Wednesday, September 30, 2009
Jason R. Bonin's article, Regionalism in International Civil Aviation: A Reevaluation of the Economic Regulation of International Air Transportation in the Context of Economic Integration (Sept. 2009), which is forthcoming in the Singapore Year Book of International Law, is available from SSRN here. From the abstract:
While the WTO Agreement liberalized trade in goods and services on a universal multilateral basis, hard rights in air services were excluded from this agreement. Indeed, the economic regulation of international air transportation still adheres to a relatively restrictive regulatory framework of bilateral treaties first developed in the 1940s. While the trend in international air transport regulation is to liberalize market access to foreign carriers, significant barriers still exist, among other things, in the form of restrictions on total market access and limitations on foreign ownership of airlines. This paper presents economic integration as one means to progressively “open up” the air services industry. Economic integration provides evidence of the political will to cooperate necessary to achieve further liberalization. Furthermore, such units provide important economic incentives to liberalize air transport. Finally, regional economic integration organizations may enhance the bargaining position against larger, more mature markets while protecting interests in “own” carriers. This paper examines the underlying economic reasons for air transport liberalization on the basis of regional economic integration. It further addresses the legal implications and constraints involved in establishing regional interests in air transportation, and highlights some policy considerations for “re-focusing” interests from states to regions.
Tuesday, September 29, 2009
Gabriel Sanchez, the International Aviation Law Institute's FedEx/United Airlines Resident Research Fellow, has made his Panel Paper for the 2009 ABA Forum on Air & Space Law Annual Meeting available for download on SSRN. See Gabriel S. Sanchez, An Overview of the Slot Challenge in the U.S. and EU (ABA Forum on Air & Space Law Panel Paper, Sept. 22, 2009) (available here).
Monday, September 28, 2009
Last week Friday, Glenn Tilton, Chairman and CEO of United Airlines and current Chair of the Air Transport Association, addressed the 2009 Annual Meeting of the ABA Forum on Air & Space Law. See Glenn Tilton, Remarks to the ABA Forum on Air & Space Law, Chicago, IL (Sept. 25, 2009) (available here).
Tilton's speech focused on the inertia of U.S. lawmakers to craft a sustainable aviation policy--one which would open up the industry to foreign investment and modernize its infrastructure. Tilton criticized recent U.S. strides toward protectionism for the airlines by asking, "What are we protecting it from? Growth? Profitability? New jobs? Global competitiveness? These are protections we can do without."
Almost all of the points made in Tilton's speech will be familiar to those who have followed the struggles of the U.S. airline industry to survive and thrive under a suboptimal regulatory regime. "Familiar" doesn't mean "unimportant," however. Industry leaders have been pressing the U.S. to move toward authentic air transport liberalization for years, but to no avail. In a 2006 speech to a conference co-hosted by the International Aviation Law Institute (IALI), Tilton suggested that the Department of Transportation conduct a formal aviation policy review to bring the U.S. regulatory regime in line with a globalized world. See IALI & Chicago Council on Global Affairs, Sustainable Aviation Policies for America and the World, at 6, Synopsis of the Proceedings (Oct. 2006) (available here). Despite the need for new thinking concerning U.S. policy in this area, the DOT still relies on a statement issued 14 years ago. See 60 Fed. Reg. 21,841 (May 3, 1995).
What will it take for lawmakers in the U.S. to wake up to the turbulent times the airline industry finds itself in and make meaningful steps toward enacting progressive legislation which will give them the freedom to operate like any other global industry? Hopefully, Tilton's remarks won't fall on deaf ears this time.
A news report from late last week discussed the possibility of a possible U.S./Japan open skies agreement being reached as part of JAL's efforts to attract a substantial equity investment from either American Airlines or Delta Air Lines. See John Crawley, Alliances Take Center Stage in U.S.-Japan Aviation Talks, Reuters, Sept. 24, 2009 (available here). Earlier discussions of JAL's predicament and the place of U.S./Japan aviation talks in them may be found on the blog here and here.
The news story deserves praise for properly focusing the discussion on the alliance system and the future of antitrust immunity as part of the U.S. open skies policy. While not an "official" element of open skies, cf. In the Matter of Defining Open Skies, 3 Av. L. Rep. (CCH) ¶ 26,960, at 23,901 (Aug. 5, 1991), antitrust immunity has long served as the "bait" on which the U.S. has "hooked" open skies partners in the past (most notably the Netherlands, France, and Germany in the 1990s). During the Continental/Star Alliance antitrust immunity proceeding earlier this year, the Department of Justice downplayed the importance of antitrust immunity to U.S. international aviation policy. See Dkt. No. OST-2008-0234, Comments of the Department of Justice on the Show Cause Order (June 26, 2009). In a filing supporting the Continental/Star application, American Airlines responded directly to the DOJ's contention by highlighting that the Department of Transportation's use antitrust immunity as a means of enticing States to sign-on to open skies agreements "has gone a long way toward creating global competition by liberalizing markets and facilitating the emergence of broad networks capable of carrying passengers around the world." OST-2008-0234, Response of American Airlines, Inc. to Comments of the Department of Justice (July 6, 2009), at 3. It also rightly noted that open skies is an unfinished project as "[m]ajor markets remain closed--such as Japan, China, Russia and Brazil. Alliances will help open those markets to new competition--unless, of course, the [DOT] succumbs to pressure to turn back the clock." Id.
Thankfully, the DOT resisted the pressure to "turn back the clock" in approving (albeit with some caveats) the Continental/Star application. See "DOT Approves the Expanded Star Alliance." That doesn't necessarily mean it's moving forward, however. The pending oneworld Alliance application provides the DOJ with another opportunity to attack the alliance system, including providing it with antitrust immunity. The 2009 FAA Reauthorization Act, which would sunset all of the alliance's antitrust immunity, has been put on hold, but for how long? Japan, which has been historically adverse to open skies, will no doubt keep a close eye on regulatory developments in the U.S. before moving ahead on liberalizing its aviation market. If neither of its international carriers, JAL and ANA, are able to secure immunized membership in a major alliance, then a major incentive to sign an open skies bilateral will be gone. In that case, both Japanese and U.S. airlines lose out. As it stands, only United Airlines and Northwest have full access into the Japanese market. (See correction to news reports to the contrary here.) With open skies, any U.S. carrier ready, willing, and able to compete in the transpacific market could add Japan to its list of destinations. If the U.S. is still serious about creating competitive air transport markets around the world, liberalizing its aviation agreement with Japan is absolutely necessary.
Sunday, September 27, 2009
The Aviation Law Prof Blog has been silent for the last few days due to the International Aviation Law Institute's participation at recently concluded 2009 ABA Forum on Air & Space Law Annual Meeting here in Chicago, Illinois. Prof. Brian Havel, IALI's Director, served on the Organizing Board for this year's event while Gabriel Sanchez, the Institute's FedEx/United Airlines Resident Research Fellow, spoke on slot control in the U.S. and EU as part of the Forum's Young Lawyer's Panel. More updates on this year's Forum Meeting will be posted to the blog this week as part of our regular posting schedule.
Wednesday, September 23, 2009
The Dow Jones Newswire broke a story this afternoon reporting that John Porcari, U.S. Deputy Transportation Secretary, has recused himself from the ongoing American Airlines/British Airways/Iberia antitrust immunity proceeding. See Kaveri Niththyananthan, U.S. Transportation Official Recused From British Airways/AMR Study, Dow Jones Newswire, Sept. 23, 2009 (available here).
Porcari, in his former capacity as Maryland's Secretary of Transportation, supported the airlines' bid for antitrust immunity in a November 2008 letter to former U.S. Transportation Secretary Mary Peters. In the letter, Porcari wrote:
The emergence of airline alliances has bolstered competition and has greatly enhanced air service access around the world. In addition, the Open Skies agreement with the European Union now provides for access to London Heathrow for all U.S. carriers. The approval of this [antitrust immunity] application would be a prudent extension of your department's efforts to reduce barriers to entry and enhance competition in the international aviation arena.
Advancing inter-gateway competition has also been an objective of U.S. international aviation policy since the mid 1980s. I believe many benefits would accrue to BWI Marshall with the approval of this application. British Airways' daily non-stop service to London-Heathrow would be bolstered with a code share with American Airlines and federal employees who travel internationally would have more choices should British Airways and American Airlines be awarded Fly America traffic. Also, the Washington Council of Governments' biannual passenger survey consistently reports BWI Marshall as the preferred airport in the Washington-Balitmore metropolitan area.
Your affirmative decision for this ATI application is critical for the future growth of trans-Atlantic travel from BWI Marshall. Providing the carriers with [antitrust immunity] levels the playing field among the major airline alliances and further advances goals of U.S. international aviation policy, including inter-gateway competition.
See Letter from John D. Porcari to Hon. Mary Peters (Nov. 12, 2008) (filed Dec. 9, 2008 as part of DOT Dkt. No. OST-2008-0252) (available here).
The International Air Transport Association, the largest trade group for the global aviation industry, announced yesterday that it has established a climate change proposal on behalf of the airlines for the upcoming U.N. Summit on Climate Change in New York. A press summary of the proposal is available through IATA's website here.
This type of global thinking for the airline industry is sorely needed. After the European Community absconded from its commitment to address the aviation emissions issue through the International Civil Aviation Organization in 2007, it appeared that the aviation industry would have to endure a new fractured regulatory regime over its operations. IATA's proposal would restore ICAO's primacy of place in addressing international airline emissions and establish a multilateral solution. From the press release:
“Climate change is a global problem. Aviation is a global industry. And we need a global approach for this industrial sector if we are to deal with climate change effectively,” said Giovanni Bisignani, IATA’s Director General and CEO.
“Mechanisms designed for ground-based polluters will not work effectively for aviation which can emit CO2 across borders and over the high seas even on a single flight. And already uncoordinated national and regional schemes are creating a patchwork of punitive taxes that fill government coffers, but do little or nothing to effectively manage aviation’s emissions,” said Bisignani.
“The Kyoto Protocol directed states to address aviation through ICAO. Its global standards and cooperation with industry have made air transport the safest form of travel. A global sectoral approach for aviation can leverage this same leadership to deliver results for aviation and the environment,” said Bisignani.
Tuesday, September 22, 2009
Due to the dominance of the health care reform agenda, Congress has reportedly run out of steam for passing the controversial 2009 FAA Reauthorization Act. See Jim Abrams, Congress Puts Off Action on Road, Air Bills, Associated Press, Sept. 22, 2009 (available here). From the story:
The House in May passed a bill authorizing $70 billion for the FAA over three years. The Senate Commerce Committee in July approved a two-year, $35 billion bill. Both measures concentrate money on the NextGen satellite-based air traffic control system that will make the nation's airways significantly safer and more efficient.
But the Senate Finance Committee, which is working on health care legislation, has yet to complete work on the tax provisions in the FAA bill.
Commerce Committee Chairman Jay Rockefeller, D-W.Va, believes the FAA has broad bipartisan support and that it's critical for the Senate act on it this calendar year, said spokeswoman Jena Longo. But "floor time is of great concern," she said.
Even if the Senate took action, there would be serious policy differences to work out with the House. The House bill, for example, would allow airports to raise passenger facility charges from $4.50 to $7 a ticket. It also has angered the European Union by directing more U.S. inspections of overseas aircraft repair stations. Another provision of the House bill would make it easier for unions to organize FedEx truck drivers and other non-aviation employees.
Both the House and Senate bills have provisions to improve the rights of air travelers, but the Senate Commerce version specifies that an air carrier must provide passengers the option to leave a plane after three hours of waiting on a runway.
This may be good news for the ongoing negotiations between the U.S. and European Community for a "second stage" agreement to expand the traffic rights and cooperation provisions contained in the 2007 U.S./EC Air Transport Agreement. Statesmen from across the Atlantic, including EU Ambassador John Bruton and former U.K. Transportation Secretary Geoffrey Hoon, both chastised the Reauthorization Bill as a potential roadblock to a second agreement. In addition to the Act's troublesome provisions on foreign repair stations, the legislation would also end antitrust immunity for international alliances and tighten restrictions on foreign control of U.S. airlines.
Bob Crandall, former President and Chairman of American Airlines, went public today with his support for federal passenger rights legislation. See Joan Lowy, Ex-CEO Backs Limit on Leaving Passengers on Tarmac, Associated Press, Sept. 22, 2009 (available here). From the story:
"I think the airline industry should have led the way in responding to this problem rather than having resisted it," Crandall said. "Every responsible airline executive I know thinks these things are an outrage."
However, he said returning passengers to terminals likely will result in more flight cancellations and modest fare increases.
Since flights are increasingly full or nearly full due to airlines' cutbacks in schedules, passengers who opt to deplane may have difficulty finding seats on other planes and may be delayed longer than if they had continued to wait on a runway, Crandall said.
He recommended an initial four-hour time limit to give airlines time to make adjustments before ratcheting down to a three-hour limit in 2011.
Crandall's publicly stated views are consistent with those he expressed to the International Aviation Law Institute last week as part of its ongoing Conversations with Aviation Leaders series. (The full three-hour interview with Crandall is forthcoming on the Institute's website here.) During the interview, Crandall took repeated note that the U.S. lacked a coherent air transport policy and cited serious delays at airports as evidence of that fact.
Monday, September 21, 2009
British Airways is reported to be in talks with Japan Airlines (JAL) to ensure it stays in the oneworld alliance, As discussed on the blog last week, see here, JAL is seeking over $2 billion in funding to offset the severe losses it's suffered over the last several years. News agencies began to immediately report that Delta Air Lines, a member of the rival SkyTeam Alliance, was eager to strike a deal with the Japanese airline. Shortly thereafter, American Airlines became involved in intense negotiations with talks of take a substantial stake in the carrier. Given the importance of JAL to oneworld's network access into Japan and Asia, both BA and AA will likely remain vigorous in their attempts to broker a deal.
If a deal with JAL falls through and the carrier defects to SkyTeam, it may not be the worst news oneworld hears in 2009. The alliance's pending antitrust immunity application before the U.S. Department of Transportation is expected to be decided in October. With the Justice Department remaining critical in its stance toward these international ventures, both BA and AA should expect the same (if not more) intense scrutiny from Justice's Antitrust Division that Continental Airlines received in its bid to join the Star Alliance. While the DOT eventually decided to step aside most of the Justice Department's concerns when issuing its final order for Star, there is no guarantee it will be so sanguine about the BA/AA link-up. Much attention has been placed in recent months on the dominant position both carriers will have in the transatlantic market between the U.S. and London Heathrow should they be granted full antitrust immunity to cooperate on scheduling, routes, and prices. That fact may stay the DOT's hand when it goes to wield its wand of antitrust immunity in October.
Saturday, September 19, 2009
While not directed at air transport services per se, Panagiotis Delimatsis et al.'s Developing Trade Rules for Services: A Case of Fragmented Coherence? (NCCR Trade Reg. Working Paper No. 38, Sept. 1, 2009) (available from SSRN here), provides some fascinating points of reflection for those concerned about the role of a multilateral forum like the WTO for trade in air transport services or whether trade in this sector ought to continue on a bilateral (or plurilateral) basis. From the abstract:
This paper presents the results of a four-year project tackling several issues relating to multilateral and preferential trade in services. One of the underlying organising principles of our research on services trade has been a presumed fault line between the innate coherence that is achieved through multilateral rules and commitments, on the one side, and the more inherently fragmented nature of preferential solutions or rules, on the other. Doubtlessly rooted in the way mainstream trade theorists and economists more broadly have long championed multilateralism over its peripheral brethren, such a perception proceeds from the assumed second-best nature of preferential, or non-WTO-centric, policy and rule-making approaches. Our key messages put forward concrete proposals to improve regulation of services trade. We find, inter alia, that: a) fragmentation is a source of policy and innovation apt to inform multilateral rule-making, while theatres at the periphery may yield superior outcomes or more politically palatable bargains; b) the adoption of a necessity test applicable across services sectors at the multilateral level would improve the quality of services trade regulation domestically; c) the current treatment of labour mobility under GATS is not conducive to an optimal global governance of migration; d) when examing likeness, both service-related and supplier-related factors have to be considered to decide whether there is competitive relationship in the marketplace; e) Overlapping multilateral and bilateral rules on investment blur the rights and obligations of domestic authorities and foreign investors in services; f) co-ordination between the WTO and arbitral panels so that similar principles are intepreted in a uniform manner can lead to a more coherent international investment framework in services.
Federico Ciliberto of the University of Virginia's Department of Economics has an interesting working paper up online from SSRN. See Market Structure and Multiple Equilibria in the Airline Industry (Working Paper, Oct. 1, 2007) (available here). From the abstract:
We provide a practical method to estimate the payoff functions of players in complete information, static, discrete games. With respect to the empirical literature on entry games originated by Bresnahan and Reiss (1990) and Berry (1992), the main novelty of our framework is to allow for general forms of heterogeneity across players without making equilibrium selection assumptions. We allow the effects that the entry of each individual airline has on the profits of its competitors, its "competitive effects", to differ across airlines. The identified features of the model are sets of parameters (partial identification) such that the choice probabilities predicted by the econometric model are consistent with the empirical choice probabilities estimated from the data.
We apply this methodology to investigate the empirical importance of firm heterogeneity as a determinant of market structure in the U.S. airline industry. We find evidence of heterogeneity across airlines in their profit functions. The competitive effects of large airlines (American, Delta, United) are different from those of low cost carriers and Southwest. Also, the competitive effect of an airline is increasing in its airport presence, which is an important measure of observable heterogeneity in the airline industry. Then, we develop a policy experiment to estimate the effect of repealing the Wright Amendment on competition in markets out of the Dallas airports. We find that repealing the Wright Amendment would increase the number of markets served out of Dallas Love.
Friday, September 18, 2009
With the World Trade Organization back in the news, blog readers may be interested in staying aprised of developments in the second review of the General Agreement on Trade in Services's Annex on Air Transport. A full website dedicated to the review is available here.
Of particular interest should be the extensive three-part series of review documents which chronicles global trade developments in the air transport sector. While some methodological issues have been raised over the course of the review, the WTO's Quantitative Air Services Review (QUASAR) offers the best analysis of global trends toward (or away) from air transport liberalization and provides a wealth of country-specific data on the types of air service agreements they have in force, their exchange of freedoms, and how different sectors of their air transport market are affected.
Wednesday, September 16, 2009
Blog readers may be interested to read a recent working paper by Michael Keen and Jon Strand of the International Monetary Fund. See Indirect Taxes on International Aviation (IMF Working Paper No. 06/124, May 2006) (available through SSRN here). From the abstract:
This paper examines the case for internationally coordinated indirect taxes on aviation (as a source of general revenue-not (necessarily) as a source of development finance). The case for such taxes is strong: the tax burden on international aviation is currently limited, yet it contributes significantly to border-crossing environmental damage. A tax on aviation fuel would address the key border-crossing externalities most directly; a ticket tax could raise more revenue; departure taxes face the least legal obstacles. Optimal policy requires deploying both fuel and ticket taxes. A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage), or alternatively ticket taxes of 2.5 percent, would raise about US$10 billion if imposed worldwide, and US$3 billion if applied only in Europe.
Giovanni Bisignani, Director and CEO of the International Air Transport Association, urged U.S. President Barack Obama and his Administration to formulate a comprehensive aviation policy. See Giovanni Bisignani, Remarks to the International Aviation Club, Washington, D.C. (Sept. 15, 2009) (available here). Coincidentally, this came just a day after former American Airlines President and Charman Bob Crandall recorded his thoughts for the International Aviation Law Institute's Conversations with Aviation Leaders series that the U.S. direly lacked such a policy. See "A Conversation with Bob Crandall." However, Bisignani and Crandall would likely find little common ground on what such a policy would look like. On the matter of air transport liberalization, Bisignani stated:
Finally, we must cooperate with government to liberalize this crazy industry. It has been three decades since the US started the process with domestic deregulation. This crisis highlights that we must finish the job.
The US has always been a bastion for free markets. Your open skies vision changed the industry market by market. The US-EU agreement on open skies is a great example. It did not go as far as we wanted and outdated ownership restrictions remain. But it is an important step in the right direction creating new opportunities in the world’s largest aviation markets. Now we need a strong signal on liberalization by addressing ownership in the second stage.
. . .
Let me be clear. We are not asking for bailouts. But airlines need the freedom to operate like any other business. The ability to merge or consolidate across borders could be a lifeline particularly if the situation gets bloody later this year. Consolidation strengthened some European carriers -- Lufthansa with Swiss, Brussels, bmi and Austrian as well as Air France with KLM and an interest in Alitalia. Delta and Northwest are good examples on this side of the ocean.
But in a global business why restrict consolidation within political borders? Automobiles, telecoms and pharmaceuticals are all strategic industries benefiting from global capital. Why treat aviation differently? It does not protect jobs. About 200,000 US airline jobs disappeared after 9/11. A different approach is required.
See Bisignani, supra; cf. Robert L. Crandall, Remarks to the Wings Club, New York, N.Y. (June 10, 2008), reprinted at 8 Issues Aviation L. & Pol'y 9-19 (2008) (criticizing the U.S. open skies policy and offering support for maintaing tight caps on foreign ownership of U.S. airlines).
Tuesday, September 15, 2009
There has been a great deal of reporting in the papers concerning talks between Japan Airlines (JAL) and U.S. rivals Delta and American over a possible capital infusion to prop up the struggling Japanese carrier. See, e.g., Yoshio Takahashi, JAL Plans Job Cuts, Confirm Alliance Talks, Wall St. J., Sept. 15, 2009 (available here); Hiroko Tabuchi, Japan Airlines in Talks with U.S. Rivals, N.Y. Times, Sept. 14, 2009 (available here). The talks come amidst speculation that the United States and Japan are making progress on securing a new biltaeral air services treaty to replace their highly restrictive one. See 3 Av. L. Rep. (CCH) ¶¶ 26,366a et seq. (containing the U.S./Japan bilaterals and subsequent amendments). There is no word yet on whether the new agreement would fall within the conceptual framework of the U.S. open skies policy. See generally In the Matter of Defining Open Skies, 3 Av. L. Rep. (CCH) ¶ 26,960, at 23,901 (Aug. 5, 1991); see also U.S. International Air Transport Policy Statement, 60 Fed. Reg. 21,841 (May 3, 1995).
The establishment of a U.S./Japan open skies biltaeral may be critical to the success of talks between JAL and the U.S. carriers. As it stands, American's access into the Asian market depends on its codeshare arrangement with JAL as part of the oneworld alliance. American is therefore understandably concerned that Delta--one of its chief rivals and a member of SkyTeam--is apparently seeking to lure JAL away. However, JAL's participation in either oneworld or SkyTeam lacks the boon of antitrust immunity for the deal. As has been Department of Transportation policy since the early 1990s, antitrust immunity is only awarded to arrangements with carriers from States which have an open skies bilateral with the U.S. While it's possible that American is promising substantial funds for JAL simply to keep its codeshare deal alive, in all likelihood it is looking for a much deeper integration in the form of a fully immunized alliance. This would allow American and JAL to coordinate on routes, branding, and establish a mechanism for revenue sharing. At the same time, Delta could strengthen SkyTeam by adding JAL into the mix. Like American, it would still need antitrust immunity to take full advantage of JAL's participation.
Arguably, there is more at stake for American over the future of JAL than for Delta. Delta already has access to the Japanese market through Northwest Airlines. Bringing JAL into SkyTeam or even simply luring it out of the oneworld would devastate the alliance's (and hence American's) Asian market access. The other major Japanese carrier, All Nippon Airways, is already a member of the Star Alliance and would therefore not be a viable partner for American to court. JAL is reportedly seeking $2.5 billion in funds--a number American is unlikely to match given the present state of its balance sheets and the present downturn in demand for air transport services. It is possible that American could convince other oneworld partners, such as British Airways, to take a stake in JAL. However, they too are suffering under the present crisis and may not be keen on spreading their remaining capital too thinly.
Assuming that American and, potentially, some of its oneworld partners do take a stake in JAL on the grounds that the Japanese airline will further integrate itself into the alliance, it may be too little, too late. The 2009 FAA Reauthorization Act--which has already passed the House--contains a provision which would sunset all antitrust immunity for international alliances and potentially set the DOT's immunity powers on the road to extinction. This possibility may very well dissuade Japan from signing an open skies agreement with the U.S. Arguably, without the bait of antitrust immunity, the U.S. could not have secured its open skies relationships with the European Community, Canada, and Australia. If that happens, an ownership stake in JAL may fast resemble a familiar phenomenon in the airline industry: a bad investment.
The International Aviation Law Institute (IALI) conducted the third in its series of "Conversations with Aviation Leaders" yesterday as part of the Intitute's oral history project on airline deregulation. IALI's distinguished guest for yesterday's conversation was Robert "Bob" Crandall, former President and Chairman of American Airlines. Crandall led American Airlines through the turbulent period following deregulation to become one of the largest and most successful carriers in U.S. history. While initially opposed to airline deregulation, Crandall nevertheless found ways to help American thrive in the new competitive landscape by harnessing yield management to better price seats in relation to their value, developing the frequent flier program, and launching the computer reservation system Sabre. Though he retired from American in 1998, Crandall remains a strong voice in the airline industry. His speech calling for reregulation of the airline industry at the Wings Club in Washington, D.C. last year drew considerable attention and prompted Michael Levine, one the intellectual architects of deregulation, to answer Crandall's charges that deregulation amounts to a policy failure. (Both speeches were reprinted in Vol. 8, Issue 1 of IALI's biannual publication, Issues in Aviation Law and Policy.)
Crandall's interlocutor for the event was former U.S. Ambassador and current IALI Advisory Board Member J.D. Bindenagel. Bindenagel, who participated in the negotiations for the U.S./Germany open skies treaty, covered a broad range of topics during his three-hour conversation with Crandall. Everything from the political and social circumstances leading up to deregulation to business strategies in a competitive market and the current state of the U.S. domestic and international airline industry was covered. In addition to offering his own experiences of some of the key events leading up to and following deregulation, Crandall spoke candidly about what he sees as the failure of the U.S. to establish a coherent transportation policy which includes aviation. During the course of the discussion, Crandall also criticized the open skies policy, airline alliances, and the suggestion that there should be increased foreign investment in U.S. carriers.
The full three-hour interview will be accessible online for free through IALI's website in the next 10 to 14 days. Meanwhile, blog readers are encouraged to access and watch the Institute's two previous conversations with former Civil Aeronautics Board Chairman Alfed Kahn and Professor Michael Levine of NYU's School of Law. Both were instrumental in laying the intellectual ground for airline deregulation and have defended the shift in U.S. regulatory policy--albeit with some caveats--to this day. Both interviews can be accessed here.
Monday, September 14, 2009
Earlier this week, the Financial Times published an in-depth story on the history, development, and current state of the international airline alliance system. See Aviation: Ties in the Sky, Fin. Times, Sept. 9, 2009 (available here). The story also comes with an online interactive feature which allows users to explore the three major alliances: SkyTeam, Star, and oneworld. See here.
The article deserves attention, not least because it provides a concise iteration of the relevant legal and political conditions which have made alliances both possible and necessary. The linking of U.S. antitrust immunity with open skies bilateral agreements is an aerodiplomatic/aerolegal fact oftentimes passed over in the ever-growing popular literature on why these transnational joint ventures could be problematic. (For whom? Consumers? Regulators? Competitors unable to develop an alliance network of their own? These categories are often compacted by those who condemn these link-ups.) Without the bait of antitrust immunity, it is unlikely that the U.S. could have "lured" many important partners to accept the liberal trade provisions of open skies. As both American and United Airlines pointed out during the recently concluded Star Alliance immunity application proceeding before the Department of Transportation, there are still many aviation trading partners with which the U.S. has no open skies treaty. These include China, Japan, Russia, and Brazil. What are the chances that these global players will sing-on to open skies without the same coin of exchange U.S. partners Australia, Canada, and the European Community have received?
The airline industry is in turbulent times. No one denies this, just as no one concerned with air transport being allowed to operate as a truly globalized industry denies that it continues to labor under a suboptimal international regulatory schema. As the Financial Times properly points out, this schema forecloses alliance partners such as British Airways and American Airlines from truly rationalizing their costs and consummating a transborder merger. For dubious reasons rooted in national pride, misplaced security concerns, protectionism, and other causes, airlines remain "exceptional," that is, they remain subject to outmoded mercantallist mindset.
The airlines, through a mix of entrepreneurial ingenuity and commercial necessity, have forged comprehensive global route networks through the alliance system. They have moved ever closer toward providing global brands--SkyTeam, Star, and oneworld--which are available to almost any one, in any place, and at any time. Though still in its tender years, the alliance system is rapidly providing aviation's version of McDonalds, Burger King, and Starbucks: service providers with undeniable international recognition. Is this not what a globalized world enables? That one can be in any city in the world and know that the type of product and service they demand is there? Why is this acceptable for fast food and coffee and not air transport services?
Thursday, September 10, 2009
Last night, President Barack Obama addressed the nation on the contentious and highly politicized issue of reforming health care. Without weighing in on the substantive questions (which in any event lie outside the proper conceptual scope of this blog), it is at least fair to say that Obama has used the authority of his office to plant health care reform on the national agenda and that until he chooses--following victory, defeat, or stalemate--to remove it, it will continue to be a prime focus for punditry, legislative bickering, and even dinner table debates. The power of agenda-setting is not provided for in the Constitution. (In fact, the Constitution gives the chief executive very few direct powers of any kind.) See Gene Healy, The Cult of the Presidency (Cato Inst. Press, 2008). It represents an organic development of the office.
For those of us who pay attention to the aviation industry, however, the President’s agenda-setting activities--if indeed we can identify any of them--have been pretty threadbare. To a large degree this is understandable. We are in the midst of the greatest economic downturn since the Great Depression. According to the eminent Seventh Circuit judge and uber-commentator Richard Posner, we are enduring an actual depression. See Richard A. Posner, A Failure of Capitalism (Harvard Univ. Press, 2009). U.S. policymakers are currently fixated, in addition to health care, on two major overseas conflicts. Getting traction for transportation policy issues at present is virtually impossible. Yet no robust economic recovery can occur if the United States embraces protectionism with respect to goods and services. Concerns have already been raised by trade officials and observers that the United States has unfairly subsidized its automotive sector, illegally reneged on commitments to open up trucking routes to Mexico under the North American Free Trade Agreement, and jeopardized its cosmopolitan trade instincts by inserting "Buy America" provisions into a $700 billion plus economic stimulus bill. See The Nuts and Bolts Come Apart, Economist, Mar. 26, 2009 (available here).
The air transport industry has had no less reason for concern. The 2009 FAA Reauthorization Act brims with protectionist provisions which sit like a black cloud over the ongoing "second stage" U.S./EC negotiations to expand the rights and opportunities granted to both parties' airlines under their 2007 Air Transport Agreement. As this blog has serially discussed, some of these provisions may prove to be a "bridge too far" and compel the EU Member States to suspend provisions from the first agreement. See, e.g., earlier posts here, here, & here.
Why has this happened? Arguably, if aviation is truly "off the agenda," shouldn't we at least be experiencing stasis right now? Why these legislative rumblings which will have detrimental effects on free trade in air services? The truth is that aviation is not off the agenda--not completely. It's simply been transferred from the conscious realm of newspaper headlines, CNN reports, and (non-aviation) blogs to sit behind a shroud of ignorance – the recondite realm of Congressional committees and subcommittees where the information costs to average Americans are high and patience for (or interest in) their protracted discussions is low. Rep. James Oberstar, Chairman of the House Transportation Committee, is a master within this mysterious realm. Taking full advantage of the aviation policy vacuum in the current administration, Rep. Oberstar seeks a new order of things: an end to global airline alliances; foreigners denied careers in the management of U.S. airlines; a halt to the open skies adventure. The potential consequences for the industry--and for consumers--are quite staggering.
In the late 1970s, President Jimmy Carter, by an act of sheer presidential political will, placed airline deregulation on the national agenda. For all of the important work Senator Kennedy and his subcommittee did on the shortcomings of the Civil Aeronautics Board or that Alfred Kahn accomplished as chairman of that agency, deregulation required the direct interest of the President before it could evolve into a legislative fact. Robust economic analysis and careful studies of intrastate air transport exposed a solid case for removing the deadweight of regulation. But intellectual speculation was nowhere near adequate to accomplish the change that economists and lawyers were proposing. A leader had to take the matter to the country. The Obama administration is allowing members of Congress to practice a retrogressive and mercantilist air transportation policy. If he seizes the agenda-setting power of his office, however, the President can champion airline deregulation on a global scale. But the power of his Presidency needs to be deployed. From Chicago’s President, a new Chicago Convention? Cf. Int'l Aviation L. Inst. & Chi. Council on Global Affairs, Sustainable Aviation Policies for America and the World (2006) (available here) (summarizing the proceedings of an aviation leadership summit where FedEx Senior Vice President and General Counsel Rush O'Keefe called for a new Chicago Convention).
Wednesday, September 9, 2009
There are reports out today that the United Kingdom's Committee on Climate Change will announce that "[d]eveloped countries must ensure greenhouse gas emissions from aviation are no higher than 2005 levels by 2050." See Fiona Harvey, Cap Airline Emissions, Says Body, Fin. Times, Sept. 9, 2009 (available here); see also Alex Morales, Airline Emissions Should Be Capped at 2005 Levels, Bloomberg, Sept. 9, 2009 (available here). An agreement on such a cap would be part of the December U.N. climate talks to be held in Copenhagen.
As it stands, the Kyoto Protocol to the United Nations Framework Convention on Climate Change, Dec. 10, 1997, 37 I.L.M. 22 (1998), designates the International Civil Aviation Organization as the proper international organ for dealing with international aviation emissions. See id. art. 2(2). The major public and private international air transport organizations, ICAO and the International Air Transport Association, support a global aviation emissions trading scheme to combat the purported problem. Such a scheme must be properly designed, consensual, multilateral, and in lock-step with infrastructure enhacements, technological improvements, and research and development into alternative fuels. See ICAO, Consolidated Statement of Continuing ICAO Policies and Practices Related to Environmental Protection, available in Assembly Resolutions in Force, ICAO Doc. 9848 (Oct. 4, 2004). In late 2007, however, the European Community broke ranks with ICAO and has since put in motion a regulation to bring civil aviation into its own emissions trading scheme. This unilateral action has potentially undermined ICAO's U.N.-designated role in this area. See Gabriel S. Sanchez, European Unilateralism, Nat'l L.J., Mar. 31, 2008 (available here).
What does this latest proposal say about ICAO's status in the area of aviation emissions? If a new international agreement is brokered outside of ICAO, it would likely deal a terminal blow to the organization's legitimacy in handling this issue. If the proposed cap is set in place, the airlines themselves will have to devise a way to scale back their emissions without undermining their competitiveness. 2050 is still four decades away; undoubtedly many carriers will hold to the promise of what "green technology" can bring. Of course, cutting flights and, thus, cutting emissions isn't a problem at the moment. With a worldwide drop in demand for air transport services, international airlines are simply flying less (8% less in the U.S. this year). Rising fuel costs will undoubtedly result in higher air fares, thus keeping demand at bay even after the global economy recovers (whenever that is). Still, governments could do more to help the airlines meet a new cap. Even if a market-based program like a global ETS for aviation isn't put in place, States could do more to improve their air traffic management systems and therefore curtail wasteful emissions. They could also take steps to allow crossborder airline mergers and allow the global marketplace to consolidate in proportion to actual consumer demand. Let the fit survive and thrive. That way, there will not only be less planes in the sky but less fuel inefficient ones as well. Or, as has so often been the case with civil aviation, countries can impose further regulatory demands on the industry while still expecting frequent, inexpensive, and widespread service. At some point--perhaps in 2050, perhaps sooner--this paradoxical approach to the airline industry will prove untenable. By then it may be too late.