Monday, May 25, 2009

The House Passes Protectionist Act

The U.S. House of Representatives took a large protectionist step yesterday for the U.S. airline industry by passing the 2009 FAA Reauthorization Act, H.R. 915, 111th Cong.  More than just a funding bill for the Federal Aviation Administration, the Act contains provisions which would sunset all antitrust immunity for international airline alliances three years after enactment (sec. 426(e)); tighten the statutory requirement that domestic airlines be under the "actual control" of U.S. citizens by excludiing foreigners from "control[ing] all matters pertainingto the business and structure of the air carrier" (sec. 801); and mandating twice-yearly inspections of foreign repair stations by FAA personnel (sec. 303).  (A sample of previous discussions of the Act and its potential impact can be found on the blog here, here, and here.)

All three provisions are a mistake.  With respect to international airline alliances, much ink has already been spilt discussing the clear consumer benefits they bring and unmasking the myth that they are inherently anticompetitive.  See, e.g., Michael E. Levine, Commentary, Airline Alliances and Systems Competition, 45 Hous. L. Rev. 333 (2008).  What has not been sufficiently highlighted is the role of allowing alliances to develop and flourish in enticing foreign partners, most notably the European Community (and previously its individual Member States), 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.  This practice is explicitly referenced in Paragraph 48 of the Memorandum of Consultations to the 2007 U.S./EC Air Transport Agreement, 2007 O.J. (L 134) 4, where the U.S. assured the EC 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)."  Under the version of the Act passed by the House, this assurance rings hollow.  Even though the alliance provision provides that airlines may reapply for approval and immunization after the sunset, the time. money, and uncertainty involved will likely dissuade them from doing so.  The EC, which has come to take a generally positive view of alliances in light of the continuing dominance of the nationality rule, could perceive the regulatory hostility toward these arrangements embodied in the Act as undermining the liberalizing "spirit" of the 2007 Agreement and souring the ongoing second stage negotiations.

Also detrimental to U.S./EC aeropolitical relations is the Reauthorization Act's amendment to the U.S. statutory requirements on ownership and control of domestic carriers.  Introduced originally as part of the stillborn 2007 FAA Reauthorization Act, H.R. 2881, 110th Cong., the provision drew sharp criticism from Rep. John L. Mica, ranking Republican member of the House Transportation and Infrastructure Committee.  Mica 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.  If this provision is enacted, it would throw another bolt on the door to authentic liberalization in the context of U.S./EC second stage negotiations.  The amendment may also contradict the 2007 Agreement's provisions for branding and franchising opportunities.  Cf. U.S./EC Air Transport Agreement, art. 10(8) & Annex 5.  

Finally, to the Reauthorization Act's requirement for twice-yearly inspections of foreign repair stations by the FAA.  While no one doubts the need for robust safety standards for civil aviation, the language of the Act leaves no room for granting latitude to aeropolitical partners ready, willing, and able to harmonize high-level safety oversight.  The inspection requirement has prompted the European Commission to threaten pulling out of an aviation safety agreement it signed last year with the U.S. which allows for the mutual recognition of each party's safety certification for repair stations.  Without it, the European Aviation Safety Administration is prohibited under EC law from recognizing FAA certification and would thus have to engage in its own independent, time-consuming, and costly inspections of U.S. stations.  The European Commission has estimated that the additional inspections could cost the U.S. airline industry up to $35 million a year compared to the $1.1 million it would spend under the bilateral.  Ironically, the inspection provision, which has the strong support of labor unions seeking to protect jobs at domestic stations, could lead to new costs being passed on to the U..S. carriers which use them--costs which may very well result in increased ticket prices, a further drop in demand for air services, and the loss of numerous aviation-related jobs.

All hope is not lost, however.  It may be some time before the U.S. Senate gets around to passing its version of the Act and there is no guarantee that it will contain all of these protectionist provisions (at least not in the form passed by the House).  The cries of the European Commission and the Air Transport Association, the U.S. industry's primary lobbying group, may not fall on deaf ears.  And yet, with the rising ride of protectionism worldwide and the heavy influence of labor on a Democrat-dominated Congress and Administration, there is a well-founded fear that at least one of these troubling measures will make it onto President Obama's desk.  By that point it will be too late and international civil aviation could find itself thrust into a new era of managed trade where political wrangling, not entrepreneurial acumen and market discipline, dominates.

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