Tuesday, March 31, 2009

Ambassador Bruton's Remarks at the GMF

A copy of EU Ambassador John Bruton's remarks at last Friday's event sponsored by the International Aviation Law Institute and the German Marshall Fund are available online at the European Commission's Delegation to the U.S. website here.  In addition to Ambassador Bruton's comments on the future of U.S./EU aviation relations, the event also saw the launch of Professor Brian Havel's new book, Beyond Open Skies: A New Regime for International Aviation.  A summary of the event will be posted on the blog shortly.

March 31, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 26, 2009

On Protectionism and Alliances

A recent inquiry to the blog took note of our recent postings on protectionism and the aviation industry and asked if international airline alliances are not also "very dangerous mechanisms for allowing market-dominating behavior, which is detrimental to the consumer, free competition and open access for new entrants."  That is a fair question, but one which would require far more than a single blog post to answer comprehensively.  Nevertheless, it is possible to address some general points concerning international alliances and why their potential anticompetitive effects ought to be distinguished from the more pervasive problem of protectionism.

When we refer to "protectionism" on the blog, we are referring to State policies which inhibit free trade in goods and services.  In the context of civil aviation, we are typically talking about such practices as States limiting foreign ownership and control of their carriers (either through national laws or in their bilateral air services agreements with other countries), restricting foreign carriers' domestic traffic rights (cabotage), or injecting public subsidies (State aid) into their flag carrier(s).  This list is by no means exhaustive.  Bilateral agreements which fall outside the "open skies" framework can have all sorts of additional protectionist provisions, from demanding 50/50 capacity sharing on routes to complex, highly-politicized route exchanges.  (Article 11 & Annex I of the now-defunct 1977 U.S./UK Air Transport Agreement, commonly known as Bermuda II, serve as the locus classicus for these restrictions.)  The U.S.'s Fly America program has been derided as protectionist by EU Member States; so, too, has the recent European Commission proposal to suspend its "use or lose" slot rule at Community airports.  It is the position of the International Aviation Law Institute (and thus this blog) that these and other forms of protectionism impede the safe and orderly development of international civil aviation and the offering of air services on the basis of equality of opportunity, operated soundly and economically.  Cf. Chicago Convention on International Civil Aviation, pmbl., 61 Stat. 1180, 15 U.N.T.S. 295.

Airline alliances, by their very nature as agreements between private entities, do not engage in protectionism.  That does not mean they or their individual members refrain from engaging in anticompetitive behavior.  An exhaustive treatment of the merits of this general charge is beyond the scope of this post.  However, when examining airline alliances--specifically the three major global alliances--it is important to look at each of their respective networks as a whole and how it does (or does not) compete with the networks of the other alliances.  It is easy to narrow the analysis down to specific city pairs and find that a particular alliance, acting through one or more of its member airlines, dominates the route.  That's inevitable for the simple fact that not every city pair demands, or can support,multicarrier competition.  But in the aggregate, how important are those city pairs?  If a consumer is looking to fly from Grand Rapids, Michigan, to Frankfurt, one can do so through SkyTeam or the Star Alliance.  SkyTeam will take them from Grand Rapids to Detroit, Michigan, on Northwest Airlines, before placing the consumer on a KLM plane bound for Frankfurt.  On the other hand, Star will take the consumer from Grand Rapids to United's hub at Chicago O'Hare and on to Frankfurt on a flight operated by Lufthansa.  For the consumer, the question is likely to come down to which alliance will get them from Point A (Grand Rapids) to Point B (Frankfurt) in the cheapest, most time convenient manner possible.  If this consumer is a frequent air traveler, they may take into account what additional "perks" are offered by one alliance or the other.  For example, if the consumer is going to Frankfurt on vacation but normally makes frequent trips between, say, Grand Rapids and St. Paul, Minnesota, on Northwest to visit immediate family, the consumer may be inclined to pick SkyTeam to maximize frequent flyer miles.   

Now, as the example loosely illustrates, despite the large networks that Star, SkyTeam, and oneworld have developed, there is not complete overlap.  Parts of each alliance's network will be dominated by one of its members.  The competition for these international alliances, however, is for the large body of consumers who want to get from their city to a distant destination and that is what produces choices for consumers and keeps overall costs down.  It is also important to bear in mind that alliance members operating between major city pairs will still face competition from airlines offering point-to-point service, including low-cost carriers.  The barriers to entry that alliances are oftentimes accused of erecting, such as slot hoarding, can be and ought to be dealt with through robust competition rules.  Alliances are not, by nature, compelled to engage in such practices and can readily be dissuaded from doing so without impeding their ability to expand their respective networks and continue to offer consumers substantial benefits.

As a final note, in most instances airline alliances are "second best" options in the face of legal hurdles which prohibit or minimize the benefits of transnational mergers.  While some analysts have argued that alliances are preferable to mergers in that they do not demand the same levels of capital investment and thus carry less risk, they have exhibited signs of instability in their relatively short history and remain the subject of political discontent (particularly in the United States). 

March 26, 2009 | Permalink | Comments (1) | TrackBack (0)

Tuesday, March 24, 2009

Airline Alliances? "Hell no," Says Oberstar

Rep. James Oberstar, Chairman of the House Transportation Committee and main proponent of a provision in the 2009 FAA Reauthorization Act which would sunset antitrust immunity for global airline alliances, defended his position before the International Aviation Club (IAC) in Washington, D.C. yesterday.  According to a story from Reuters, Rep. Oberstar derided the immunized alliances as "de facto merger[s]" before asking rhetorically, "Is that what I voted for when I voted for [U.S. airline] deregulation in 1978?  Hell no."

The full prepared text of Rep. Oberstar's speech is available on the IAC's website here.  An independent review of the speech supplied to the blog noted that some of Rep. Oberstar's more provacative remarks are not included in the IAC text, including the aforementioned mild expletive.  However, the speech is well worth reading for those wishing to gain insight on the protectionist motivations of one of Capital Hill's most influential lawmakers.

March 24, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, March 23, 2009

Safety Transparency in the EU

Aviation lawyers Guido de Vos and Frans Vreede (whose earlier guest post on the blog is available here) of the Dutch firm AKD Prinsen Van Wijmen have written a fresh commentary on opening the European Commission's database on airline safety performance to the public.  Noting that the EU's current airline blacklist "is no panacea for aircraft accidents," their piece begins: 

A serious accident involving a Turkish Airlines aircraft took place in the Netherlands last Wednesday.  The drastic impact of such a disaster on victims and relatives cannot be stressed enough.  Fortunately aid workers were on hand quickly, and the fact that no fire broke out prevented more serious consequences. Speculation began immediately as to the cause of the crash.  The history of air disasters has shown that there is seldom one single cause; the disaster is usually the result of a chain of interrelated events.  It is the task of the Safety Investigation Board to carefully ascertain the cause.  Anyone is free to state their opinion, since statements before the Council cannot, in principle, be used in criminal proceedings.

In the meantime, it has been suggested in various media that Turkish Airlines has the reputation of being an unsafe airline because it has been involved in other serious accidents. However, the European Commission quickly issued a statement that the company is not, and never has been, on the European blacklist of unsafe airlines.

The rest of the article is available online here.

March 23, 2009 | Permalink | Comments (0) | TrackBack (0)

The ATA on Antitrust Immunity

The Air Transport Association (ATA) released a public statement today urging the Obama Administration to resist the recent amendment to the 2009 FAA Reauthorization Act which would sunset the antitrust immunity for existing airline alliances.  See previous discussion on the blog here, here, and here.  According to the ATA, the legislation could result in the loss of 15,000 U.S. airline jobs and have a ripple effect across the travel and tourism industry.  The statement also observed:

International alliances are a vital element of a global economy and produce enormous benefits for travelers, businesses, shippers and others. The U.S. Department of Transportation (DOT) has historically approved international airline alliances because of the substantial benefits that they provide both to passengers, and to European and U.S. airlines.  [The legislative proposal] could destroy important service and public benefits such as competitive fares and new routes by withdrawing previously granted rights for carriers to participate in alliances.

In addition to the ATA's comments, it is important to take cognizance of the fact that the extension of antitrust immunity for airline alliances has been crucial to persuading countries to sign open skies agreements with the U.S.  For example, the full implementation of the 1996 U.S./Germany Air Transport Agreement was preconditioned on U.S. antitrust immunity for an expanded Lufthansa/United Airlines alliance.  Likewise, the DOT's 1996 refusal to extend antitrust immunity to the proposed British Airways/American Airlines alliance was due to a breakdown in negotiations for a liberal U.S./UK agreement to replace the highly restrictive Bermuda II treaty.  This practice was explicitly referenced in Paragraph 48 of the Memorandum of Consultations to the 2007 U.S./EC Air Transport Agreement where the U.S. assured EU Member States that that the Agreement "will satisfy the DOT requirement that, to consider . . . an application from foreign airlines for antitrust immunity or to continue such immunity, an Open Skies agreement must exist between the United States and the homeland(s) of the applicant foreign airline(s)." 

The proposal to sunset current antitrust immunity for airline alliances comes with the risk that the DOT will lose the authority to grant it altogether.  If that happens, the U.S. will be deprived of an important bargaining chip for future air transport negotiations, particularly with crucial markets such as Japan, China, Mexico, and Brazil.  More problematic is the possibility that the U.S. will lose the confidence of EU Member States during the ongoing negotiations for a second stage air transport agreement, leading to a possible suspension of some (if not all) of the traffic rights acquired for U.S. carriers in 2007.  The result could be not just a loss of 15,000 U.S. jobs, but the forfeiture of two decades' worth of aerodiplomacy which has helped rid the transatlantic market of inefficient protectionism. 

March 23, 2009 | Permalink | Comments (0) | TrackBack (0)

A Suggestion for Congestion

Readers of the blog may be interested to read Michael E. Levine's recently published analysis of alleviating airport congestion through slot auctions, Airport Congestion: When Theory Meets Reality, 8 Yale J. on Reg. 37 (2009).  In the article, Levine critiques the Federal Aviation Administration's slot auction proposal and suggests a new way forward through the use of blind auctions. 

March 23, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, March 20, 2009

Schnurman on AA Labor Issues

Though it's now a week old, Mitchell Schnurman of the Fort Worth Star-Telegram wrote an excellent commentary on the ongoing negotiations between American Airlines and its pilots union. 

March 20, 2009 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 19, 2009

Time to Amend the Chicago Convention?

According to a story from Air Transport World, the U.K. House of Commons Environmental Audit Committee is urging the Government to seek amending the Chicago Convention on International Civil Aviation in order to allow governments to tax international aviation fuel.  The Committee cited the declining price in fuel as justification for the policy.

Under Article 24(a)of the Chicago Convention, 61 Stat. 1180, 15 U.N.T.S. 295, "[f]uel . . . on board the aircraft of a contracting State, on arrival in the territory of another contracting State and retained on board on leaving the territory of that State shall be exempt from customs duty, inspection fees or similar national or local duties and charges."  This provision was reiterated by the International Civil Aviation Organization Council in a 1993 resolution.  See ICAO, ICAO's Policies on Taxation in the Field of International Air Transport, ICAO Doc. 8632-C/968 (2d ed. 1994).  Paragraph 2 of that resolution goes on to state that "fuel . . . taken on board for consumption" by an aircraft from a contracting State in the territory of another contracting State departing for the territory of any other State "shall be furnished exempt from all customs and other duties."  Finally, Paragraph 4 makes clear that "[t]he expression 'customs and other duties' shall include import, export, excise, sales, consumption and internal duties and taxes of all kinds levied upon . . . fuel."  

Both Article 24 and the subsequent resolution accords with the Chicago Convention's telos that international civil aviation "be developed in a safe and orderly manner and that international air transport services may be established on the basis of equality of opportunity and operated soundly and economically."  See Chicago Convention, pmbl.  Remove the protections of Article 24 and what you are left with is the opportunity for States to meddle in the orderly development and provision of air services by stuffing their coffers with monies drawn from fuel taxation.  For airlines to operate "soundly and economically," they must be placed out of the reach of the opportunistic hands of governments. 

Clearly, the worldwide economic downturn has placed great strains on governments trying to balance fiscal responsibility with providing the aid they believe is necessary to combat the crisis.  But the aviation industry, no less than governments, has been adversely impacted as well.  While the airlines have been given some relief through the fall in oil prices, they are now feeling the brunt of a global decline in demand for their services.  Any amendment to the Chicago Convention will be accompanied by deliberation and that takes time.  By that point, there is no telling where fuel prices will be.  An amendment so radical as to allow States to do what they have been rightly barred from doing for over 60 years will not be easily implemented or revoked.  When the global economy finally "bottoms out" and matters are back to "normal," will the U.K. and other likeminded States be ready to lead the charge to reinstall Article 24?  That's doubtful.  The temptation will be too great for governments the world over to reserve for themselves the right to tax civil aviation when it appears politically expedient.  The result will be to place another economic encumbrance upon the international airline industry and inevitably retard the development  and operation of civil aviation the Chicago Convention was meant to secure.   

March 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Update and Reminder

Due to an influx of projects at the International Civil Aviation Law Institute, blog updates have been a bit sparse this week.  Regular posting will resume shortly.

As a reminder, the German Marshall Fund in Washington, D.C. will be co-hosting a luncheon with the Institute on Friday, March 27 from 12-2p entitled, "Transatlantic Aviation: Can We Move Beyond Open Skies?"  The event will be keynoted by Ambassador John Bruton from the Delegation of the European Commission to the United States and will also launch Prof. Brian Havel's new book, Beyond Open Skies: A New Regime for International Aviation.  Readers interested in attending are encouraged to contact the Institute as there are  a limited number of seats available and attendance is by invite only. 

March 19, 2009 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 17, 2009

Havel on United/Aer Lingus

Prof. Brian Havel was quoted in a story from the March 16 edition of the Chicago Tribune.  Entitled "Clipping Union's Wings," the Tribune discussed the recently announced United Airlines/Aer Lingus joint venture which will use non-union crews and Aer Lingus planes to operate new flights between Washington Dulles and Madrid starting in March 2010.  In response to concerns over who would regulate the new venture given the fact that the services would be preformed by an Irish carrier between the United States and Spain, Havel remarked that "the regulatory framework isn't as airtight as it should be."  He went on to state that the partnership itself is "an entirely unintended and brilliant consequence of" of the 2007 U.S./EC Air Transport Agreement. 

March 17, 2009 | Permalink | Comments (0) | TrackBack (0)

Friday, 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 13, 2009 | Permalink | Comments (0) | TrackBack (2)

Thursday, March 12, 2009

Reconsidering Cabotage

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 12, 2009 | Permalink | Comments (0) | TrackBack (2)

Wednesday, 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.   

March 11, 2009 | Permalink | Comments (0) | TrackBack (0)

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 11, 2009 | Permalink | Comments (0) | TrackBack (1)

Tuesday, 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.

March 10, 2009 | Permalink | Comments (0) | TrackBack (0)

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 10, 2009 | Permalink | Comments (0) | TrackBack (3)

Sunday, 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).

March 8, 2009 | Permalink | Comments (0) | TrackBack (0)

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.

March 8, 2009 | Permalink | Comments (1) | TrackBack (0)

Saturday, March 7, 2009

Slouching Toward Protectionism

The House Transportation and Infrastructure Committee approved the FAA Reauthorization Act of 2009.  Section 801 of the bill, as discussed last week on the blog, could foreclose to foreign citizens all middle and upper management positions in U.S. airlines.  The provision, which was first made part of the stillborn 2007 FAA Reauthorization Act by Rep. James Oberstar, is clearly antithetical to the U.S.'s pursuit of "Open Skies" and is more than enough to warrant alarm among EU leaders looking to enhance the 2007 U.S./EC Air Transport Agreement.  Now Rep. Oberstar has gone a step further, attaching his proposal to sunset antitrust immunity for transnational airline alliances to the FAA legislation.  The result is a protectionist package which could set air transport liberalization back decades.

It is difficult to discern just what Rep. Oberstar is trying to achieve.  If his concern is primarily that antitrust immunity has anticompetitive effects, then he should push for what the airlines truly need: the ability to execute transnational mergers.  But as Section 801 makes plainly clear, Rep. Oberstar has no interest in opening up U.S. carriers to foreign investment or even substantial foreign involvement.  International airline alliances have been the industry's ingenious (albeit unstable) response to nationality restrictions; take them away and the airlines are back to the "good old days" of interlining agreements which are both inefficient and costly to consumers.  Equally troubling is that U.S. airlines may lose many of their hard won traffic rights into the EU.  Under the 2007 agreement, the Community or, perhaps, the individual Member States acting unilaterally, may suspend rights if they are not satisfied that sufficient progress has been made toward a second stage agreement.  There is likely nothing the U.S. could offer its primary aviation trading partner to compensate for the loss its carriers' capacity to form strategic partnerships. 

Those entertaining the notion that Rep. Oberstar's proposals are either prudent or wise ought to reflect on the now-defunct air services agreement signed between the U.S. and the United Kingdom in 1977 (commonly referred to as "Bermuda II").  Seen as the high water mark of British protectionism, Bermuda II imposed artificial and highly politicized controls on fares, routes, and capacity and kept London Heathrow locked to all but two American carriers.  Only with the signing of the 2007 U.S./EC agreement was Bermuda II fully overcome.  U.S. airlines cannot afford to operate under these constraints again and yet Rep. Oberstar's own brand of protectionism may lead to reinaugurating them as normative for international civil aviation.  At that point the transatlantic marketplace becomes the theater for an aviation trade war: U.S. airlines will be the casualties and consumers the collateral damage.   

March 7, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, March 2, 2009

The Return of Section 801

Those who have followed Rep. James Oberstar's crusade to bind international aviation in new regulatory strictures may not be surprised to learn that Section 801 from the stillborn FAA Reauthorization Act of 2007, H.R. 2881, 110th Cong. (2007), is part of the 2009 version, H.R. 915, 111st Cong. (2009).  The section would amend the statutory provisions on ownership and control of U.S. airlines by mandating that

an air carrier shall not be deemed to be under the actual control of citizens of the United States unless citizens of the United States control all matters pertaining to the business and structure of the air carrier, including operational matters such as marketing, branding, fleet composition, route selection, pricing, and labor relations.

A 2007 letter to Rep. Oberstar from Rep. John L. Mica, ranking Republican member of the House Transportation and Infrastructure Committee, warned that the language could be interpreted by a future Administration as requiring that all middle and upper management positions in U.S. airlines be occupied by U.S. citizens.  Not surprisingly, Rep. Oberstar has chosen not to heed that warning. 

Clearly, the language is not in the "spirit" of the 2007 U.S./EC Air Transport Agreement.  If the bill passes with the new control requirements intact, it would throw another bolt on the door to authentic liberalization and likely sour the ongoing negotiations for a second stage agreement.  The language may also contradict the 2007 Agreement's provisions for branding and franchising opportunities (cf. Article 10(8) & Annex 5).  Between this proposed amendment and a pending bill which could very well mark the end of the international aviation alliance system (discussed on the blog here and here), Rep. Oberstar appears to be charting a course for the international aviation industry away from "Open Skies" and back under the dark clouds of regulatory dominance and managed trade.

March 2, 2009 | Permalink | Comments (0) | TrackBack (0)