March 13, 2009
The Virgin America Citizenship Saga Continues
According to an article which appeared in yesterday's International Herald Tribune, Virgin America remains steadfast that it is still owned and controlled by U.S. citizens. (For a discussion of U.S. statutory provisions on airline citizenship, see the previous blog post on Virgin America here.) Contrary to what was reported in The Wall Street Journal earlier this week, Virgin America's Chief Executive David Cush stated that "[a]ny story saying that 76 percent of voting shares have been sold back to the Virgin Group and are being held by the Virgin Group is an inaccurate story."
As discussed previously on the blog, Alaska Airlines has been leading the charge for the U.S. Department of Transportation to review (and, presumably, revoke) Virgin America's certificate of public convenience and necessity. Yesterday, in its latest filing before the DOT, see Petition of Alaska Airlines . . . , Dkt. No. OST-2009-0037, Reply of Alaska Airlines, Inc. and Motion for Leave to File (Mar. 12, 2009), Alaska cited the WSJ story that the U.K.-based Virgin Group "owns virtually 100 percent of Virgin America's voting securities." Alaska also requested that the DOT not be swayed by Virgin America's choice to leave its apparent former U.S. investors on its shareholder board with control of at least 75% of the voting stock. As Alaska argues:
If it becomes acceptable for a foreign citizen owning virtually all of a carrier's voting stock to insulate its foreign ownership by placing the voting rights to 75 percent of the stock in the hands of of a U.S. 'rent-a-citizen' with absolutely no beneficial interest in that stock, it could be reasonably said that there is nothing left of the statutory requirement that U.S. citizens maintain ownership of 75 percent of a carrier's voting securities.
In a footnote to its filing, Alaska did recognize that Annex 4 to the 2007 U.S./EC Air Transport Agreement stated that "ownership by Nationals of a [EU] Member State or States of 50 percent or more of the total equity of a U.S. airline shall not be presumed to constitute control of that airline. Such ownership shall be considered on a case-by-case basis." Even so, the alleged fact that the Virgin Group now owns nearly 100% of Virgin America's equity and that, according to Alaska, there exists no "countervailing influence from U.S. citizen shareholders is more than enough to call Virgin America's citizenship into question."
Not surprisingly, Alaska Airlines is not alone in its dogged pursuit of Sir Richard Branson's brainchild. Both the Air Line Pilots Association and the Association of Flight Attendants filed supporting answers last month. Additionally, the Aircraft Mechanics Fraternal Association (AMFA) filed its own petition for the DOT to review Virgin America's citizenship. See Petition of Alaska Airlines . . . , Dkt. No. OST-2009-0037, Answer of Virgin America Inc. to Petition of [AMFA] (Mar. 3, 2009) (requesting the DOT to consolidate the Alaska Airlines and AMFA petitions). Branson has never been shy about his disdain for the unions. They, in turn, were extremely vocal in opposing Virgin America's initial certificate application in 2006. It is difficult to gauge what (if any) influence they will have over the present proceedings. Assuming Virgin America isn't able to unload 75% or more of its voting shares into the hands of U.S. citizens, all eyes will be on the DOT to see if it is willing to find some plasticity in the statutory requirements, particularly given the language of Annex 4 of the U.S./EC Agreement. But even "some plasticity" may not be enough if the Virgin Group ultimately holds nearly 100% of Virgin America's equity. Even placing a majority back into U.S. hands may assuage some DOT concerns and give the agency enough interpretive wiggle room to allow Virgin to stay airborne. On the other hand, given the nativist rumblings of Rep. James Oberstar and the nationalistic provisions in the pending 2009 FAA Reauthorization Act, how long will it be before Congress steps in to steer the DOT's hand? It had no problem doing so in 2003 during the DHL Airways proceedings, see DHL Airways, Inc. . . . , Dkt. No. OST-2002-13089, Order Declining Review (May 13, 2004), or in the DOT's 2005 Notice of Proposed Rulemaking, see 71 Fed. Reg. 26,425 (May 5, 2006) (discussing the legislative and political backdrop of the proposal). There's little reason to suppose they'll sit tight now.
March 12, 2009
Since yesterday's post on Virgin America mentioned the possibility that the carrier is now engaging in illegal cabotage, readers of the blog may be interested in Prof. Robert Hardaway's article, Of Cabbages and Cabotage: The Case for Opening Up the U.S. Airline Industry to International Competition, 34 Transp. L.J. 1 (2007). Obviously, with the shifting economic and political climate in the U.S., Prof. Hardaway's thesis isn't likely to pick up much traction anytime soon. On the other hand, his study remains useful for grasping the longstanding legal and political hurdles to "de-cabotaging" U.S. airspace and provides a number of thoughtful arguments for why they should be dismantled.
March 11, 2009
Beyond Open Skies Book Launch
[Note: This entry was updated on March 13, 2009.]
The International Aviation Law Institute is pleased to announce that Prof. Brian Havel's new book, Beyond Open Skies: A New Regime for International Aviation (Kluwer Law International, 2009), will be officially launched at the German Marshall Fund in Washington, D.C. on March 27. Introducing the book will be John Bruton, former Prime Minister of Ireland and current European Union Ambassador to the United States. Ambassador Bruton will discuss potential reforms to the international air transport regulatory system with specific reference to the work left unfinished by the 2007 U.S./EC Air Transport Agreement. Prof. Havel, along with the Institute's Executive Director Stephen Rudolph and FedEx/United Airlines Research Fellow Gabriel Sanchez, will be in attendance. Those interested in attending the event may send inquiries to the Institute.
Beyond Open Skies offers a systematic comparative analysis of the legal and policy dimensions of airline deregulation by federal fiat in the United States and by supranational collaboration in the European Union. The book draws upon a variety of sources, including very recent developments in U.S. and EC international aviation law, policy, and diplomacy, to propose a genuine multilateral air transport system. It examines the potential of the "open skies" initiative, in the aftermath of the 2007 U.S./EC Air Transport Agreement, to inspire a genuine globalization of the world’s air transport industry.
Those interested in purchasing the book may do so online at the Wolters Kluwer website.
The End of Virgin America?
The Wall Street Journal reported yesterday that Virgin America's primary U.S. investors, hedge funds Cyrus Capital Partners LP and Black Canyon Capital LLC, sold their 77% stake in the airline back to the U.K.-based Virgin Group. The transaction may compromise Virgin America's compliance with federal law.
Under the Federal Aviation Act, 49 U.S.C. § 41101(a), "an air carrier may provide air transportation only if the air carrier holds a certificate [of public convenience and necessity]" from the Department of Transportation. This certificate can only be issued to a carrier which the legislation defines as a "citizen of the United States undertaking by any means, directly or indirectly, to provide air transportation," § 41101(a)(2). For the purposes of the statute a "citizen of the United States" means
(A) an individual who is a citizen of the United States;
(B) a partnership each of whose partners is an individual who is a citizen of the United States; or
(C) a corporation or association organized under the laws of the United States or a State, the District of Columbia, or a territory or possession of the United States, of which the president and at least two-thirds of the board of directors and other managing officers are citizens of the United States, which is under the actual control of citizens of the United States, and in which at least 75 percent of the voting interest is owned or controlled by persons that are citizens of the United States.
49 U.S.C. § 40102(a)(15) (emphasis added).
Unless Virgin America has found replacement U.S. investors since yesterday, it is currently operating above the statute's limit of 25% on foreign investment in the voting securities of a U.S. airline. A similar violation of the foreign ownership threshold was enough for the DOT to dispose of Virgin America's initial certificate application in 2006 (though the Department opted to also examine the statute's other requirement that an airline be "under the actual control" of U.S. citizens). See U.S. DOT, Application of Virgin America . . . , Dkt. No. OST-2005-23307, Order to Show Cause (Dec. 27, 2006), at 14-15 & 21. While The Wall Street Journal also reported that in order for Virgin America "[t]o ensure [it] remains controlled by U.S. investors in the short term, representatives of the departing shareholders will remain on Virgin America's board until new shareholders are found," it still does not solve the problem created by the Virgin Group apparently exceeding the ownership cap. The statute's "actual control" requirement, which is qualitative and notoriously vague, needn't come into play. And even if it did, the fact that it has historically operated in the DOT's jurisprudence--in the words of former DOT Under Secretary for Policy, Jeffrey Shane--as the "it's for us to know and you to find out" standard means that Virgin America can hardly rest assured that its apparent compliance won't fall victim to whimsical application.
What this seems to mean is that as of this moment, Virgin America is operating U.S. domestic services as a foreign-owned carrier. In other words, it's engaging in cabotage. While there are no criminal penalties attached to what Virgin America seems to be doing, this latest development will no doubt expedite the DOT's ongoing review of Virgin America. As discussed previously on the blog, Alaska Airlines filed a petition for the DOT to review Virgin America's citizenship status in anticipation of a withdrawal from U.S. investors. Given the tough economic climate and the waning demand for air travel, the Virgin Group is unlikely to find enough domestic takers to satisfy the DOT. If the carrier is forced to cease operations, it will be interesting to see what (if any) effect it has on the ongoing negotiations between the U.S. and EU for a second stage air transport agreement. No doubt the U.K., which has never been shy about its willingness to suspend the first agreement, will frown upon it.
March 10, 2009
European Commission Proposes Suspending Slot Rule, Competition
On the same day the European Commission approved Greece's latest plan to privatize its long protected carriers Olympic Airlines and Olimpic Airways Services, it also proposed to protect incumbent airlines through a (temporary) suspension of the Community's "use it or lose it" rule for airport slots. Citing the "knock-off effect" the current economic crisis has had on air travel, the Commission wants to give airlines a pass during the summer 2009 season (April to October) so that they can reduce capacity without the risk of slot forfeiture.
Under Article 9(3) of Council Regulation 95/93, 1993 O.J. (L 14) 1 (Jan. 18, 1993), a carrier must operate 80% of its slots during the period for which they have been allocated in order to retain them for the next equivalent period. According to the Commission, the new proposal is meant to "prevent airlines maintaining their capacity and operating purely in order to keep their slots." But what's wrong with that? If a carrier values a particular slot highly enough, it will make the extra effort to hold it or avail itself of the secondary market. If the Commission's proposal is enacted, it will deny competitors and new entrants the chance to acquire slots which would otherwise be forfeited or sold. In other words, it will maintain the status quo while gutting the purpose of having a "use it or lose it" rule. Obviously, when economic conditions are good, carriers can maintain a dominant position so long as they offer services consumers actually want. When conditions sour, that is the time to weed out the weak and offer opportunities for airlines with innovative business models and disciplined practices to enter the market or expand services. If they fail, then the slots will be back up for availability and the "old guard" remains. If they succeed, then it is the consumers who win. Why would the Commission, which is supposedly so conscious of both consumers and maintaining fair competition in the EU's common aviation market, looking to undermine both?
The capacity crunch at EU airports has been a vexing reality for well over a decade. Its anticompetitive effects are clear. The "use it or lose it" rule has been one small (but important) means to offset this problem. What the Commission is proposing is an EU-wide form of protectionism for the incumbent airlines which will effectively suspend competition during the summer months. That is not consistent with the common aviation market the Commission has worked so diligently in the past to establish, maintain, and expand. It signals an alarming change of attitude in Brussels, one which may have more longterm consequences. In closing its public statement on the proposed slot rule, the Commission noted that while "[t]he measure is only planned for one season[,] . . . depending on how serious the [economic] situation appears as the 2009-20010 winter season approaches, [it] may decide . . . to renew all or part of the scheme." The effect on competition would be chilling.
Olympic Airlines: A Long Overdue Privatization
The European Commission announced today that Greece's latest privatization plan for Olympic Airlines and Olympic Airways Services does not run afoul the Community's State aid rules. Under the plan, Greece will open negotiations with interested parties to sell the carriers' assets. In September of last year, Greece was granted approval to privatize Olympic Airlines and Olympic Airways Services by public tender. Due to the financial crisis and worldwide economic downturn, the public tender process proved unsuccessful.
The European Commission and Greece have been at odds for fifteen years over the latter's repeated artificial resuscitation of its flag carrier. The most heated battle began in 2003 when Greece restructured Olympic Airways, forming Olympic Airlines and providing the ailing carrier with euro 160 million in illegal State aid. Since then, the Commission has found further injections of illegal aid, including euro 850 million since it rendered its last decision on the matter in 2005. Clearly for Greece, State aid for Olympic was always intended to be something much more than a transitional byproduct of EC air transport liberalization.
Of course, Greece hasn't been alone in propping up a dying airline. Across the Ionian Sea, Alitalia--civil aviation's Nosferatu--was feeding off the Italian Government until late last year. For both Greece and Italy, national politics and chauvinism animated the unwarranted and wasteful protection of airlines which failed to discipline themselves to the market. Now, after hundreds of millions of euros have been flushed away, can privatization and, hopefully, eventual consolidation run its proper course.
March 8, 2009
Remembering Bermuda II
For readers either unfamiliar with the 1977 U.S./UK air services agreement (commonly referred to as "Bermuda II") or looking for a refresher on the agreement which should never have been, the following articles from the law journal archives may be of interest:
Bin Cheng, The Role of Consultation in Bilateral International Air Services Agreements, as Exemplified by Bermuda I and Bermuda II, 19 Colum. J. Transnat'l L. 183 (1981);
Harriet Oswalt Hill, Comment, Bermuda II: The British Revolution of 1976, 44 J. Air L. & Com. 111 (1978);
Benjamin A. Sims, International Air Transportation: The Effect of the AIrline Deregulation Act of 1978 and the Bermuda II Agreement, 10 Transp. L.J. 239 (1978); and
Robert E. Young, Bermuda II Treaty Negotiations Between the United States and the United Kingdom, 6 Int'l Bus. Law. 255 (1978).
More on the Potential Impact of the FAA Reauthorization Act
A story from the Dow Jones Newswire on Rep. Oberstar's legislative proposal which could mark the end for international airline alliances sheds more light on what it could cost the airline industry. According to the story, the oneworld alliance alone has generated $3 billion in revenue for its members over the last 10 years--revenue they would have never seen had the alliance not existed. Also troubling is the Air Transport Association's estimate that 15,000 jobs could be lost if the alliances are forced to disband. Add to that the elimination of consumer benefits the alliances bring and what you have is an outcome with no winners and a lot of losers.
The story also contains observations from executives at Delta and American, along with the important observation of Michael Whitaker, Senior Vice President of United Airlines, that "[w]hen planes are full, alliances aren't as important as they are now, since alliance partners can provide you with passengers from other airlines."
The International Air Transport Association has already predicted $2.5 billion in losses for the worldwide air transport industry in 2009. With the global economy still on a downward slide and the bottom not yet in view, international carriers are slashing capacity in hopes of filling every seat they make available. But the capacity cuts already made won't be enough if these airlines are denied crucial feeder traffic from their alliances. Consumers, who have been compelled by current economic conditions to limit air travel, will be forced to watch as their travel costs increase, route options dwindle, and benefits such as shared frequent flier programs disappear.