Aviation Law Prof Blog

Needful Distinctions

At the conclusion of his recently published tract, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (Harvard Univ. Press, 2009), Judge Richard Posner identifies the present depression as "the product of a financial crisis that resulted from the confluence of two dangerous developments: low interest rates in the early 2000s and the deregulation movement, which began in the 1970s," id. at 315.  On the latter development, it would seem that Judge Posner is repeating a certain prejudice which has captured part of the present political imagination: deregulation is intrinsically bad (if not evil) and thus to blame for the U.S.'s (if not the world's) present economic woes.  However, 200 pages earlier in the book, Posner offers an important observation which lends credence to the view that it is not deregulation per se which is blameworthy, but a failure of some to make the necessary distinctions between the industries and sectors which have been subject to a rollback in regulatory oversight:

The roots of the failure [for government to prevent the economic crisis through stronger regulatory oversight of the financial sector] lay in a widespread dissatisfaction, beginning in the 1970s,with public-utility and common-carrier regulation, and other forms of economic regulation as well, including the regulation of banking and investment.  The economists who inspired the deregulation movement were not macroeconomists and did not differentiate between banking and other regulated industries, such as railroads and airlines.  They were not alert to the macroeconomic implications of competition in banking; and macroeconomists . . . thought that the problem of depressions had been solved.

Id. at 115.

Without entering the present fray over the extent to which financial institutions such as banks ought to be reregulated, it is worth reiterating that a commitment to a liberal, free market approach to the transnational air transport industry is not foreclosed by present (and hopefully passing) economic conditions.  Such an approach, as demonstrated by the airline deregulation movements of the U.S. in the 1970s and the European Community in the 1990s, has resulted in cheaper fares, more services, new route networks, and innovative consumer benefits programs.  It has also, as the airlines' cultured despisers are quick to point out, brought on a plethora of bankruptcies, a sharp reduction in onboard amenities, and concerns over apparent market dominance by a shrinking number of carriers.  The debate which began raging shortly after the U.S. industry was deregulated--and which has never subsided--is the extent to which deregulation itself led to these outcomes.  See, e.g., Airline Deregulation: The Early Experience (John R. Meyer et al. eds., Auburn House Pub. Co., 1981); Barbara S. Peterson & James Glab, Rapid Descent: Deregulation and the Shakeout in the Airlines (Simon & Schuster, 1994).  The absence of regulatory strictures are not to blame for bad business models.  To quote Posner again (though this statement will no doubt be obvious to those who follow the airline industry): "[A]irlines are constantly teetering on the edge of bankruptcy because of their very high fixed costs--costs that by definition do not fall when output falls."  Posner, supra, at 160 (parentheses eliminated).  In a volatile operating environment such as the one carriers have been forced to contend with since at least 2007, staying alive is about all the airlines can do until better times appear.

Yet for all of the criticisms heaped on the industry, few seem to realize (or want to realize) that deregulation for the airlines has been an interrupted process which continues to verge on reversal.  Civil aviation remains one of the most heavily regulated industries in the world.  It has never had the freedom to become a truly globalized industry.  Instead, it has remained subject to an international regulatory system organized around the nationalist notion of the flag carrier and subject to strict limits on national ownership and control.  In the U.S., legislative proposals such as those contained in the 2009 FAA Reauthorization Act would raise new, xenophobic restrictions on foreign participation in the business operations of American carriers while undermining the survival of international airline alliances--the industry's ingenious answer to foreign ownership caps.  Even if it is possible to rightly decry the "anarchy" brought on by the deregulation of certain industries or markets, there's simply no way to do so consistently or honestly with respect to civil aviation.  Civil aviation's time, in the view of lawmakers, has not come. In the wake of the great financial meltdown of 2008, it is difficult to see when it will come.  That does not mean it isn't worth agitating for.  To do so successfully calls for making distinctions which, upon sober reflection, appear quite obvious and yet are oftentimes clouded by the fallout of economic collapse and the proverbial steam emitting from the ears of indignant politicians.

Update From the Institute

With a number of projects coming to a close as the academic term ends at the DePaul University College of Law, the International Aviation Law Institute has had precious little time for blogging.  Rest assured, however, that regular postings will resume this week.  In the meantime, readers of the blog may wish to visit their local bookstore and purchase a copy of Judge Richard Posner's A Crisis of Capitalism: The Crisis of '08 and the Descent into Depression (Harvard Univ. Press, 2009).  Judge Posner will launch a new blog atThe Atlantic, The Posner Economic Crisis Blog, to keep his work updated.  For those who have (or plan to) purchase a copy of Prof. Brian Havel's Beyond Open Skies: A New Regime for International Aviation (Kluwer Law International, 2009), you will note from the book's Preface that the Aviation Law Prof Blog serves a comparable, but more expansive, function.  

European Commission Investigates Star, oneworld

The European Commission announced yesterday that it has opened formal proceedings against members of the Star and oneworld airline alliances.  According to its public statement, "the Commission is assessing whether [the members'] joint activities" related to "managing schedules, capacity, pricing, and revenue management on transatlantic routes, as well as share revenues and sell tickets on these routes without preference between the carriers" could restrict competition.  The Commission noted that it would take the consumer benefits conferred by these alliances into account during its investigation and that the investigation itself does not imply that the Commission has any conclusive proof that these cooperative arrangements have infringed EC competition law.

According to various news reports, the airlines appear to be taking the investigatory notice in stride.  In a statement to Air Transport World, oneworld Vice President for Communications Michael Blunt said the investigation "is no surprise" and that "[i]t is the normal European process for addressing any agreement of this kind."  Another story in the Wall Street Journal contained a similar sentiment from British Airways, which remarked that the investigation "is a normal part of the EU process of examining [its] immunity application with American Airlines and Iberia."  American Airlines was also reported as calling the investigation "routine."  Continental Airlines, which recently won tenative approval from the U.S. Department of Transportation to join the Star Alliance (discussed on the blog here), expressed "confiden[ce] that the European Commission will reach a similar conclusion" regarding its cooperative arrangement with Star members United, Air Canada, and Lufthansa. 

The Commission's attitude toward international airline alliances has softened over the years.  Since its 1996 announcement that it would open procedures to investigate six of the then-extant transatlantic cooperative agreements, the Commission has taken a "broadly positive approach to airline alliances to allow [EU] carriers to compete effectively on a global level."  There is no immediate reason to believe this is no longer the case.  Given the EU's concern over the recent U.S. legislative proposal which could end antitrust immunity for airline alliances, it seems unlikely that the Commission would try and undermine its position by needlessly tightening the strictures on these alliances. 

Levine Link and Recommendation

Several weeks ago, the blog mentioned a new article by Professor Michael E. Levine, Airport Congestion: When Theory Meets Reality, 26 Yale J. on Reg. 37 (2009).  Those interested in reading the article can access it through SSRN here. 

Readers of the blog who have followed Levine's pioneering work on airline deregulation should be interested in his scholarly essay, Why Weren't the Airlines Reregulated?, Yale J. on Reg. 269 (2005), which is also part of an extremely informative anthology published by the Brookings Institution, Creating Competitive Markets: The Politics of Regulatory Reform (Marc K. Landy et al. eds., 2007).  Creating Competitive Markets presents itself as a "cautionary tale" about the application of economic theory to specific sectors in the markets and the sometimes harsh outcomes following deregulation.  Essays in the volume also draw attention to what the work's editors call the "redeployment" of government controls following deregulation.  Readers may also find Edward Iacobucii et al.'s chapter, The Political Economy of Deregulation in Canada, with its critical analysis of the oft-neglected topic of Canadian airline deregulation to be particularly illuminating.  More information on the volume, along with a sample chapter, is available from the Brookings Institution here.

On the DOT's Tentative Approval for Continental to Join Star

Last week the U.S. Department of Transportation issued a Show Cause Order for the Star Alliance's Joint Application for a grant of authority and antitrust immunity for Continental to be added to the alliance.  See Dkt. No. OST-2008-0234, Order 2009-4-5 (Apr. 7, 2009) [hereinafter Continental Order].  The order, which was issued against the backdrop of Rep. James Oberstar's proposal to sunset all antitrust immunity for international alliances, defies the predictions of some industry analysts that the legislative proposal itself would have a chilling effect on any further grants of immunity.  Not surprisingly, the DOT opted not to address any political concerns with its order and instead focused on applying its standard alliance approval and immunization jurisprudence to the proposal.

The statutory basis of this jurisprudence is found in the 1979 International Air Transportation Competition Act which allows crossborder intercarrier agreements such as alliances to be filed before the DOT for approval and antitrust immunity.  See 49 U.S.C. §§ 41308-09.  Under the statute, the DOT shall approve such agreements so long as they are "not adverse to the public interest."  § 41309(b).  Applying the standard Clayton Act test, however, the DOT "shall disapprove . . . an agreement . . . that substantially reduces or eliminates competition," § 41309(b)(1), unless "the agreement . . . is necessary to meet a serious transportation need or to achieve important public benefits (including international comity and foreign policy considerations)," § 41309(b)(1)(A).  The DOT must also apply the so-called Bank Merger Act escape clause to find that "the transportation need cannot be met or those benefits cannot be achieved by reasonably available alternatives that are materially less anticompetitive."  § 41309(b)(1)(B).  Only after winning DOT approval can an agreement receive antitrust immunity "to the extent necessary to allow [the applicants] to proceed with the transaction specifically approved . . . and with any transaction necessarily contemplated by the [approval] order" if the DOT "decides it is required by the public interest."  See § 41308(b).  While there are two "public interest" tests bundled in the DOT's alliance approval and immunization jurisprudence, the DOT "has always recognized that the public interest standard [for antitrust immunity] is a much more stringent standard than [the alliance approval] public interest standard."  See Continental Order, supra, at 18 (internal quotation marks ommitted).

With respect to its tentative order authorizing Continental to join the Star Alliance with full antitrust immunity, the DOT found that the addition of Continental to the alliance was not likely to substantially reduce competition "provided that transatlantic markets remain governed by a regional open-skies agreement that promotes new entry regardless of national borders."  See id. at 17.  With the Clayton Act test satisfied, the DOT did not have to go through the process of rehabilitating the proposal by examining whether approval would "achieve important public benefits."  Arguably, the DOT could forego granting antitrust immunity upon approval since, in its own words, "[i]t is not our policy . . . to confer antitrust immunity simply on the grounds that agreements do not violate the antitrust laws."  Id.  Rather, such grants are only given "if the parties [to the agreement] would not otherwise go forward without it" and "the public interest requires" it.  Id.  However, given that the proposed expansion of the Star Alliance "involves multiple large carriers, including two U.S. carriers, combining their international operations on a scale not previously attempted," id. at 18, there remains a risk of antitrust litigation sufficient to satisfy the DOT of the need for immunization, see id. 

As for the immunization "public interest" test, the DOT was persuaded by the host of public benefits an expanded and fully operational Star Alliance could confer, including an expanded network, new online services, enhanced service options, enhanced competition, cost efficiencies, and the strengthened financial position of the carriers involved.  See Continental Order, supra, at 19.  However, the DOT did express concerns that the fully array of benefits the alliance could offer hinged on the carriers fully implementing their "Atlantic Plus-Plus" (A++) plan which would bring the transatlantic routes served by Air Canada, Continental, Lufthansa, and United within the venture, allowing the participants to "jointly manage capacity scheduling, pricing, revenue management, sales, marketing, and financial settlement."  Id. at 3-4.  Since the plan has yet to be fully executed, the DOT conditioned its approval and immunization on complete implementation within 18 months of an issuance of a final order for the alliance application.  See id. at 21-22.

Two additional outcomes from the DOT's order bear mentioning.  First, despite having the discretion to "carve out" city pairs from an alliance approval and immunization application where there are concerns that consumers may be harmed from reduced competition, the DOT not only declined to do so on markets affected by Continental's entry into Star, but instead tentatively removed earlier carve outs for the Chicago/Frankfurt and Washington/Frankfurt markets pending full implementation of A++.  See id. at 10-11.  Second, the DOT was relieved of any competition fears it might have concerning two major U.S. carriers as part of the single alliance through a Department of Justice-reviewed submission by the airlines that they remain subject to U.S. antitrust laws for conduct in any air transportation market solely within the United States and will adhere to strict confidentiality guidelines with respect to "competitively sensitive information concerning air transportation in domestic markets."  See id. at 22.  On this matter, the DOT also issued a potential signal for future alliance expansion by stating its unwillingness "to arbitrarily limit the number of U.S. carriers that may join an immunized alliance," instead opting to "assess the risk of harm [to competition] on a case-by-case basis and weigh it against the potential public benefits."  See id. at 14.

With two key U.S. carriers tentatively cleared to be part of a single immunized international alliance, it will be interesting to see whether the DOT's liberality toward these ventures carries over to the still pending American Airlines/British Airways/Iberia (oneworld) application.  As it stands, Star and SkyTeam remain the only two fully immunized alliances competing in the transatlantic market.  Given the DOT's explicit confidence that the 2007 U.S./EC Air Transport Agreement has established the proper environment for free and open competition, handicapping oneworld appears neither prudent nor wise.  At the very least, it would mean one less major actor which could bring competitive discipline to the other two.  More troubling, it could sour the ongoing negotiations between the U.S. and EC for a second stage agreement and unravel the conditions altogether for enhanced transatlantic competition.

Conversations with Aviation Leaders

With the U.S. Congress and governments worldwide fixed in a reregulatory mindset with respect to civil aviation, readers of the blog may be interested in viewing online the first two installments of the International Aviation Law Institute's Conversations with Aviation Leaders, featuring Profs. Alfred Kahn and Michael Levine.  In two separate conversations, running nearly three hours each, both men discuss the intellectual and political impetus behind U.S. airline deregulation in the 1960s and 70s and the pivotal roles they played in the process. 

Both interviews can be accessed through the Institute's homepage here. 

Goodbye to the Dutch Ticket Tax

The International Air Transport Association (IATA) expressed approval recently over the Dutch Government's decision to eliminate its controversial tax which imposed a cost of between euro 11.25 to 45 for every passenger departing from its airports.  According to IATA Director General and CEO Giovanni Bisignani, "The tax was a [euro] 312 million competitive disadvantage for the Dutch economy. . . . [Abolishing the tax] will provide an economic boost in [the current economic] crisis and help build a competitive future" for the Netherlands.

While the abolition of the tax is certainly a welcomed development, its legality was in question from the beginning.  In a guest post from February 2008, Dutch aviation lawyer Frans Vreede scrutinized the tax in light of both Article 15 of the Chicago Convention and the recent U.S/EC Air Transport Agreement.  In Vreede's view, "the intention of Article 15 is not simply to act against discriminatory fees, but to altogether ban the setting of fees which have nothing to do with the use of airports and airport facilities."  Given that the Dutch tax was--in Vreede's words--"a flat tax aiming to top up the exchequer by €350 million ($518 million) per year," it was inconsistent with the Chicago Convention.  Despite this observation, the tax survived court challenges in the Netherlands and only fell after KLM and the Schiphol Group spearheaded a lobbying campaign against it.  Unfortunately, what this means is that the tax or one like it could reappear once the economic climate improves.

Blog readers interested in a concise analysis of the legal challenges to the tax should read Prof. Brian F. Havel and Niels van Antwerpen's The Dutch Ticket Tax and Article 15 of the Chicago Convention, 34 Air & Space Law 141 (2009).  (A link will be posted on the blog upon availability.)  With the temptation to tax civil aviation an persistent threat and the European Community committed to still bringing aviation into its emissions trading scheme, the legal issues addressed in the piece remain as timely as ever. 

Oberstar on Virgin America

Rep. James Oberstar has finally weighed-in on the matter of Virgin America's citizenship.  In a letter to U.S. Transportation Secretary Ray LaHood, Oberstar questioned the airline's citizenship status and called for a public inquiry into the matter.  As discussed previously on the blog here and here, Alaska Airlines has already petitioned the U.S. Department of Transportation to open a public proceeding into Virgin America's citizenship following news reports that the carrier's primary U.S. investors--two hedge funds--sold back their stake to the U.K.-based Virgin Group, effectively leaving the latter as the sole owner.  Virgin America has disputed this claim to the extent that it insists that 75% of its voting shares are still held by U.S. citizens (presumably the hedge funds).

The question of the hour, as a number of observers have pointed out, is whether those shares are still owned by U.S. citizens.  In other words, do the U.S. citizens controlling at least 75% of the voting shares still have a financial stake in them?  As Rep. Oberstar states in his letter:

If the [former U.S. owners] have no further stake in the success of the company, there is serious question as to whether their continued title to the shares is sufficient grounds for them to be considered the owner of the stock, for the purpose of the statutory requirement that a U.S. carrier must have 75 percent of its voting stock owned or controlled by persons that are citizens of the United States.  If the Virgin Group has all of the financial interest in the stock, it would seem to be the owner for purposes of the citizenship requirement.

In its March 23 filing before the DOT, Virgin America did not deny that the U.S. hedge funds had sold back their financial iinterest in the carrier's voting stock to the Virgin Group.  Rep. Oberstar believes "[i]f Virgin had been able to make this denial, it presumably would have done so, since this would be a strong, if not irrefutable, argument for denial of the requests for an investigation." 

With this degree of high profile scrutiny being placed on Virgin America, it is unlikely that the airline will be able to stave off a public investigation much longer.  The climate for latitude from the DOT is not good.  Rep. Oberstar and other members of Congress have already begun publicly scrutinizing the DOT for what they see as an overly permissive granting of antitrust immunity to airline alliances.  With legislation pending which could sunset all antitrust immunity within three years and begin an investigatory process which could lead to the DOT losing its immunization powers altogether, the pressure is certainly on for the agency to fall in line with the regulatory (and some would say protectionist) temperament on Capitol Hill.  If that's the case, then Sir Richard Branson's bold endeavor to finally penetrate the restricted U.S. air transport market may be at its end.

IALI & GMF Event Report

Last Friday, the International Aviation Law Institute and the German Marshall Fund hosted a luncheon seminar entitled "Transatlantic Aviation: Can We Move Beyond Open Skies?"  The event drew a capacity crowd of more than 100 aviation lawyers, academics, industry leaders, and government officials and featured the formal launch of Professor Brian Havel's new book, Beyond Open Skies: A New Regime for International Aviation.  EU Ambassador to the United States John Bruton launched the book and delivered a spirited address on the future of U.S./EU aviation relations.   Ambassador Bruton took time also to comment on the pending 2009 FAA Reauthorization Act and its potential to hinder the ongoing negotiations for a second stage U.S./EC Air Transport Agreement.  He exhorted the mainly U.S. audience to recall the free market principles for air transport that the United States has evolved and exported (“Europe imitated the United States and now we need to get the United States to imitate itself,” he declared) and to stay true to these principles even in tough economic times.  With Professor Havel serving as moderator, Ambassador Bruton also fielded questions from audience members on legal and policy developments affecting aviation in Europe, including noise restrictions at EU airports, the European Commission's proposal to temporarily suspend the "use or lose" slot rule, and the controversial plan to bring aviation into the EU’s emissions trading scheme. 

At the close of the event, Professor Havel presented a crystal vase to Ambassador Bruton on behalf of the Institute.  The vase was engraved by Professor Havel's brother, Mirek, who trained with Waterford Crystal.  This was one of the Ambassador's last public events in his four-year term in Washington. 

The Institute expresses its sincere thanks to Ambassador Bruton and the European Commission Delegation to the United States, and to the German Marshall Fund, for their collaboration with us in promoting and staging this event.  The Institute also expresses its appreciation to all of the program attendees and hopes that they found the discussion lively and informative.

Ambassador Bruton's Remarks at the GMF

A copy of EU Ambassador John Bruton's remarks at last Friday's event sponsored by the International Aviation Law Institute and the German Marshall Fund are available online at the European Commission's Delegation to the U.S. website here.  In addition to Ambassador Bruton's comments on the future of U.S./EU aviation relations, the event also saw the launch of Professor Brian Havel's new book, Beyond Open Skies: A New Regime for International Aviation.  A summary of the event will be posted on the blog shortly.