Aviation Law Prof Blog

IALI at the German Marshall Fund

On April 14, the International Aviation Law Institute's Director, Prof. Brian Havel, was part of a luncheon panel discussion entitled, "Open Skies: Will there ever be truly open transatlantic air services?" at the German Marshall Fund in Washington, D.C.  A summary of the event can be found at the GMF's website.

eAnalyst Article

Prof. Brian Havel's article "US/EU Open Skies Negotiations: The Second Stage Begins," from the April 2008 edition of the International Air Transport Association's eAnalyst is now online.  In it you will find commentary on the issues to be discussed during the second stage of "Open Skies" talks between the U.S. and EU along with an analysis of the different policy visions both sides are bringing with them to the negotiating table.

India's Pro-Aviation Measures

The Indian government took two substantial steps last week towards helping their country meet the infrastructural demands accompanying their rapidly growing aviation sector. Last week, India cleared a policy where new airports may be setup within 150km of each other so long as the plan receives government approval. Prior to this shift in policy, India had forbade all airport construction which violated the 150km rule. Industry observers have argued that the old position would be unsustainable given India’s push to improve its aviation sector by expanding services and increasing its fleet size. In 2005, India spent over $13 billion at the Paris Air Show on new aircraft orders—a 164% growth in its fleet. Compared with the 2.7% growth the rest of the world experiences, it is evident that India needs to take swift steps to ensure it can readily utilize the new craft.

In addition to the relaxation of the 150km rule, India also announced that airport projects falling outside of the 150km radius would no longer need pre-approval from the Central Government but would instead only need to apply for licensing from the Directorate General of Civil Aviation (DGCA). Private airports established for non-scheduled traffic and cargo were also relieved of needless pre-approval hurdles with licensing coming from the DGCA. Both measures should encourage airport growth with the latter helping to relieve congestion at India’s public airports. There is also hope that the private airports will contribute to the improvement of air services within India as their success will depend exclusively on their ability to attract private business.

Indian aviation still faces some significant hurdles. Airport charges in India are substantially higher than those found in neighboring countries. K. Ramalingam, Chairman of the Airports Authority of India, has stated that "[t]here is a need for providing better services and reducing various charges levied by the airports to make them more profitable. Reduction in charges and better services will invite more air carriers and help in earning more money." The International Air Transport Associated has long criticized India for what it perceives to be excessive and unbalanced landing charges. According to IATA, India’s charges should be cost-based and rationally related to the services being provided. Instead, the organization has observed India overcharging for services at seven profitable airports in order to cross-subsidize its non-profitable ones. A business model similar to the one pursued in Singapore and Hong Kong where non-aeronautical revenue is used to support international airports has been suggested by IATA as a way for India to reduce its charges. IATA is also supportive of India’s Airport Economic Regulator Authority Bill which would establish a monitoring body for India’s airport charges. Currently, the bill is still sitting before the Indian Parliament awaiting approval.

Media Distractions

Sunday's edition of The Chicago Tribune ran a comprehensive piece on recent shakeups in the U.S. airline industry and its potential impact on prices.  Entitled, "Is This the End for Cheap Airline Fares?," the article sounds the usual tocsins that mergers (e.g., Delta/Northwest) mean less competition which will inevitably lead to hikes in ticket prices.  To its great credit, the piece also extended its analysis to the realities of exorbitant fuel prices and the senselessly cheap rates which came about as a result of the low-cost carrier boom-rates that few, if any, airlines can afford to sustain in today's economic environment.  This is good to keep in focus, especially during a time where the media appears saturated with apocalyptic pronouncements concerning U.S. aviation and the doomed place of the
consumer.  This unfortunate reality is no doubt why Richard Anderson and Doug Steenland, CEOs of Delta Air Lines and Northwest Airlines, felt compelled to rebuke six myths concerning airline mergers in the pages of The Wall Street Journal last week.

Obviously, it is nothing new to see sensationalist reporting overtaking critical analysis, due reflection, and the publication of reliable, cogently reasoned, results.  The latter, of course, takes time; the former rides a wave of understandable public concern, amplifying it back tenfold so that the final result is the perception of an industry animated by unbridled greed and mindless inefficiency.  That these two characteristics are, in fact, contradictory is passed by on the rush to pound another nail in the
casket of aviation's public image.

There are two very damaging, intertwined, prospects which may well appear in reality should this media-fueled tarring n' feathering of the airline industry continue.  The first is that the public eye will be further diverted from the issue of foreign investment restrictions-restrictionswhich are arguably crippling the U.S. airline industry by not allowing it to find new sources of investment capital.  The second is that a new movement to reregulate the airline industry will be encouraged despite the fact that one of the last vestiges of economic regulation-strict caps on foreign investment and control-lies at the heart of current airline woes.  Without the removal of these restrictions, U.S. airlines will still be constrained in the route options they offer to customers and, therefore, less likely to find themselves in a position to offer reduced air fares. Further, without foreign carriers having the option to compete in the U.S. market, choices for consumers will remain limited-perhaps increasingly so given the rising number of airline collapses.  It would be a dark irony indeed if the outcry against increasing airline prices, reduced routes, and sub-par service overshadowed the very thing which above all else could rectify them.

More Mergers?

Yesterday’s big announcement of a Delta/Northwest Airlines merger has already sparked industry observers to start speculating that more will be on the horizon.  According to a piece in today’s New York Times, yesterday’s announced merger “is likely to spur other carriers to go after the cost savings and global brand recognition required to survive amid soaring fuel prices and a weak U.S. economy.”  Currently, most speculation revolves around a potential merger of United Airlines with Continental.  However, other possibilities, such as a Continental and the Alaska Air Group should not be discounted.  While future merger talks seem likely at this point, John Pincavage, an airline financial advisor, told the Chicago Tribune that “[i]t’s a dangerous time to be making mergers when you're heavily dependent on exogenous variables over which you have no control [e.g., fuel prices] . . . . Make the wrong moves and you could be building a bigger Titanic.”

Not everyone is entirely pleased about the merger, of course.  Aside from the reports of labor disputes, some critics are wondering if the Delta/Northwest merger will translate into fewer choices and higher prices.  Yet, amidst the criticisms, there is a paucity of suggested alternatives.  Industry watchdogs and consumer groups want frequent, affordable, high-quality air service while simultaneously knocking the industry as a whole for being unprofitable.  On the other end of the spectrum, investors see the move towards consolidation as a necessary step in a volatile aviation marketplace.  Even if consolidation means fewer planes overall or the elimination of unprofitable routes, observers point out that the Delta/Northwest deal combines Delta’s strong Atlantic routes with Northwest’s Pacific network.  The outcome could be a more streamlined global service for consumers.  Additionally, both carriers’ relationship with Air France-KLM also opens up further possibilities for travelers.  While it is no doubt true that mergers can have adverse consequences for consumers, a “Gloom n’ Doom” scenario is not the only one available.

Surprisingly, one critical fact missing from most of the media discussion over airline mergers is the restriction on foreign ownership of U.S. carriers.  With the second stage of “Open Skies” talks between the U.S. and European Union set to begin in a month, it is important to take notice of the fact that the current environment for airlines in the U.S. practically begs for the removal of those restrictions.  As is evident from the news reporting itself, U.S. carriers are faced with a very limited number of options when it comes to mergers or even generating fresh capital.  Having access to the deep pockets of potential European investors could give them the protection they need to weather the storm of an economic downturn.  With EU Member States already announcing that they would cancel rights under the first “Open Skies” agreement should foreign investment restrictions not be eased, U.S. airlines may have some real hope of getting access to foreign capital.  Whether or not that access comes quickly enough is still an open question.  With more low cost carriers now staring at bankrutpcy or worse, even the smoothest talks may not be able to reach, sign, and execute an agreement before more fall by the wayside.

The American Fallout

American Airlines announced today that it was canceling nearly 600 more flights on Friday due to delays in checking and repairing their fleet of MD-80 aircraft.  Standard & Poor's has come forward to project that the costs associated with the groundings, cancellations, and rebookings will exceed $30 million.  Additionally, S&P stated that the cancellations are likely to impact any decision on the part of the airline to raise its rates to offset rising fuel costs.

Not surprisingly, the media has jumped on the bandwagon of airline bashing in the wake of American's problems.  For example, the business news outlet CNBC ran a video report suggesting that airlines in the United States should be nationalized.  The report, "Time to Deregulate [sic] the Airlines?," featured CNBC anchoress Erin Burnett conflating issues as diverse and complicated as airline service, safety, infrastructural constraints, and business losses into a pseudo-argument for radical, government-mandated, changes to the industry.  On the opposite end were aviation reporters Matthew Wald of the New York Times and CNBC's own Phil LeBeau.  Both made strong cases for the clear benefits of deregulation and pointed out the detrimental impact a nationalized airline industry would have on the U.S. economy.

While Burnett's "reporting" was inexcusable for its flagrant disregard of setting forth the issues in a coherent manner, her attitude bespeaks a larger problem that concerns the public's perception of the airline industry.  Too often, in the face of manifest problems, there is a call for government to step in and manacle the airlines.  What is overlooked is the fact that many of these complications are not the result of some cavalier attitude on the part of airlines, but rather linked to a series of complex problems with infrastructure itself.  So long as the U.S. continues to manage its air traffic with an antiquated air traffic control system, issues involving long delays, cancellations, and inefficient flights will not be rectified.  On the safety end, an FAA that decides to run hot and cold on oversight will
almost invariably have a severe impact on the grounding of airplanes each time it decides a "crack down" is due in order to save its public image.

An editorial from yesterday's New York Times put it best: "If there can be any good news in hundreds of thousands of passengers being stranded as airlines ground fleets of planes for urgent inspection, it is that the Federal Aviation Administration is doing its job.  Unfortunately, it is trying to make up for years of not doing its job in keeping them safe, and travelers are the victims."  Even more unfortunate is that those victims, understandably irate as they are, seem more inclined to blame the airlines
rather than the government.  With the fervor over passenger rights still running high, it is not unforeseeable that these problems will add up to swift legislative action.  The looming question remains whether such legislation will be rationally drawn and built into a larger package of reforms to improve infrastructure and oversight, or whether it will merely be an empty showing of government paternalism over its petulant child, the aviation industry.  If the latter proves true, it could have devastating effects for an already beleaguered industry whose existence and sustainability are critical for America's economic wellbeing.

From the News

American Airlines announced today that it was canceling 933 more flights in order to inspect and repair wiring on its MD-80 aircraft.  This most recent news brings American's total canceled flights to over 2,500 since Tuesday when this internal crisis began.  American is hopeful that it will be able to return to business as usual come Sunday, though that could certainly change.  One positive sign is that the flight reductions themselves have started to decrease and over a third of American's MD-80 fleet has been returned to active service.  American's safety difficulties appear to be rooted in the FAA's recent oversight crackdown.  As readers of the blog will no doubt recall, the FAA has been under intense public and political scrutiny since it was accused of laxity in its inspections of Southwest Airlines' fleet.  In addition to American, Delta, Alaska, and Midway Airlines have also been compelled to ground portions of their fleet in response to FAA safety demands.  While there is no word yet on what the economic impact will be from all of these groundings, Gerald Arpey, American's CEO, stated that the groundings will cost the airline tens of millions of dollars.

On the passenger rights front, a breaking news report indicates that federal passenger rights legislation-now the only hope for airline consumer groups following the Second Circuit's decision in ATAA v. Cuomo-looks to be going forward.  The current FAA reauthorization bill, which has sat lifeless on the dockets of the House and Senate for months, contains marching orders for airlines whose aircraft are left out on the tarmac for three or more hours.  In addition to requiring provisions for adequate food, water, and working toilets, the proposed legislation would also allow passengers to request a return to the terminal if the plane has sat at the tarmac for at least three hours and the captain determines there is no imminent sign of departure.  It now appears that the federal passenger rights act will be removed from the reauthorization bill and reattached to moving legislation.

Finally, on the analysis front, the Wall Street Journal's Scott McCartney has an intriguing piece on the supposedly new airline attitude toward customers of out-of-business carriers: "It's your loss, not ours."  Citing the fact that Congress allowed protections for airline customers expire in 2006, McCartney stated that consumers should no longer expect other carriers to honor their tickets.  Consumers should therefore be wary about purchasing tickets on struggling carriers; unless they have a code-share relationship with one of the more stable airlines, options for rebooking will remain slim.  As a further point of interest, McCartney supplied a "Carriers to Watch Closely" list which included Frontier Airlines, ExpressJet, Sun Country, and Italy's version of the "living dead," Alitalia.

Black Wednesday for Two Airlines

Wednesday proved to be a dark day for airlines on both sides of the Atlantic. In the United States, low-cost carrier ATA Airlines filed for bankruptcy after losing a key contract for its military charter business. "Unfortunately, the cancellation of a critical agreement for our military charter business undermined ATA’s plans to address the current conditions facing all scheduled service airlines, including the tremendous spike in the price of jet fuel in recent months," explained ATA CEO Doug Yakola. ATA has halted all service, informing passengers that it would not honor any standing tickets or reservations. Carrying an average of 10,000 passengers each day, ATA’s cancellation of services is likely to cause some chaos as passengers scramble to make last minute adjustments. ATA’s financial woes also come as a blow to the beleaguered Southwest Airlines with which ATA had a code-sharing arrangement. Southwest has committed itself to giving booking priority to any passengers scheduled to fly within 14 days through their previous arrangement with ATA. Coincidentally enough, this news comes just as Congress begins hearings to investigate the FAA and its apparently cozy relationship with Southwest. Some have argued that this relationship led to undue endangerment of passengers flying on Southwest Airlines due to lax safety inspections.

In Europe, Italy’s Alitalia may have had the proverbial stake driven through its heart. After years of being the industry’s Nosferatu, perpetually rising from the dead, Alitalia’s hopes for a new source of financial lifeblood from Air France-KLM may be extinguished. Late last night, Air France-KLM announced that it was rescinding its offer after Alitalia’s union made proposals which "would involve retaining a number of activities generating large scale losses within the Alitalia group," said Air France-KLM in a prepared statement. The deal, valued at an estimated $1.15 billion, would have given the struggling Italian airline a new lease on life after seeing its operating capital quickly diminish over the last couple of months. While some analysts believe that the deal is officially dead, Alitalia’s unions are still holding out hope that a new agreement may be reached. However, even if the union problem is taken care of, Air France-KLM’s bid still hangs on the outcome of Italy’s upcoming elections. Should Silvio Berlusconi return to power as prime minister, he is expected to block the deal on chauvinistic grounds that Italy’s flag carrier should not fall into the hands of foreigners. A recent government tax break and the selling of its Air France-KLM shares have allowed Alitalia to survive for now. In the meantime, the board of directors has called an emergency meeting to decide what its next move should be in the face of what the airline can only consider to be a disaster.

Open Skies - Ready to Launch

News agencies all over the world are reporting on the historic U.S./EU Air Transport Agreement, dubbed "Open Skies," which goes into effect this Sunday.  Under the Agreement, the old restrictions on which airlines have access to the lucrative transatlantic route between the United States and Europe have been abolished.  Many commentators are hopeful that the Agreement will bring about greater choice for consumers and result in lower airline costs.  However, as the BBC News has correctly reported, the current cost of fuel is likely to offset these anticipated price reductions.  What the BBC failed to get right-and what should be made perfectly clear-is that the Agreement still maintains the old strictures on foreign investment.  Contrary to the BBC's claim that U.S. airlines will be able to buy up to 49% shares in their European rivals while foreign investment in U.S. airlines is capped at 25%, the Agreement provides that European investors can acquire 49% equity stock in U.S. carrier with the possibility of gaining more, subject to Department of Transportation approval.  The 25% limit applies only to voting stock.  Under the Agreement, the EU is permitted to impose a reciprocal 25% voting stock on U.S. investment-a much tighter cap than what existed prior to the Agreement.

News agencies have also picked up on the fact that a "second stage" of negotiations between the U.S. and EU is set to begin on May 15.  One of the key issues for those talks will be opening up foreign investment.  Jacques Barrot, the EU Transport Commissioner, has already vowed to suspend rights under the current Agreement if a satisfactory outcome on the matter is not reached by 2010.  According to Barrot, the next stage of negotiations "will aim to achieve full liberalisation in traffic rights, new possibilities for investments by European companies in the United States and for U.S. companies in Europe, measuring the effect on the environment and constraints on exercising traffic rights, access to transport programs financed by the U.S. government, and leasing aircrafts with crew."

As readers of the blog may recall, the International Aviation Law Institute, in cooperation with the International Institute of Air and Space Law at Leiden University, convened an experts' Working Group in Dublin, Ireland last November to begin discussing the "second stage" issues.  This fall, the Institute will provide a full treatment of the evolution, implications, and future of the new U.S./EU open skies agreement in Professor Brian Havel's new book, Beyond Open Skies.

Safety Issues

American Airlines announced today that it has grounded two-thirds of its MD-80 fleet, prompting 171 of its 2,200 daily flights to be canceled. Concerns over the connection of wiring within the aircraft spurred American to action. American Airlines is hopeful that the inspections, which only take a matter of hours, will be prompt and allow them to put the MD-80’s back into service. In an official statement, American noted that a Federal Aviation Administration audit led to concerns over the wiring. However, the decision to ground the planes was American's. This matter comes on the heels of public backlash against the FAA for lax inspections of Southwest Airline’s fleet. While that incident ultimately led to FAA issuing a stiff $10.2 million fine against Southwest, a Congressional investigation of the incident and the FAA’s handling of the situation is still on the horizon.

In addition to the current American Airlines situation, the FAA has also ordered the inspection of hundreds of Boeing 737 aircraft after concerns that a faulty bolt may be causing fuel leaks. The order includes both older and newer models of the aircraft, though at this time no action has been taken to ground any of the aircraft under inspection. Airlines have ninety days following the order’s effective date of April 8 to complete the inspections. While the FAA only has direct authority over U.S. airlines, it is likely that the order will be followed in other countries whose airlines utilize the Boeing 737.

Second Circuit to the Rescue

As expected, the Second Circuit Court of Appeals struck down New York State's Airline Passenger Bill of Rights Act.  In a unanimous decision, the court found the act expressly preempted by the Airline Deregulation Act of 1978.  Also of concern to the court was the potential of giving free reign to state regulation of the airline industry.  "If New York's view regarding the scope of regularity authority carried the day," so the court observed, "another state could be free to enact a law prohibiting the service of soda on flights departing from its airports, while another could require allergen-free food options on all outbound flights, unraveling the centralized federal framework for air travel."  The court was not unsympathetic to the aims of the New York statute: "Although the goals of the [statute] are laudable and circumstances motivating its enactment deplorable, only the federal government has the authority to enact such a law."

It remains to be seen what the next course of action may be on the part of New York State or consumer advocacy groups.  News outlets are already reporting that New York State attorney Andrew M. Cuomo is contemplating an appeal to the Supreme Court.  So far there is no word on what, if any, action federal legislators may attempt to take.

Netherlands Court Upholds Ticket Tax

Readers of the Aviation Law Blog may recall Frans Vreede’s guest post from February 5 on the Dutch Ticket Tax. In that post, Mr. Vreede set down an argument against the Netherlands’ imposition of a $67 per ticket tax on all departures bound for outside the territory of the European Union ($17 for those within). As Mr. Vreede’s post made clear, the tax may be in violation of Article 15 of the Chicago Convention and may also run afoul of the U.S./EU Air Transport Agreement. Despite this, a Dutch court in the Hague has rejected claims of the tax’s illegality.

Led by the Amsterdam airport Schiphol Group, the challenge to the new ticket tax fell to a narrow reading by the court. On a first sight reading of the case, the judge took Article 15’s omission of the word "tax" from the list of impermissible charges to be indicative of its inapplicability. The court failed to consider the purpose behind the article itself, i.e., as a prohibition to setting charges which have no relationship to the use of airports or their facilities. While the court’s decision marks an obvious setback for civil aviation in the Netherlands, an appeal to the country’s Supreme Court to review the decision’s merits is likely.

News on Open Skies

With the U.S./EU Air Transport Agreement (dubbed "Open Skies") set to come into effect in just under two weeks, rumblings of dissent and concerns over the Agreement's impact are already occurring.  According to an article which appeared in yesterday's edition of The Guardian, the International Air Transport Association's Chief Executive Giovanni Bisignani is claiming that continued government shielding of its flag carriers is "killing the aviation industry."  Bisignani specifically singled out the Open Skies Agreement as falling short of expectations given the foreign control restrictions it left in place.  He has even gone so far as to accuse Jeffrey Shane, U.S. Under Secretary of Transportation Policy, of being a "protectionist" due to the maintenance of the foreign investment caps under Open Skies.  This hostility towards U.S. policy is more than mere rhetoric.  As the article rightly points out, EU Member States may suspend rights under the Open Skies Agreement should the next stage of negotiations fail to yield satisfactory results.  While any suspension of rights is not likely to come into effect until 2012, the very possibility that EU Member States may ground flights from U.S. carriers undoubtedly adds a layer of necessity for both sides to reach a workable solution to the foreign investment problem.

With respect to the impact of Open Skies, both the European Commission and the U.S. Department of Transportation announced that it will launch a joint research project to examine transatlantic airline alliances.  Under the alliance system, carriers agree not to compete against each other on the same routes and also engage in code sharing.  This system of alliances, while unstable at times, has become a necessity for airlines in an era still plagued by restrictions on full-fledged mergers.  The future of these alliance networks will be a subject of great interest given the fact that Open Skies will undo current restrictions on the transatlantic route between the U.S. and EU, thus inviting further competition.

As for the transatlantic route itself, the Wall Street Journal is reporting that both United Airlines and American Airlines have responded by offering new services between the U.S. and London's Heathrow Airport.  United is offering a package deal on its new Denver to London Heathrow service while American has opted to pull its flights from Gatwick Airport and reroute them into Heathrow.  Still, passengers shouldn't get too excited about the possibility of further direct flights into Heathrow.  With the very slots available commanding high prices and government-imposed traffic caps, it remains unlikely that any but the largest carriers will be able to take full advantage of Open Skies' opportunities at Europe's busiest airport.

More on Passenger Rights

For those who have kept tabs on the bountiful supply of airline passenger rights legislation over the years, it should come as little surprise that these proposals can be linked to highly publicized debacles involving a minute number of aircraft being stranded for an outrageous period of time. Consider the "textbook case" of Northwest Airlines' stranding of a plane full of passengers for eight hours without food, water, or working toilets in 1999. That notorious incident gave rise to two federal bills: The Airline Passenger Bill of Rights Act of 1999 and the Airline Passenger Fairness Act of 2000. Calling for a wide-range of reforms, including compensating passengers left on the tarmac for more than two hours, the legislation was ultimately set aside in the face of the industry's attempt to self-regulate through the so-called "Customers First" commitment. Inevitably, more delays occurred and when they did, the media were front and center to "inform" the public how "insincere" the airlines really are when it comes to their customers.

As discussed on this blog yesterday, the airlines are now in a heated legal battle over New York's choice to circumvent the federal government's regulatory authority and enact its own passenger rights law. Should the airlines prove unsuccessful in their appeal of a lower court ruling which upheld the law (an unlikely, though not impossible, result), they will soon find themselves confronting a plethora of enactments across the United States with varying standards and penalties. While there is always the hope that cooler heads will prevail and a more coherent framework will be designed to meaningfully address the infrastructural problems which are at the heart of most delays, more public outcry fueled by media reporting may cut such efforts short.

Last week, American Airlines left seventeen aircraft on the tarmac for four hours or more at Dallas/Forth Worth International Airport. Back in January 2007, American had announced that it would abide by a new internal policy not to leave aircraft stranded on the tarmac for more than four hours. According to the consumer advocacy group The Coalition for an Airline Passengers Bill of Rights (CAPBOR), the incident last week was the sixteenth individual incident involving over seventy aircraft left stranded by American for four hours or more. American had initially adopted the rule in response to its stranding of 121 flights on December 29, 2006. The latest series of strandings at Dallas/Fort Worth prompted CAPBOR to decry any voluntary plan by the airlines to deal with delays as "a recipe for disaster," with American's plan in particular amounting to "nothing more than a PR strategy designed to fool the public and convince the government that mandatory guidelines are unnecessary."

In its defense, American Airlines issued an apology to all passengers involved and offered $500 travel vouchers good towards any future flight on the airline. The airline also noted that severe weather conditions had prompted the delays and that one of its jets had narrowly avoided catastrophe after slush and ice had been sucked into its engine. It remains to be seen what sort of mileage consumer groups such as CAPBOR will be able to get out last week's delays on their route towards more government involvement in the airline industry.