Friday, March 25, 2011

Capacity Cuts

Just when it looked like the U.S. airline industry was on the road to recovery, rising fuel prices and the recent earthquake in Japan have spurred some carriers, including US Airways and Delta Air Lines, to cut capacity.  See Karen Jacobs, U.S. Airlines Cut Capacity to Battle Fuel Costs, Reuters, Mar. 23, 2011 (available here).  Additionally, airline analysts are encouraging the cuts, though some have criticized American Airlines for not being more aggressive with theirs.  See Terry Maxon, Wall Street Talks Smack About American Airlines' Capacity Plans, Airline Biz Blog, Mar. 23, 2011 (available here).

As the various stories concerning the capacity cuts point out, flight reductions will likely mean higher prices for consumers in the coming months, particularly on international routes.  Whether these moves will be enough to keep the struggling airline industry profitable remains to be seen.  Domestic carriers like Southwest currently have no plans to reduce capacity, though even their consumer base may have to endure a price spike if fuel prices continue to rise or Southwest's main competitors scale back their service offerings. 

March 25, 2011 | Permalink | Comments (0) | TrackBack (0)

Barriers to Entry in the Airline Industry

Blog readers may be interested in reviewing Jonathan W. Williams & Connan Andrew Snider's recent working paper, Barriers to Entry: An Analysis of the Wendell H. Ford Aviation Investment and Reform Act (Working Paper, Mar. 3, 2011) (available from SSRN here).  From the abstract:

In the airline industry, passengers pay higher fares at airports where a single carrier controls a high fraction of traffic. The economics of the industry suggests an inherent tradeoff between product quality and carrier size and concentration, making the welfare implications of these premia ambiguous. In this paper, we investigate the success of Congressional mandates aimed at increasing competition at highly concentrated major US airports. The mandates required airports above certain concentration thresholds to take concrete steps to ease and encourage new entry and expansion by smaller airlines, primarily by increasing access to airport facilities. We exploit a sharp discontinuity in the laws implementation to identify the effects of the law. In so doing we shed light on the nature of high fares at these concentrated airports. We find a statistically and economically significant decrease in fares resulting from an airport's coverage by the legislation. More specifically, we find that in markets where one (two) of the market's endpoints was (were) covered, fares dropped by 10% (18%). Moreover, most of this decrease has come from decreases in dominant carriers’fares. We also find that approximately half of this decline in fares is driven by the entry of low-cost carriers into new markets. We find little evidence that the fare declines have been accompanied by decreases in quality measures, with the exception of congestion-related delays, suggesting the legislation has been welfare improving for consumers.

March 25, 2011 | Permalink | Comments (0) | TrackBack (0)

China Challenges EU ETS

China's three major international airlines, acting under the auspices of the China Air Transport Association, plan to challenge the legality of the European Union's plans to bring aviation under its Emissions Trading Scheme in 2012.  See China Airlines to Challenge EU Carbon Tax: Report, AFP, Mar. 24, 2011 (available here).  If the suit goes forward, it will be the second such challenge to the ETS.  U.S. air carriers, acting through the Air Transport Association of America, filed suit in the United Kingdom last year. 

March 25, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, March 14, 2011

GAO on Aviation Security

The U.S. Government Accountability Office has released a new report, Aviation Security: Progress Made, But Challenges Persist in Meeting the Screening Mandate for Air Cargo, GAO-11-413T (Mar. 9, 2011) (available here).  From the summary:

The Department of Homeland Security's (DHS) Transportation Security Administration (TSA) is the federal agency with primary responsibility for securing the air cargo system. The Implementing Recommendations of the 9/11 Commission Act of 2007 mandated DHS to establish a system to screen 100 percent of cargo flown on passenger aircraft by August 2010. GAO reviewed TSA's progress in meeting the act's screening mandate, and any related challenges it faces for both domestic (cargo transported within and from the United States) and inbound cargo (cargo bound for the United States). This statement is based on prior reports and testimonies issued from April 2007 through December 2010 addressing the security of the air cargo transportation system and selected updates made in February and March 2011. For the updates, GAO obtained information on TSA's air cargo security programs and interviewed TSA officials.

As of August 2010, TSA reported that it met the mandate to screen 100 percent of air cargo as it applies to domestic cargo, but as GAO reported in June 2010, TSA lacked a mechanism to verify the accuracy of the data used to make this determination. TSA took several actions in meeting this mandate for domestic cargo, including creating a voluntary program to facilitate screening throughout the air cargo supply chain; taking steps to test technologies for screening air cargo; and expanding its explosives detection canine program, among other things. However, in June 2010 GAO reported that TSA did not have a mechanism to verify screening data and recommended that TSA establish such a mechanism. TSA partially concurred with this recommendation and stated that verifying such data would be challenging. As GAO reported in June 2010, data verification is important to provide reasonable assurance that screening is being conducted at reported levels. As GAO further reported in June 2010, there is no technology approved or qualified by TSA to screen cargo once it is loaded onto a pallet or container--both of which are common means of transporting domestic air cargo on passenger aircraft. As a result, questions remain about air carriers' ability to effectively screen air cargo on such aircraft. TSA has also taken a number of steps to enhance the security of inbound air cargo, but also faces challenges that could hinder its ability to meet the screening mandate. TSA moved its deadline for meeting the 100 percent screening mandate as it applies to inbound air cargo to the end of 2011, up 2 years from when the TSA administrator previously reported the agency would meet this mandate. According to TSA officials, the agency determined it was feasible to accelerate the deadline as a result of trends in air carrier reported screening data and discussions with air cargo industry leaders regarding progress made by industry to secure cargo on passenger aircraft. TSA also took steps to enhance the security of inbound cargo following the October 2010 Yemen air cargo bomb attempt--such as requiring additional screening of high-risk cargo prior to transport on an all-cargo aircraft. However, TSA continues to face challenges GAO identified in June 2010 that could impact TSA's ability to meet this screening mandate as it applies to inbound air cargo. For example, GAO reported that TSA's screening percentages were estimates and were not based on actual data collected from air carriers or other entities, such as foreign governments, and recommended that TSA establish a mechanism to verify the accuracy of these data. TSA partially agreed, and required air carriers to report inbound cargo screening data effective May 2010. However, TSA officials stated while current screening percentages are based on actual data reported by air carriers, verifying the accuracy of the screening data is difficult. It is important for TSA to have complete and accurate data to verify that the agency can meet the screening mandate. GAO will continue to monitor these issues as part of its ongoing review of TSA's efforts to secure inbound air cargo, the final results to be issued later this year. GAO has made recommendations in prior work to strengthen air cargo screening. Although not fully concurring with all recommendations, TSA has taken or has a number of actions underway to address them. Continued attention is needed to ensure some recommendations are addressed, such as establishing a mechanism to verify screening data. TSA provided technical comments on the information in this statement, which GAO incorporated as appropriate.

March 14, 2011 | Permalink | Comments (0) | TrackBack (0)

Remedies in International Law

Though not directly aviation related, blog readers who are interested in international law (or international trade law) generally may want to read Eric A. Posner & Alan O. Sykes' new working paper, Efficient Breach of International Law: Optimal Remedies, "Legalized Noncompliance," and Related Issues (U Chi. Olin Working Paper No. 546, Mar. 2011) (available from SSRN here).

In much of the scholarly literature on international law, there is a tendency to condemn violations of the law and to leave it at that. If all violations of international law were indeed undesirable, this tendency would be unobjectionable. We argue in this paper, however, that a variety of circumstances arise under which violations of international law are desirable from an economic standpoint. The reasons why are much the same as the reasons why non-performance of private contracts is sometimes desirable – the concept of “efficient breach,” familiar to modern students of contract law, has direct applicability to international law. As in the case of private contracts, it is important for international law to devise remedial or other mechanisms that encourage compliance where appropriate and facilitate noncompliance where appropriate. To this end, violators ideally should internalize the costs that violations impose on other nations, but should not be “punished” beyond this level. We show that the (limited) international law of remedies, both at a general level and in certain subfields of international law, can be understood to be consistent with this principle. We also consider other mechanisms that may serve to “legalize” efficient deviation from international rules, as well as the possibility that breach of international obligations may facilitate efficient evolution of the underlying substantive law.

March 14, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, March 3, 2011

Enemies United Against Taxation

After 2,300 years, the observation of the great Indian political adviser and architect of the Mauryan Empire, Chanakya, still rings true: The enemy of my enemy is my friend.  With that point in mind, bitter airline rivals British Airways and Virgin Atlantic, along with airports and tourist sector stakeholders, are showing a united front against the United Kingdom raising its air passenger tax as part of its new budget.  See Pilita Clark, Air Industry United to Fight Tax Raises, Fin. Times, Mar. 3, 2011 (available here).  Though there appears to be little hope that the U.K. will reduce the tax, passenger airlines would welcome shifting the charges from a per-passenger to a per-aircraft tax.

The U.K. Treasury has defended the air passenger tax as integral to its public financing and deficit reduction plan, though it is questionable whether the airline industry--which produces positive economic effects for airports, travel and tourism, and the countless other industries which rely upon air transport in their day-to-day operations--should be targeted at all.  Is the economic good which could come from the U.K. balancing its budget worth the potential cost of hampering the vitality of its airlines?  It would be well for the British Government to take pause and recall the words of its great statesman, Sir Winston Churchill: "We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket trying to lift himself up by the handle."

March 3, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 1, 2011

Canada's New Air Services Agreement with Qatar

Air transport liberalization between two State partners is easy to infer when their aeropolitical relations have historically been nonexistent.  By offering the Gulf State an unimpressive three-flights-a-week, Canada has managed to simultaneously expand Qatar's market access rights while remaining unabashaedly protectionist.  See Matthew Fisher, Qatar, Canada Do Airline Deal, Montreal Gazette, Nov. 12, 2010 (available here).  Qatar will begin serving Montreal from its hub in Doha this June.  See Amina Murtada, Qatar Airways Launches Three Non-Stop Services to Montreal Weekly, Feb. 27, 2011 (available here).

The restrictive accord with Qatar flatly contradicts the Canadian Government's "Blue Sky" air transport policy, a de facto replication of the U.S. Open Skies policy.  Instead of "encouraging the development of new markets, new services and greater competition," see Transport Canada, Canada's Blue Sky Policy (Nov. 27, 2006) (available here), the Canadian Government has opted to limit the traffic rights of one of the world's most dynamic airlines in order to protect its flag carrier, Air Canada.  This should come as no surprise.  Canada continues to limit flights from Qatar's neighbor, the United Arab Emirates, despite Emirates' 90% load factors on its thrice weekly flights from Dubai to Toronto. 

March 1, 2011 | Permalink | Comments (0) | TrackBack (0)

Southwest/AirTran Hearing

Blog readers interested in perusing the testimony from last week's Senate Judiciary Subcommittee on Antitrust, Competition Policy, and Consumer Rights may do so here.

March 1, 2011 | Permalink | Comments (0) | TrackBack (0)

OECD Implements New Aircraft Understanding

Last week, the OECD adopted new (albeit non-binding) rules governing export credits for aircraft financing.  At the signing ceremony for the Sector Understanding on Export Credits for Civil Aircraft, Doc. No. TAD/PG(2011)3 (Feb. 2, 2011) (available here), OECD Secretary-General Angel Gurria touted the agreement's ostensible benefits:

The new Aircraft Sector Understanding is interesting and remarkable:  

First, because, it unifies the terms, conditions, and procedures of official support for large and regional aircraft exports; second, because of its innovative design; third, because of its ability to significantly reduce, if not eliminate, subsidies; and fourth because it creates a level playing field among exporters, airlines and governments.

See Angel Gurria, OECD Secretary-General, Remarks at the Aircraft Sector Understanding (Feb. 25, 2011) (available here). 

Missing from Gurria remarks, however, was any response to the public charge that the Understanding was crafted to dampen the competitive position of Gulf air carriers Emirates and Etihad.  Cf., e.g., James Hogan, CEO Etihad, On the Record: Export Credit Financing (Feb. 11, 2010) (available here).  Though both airlines maintain that export credits support less than a quarter of their aircraft financing, that has not stopped airlines in the United States and European Union from arguing that the credits confer an undue advantage on the Middle Eastern airlines.  But even with the revised rules in place, Emirates and Etihad are well-positioned to out-compete their European rivals.  The biggest remaining hurdle between the Gulf carriers and open competition in the EU are the protectionist air services agreements with the United Arab Emirates maintained by the Member States.  Were the European Commission to win a mandate to enter into comprehensive negotiations with the UAE for a deal similar to the 2007 U.S./EU Agreement or the 2009 EU/Canada Agreement, the European legacy carriers would surely suffer. 

March 1, 2011 | Permalink | Comments (0) | TrackBack (0)