Monday, July 28, 2008
Over the past several months, the Aviation Law Blog has provided commentary on the ongoing legal battle over the so-called "environmental tax" the Dutch government has imposed on all flights departing the Netherlands. By imposing a €11.25 fee (€45 for those outside Europe), the Netherlands claims it can help offset the effects of aviation on the environment. The key problem with this line of reasoning is that nothing in the legislation establishing the tax specifies where the money it generates goes or how it will be used. And while the government may claim publicly that the €350 million a year the tax is expected to raise is meant to compel travelers to have a nice, long ponder over the environmental costs of flying, it doesn’t alter the fact that the tax itself is likely illegal. As Frans Vreede, a partner in the Dutch law firm of Boekel De Nerée, argued in a guest post on this blog, the tax appears to violate Article 15 of the Chicago Convention and may, in fact, be contrary to the principles set forth in the 2007 U.S./EU Air Transport Agreement. Despite this, the tax has survived two court challenges, being most recently upheld by the Dutch Court of Appeals in The Hague.
The economic impact of the tax could be devastating. The Netherlands’ Schiphol Airport expects a halt to its growth to result from the tax and will prevent the creation of as many as 10,000 jobs. There are further worries that the volume of departing passengers will experience an overall decline for the remainder of 2008. In fact, a recent report sponsored by the Dutch government believes the tax will adversely impact Schiphol’s competitiveness with airports in neighboring EU countries. Airlines as well are expected to feel the brunt. Air France-KLM is expecting as large a drop as a million Dutch passengers while the low-cost carrier EastJet anticipates a 15% reduction. In light of the problems the tax is expected to cause, it is not surprising that the European Low Fares Airline Association has strongly condemned the tax, noting the bitter irony that low-cost carriers—arguably the most environmentally efficient in the EU—are poised to be the hardest hit by the new charges.
If the legal and economic problems presented by the tax aren’t enough to call it into question, there is also the practical reality that, in the words of International Transportation Association President Giovanni Bisignani, "[t]axes don’t reduce emissions[,] [o]nly better operations and technology…do." One has to be suspicious then of such a hefty imposition which is expected to send many millions of euros into the national treasury rather than being earmarked for investment in clean technologies or improving airport infrastructure. Regardless of the final outcome of the continuing legal battle over the tax, at some point the adverse effects of this tax (coupled with its embedded irrationalities) will catch up to it. By that time, aviation in the Netherlands may have suffered irreparable harm, consumers’ pocketbooks will have been needlessly stretched, and Mother Earth, the purported recipient of this allegedly beneficent charge, won’t be breathing any easier.
Friday, July 25, 2008
Next week, Michael Levine, former General Director of International and Domestic Aviation at the now-defunct Civil Aeronautics Board, and now a senior researcher and lecturer at NYU School of Law, will address the International Aviation Club in Washington, D.C. on the topic of reregulating the airline industry. Responding in part to former American Airlines Chairman Robert Crandall's recent speech (and subsequent open letter) calling for the government to step-in and "save" U.S. aviation, Levine will argue that the industry will have to adapt to the challenges facing it and that "reregulation will simply postpone the inevitable adjustment and [be] a prescription for waste." As Levine has already gone on to state, "Reregulation wouldn't affect the price of oil or the fragility of the economy. Those fundamentals will take time, perhaps a lot of time, to fix. The industry needs to adapt to these realities and to adapt, it will need the kind of innovation and flexibility that regulation is designed to impede."
In addition to his arguments against reregulation, it is interesting to note that Levine has long been skeptical that such measures are even politically feasible. In his extended essay, "Why Weren't the Airlines Reregulated?," 23 Yale Law Journal 269 (2005), Levine pointed out that the lower fares and increased services the industry has provided since deregulation, when combined with the general lack of unanimity brought on by multifaceted interests and competitive strategies, has neutralized the political will to see reregulation made a reality. Of course, some might argue that when Levine penned the piece back in 2005, he couldn't have foreseen the current crisis. Maybe so. He's not Nostradamus. On the other hand, it doesn't take a crystal ball to see that the airline industry will experience its fair share of peaks and valleys. Following a general surge during the 1980's, the airlines lost an estimated $15 billion between 1991 and 1993 before returning to profitability during most the 90's. Following 9/11, a staggering $25 billion in losses were recorded and yet again the industry weathered the storm and continued to provide an invaluable contribution to the world economy.
Up until the recent surge of European Union efforts to broaden its liberalization agreements with countries around the world, the U.S. and its model of deregulation had been a beacon of real progress in the industry. While we may be experiencing a sea change away from the "Open Skies" approach the U.S. launched in the mid-1990's towards multilateral arrangements, it must be remembered that "Open Skies" marked the first significant step away from the restrictive bilateral system which dominated international civil aviation for over fifty years. Without deregulation and the cultivation of its benefits, the U.S. could never have taken the steps it did to help foster a truly liberalized global airline industry. Last year's Air Transport Agreement with the EU-the ultimate efficacy of which still rides on the prospect that the U.S. is amenable to opening its skies and markets further with the EU-will be nothing short of a wasted effort should U.S. aviation find itself suffocated by new layers of regulation. Its airlines will have to concede competitiveness and profitability worldwide for the dubious security domestic protectionism might afford them. And the U.S. consumers? It will be an uncomfortable and expensive ride for a while, but not nearly as uncomfortable and expensive as a new era of government regulation would likely be.
Friday, July 18, 2008
Last November, the European Commission issued a proposal to revise its decades-old "Code of Conduct" for Computerized Reservation Systems (CRS). When the Commission began its work on revising the CRS code back in 2002, some speculated that full liberalization of the CRS market was on the horizon. These hopes (or, for some stakeholders, fears) were dashed once the Commission’s proposal appeared. Responding to concerns that the old CRS code led to market distortions, specifically with regard to the limits placed on the CRS providers themselves to freely negotiate services and fees with individual airlines, the new proposal would finally allow real competition by removing these archaic strictures. At the same time, however, the so-called "safeguards" which mandate that airlines which own or control a CRS share the same information with competing CRS systems as they use with their own and that neutral information is provided to travel agents and consumers is maintained in the proposal. While this is certainly not the first time consumer interests have set the tone for EU legislation, this may very well be another instance of maintaining regulation where none is needed. After all, the Untied States let its CRS code go the way of the dodo in 2004 and since that time has seen a 20-30% drop in booking fees. The effect has been to reduce costs to U.S. airlines, making them more competitive in this respect than their EU counterparts. Similarly, CRSs whose business deals with the airlines tend to be worldwide can offer competitive pricing for U.S. market bookings which, up until now, remains restricted in the EU. Perhaps some of this will be redressed should the CRS proposal go into effect, but why risk hampering the EU aviation market at all when the US experience tells a different story?
There is no easy or, rather, clear answer to that question. In a consultation paper produced prior to the CRS proposal, the European Commission recognized substantial changes to the CRS market which, arguably, lifted any perceived need for continued regulation. The most substantial change, of course, is the fact that CRSs, particularly the "big four" (Amadeus, Galileo, Worldspan, and Sabre) are no longer owned and controlled by the airlines. Only Amadeus still has significant airline investment from KLM/Air France, Iberia, and Lufthansa. If the original CRS code was intended to stop the once carrier-controlled industry from using CRS displays to give preferential treatment, should not this sea change be a sign that the rules are no longer necessary? Apparently not for the Commission. Concern that Amadeus or even other CRSs with minor amounts of airline investment can still harm the consumer appear to have won out despite the lack of clear evidence that this is even still a substantial risk. More confusingly, the Commission opted not to follow the suggestion of some stakeholders that a "sunset clause" be placed into the CRS code where it would finally expire once all airlines have fully divested from the CRS market.
Also inexplicably bypassed by the Commission is the reality that alternative booking channels have grown exponentially since the arrival of the original code in 1989. According to the Commission’s own findings, the Internet, when combined with airline office sales and call centers, accounts for 40% of all airline ticket sales in the EU. The rise of the low-cost carriers in the EU have depended heavily on direct sales as a means of keeping their costs down and reaching out directly to consumers who might otherwise frequent the longstanding flagship carriers. CRSs are thus no longer "the only game in town"; the competitive pressure now placed on them from alternative booking channels is substantial. Why, then, keep their hands tied with regulations? If a free and open aviation market is desirable (and certainly no one can deny this has been EU policy for over a decade now), then so too should be a free and open CRS market. The Commission’s attempt to excuse itself from taking these market developments into account on the grounds that Internet penetration remains low in some areas of the EU may be relevant, but not for long. Given that Europe as a whole has experienced 263.5% usage growth since 2000 and shows no signs of slowing down, an argument which hinges on Internet access rates has its own "sunset clause" attached to it.