April 21, 2011
Latin American Liberalization
Despite its longstanding resistance to air transport liberalization, Brazil is on the cusp of relaxing its airline investment rules as part of the country's plans to improve its transport infrastructure before the 2014 World Cup and the 2016 Olympics. See Samantha Pearson & Joe Leahy, Airline Ownership Reform Aims to Boost Investment, Fin. Times, Apr. 20, 2011 (available here). The move will help foster the pending merger between Brazil's largest international airline, TAM, and Chile's LAN--a deal currently awaiting the green light from Chilean courts.
Brazil's decision to liberalize its investment rules, coupled with its recent agreement to an incremental "Open Skies" pact with the United States, is another sign that the Latin American region is moving toward a free trade environment for air services. Chile, which has no airline investment limits, has aggressively pursued liberal air services agreements which have even included cabotage rights. Meanwhile, several Latin American carriers, including LAN and the recently merged TACA/Avianca, have acquired subsidiaries across the region in an effort to build-up authentically multinational aviation enterprises.
The question which remains to be answered is how far will this crossborder investment go and what, if any, response will come from States situated outside the region. Under the nationality clauses contained in most States' air services agreements, only airlines which are owned and controlled by citizens of their home States are eligible to perform international services. Once the LAN/TAM merger is complete, the U.S. could, in theory, invoke the nationality clause under its agreement with Brazil to limit or revoke TAM's market access privileges. While the United States has apparently engaged in a policy of granting tacit waivers to its Open Skies partners, there is nothing to legally prevent the U.S. from switching gears and demanding citizenship purity from Brazilian airlines.
Currently, the U.S. has little-to-no incentive to play hardball with its Latin American partners. Though growing, none of the major Latin American airlines are major competitive threats to U.S. carriers. Moreover, U.S. airlines are currently courting several Latin American airlines to join one of the three major airline alliances--oneworld, SkyTeam, and Star. If, however, one or more of the expanding Latin American airlines opts to follow the Emirates model of rejecting the alliance system and attempting to compete independently, it may not be long before one or more of the American carriers is lobbying the U.S. to take a stronger stance on international airline ownership rules. The same could happen if one or two of the alliances loses out in the battle to lure large Latin American carriers into their respective folds.
Incidentally, our friends in the Brazilian aviation academy are not quite so sanguine about the impending change of rule as reported by the FT. One leading professor told us that the law is languishing “in a drawer or on a shelf” somewhere in the bowels of the Parliament building in Brasilia and that nobody can find it. Whether he meant that statement literally or metaphorically, his point is that legislative change in Brazil, especially for the airline industry, comes exceedingly slowly.
April 20, 2011
New Passenger Rights Regulation
The U.S. Department of Transportation has issued its final rule establishing penalties for tarmac delays on international flights and lost baggage. See Enhancing Airline Passenger Protections, Final Rule Dkt. No. OST-2010-0140 (Dep't of Transp. Apr. 20, 2011) (available here). Under the new penalty scheme, airlines which leave passengers on the tarmac for more than four hours may be fined as much as $27,500. Additionally, passengers bumped off of flights may be eligible for up to $1,300 in compensation.
It's difficult to discern the logic behind imposing such burdensome regulations on the airline industry at a time when air carriers are facing rising operating costs. Arguably, the DOT should have left the matter of delays and cancellations for the market to sort out. Airlines which develop a reputation for bumping passengers without attractive compensation or stranding passengers on the tarmac will be penalized by a loss of business. Moreover, when serious delays do occur, it's important to bear in mind that they are typically beyond the airlines' ability to control. Even without the threat of government penalities, delays impose substantial operating costs on airlines. They have no "incentive" to leave their planes on the tarmac or thwart their customers' travel plans.
April 18, 2011
New Report Blasts the Philippines
A new report by the risk consultancy group Pacific Strategies and Assessments states that the Civil Aviation Authority of the Philippines is "ill-prepared [to] enforce international civil aviation standards." See Gov't Seen Still Unable to Enforce International Aviation Standards, BusinessWorld Online, Apr. 18, 2011 (available here). This is bad news for the country, which has been designated by the International Civil Aviation Organization as a "significant safety concern." Moreover, both the United States and the European Union have taken steps to limit flights from Philippine air carriers under their respective safety enforcement regimes.
With the Philippines expected to fail the next round of international audits, it may be years before the country is able to upgrade its safety and technical oversight standards. Despite its informal pledges to assist member States in meeting international standards, ICAO has few tools available to see this goal met.
U.S./Saudi Arabia Open Skies
The U.S. Open Skies policy continues to attract new partners. After commemorating its 100th Open Skies partner earlier this month, the State Department announced today that it has finalized a liberal air services agreement with Saudi Arabia:
On April 18, the United States and the Kingdom of Saudi Arabia initialed the U.S.-Saudi Arabia Open Skies Agreement. The Agreement, which will be applied on the basis of comity and reciprocity pending its entry into force, will liberalize our bilateral aviation relationship.
This agreement strengthens and expands our already strong trade and tourism links with Saudi Arabia, and will benefit American and Saudi Arabian businesses and travelers. It will expand air service and encourage vigorous price competition by airlines, while safeguarding aviation safety and security.
See Press Release, State Dep't, United States and Saudi Arabia Initial Open Skies Agreement (Apr. 18, 2011) (available here).