to provide these services on its own and not as a direct air carrier for an OF AC licensed charter operator (a "Carrier Service Provider"). To do so, Spirit must (a) hold an effective Carrier Service Provider ("CSP") license issued by OF AC, so that it can apply for landing rights in Cuba, enter into ground arrangements in Cuba, and operate to/from Cuba, (b) obtain Part 380 authorization from the Department upon filing a public charter prospectus, (c) maintain the financial security arrangements required in Sections 212.7, 212.8, 380.34, and 380.35 of the Department's Regulations, and Cd) comply with all other applicable mles and regulations relating to the Cuba charter f1ights. Spirit seeks a waiver of ( c) and makes statements in support of this waiver. Many of its statements are incorrect.
ZlJCKERT SCOUTT [;r RASENBERGER, L.L.P. Page 2 I. Spirit Airlines Does Not Appear to Hold a CSP License Spirit acknowledges that "air service to Cuba remains restricted to licensed charter tlights." Spirit Request at 2. Yet, Spirit does not seem to comply with the OFAC licensing requirements. OF AC requires that charter operators and air carriers obtain CSP licenses before they engage in any transactions relating to transportation services to Cuba. Charter operators, therefore, must obtain CSP licenses before they enter into charter agreements with direct air carriers and apply for other required authorizations and permits (including landing rights in Cuba and Part 380 authorization from the Department). Air carriers, likewise, must obtain CSP licenses before they may apply for these same authorizations and permits. In fact, if a carrier such as Spirit Airlines wants to market and sell charter air transportation services to Cuba on its own, it must hold an effective CSP license. To the extent that Spirit wishes to sell tickets on the flights, it must obtain a Travel Service Provider ("TSP") license as well. And if it hopes that travel agencies will sell tickets on the Spirit charter flights, it must ensure that each agency has an effective TSP license. Spirit has not indicated that it will comply with any of these rules. In fact, it has not stated in the Request that it even holds an effective CSP license. OFAC's most recent list of Authorized Service Providers, moreover, does not confirm that Spirit holds either the CSP or TSP license. See April 18,2011 List of Authorized Service Providers at: http://www.treasury.gov/resource-center/sanctions/programs/documents/cuba tsp.pdf How is it then that Spirit can submit a request for a waiver, let alone apply for landing rights in, and offer charter air transportation services to, Cuba? Gulfstream respectfully objects to the grant of any waiver to an air carrier that does not hold required OF AC license. II. OFAC Regulations And Rules Do Not Replace The Department's Consumer Protection Requirements Spirit further states that OF AC requires air carriers "to certify that their financial responsibility to operate the flights." See Spirit Request at 2 (citing Circular 2006 at Appendix I, page 7). Spirit then suggests that it should not have to comply with DOT's financial security requirements because the certification of financial ability somehow protects passenger payments. There is nothing in Circular 2006 to suggest or state this. The certification to which Spirit refers is a statement that applicants must make in their CSP license applications. According to Circular 2006 Appendix I, applicants must certify that they are currently able "to be responsible for all of the financial requirements inherent in the operation of the Flights." OFAC further requires that applicants provide "a detailed estimate of each relevant expense in the operation of the Flights." The estimate and the certification together are intended to demonstrate that applicants know the expenses they will incur in
ZUCKERT SCOtJTT [y RASENBERGER, L.L.P Page 3 arranging/operating charter flights and can pay those expenses. Nothing in Circular 2006 states that the certification extends to financial security arrangements to protect passenger payments. Nor does Circular 2006 state that the certification in any way replaces DOT's consumer protection requirements. The fact that Circular 2006 references the Operator-Participant Contract but not DOT's financial security requirements, moreover, does not mean that the financial security requirements are not necessary or do not apply. Appendix II of Circular 2006 certainly does incorporate the DOT Operator-Participant Contract requirement into OFAC's screening procedures. OFAC, however, does not "provide specific operator-participant contract requirements" as Spirit states. To the contrary, OF AC establishes a rule as to the documentation Carrier Service Providers must receive when a Licensed Traveler makes a reservation or purchases a ticket. It is DOT - not OF AC - that requires all charter passengers to receive, review and sign the Operator-Participant Contract. And it is DOT - not OF AC - that requires charter operators and air carriers to enter into financial security arrangements for protecting passenger payments. Circular 2006 does not change or replace DOT's requirements. Gulfstream objects to any suggestion that OF AC has responsibility for ensuring that passenger payments are protected. OFAC's application process does not replace the need for DOT's financial security requirements, particularly in the U.S.-Cuba market. III. DOT's Financial Security Requirements Do Not Impose Burdensome Transaction Costs That Result In Fare Increases As its main argument, Spirit contends that the costs of maintaining DOT-required financial security arrangements have resulted in high fares to Licensed Travelers. It further argues that Spirit would be able to offer lower fares to Licensed Travelers, if it did not have to enter into financial security arrangements. Spirit Request at 3 and 5. Gulfstream respectfully objects to the notion that the costs of maintaining a $200,000 surety bond or letter of credit and a depository arrangement are burdensome transaction costs that have significantly impacted its fares. Gulfstream certainly has costs of arranging charter flights to Cuba. Not only must it pay the direct air carrier for operating the charter flights, but it also must pay (a) fuel surcharges to the direct air carrier, (b) landing fees, ground handling charges, and related service fees to Havanatur, S.A., the Cuban entity responsible for flight clearances and services in Cuba, (c) advertising costs to U.S. companies, and (d) various other expenses. These other expenses include DOT's prospectus filing fees, Florida Seller of Travel application and renewal fees, operating bank account fees, depository bank account fees, letter of credit fees, business insurance premiums, legal fees and costs, office supply costs, etc. Gulfstream establishes its fares for the DOT-approved charter flights based upon all of these costs.
ZUCKERT SCOUTT [y RASENBERGER, L.L.P. Ms. T orlanda Archer Page 4- While the Company does consider the costs of maintaining a $200,000 letter of credit and a depository arrangement (the "financial security costs") in determining its fares, these financial security costs are nominal in comparison to the other costs. For the year 2010, Gulfstream paid less than $4.00 in financial security charges on behalf of each Licensed Traveler booked on a charter flight it arranged to Cuba. This per passenger charge did not impact significantly the airfare Gulfstream offered in 2010. Nor does Gulfstream expect the financial security costs to necessarily cause higher airfares in 2011. I Spirit claims that it is "an experienced, financially stable, low-cost air carrier" that has "adequate financial reserves to assure reimbursement of charter participant funds in the event of an improper nonperformance of service." Spirit Request at 3-4. With this experience, Spirit should be able to negotiate similar financial security arrangements as Gulfstream. In this case, it could comply with DOT's financial security requirements without facing any unduly burdensome costs. IV. Spirit Airlines Has Made Inaccurate Statements About The Company Gulfstream is quite surprised at some of the statements and suggestions Spirit has made about the Cuba charter business in general and the Company in particular. The Request demonstrates that either Spirit does not have a full understanding of the Cuba market or it has a negative view of Gulfstream (as well as other Carrier Service Providers). To ensure that the Department has accurate information about the Company, Gulfstream corrects the inaccurate statements. A. Spirit is Wrong in Alleging That a Cartel/Monopoly Exists Spirit states that the charter companies "'are a virtual cartel that control the travel sector from the U.S. to Cuba, charging egregious fees in collusion with the Cuban authorities. '" Spirit Request at 3. While Spirit quotes another source to make this point, it clearly believes this is the case. After all, Spirit states that its proposed charter air transportation services are "necessary to meet... demand and prevent monopolistic pricing stmctures." Id. at 4. While the annual financial security cost attributable to each Licensed Traveler is nominal, the time involved in managing passenger payments forwarded to the depository bank is not insignificant. Gulfstream estimates than an employee spends between 3 and 5 hours each week preparing (1) an accounting of the payments (including amount paid and name of Licensed Traveler), (2) the flight payment certificate(s) for the amount to be paid to the direct air carrier for each flight, and (3) the flight completion certificate(s) stating the date on which each flight was completed. If the Department grants a waiver to Spirit, the Company will seek a similar waiver, so that it can minimize employee time and expenses in performing these functions.
ZUCKERT SCOUTT [y RASENBERGER, L.L.P. Ms. T orlanda Archer Page 5 Gulfstream vehemently opposes these statements and any suggestion that it (a) is part of a cartel, (b) controls the travel sector, (c) charges egregious fares and fees, or (d) is acting in collusion with Havanatur or with any other entity (U.S., foreign, or Cuban). Gulfstream has arranged charter air transportation to Cuba since 2003 (Gulfstream International Airlines arranged the charter flights from 1998 until 2003). It has excellent business relationships with direct air carriers, Travel and Carrier Service Providers, and Havanatur. These business relationships have been established through arms-length negotiations. They are entirely consistent with OFAC's Circular 2006 and with other applicable U.S. laws rules and regulations. Gulfstream is not part of a cartel or monopoly, and it is not in collusion with any entity to set prices or to engage in any prohibited practices. Importantly, Gulfstream has had a mission to provide charter air transportation services to/from Cuba, using reliable and safe airlines, 2 at best possible fare it can offer, given the high cost of chartering the aircraft, the rising fuel prices, and other required charges that are directly related to the charter flights (including landing fees, ground handling charges, insurance premiums for business liability insurance, etc.). Gulfstream's fares are solely within its discretion and are directly related to all of these costs. For Spirit to suggest that it is colluding with any entity to set fares is bordering on slander. And for Spirit to suggest that Gulfstream's fares are not appropriate given the various costs is completely inaccurate. B. Spirit is not Correct in Stating That Only a Handful of Carrier Service Providers Arrange Charter Flights to Cuba Spirit expressly states that only "a handful of charter companies regularly" arrange charter flights to Cuba before the 2004 OF AC changes that restricted Cuban American travel. See Spirit Request at 3. It also states that even after OFAC changed the travel restrictions in September 2009, "only a small number of charter operators" are servicing the Cuba market. Id. at 3-4. These statements are not correct. Prior to the 2004 OF AC changes, at least seven charter operators holding CSP licenses arranged charter flights, on a weekly basis, between three U.S. airports and five Cuban destinations. The three U.S. airports were Miami International Airport (MIA); lfk International Airport (JFK); and Los Angeles International Airport ("LAX"). The five Cuban destinations were Havana; Cienfuegos; Camaguey; Holguin; and Santiago. In 2009, before OF AC expanded the travel restrictions, an eighth charter operator returned to the Cuba charter market. Since 2009, eight charter operators have arranged charter flights between the three airports (including for a period of time LAX) and the five Cuban airports. This is not a 2 Gulfstream has chartered aircraft from reputable U.S. airlines, including American Eagle Airlines, Continental Airlines and Miami Air International.
ZUCKERT SCOUTT 6- RAsENBERGER, L.L.P. Page 6 small number of service providers, but rather a significant number given the existing travel restrictions to Cuba. C. Spirit is not Correct in Suggesting that the Carrier Service Providers are not Meeting Demand Spirit further maintains that its services are necessary to meet current demand. Spirit Request at 4. Spirit appears to suggest that the existing eight Carrier Service Providers are not meeting demand. Any such suggestion is not correct. The number of charter flights Gulfstream arranges depends upon several factors. Obviously, one ofthese factors is demand. 3 If more Licensed Travelers demand transportation than is currently offered, Gulfstream will consider adding flights. But it cannot do so without also considering whether Havanatur will grant landing rights for those additional flights. This is not a market whereby any Carrier Service Provider can simply add flights. A Carrier Service Provider should never ignore Cuba's requirements,just to flood the market with flights. The bottom line is that the Company (as well as other Carrier Service Providers) will add charter flights, ifthere is demand by Licensed Travelers and if all required authorizations and clearances will be granted. D. Spirit is not Correct in Suggesting that Carrier Service Providers are Motivated to Cancel Flights When Demand is low Spirit, lastly, maintains that it (a) will "prevent stranding passengers" when mechanical problems occur and (b) avoid cancelling flights when demand is low. Spirit Request at 4. As support, the airline states that "charter operators... may be motivated to cancel flights when demand is low." Id. Spirit, by contrast, "does not foresee cancellations" because - as it suggests - its services are reliable and those of charter operators are not. Id. at 4-5. Nothing could be further from the truth in the Cuba market. While Gulfstream is not an air carrier, it is a DOT -authorized indirect air carrier. And it charters aircraft from safe and reliable direct air carriers. If those carriers cannot operate a particular flight during Customs business hours, Gulfstream immediately arranges for alternate charter air transportation. Licensed Travelers will not be stranded as a result of a direct air carrier's mechanical problems; Gulfstream sees to it that Licensed Travelers are transported to their ultimate destination. 3 The Company questions how Spirit can make any statements about demand in the Cuba market. Spirit has not sold a single ticket for travel to Cuba. Nor should it have done so. As OFAC's April2011 List of Authorized Service Providers shows, Spirit does not have a TSP license.
ZUCKERT SCOUTT [y RASENBERGER. L.L.P. Ms. T orlanda Archer April 19, 2011 Page 7 In addition, Gulfstream has never cancelled a charter flight "when demand was low." It is not motivated to do so for a number of reasons. First, since day one, it has been committed to offering charter air transportation in accordance with DOT Regulations. It would never deviate from DOT rules by cancelling a flight for low demand. Second, Gulfstream values its customers. It has contracted with reputable U.S. direct air carriers - even when the charter price was higher than that of low cost or charter carriers - to ensure that the charter flights would operate as scheduled (and as approved by the Department). It also chooses reputable carriers because cancelling flights would irreparably impair the Company's reputation in a highly regulated and competitive market. Third, under most if not all charter agreements, the direct air carriers impose high fees when a charter operator cancels a flight. These contractual requirements tend to remove any motivation (which Gulfstream does not have) to cancel flights. Gulfstream does not wish to suggest that it has never cancelled flights. Since 2003, it has had to do so as a result of circumstances beyond its control. For example, Gulfstream has had to cancel some flights when hurricanes and tropical storms temporarily closed the airports in Cuba. Gulfstream, in these cases, ensured that Licensed Travelers were accommodated on other DOTapproved charter flights. In addition, after OF AC amended the Regulations in June 2004 to restrict travel to Cuba, Gulfstream had no choice but to cancel some flights and to substitute other flights with smaller aircraft. The Company did so, not because of low demand, but rather because of "no demand". There simply were fewer Licensed Travelers as a result ofofac's regulatory change. No Carrier Service Provider can guarantee that a flight will not be cancelled. Some circumstances (such as those relating to severe weather) are simply beyond the Carrier Service Provider's control. Even Spirit understands this. After all, it was forced to cancel scheduled flights in June 2010 as a result oflabor disputes. Given Spirit's own history of canceling flights, it is remarkable that Spirit would suggest that charter operators are more likely to cancel flights than air carriers. Gulfstream certainly has never cancelled charter flights because some seats were not filled. And while some flights had to be cancelled or delayed as a result of unforeseen circumstances, Gulfstream has made alternate arrangements - including contracting with different carriers - to accommodate Licensed Travelers. Any suggestion that it would strand passengers is not only wrong but also offensive. * * * * Gulfstream does not object to a Carrier Service Provider offering public charter air transportation to Cuba, in accordance with OF AC and DOT requirements. It, however, does take
ZlTCKERT SCOUTT 6- RASENBERGER, L.L.p. Page 8 issue with the Department granting a waiver of the financial security requirements based upon inaccurate and (in some cases) inflammatory statements. For this reason, Gulfstream objects to Spirit's waiver request. Respectfully submitted, 'ZUCKERT, SCOUTT & RASENBERGER, L.L.P. By: Lonnie Anne Pera Attorneys for Gulfstream Air Charter, Inc. cc: Ms. Joanne M. Young (by email) Mr. David W. Kirstein Counsel for Spirit Airlines, Inc. Ms. Susan Jollie (by email) Counsel for C&T Charters Mr. Pierre Murphy (by email) Counsel for Wilson International Services, Inc. Mr. Josh Romanow (by email) Counsel for Xael Charters, Inc. Mr. Charles Bishop (by email) Office of Foreign Assets Control U.S. Department of the Treasury Mr. Gilberto Torres Vela (by email) Office of Cuban Affairs U.S. Department of State