Aviation Law Prof Blog

EU Moving Toward Suspension of "Use or Lose" Slot Rule

As discussed on the blog previously, the European Commission has forwarded a proposal to the European Parliament and Council to temporarily suspend Council Regulation 95/93's "use or lose" rule where 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.  Under the Commission's original proposal, COM (2009) 121 final (Mar. 10, 2009), "slot coordinators [at EU airports] shall accept that air carriers are entitled to the same series of slots during the summer 2010 scheduling season as were allocated to them during the summer 2009 scheduling season."  In other words, the airlines would be allowed to drop below the 80% threshold without risking slot forfeiture.  The Commission's proposal also seeks to use the so-called "comitology" procedure to allow it to extend the slot rule suspension into the winter 2010-11 season if the Commission unilaterally determines that such a measure is warranted by the ongoing economic crisis.

A number of industry stakeholders and observers were immediately critical of the measure, charging that it would economically harm EU airports due to a decrease in the number of flights operated and bar potential new entrants from capturing surrendered slots.  Initially, the cries did not go unheeded.  In its draft report on the Commission's proposal, 2009/0042 (COD) (Mar. 31, 2009), the Parliament's Committee on Transport and Tourism offered a substantial amendment to the Commission's suspension plan which would lower the operating threshold from 80% to 75% to accord with an estimated 5% decrease in passenger demand rather than suspend the rule altogether.  The Committee also added the following:

If, for a series of slots, the air carrier does not meet the 75% threshold for the summer 2009 scheduling period, it will be entitled to this series of slots only if no other air carrier has applied to use it for the same route.  If one or more other carriers have applied to use it for this route, the slot shall be allocated by auction to the carrier making the highest bid.  Air carriers, including incumbent carriers, to which a series of slots is new allocated under this paragraph, must commit themselves to use it for that same route for at least the next two corresponding periods.

This tempered modification of the "use or lose" rule could have assuaged fears that the Commission is moving to protect incumbents, undermine competition, and pass costs onto the airports and consumers.  Unfortunately, the measure was short lived.  In the Parliament's approved first reading of the Commission's proposal, A6-0274/2009 (Apr. 24, 2009), the full suspension of the "use or lose" rule for the summer 2010 season is back in.  What is noticably out, however, is the Commission's hopes to use the comitology procedure to allow further unilateral suspensions.  Any future proposals to suspend the "use or lose" rule would have to go through the Parliament and Council in conformity with the so-called "codecision" procedure.  Interestingly, the Parliament also adjusted the second recital of the Commission's proposal to urge that any future proposal to suspend or modify the "use or lose" rule "should be made only if it forms part of a proposal for a general revision of" Regulation 95/93.  In the opinion of the Committee on Transport and Tourism's Rapporteur, "[Regulation 95/93] on slot allocation requires a general overhaul in the near future, which addresses, among other things, competition issues as well as questions of slot ownership, trading etc."  Assuming that such revisions would ensure that market-based measures are used to more efficiently (re)allocate slots and alleviate the capacity crunch at EU airports, they would be most welcome. 

What Is "Achievable" for the Second Stage?

Michael Goldman, a named partner at the Washington, D.C. law firm Silverberg Goldman & Bikoff, has issued a white paper at Air Transport World entitled, "Elections Do Have Consequences: The Case for a New US-EU Stage Two Agreement."  The title is a curious one since the 2007 U.S./EC Air Transport Agreement explicitly contemplates negotiations for a second stage agreement; no "case" needs to be made for one.  Cf. Air Transport Agreement, art. 21, 2007 O.J. (L 134) 4.  Arguably, however, there remains plenty of room to agitate for the specific content of a second stage agreement.  Goldman believes--no doubt quite rightly--that the chances for progress to be made on liberalizing the U.S.'s rules on foreign ownership and control of airlines are slim.  That doesn't mean, according to Goldman, that all hope for the second stage is lost.  According to Goldman, the second stage could still yield "breathtaking" results in the form of "a substantial expansion of [seventh] freedom traffic rights; arrangements for mutual recognition of each side's greenhouse gas emissions/cap and trade regimes; resolution of the contentious environmental dispute on regulation of aircraft noise near airports; and the harmonization of transatlantic security rules."

While all of these potential elements of a second stage agreement are worthy of reflection, Goldman's optimism that an expansion of seventh freedom traffic rights is "achievable" may be unwarranted.  Goldman asserts that "a broad exchange" of seventh freedom rights will "provide for balance[]" between both sides.  As it currently stands under the 2007 Agreement, the U.S. recognizes the internal EC construct of the "Community air carrier," meaning all EU carriers are eligible for designation by all Member States for seventh freedom passenger/cargo combination services from both EU and European Common Aviation Area States.  See Air Transport Agreement, supra, art. 3(1)-(3).  The 2007 Agreement also provides for unrestricted reciprocal seventh freedom all-cargo rights, except that the U.S.'s rights are limited to the Czech Republic, France, Germany, Luxembourg, Malta, Poland, Portugal, and the Slovak Republic.  See id. Annex 1, sec. 3.  These rights are in addition to the exchange of unrestricted reciprocal third, fourth, and fifth freedoms which have long been part of the U.S.'s "Open Skies" template.  It appears that Goldman perceives the absence of reciprocal seventh freedom passenger/cargo combination services and truly unrestricted all-cargo sevenths for U.S. airlines as creating an imbalance.  But is this view tenable or, rather, does this view have equal purchase on both sides of the Atlantic?

In the years leading up to finalization and signing of the 2007 Agreement, the European Commission and other commentators had analogized a grant of fifth freedom rights to U.S. carriers with eighth freedom (cabotage) rights for EU airlines.  A U.S. carrier could use the fifth freedom rights to pick up new passengers in London as an extension of a New York/London service and carry them onward to Frankfurt or Rome, for example.  However, in order for an EU carrier service from London to New York to include enplaning new passengers in New York for continuing service to Los Angeles, eighth freedom rights would be required.  It was an analogy U.S. negotiators were unwilling to accept for the purposes of the Agreement and yet one which remains important from the European perspective.  Article 21 of the 2007 Agreement specifically mentions "further liberalisation of traffic rights" as part of the second stage agenda.  Air Transport Agreement, supra, art. 21(2)(a).  This agenda item has been interpreted by European Commission Air Transport Director Daniel Calleja to mean "European [airline] companies flying freely in the U.S. and U.S. companies flying freely in Europe.  At the end of the day, you need full access on both sides."  Yet "full access" as a means to achieve balance is not what Goldman is suggesting.  He recognizes that eighth freedom rights will likely be off the negotiating table, but he fails to mention any incentive the EU might have to offer further seventh freedom concessions to the U.S.  From the EU's perspective, any further grant of traffic rights to the U.S. without a further grant of new rights to the EU will only aggravate the perceived imbalance--an imbalance the second stage negotiations are presumably supposed to correct.  

In addition to failing to take into account the backhistory of the 2007 Agreement and the EU's understanding of what constitutes "further liberalisation of traffic rights," Goldman also ignores the rise of protectionist sentiments in the U.S. as evidenced by Rep. James Oberstar's airline alliance and control provisions in the pending 2009 FAA Reauthorization Act.  If either or both provisions are enacted, the EU will have even less an incentive to give the U.S. unrestricted seventh freedom rights.  The EU may very well exercise its option to suspend rights under the 2007 Agreement beginning in 2012 as a means of retaliation.  Given this aeropolitical backdrop, it is difficult to join in Goldman's optimistic appraisal of what is "achievable."  

Aid for Airlines?

The Associated Press reported yesterday that U.S. Transportation Secretary Ray LaHood believes the Obama Administration will seek financial aid for U.S. airlines to assist them in making the necessary upgrades to their fleets for NextGen--the Federal Aviation Administration's plan to move from a radar-based to a satellite-based air traffic control system.  The system, which is expected to cost at least $20 billion, isn't expected to be completed until 2025. 

There is a not unreasonable tendency for brows to start perspiring when the words "aid" and "airlines" are used in the same sentence.  Following the post-9/11 Air Transportation Stabilization Act which authorized the Government to guarantee loans to the airlines, concerns were raised that the legislation--though limited in scope--could prefigure reregulation.  See Brian F. Havel & Michael G. Whitaker, The Approach of Re-Regulation: The Airline Industry After September 11, 2001, [2001-04 Transfer Binder] Issues Aviation L. & Pol'y ¶ 10,051, at 4101.  This time out, however, it appears that the aid will be targeted to assist in upgrading the country's woefully inadequate aviation infrastructure and not to assist the airlines through a tough operating environment.  

For those either unfamiliar with the current air traffic control system or wishing to learn more, the men's lifestyle magazine GQ recently ran a story entitled "Traffic," detailing the system's daily operations and its antiquarian mechanisms.

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.