Tuesday, April 26, 2011

Ownership: Finding a New Frontier

David Knibb has an informative piece in the latest issue of Airline Business on the incremental movement toward crossborder investment in the airline industry and the formidable challenges which remain.  See Ownership: Finding a New Frontier, Airline Bus., Apr. 18, 2011 (available here).  As the article discusses, the tolerance for foreign ownership of airlines varies from region to region and, thus far, has often been allowed on an ad hoc basis.  So long as States retain the right under their respective air services agreements (ASA) to limit or revoke the traffic rights of airlines which are not owned and controlled by the citizens of their home countries, international air carries which ingest foreign capital or come under the control of a foreign entity risk losing valuable market access privileges.  For instance, once the merger between Chile's LAN and Brazil's TAM is approved, the United States could, under the terms of its ASA with Brazil, lock-out TAM on the grounds that it is owned and controlled by Chileans.

In an effort to inject a high-level of stability into the international aviation investment regime, the United States has proposed a Multilateral Convention on Foreign Investment in Airlines.  See Facilitating Airline Access to International Capital Markets, ICAO Working Paper No. A37-WP/190 (Sept. 13, 2010) (available here).  Under the agreement, signatories would provide a list of partner States against which they will not enforce the nationality clauses in their ASAs.  This would have the benefit of providing greater legal certainity with respect to which air carriers could freely engaged in crossborder mergers and acquisitions without potentially forfeiting their traffic rights.  While a final draft of the Convention has yet to appear, the International Civil Aviation Organization is currently assessing its terms and whether or not to open the treaty up for formal ratification.

April 26, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, April 25, 2011

Option Contracts

Blog readers may be interested in reading Rolf Hellerman et al.'s new working paper, Option Contracts with Overbooking in the Air Cargo Industry (WHO Mgmt Working Paper No. 2011-PROD-2, Apr. 2011) (available from SSRN here).  From the abstract:

In today’s world economy, which is marked by increasing international trade, air cargo acts as a key facilitator. However, cargo airlines continue to struggle to be profitable because of very high asset costs and substantial demand uncertainty. To improve upon this situation, we propose an options contract. Our model captures the main features of cargo trade between an airline and a freight forwarder and allows to derive an optimal reservation policy. We then go on to analyze the impact of overbooking on the profit of the cargo capacity provider. The model is subsequently applied to real-life booking data provided by a major cargo carrier. This enables us to compare current contractual arrangements with the ones proven optimal in the model. Managerial insights to be drawn conclude this study.

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

Thursday, 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 21, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, 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 20, 2011 | Permalink | Comments (1) | TrackBack (0)

Monday, 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.

April 18, 2011 | Permalink | Comments (0) | TrackBack (0)

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).

April 18, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 13, 2011

Airline Alliances with Low Cost Carriers

Blog readers may be interested in reading Tomohiko Kawamori and Ming Hsin Lin's working paper, Airline Alliances with Low Cost Carriers (Working Paper Mar. 24, 2011) (available from SSRN here).  From the abstract:

A major carrier operates one hub linking multiple non-hub cities. It forms an alliance with a low cost carrier whose nonstop service competes with its one-stop service. The alliance’s joint profit is maximized by withdrawing the competing one-stop (nonstop) service when the major carrier’s operating cost and connecting passengers’ hub-through additional time costs are large (small). The realized alliance is welfare-improving (welfare-decreasing) when these costs are large or small (intermediate). These findings suggest the necessity of alliance regulation. In some regions, the necessity of regulation does not monotonically change as the network size increases.

April 13, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, April 11, 2011

Havel on EU ETS

A story from yesterday's edition of the New York Times featured commentary by Professor Brian Havel on the European Union's plans to apply its Emissions Trading Scheme to aviation.  See James Kanter, European Pollution Regulations Face Challenge, N.Y. Times, Apr. 10, 2011 (available here).  In it, Havel noted that "the EU regulation is an overreach" which "could set a troubling precedent where other States could begin imposing new taxes and charges on foreign airlines for activities which occur beyond their airspace."  Havel also expressed doubts that the legal challenge to the pending decision on the regulation by the European Court of Justice would favor the airlines.

April 11, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, April 7, 2011

GAO on TSA Security Measures

The U.S. Government Accountability Office has a new report out on the Transportation Security Administration's efforts to justify its passenger screening program.  See Aviation Security: TSA is Taking Steps to Validate the Science Underlying its Passenger Behavior Detection Program, but Efforts May Not Be Comprehensive, GAO-11-461T (Apr. 6, 2011) (available here).  From the summary:

The attempted passenger aircraft bombing of Northwest flight 253 on December 25, 2009, provided a vivid reminder that the civil aviation system remains an attractive terrorist target. To enhance aviation security, in October 2003 the Department of Homeland Security's (DHS) Transportation Security Administration (TSA) began testing of its Screening of Passengers by Observation Techniques (SPOT) program to identify persons who may pose a risk to aviation security. The SPOT program utilizes behavior observation and analysis techniques to identify potentially high-risk passengers. This testimony provides information on (1) the extent to which TSA has validated the scientific basis for SPOT and (2) other operational challenges. This statement is based on a prior report GAO issued in May 2010 on SPOT, including selected updates made in March 2011. For the updates, GAO reviewed documentation on TSA's progress in implementing the report's recommendations.

As GAO reported in May 2010, TSA deployed its behavior detection program nationwide before first determining whether there was a scientifically valid basis for the program. According to TSA, the program was deployed before a scientific validation of the program was completed in response to the need to address potential security threats. However, a scientific consensus does not exist on whether behavior detection principles can be reliably used for counterterrorism purposes, according to a 2008 report of the National Research Council of the National Academy of Sciences. DHS is conducting a study on the scientific basis of SPOT. Thus, in May 2010, GAO recommended that DHS convene an independent panel of experts to review the methodology of its study. DHS concurred and stated that it is convening an independent panel to review its current efforts to help validate the scientific basis for the program, which is expected to complete its work by early April 2011. Nonetheless, DHS's study to assess SPOT is not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. For example, factors such as the length of time behavior detection officers (BDO) can observe passengers without becoming fatigued are not part of the plan and could provide additional information on the extent to which SPOT can be effectively implemented. The results of a panel to review DHS's methodology could help ensure a rigorous, scientific validation of SPOT. As GAO previously reported, TSA experienced SPOT operational challenges, including not systematically collecting and analyzing information obtained by BDOs on passengers who may pose a threat to the aviation system. Better utilizing existing resources would enhance TSA's ability to quickly verify passenger identity and could help TSA to more reliably "connect the dots" with regard to persons who pose a threat. Thus, GAO recommended that TSA clarify BDO guidance for inputting information into the database used to track suspicious activities, and develop a schedule to expand access to this database across all SPOT airports. TSA agreed and in March 2011 stated that it has revised the SPOT standard operating procedures on how BDOs are to input data into the database used to report suspicious activities. TSA plans to implement these revised procedures in April 2011. TSA also reported that all SPOT airports have access to this database as of March 2011. In addition, GAO reported that individuals allegedly involved in six terrorist plots transited SPOT airports. GAO recommended in May 2010 that TSA study the feasibility of using airport video recordings of the behaviors exhibited by persons transiting airport checkpoints who were later charged with or pleaded guilty to terrorism-related offenses. GAO reported that such recordings could provide insights about behaviors that may be common among terrorists or could demonstrate that terrorists do not generally display any identifying behaviors. TSA agreed that studying airport videos could be a useful tool in understanding terrorist behaviors in the airport environment and in March 2011 reported that it is exploring ways to better utilize such recordings. GAO has made recommendations in prior work to strengthen TSA's SPOT program. TSA generally concurred with the recommendations and has actions under way to address them. GAO provided the updated information to TSA. TSA had no comment.

April 7, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 6, 2011

Independence of Aviation Safety Investigation Authorities

Professor Paul Stephen Dempsey has a new article out, The Independence of Aviation Safety Investigation Authorities, 75 J. Air L. & Com. 223 (2010) (available from SSRN here).  From the abstract:

Among the most important means of improving safety is to objectively determine the causes of aviation accidents so that appropriate action can be taken to prevent similar events from recurring in the future. The determination of causation can have an adverse political, economic, punitive, and reputational effect upon individuals, airlines, manufacturers, air navigation service providers, airports, maintenance companies, and governmental institutions. Hence, many institutions and individuals are motivated to try to influence the outcome of the investigation.

Article 26 of the Chicago Convention requires a State in which an aviation accident occurs (involving death or serious injury, or involving a serious technical defect in the aircraft or air navigation facilities) to investigate the event. The Chicago Convention obliges the 190 ratifying States to implement the standards promulgated by the International Civil Aviation Organization (ICAO) in Annexes to the Convention through their legislation, regulations, policies, and organizational structures.

Annex 13 addresses aviation accident investigations. Annex 13 provides that "the accident investigation authority shall have independence in the conduct of the investigation and have unrestricted authority over its conduct...." It also recommends that any court or administrative action designed to apportion blame or impose liability be autonomous from the accident or incident investigation. Annex 13 designates the State where the accident occurred as the appropriate body for designating the Investigator in Charge. lCAO advises that, "The accident investigation authority must be strictly objective and totally impartial and must be perceived to be so. It should be established in such a way that it can withstand political or other interference or pressure."

April 6, 2011 | Permalink | Comments (0) | TrackBack (0)

Smisek on United/Continental

The Financial Times has a story discussing the future of United following last year's merger with Continental.  See Pilita Clark, United Continental Seeks the Right Fusion, Fin. Times, Apr. 3, 2011 (available here).  In the story, United's Cheif Executive Jeff Smisek discusses the airline's plans for the future, the different operating cultures of United and Continental, and the challenges which remain to fully integrating the two companies. 

April 6, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 5, 2011

United Speaks Out Against EU ETS

Jeff Smisek, Chief Executive of United, has issued strong words against the European Union's plans to bring airlines--including U.S. carriers--under its Emissions Trading Scheme in 2012.  See Pilita Clark, United Warns EU on Emissions Scheme, Fin. Times, Apr. 3, 2011 (available here).  Interestingly, Smisek predicted that if the Air Transport Association's current legal challenge to the ETS before the European Court of Justice fails, a major international power--potentially China or the United States--will intervene on behalf of their air carriers to limit the application of the ETS.

April 5, 2011 | Permalink | Comments (0) | TrackBack (0)