Wednesday, September 2, 2015
Over the past two decades the international airline business has been dominated by two trends that can be regarded as either contradictory or complimentary: the privatization of an industry formerly dominated by national carriers, and frequent public bailouts of privatized airlines during times of financial crisis. The latest example comes from Russia, where state-owned Aeroflot will assume a 75% stake and effective control of the country's first and largest private carrier, Transaero. Combined, the two airlines control over 50% of the Russian passenger market.
Wednesday, August 26, 2015
Last week, the Australian Competition and Consumer Commission (ACCC) gave its blessing to a proposed code-sharing agreement between Qantas and China Eastern. The ACCC had indicated earlier this year that it was inclined to block the deal because it would reduce competition on the Sydney-Shanghai route, but the carriers were able to assuage those concerns by pledging a 21 percent increase in capacity on the route over the next five years.
Friday, August 21, 2015
The Washington Post has obtained copies of FAA files on close encounters between drones and manned aircraft, reporting the number of incidents is nearing 700 so far in 2015, a dramatic increase from the previous year. The Post's report has drawn more attention to an area of growing concern. New York Senator Charles Schumer reportedly intends to introduce an amendment to the upcoming FAA reauthorization bill that would require all drones to be manufactured with built-in geo-fencing that would prevent the drones from operating above 500 feet of altitude or within no-fly zones surrounding airports. The FAA is currently developing rules for commercial drone operations, but hobbyist activity is largely unregulated.
Wednesday, August 19, 2015
Professor Joseph Schwieterman, director of DePaul University's Chaddick Institute for Metropolitan Development and a long-time friend to the International Aviation Law Institute, published an opinion piece in the Wall Street Journal yesterday arguing that the Department of Transportation should take into account the availability of intercity bus services when conducting its investigation into accusations of price gouging by U.S. carriers on select routes in the immediate aftermath of last May's Amtrak derailment in Philadelphia.
Tuesday, August 18, 2015
A recent collection of papers have advanced the provocative theory that major institutional investors, such as BlackRock, Vanguard, and the like, effectively reduce competition in concentrated industries, including the U.S. airline sector, by holding stakes in competing firms. The economic theory is that by owning shares of all of the major firms within a given industry, these firms profit from most from increases to overall industry profit margins rather than from competition for market share among participants within the industry. While each individual firm should still have incentives to compete, management serves the interests of the company's largest shareholders, and thus disproportionately pursue market discipline strategies. This presumably explains patterns of executive compensation, which are tied more closely to industry performance, and the lack of increased economic output relative to recent profit levels.
Recent interest in this theory has been sparked by an econometric study of the U.S. airline industry finding airline fares to be 3-5% higher because of horizontal shareholdings by institutional investors. Posner and Weyl concisely summarize the findings and conclude that the U.S. congress should respond with legislative changes to the tax treatment of horizontal shareholdings by mutual funds. More recently, Elhauge has released a draft of a paper arguing that existing antitrust law provides sufficient authority to challenge horizontal shareholdings without legislative changes.
There is no indication yet that the DOJ is pursuing this theory in its current investigation of airline collusion, and the theory has critics who are skeptical that the government would take action that so directly threatens the very existence of index funds. Still, it remains an issue worth watching.
Monday, August 17, 2015
Last week Reuters reported that the United States and China held exploratory talks in May about revising the countries' existing bilateral air services agreement. The report indicates that no changes are imminent, formal negotiations will not begin until certain preconditions are met, and significant liberalization does not appear to be under discussion. The report quotes a Chinese official as being more interested in opening markets than in prior years, but that appears to be primarily motivated by a concern that the U.S. and Chinese passenger carriers are approaching the maximum number of weekly flights permitted under the current agreement between the U.S. and Beijing, Shanghai, and Guangzhou (160 round-trip flights for the U.S. carriers, 160 for the Chinese). The reported possibility of adding flights to and from those three major cities while decreasing the number of flights permitted to smaller markets is hardly indicative of a philosophical shift toward liberalization. The U.S., for its part, seems to be willing to play hardball as it is refusing to enter formal negotiations to revise the air services agreement until China addresses U.S. concerns over its slot allocation process at major airports, indicating that adding flights is a greater priority for the Chinese carriers than their U.S. counterparts.
Thursday, August 6, 2015
Tuesday, August 4, 2015
A conflict between French and European law concerning France's failure to recover incompatible state aid to airlines within the four month time frame required by EU regulations appears headed to the European Court of Justice. Last year, the European Commission found that multiple French airports had provided violated community limitations on state aid to airlines in their attempts to attract low-cost carriers such as Ryanair. The French government was directed to recover the approximately 10 million euros in illicit aid from the recipient airlines, but has not yet done in accordance with French law which suspends recovery actions while the matters are being appealed in French courts. European case law requires that France recover the funds within four months regardless of pending appeals.
Monday, August 3, 2015
Katherine Calhoun of SmithAmundsen has an interesting write up of the implications of a recent Seventh Circuit decision. Boeing sought to remove claims against it related to the 2013 Asiana Airlines crash in San Francisco to federal court. The Seventh Circuit determined that claims stemming from a flight operating over water could potentially create the basis for removal to federal court on the basis of admiralty jurisdiction.
Thursday, July 30, 2015
As expected, Russia used its Security Council veto to prevent the U.N. from creating a tribunal to prosecute persons responsible for last year's downing of Malaysia Airlines Flight MH 17. The Chicago Convention and its annexes include provisions for investigating accidents for the purposes of identifying causes and preventing their recurrence, but investigators are not authorized to assign blame or dispense punishment. As a specialized agency of the U.N., it is only natural that ICAO would defer to the U.N. on an issue as sensitive as this. It could be argued that protecting international civil aviation from violence should be seen as a distinct priority that should be institutionally segregated from the larger U.N., but that is not the system we have and granting ICAO the power to conduct criminal prosecutions or to sanction States, other than by revoking their voting privileges, could jeopardize the organization's ability to facilitate technical coordination on matters that are less contentious, but still extremely important. Because of the oft-lamented institutional design of the U.N Security Council, any efforts to prosecute this act will have to be conducted outside of the U.N. system, as was done in the case of the Lockerbie bombing.
Wednesday, July 29, 2015
Among the many restrictions small Unmanned Aircraft Systems (UAS) operators face, one of the least controversial is the limitation on operations above 400 feet of altitude. Similar altitude caps are common throughout the world, even in countries perceived more accommodating to small UAS operation. Most current uses for small UAS are easily satisfied at lower altitudes without worrying about the increased potential for interference with manned aircraft above that threshold. Indeed, one of the perceived advantages to operating in this space is that it presumably obviates the need for the significant technological breakthroughs and attention to regulatory compliance that would be required to integrate small UAS into the manned commercial airspace. At this week's NASA Unmanned Aircraft Systems Traffic Management Conference, Amazon proposed to further divide segregated airspace into a dedicated space for "high-speed transit" operations between 200 and 400 feet of altitude, and restrict "low-speed localized" operations to no higher than 200 feet above the surface. Presumably this would allow high volume commercial drone operators such as Amazon to operate a fleet of vehicles with more sophisticated navigational capabilities free from interference with less expensive models used by hobbyists or smaller commercial operations.
One can't help but wonder if such a demarcation wouldn't also helpfully foist the potential legal concerns about trespassing or airspace ownership onto these same hobbyists and small business owners. If altitudes above 200 feet can be designated as a separate commercial class of navigable airspace, beyond landowners' "exclusive control over the immediate reaches" of their land, then the burden of litigating over where property rights end and public airspace begins will fall to the hobbyists and local operators that will be populating that airspace.
Monday, July 20, 2015
Officials from the U.S. Federal Aviation Administration completed an initial assessment of the Thai civil aviation sector last week and reportedly identified a number of problems in need of correction for the country to maintain its Category 1 rating and avoid restrictions on Thai carriers' ability to operate to the United States. Most of the concerns are related to inadequate staffing in the Department of Civil Aviation (DCA), which has prevented the DCA from conducting inspections in keeping with international standards. It has been a trying year for Thai aviation, which was designated with Significant Safety Concerns by ICAO in January and has subsequently faced operating restrictions from China, Japan, and South Korea. Thai carriers did manage to avoid placement on the most recent edition of the EU "blacklist" last month, perhaps a reflection of the EU's emphasis on the conduct of foreign airlines as opposed to the oversight capabilities of foreign regulators.
Tuesday, June 30, 2015
Last week, the Hong Kong Air Transport Licensing Authority (ALTA) finally issued its decision rejecting Jetstar Hong Kong Airways Limited's (JHK) application for license to operate scheduled air services. This is a setback for Qantas which was attempting to add a Hong Kong-based LCC to its Jetstar Airways Group which includes subsidiaries in Australia, Vietnam, Singapore, and Japan. More broadly, the decision runs contrary to that airline groups business model that has become popular in Southeast Asia over the past decade, by which airlines such as Jetstar, AirAsia, and others have operated foreign subsidiaries through the use of local shareholders to satisfy regulatory requirements for airlines to be owned and controlled by citizens of the licensing State. While this model has largely been successful in appeasing regulators, its legality has been questioned and occasionally used by some countries as an excuse for denial of the necessary regulatory permission. Often these denials are believed to have protectionist motives and many believe that ALTA was acting to protect Cathay Pacific in this case. Even so, most prior refusals have lacked any formal administrative record to scrutinize so ALTA's issuance of a written decision in this case is at a minimum highly beneficial to the development of law in this area.
While Hong Kong lacks specific requirements about ownership and control, it has a similar requirement that airlines have their principal place of business in Hong Kong to receive an operating license from the ALTA. Principal place of business had never previously been defined in Hong Kong, so the ALTA decision cited to a handful of English and U.S. cases and adopted from those decisions the view that day-to-day operational control isn’t decisive with regard to principal place of business. Jetstar Hong Kong’s majority shareholder (in voting rights), CEO, and business operations are all located in Hong Kong, but certain decisions can’t be made without input from the two important shareholders in Australia (Qantas) and China (China Eastern). ALTA appeared especially concerned about the external influence on Jetstar Hong Kong’s route network and pricing, but other examples include important personnel actions such as appointing board members and hiring and dismissing the CEO. From the decision, it doesn’t appear that ALTA would approve any type of franchise or subsidiary arrangement as there was a lot of concern that Jetstar Hong Kong could not possibly operate independently as tied as it was to the overall Jetstar brand.
ALTA chose not to rely on ICAO guidelines in determining the principal place of business, which is as follows: "Evidence of principal place of business includes: the airline is established and incorporated in the territory of the designating Party in accordance with relevant national laws and regulations, has substantial amount of its operations and capital investment in physical facilities in the designating Party, pays income tax and registers its aircraft there, and employs a significant number of nationals in managerial, technical and operational positions." ALTA correctly observed that the ICAO definition was intended for designating and authorizing airlines to serve international routes, which is a distinct process from receiving an operational license from a national aviation authority. But ALTA never explains why Hong Kong’s reasons for adopting a principal place of business test for licensing would be any different than the reasons for having such a test for authorizing or designating carriers to serve foreign routes, which make it difficult to understand if the factors ALTA has chosen to apply successfully advance the objectives of the
principal place of business requirement.
In addition, it isn't clear that Jetstar Hong Kong has a principal place of business under the test ALTA has devised. Neither the Australian or Chinese shareholders appear to have independent enough control from each other or Hong Kong to qualify. ALTA is clearly aware of this criticism and asserts that it doesn’t need to determine where the principal place of business exists, just whether it is in Hong Kong. But more consideration should probably have been given to the possibility that while Hong Kong may not satisfy all prongs of the test, relative to any other location it is the most principal place of business.
Ultimately, the decision is a defeat for those pushing against ownership and control restrictions, unless more of these results can convince affected parties that the proper response is to seek repeal of these regulations, as opposed to relying on creative corporate arrangements to work around them.
Tuesday, June 23, 2015
Polish national carrier, LOT Airlines, temporarily suspended service on Sunday because of an external attack on its computer systems. International aviation's various security treaties are often cited as a model for an international cybersecurity regime (see Hathaway, et al, The Law of Cyber-Attack). Presumably this attack would be covered by the 1971 Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation or its 1988 Supplementary Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation, but without more specific information about the attack it is difficult to assess the legal implications with certainty. The 1971 Convention covers acts that seriously endanger the safety of an aircraft while in flight, including damaging air navigation facilities or interfering with the operation of an aircraft. It would seem a good case could be made to include disruption of the computer system that produces flight plans for the operation of aircraft, which is reportedly what took place, under those categories. Even so, this incident should provide sufficient incentive for the international civil aviation community should to examine how well the existing security conventions cover all forms of attack on airline computer systems, even those less directly connected to the operation of aircraft.
Thursday, June 11, 2015
There were multiple developments today in news stories about which we have recently blogged, so we have decided to include a brief list of links to keep readers up-to-date on these items:
- Portugal has chosen the investor group led by Azul's David Neeleman as the winning bidder for TAP. The group will be acquiring a controlling stake of 61 percent, so there are undoubtedly some European partners within the investment group to avoid running afoul of foreign ownership limits.
- Ryanair says it will appeal the latest order by the UK Competition and Markets Authority to sell its stake in Aer Lingus, and suggested that it will likely wait to make a decision on selling to IAG until after the EU competition authorities have probed the deal.
- Aviation officials in the EU and U.S. are struggling to determine how to better avoid a tragedy similar to the recent Germanwings 9525 crash. The EU appears to be giving stronger consideration to mental screening requirements, though it is possible the rules would be directed at flight schools and not airlines. U.S. officials sound more skeptical of additional mandated medical screenings, and are instead searching for ways to better facilitate self-reporting by pilots.
Wednesday, June 10, 2015
The U.S. Environmental Protection Agency (EPA) announced today that it is proposing to find that greenhouse gas emissions from aircraft engines contribute to air pollution that endangers public health and welfare. In doing so, the EPA is acting under the authority provided it by Section 231 of the Clean Air Act, which directs the agency to study emissions from aircraft and to issue standards to control emissions "which may reasonably be anticipated to endanger public health or welfare." Such a finding has long been seen as inevitable. In 2007, the Supreme Court held in Massachusetts v. EPA that greenhouse gas emissions were covered air pollutants under the Clean Air Act. Subsequently, the EPA has found that greenhouse gases endangered public health and welfare when emitted by motor vehicles, leaving little basis to assert that these gases would not endanger public health and welfare when emitted by aircraft.
The EPA has, however, held off on issuing an endangerment finding until now, choosing to first act on emissions from other sectors such as motor vehicles, trucking, and power plants. This delay in addressing aircraft emissions, which has been challenged in court by environmental groups, is likely primarily attributable to the airline industry's relatively minor contributions to total greenhouse gas emissions compared to those other sectors. But a secondary reason for the timing of today's announcement is readily apparent from reading the text of the EPA's statement, a desire not to get ahead of ICAO. The EPA has joined the FAA in representing the U.S. at ICAO's deliberations over the development of international standards for greenhouse gas emissions from aircraft, which are scheduled for release next year. An endangerment finding is just a preliminary step the EPA must take before developing and issuing rules restricting aircraft emissions. The EPA's announcement today made clear that this endangerment finding is intended to lay the groundwork for the EPA to issue domestic rules conforming to the international standards agreed upon within ICAO. There is no indication at this point that the EPA intends to go any further in restricting aircraft emissions than the eventual international standards. A detailed account of the EPA's reasoning and analysis can be found here.
Tuesday, June 9, 2015
Bloomberg is reporting that the U.S. Federal Aviation Administration (FAA) has advised the National Transportation Safety Board (NTSB) that it does not believe it is feasible to make black box recorders or other cockpit electronics impervious to pilot tampering. The FAA's primary concern, according to the report, is that pilots need to retain the ability to turn off certain electronic components in the event of a fire or other electronics malfunction. The issue of pilot misconduct has received increased attention following the disappearance of Malaysia Air Flight 370 and the crash of Germanwings Flight 9525.
Monday, June 8, 2015
The Portuguese government appears to be proceeding with the sale of national carrier TAP despite the legal concerns about the bidding process that emerged last week. While the procedural improprieties raised by the administrative court are believed to be minor, a second area of potential legal concern has received less attention. The two leading bidders competing to acquire a controlling interest in the airline are investors associated with Latin American carriers Azul and Avianca. The European Union's requirement that community carriers be majority-owned by nationals of a European Union Member State would presumably prevent either of these bidders from obtaining the full 61 percent stake the Portuguese government is auctioning off. Foreign ownership and/or control would also endanger TAP's ability to operate international routes under Portugal's bilateral air services agreements as well as the multilateral agreements to which Portugal is a party through its EU membership.
What explains the seeming lack of concern over TAP's likely sale to a non-European interest? In all likelihood, both the Portuguese government and the prospective buyers are confident a deal can be structured to evade the foreign ownership rules. Evidence of this attitude can be seen in a Wall Street Journal story from last week reporting that if Azul's investors, if successful in their bid for TAP, would keep the two airlines separate "for legal reasons" and coordinate their operations through an alliance. Local partners can probably be found to ensure sufficient European ownership of TAP, or perhaps the winning bidder will be content to take a 49 percent stake and exert significant managerial influence as Etihad has done with some of its recent European investments. Creative work-arounds such as these have become increasingly prevalent throughout international aviation. At some point policy makers need to consider the utility of maintaining foreign ownership restrictions that are only loosely enforced and add layers of complexity onto airlines' corporate structures to preserve a fiction of legal compliance.
Thursday, June 4, 2015
A useful example of the ability of the international community to pressure a non-compliant state into reforms is currently underway in Thailand. Earlier this year, an ICAO audit revealed deficiencies in the country's safety oversight. That finding has jeopardized the ability of Thai carriers to operate charter flights to Japan and China, leading to a memorandum of understanding under which the Thai government will submit its reform proposals to the Japan Civil Aviation Bureau for review. The current plans for restructuring the Thai Department of Civil Aviation involve the creation of a separate airports authority and safety and licensing regulator, potentially funded by a direct levy on Thai carriers. Thailand appears to be feeling added pressure because of upcoming inspections planned by the U.S. FAA in July and another ICAO audit, this time of Thailand's aviation security practices, next year.
Wednesday, June 3, 2015
The Supreme Administrative Court of Portugal issued an injunction earlier today against the government's plan to sell national carrier TAP on the grounds that the government had failed to follow proper procedure under Portuguese law by neglecting to have the airline's finances independently evaluated. The government reportedly hopes to seek relief from the ruling and move forward with this plan accept bids this Friday.