Wednesday, August 31, 2011

Regulatory Capture Avoidance

On August 19, the FAA announced a new rule restricting the capacity in which carriers may employ former FAA safety inspectors for two years after those inspectors leave the agency (FAA press release available here). Creation of this rule was undoubtedly motivated by the 2008 scandal in which FAA inspectors were found to have allowed carriers to avoid aircraft inspection requirements. While less controversial than the passenger protection rules that went into effect the following week, this rule is aimed at a problem that is arguably more important. It is a welcome development that should benefit the agency, the industry and the public.

August 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 30, 2011

Potential Implications of Canada's Competition Tribunal Proceedings Against Air Canada/United Venture

The decision of Canada's Competition Bureau to bring formal proceedings against Star Alliance members Air Canada, United and United's recent merger partner, Continental Airlines, could open the door to fracturing the alliance system. Since the 1990s, States have expressed a desire to have their carriers integrated into an alliance by finalizing Open Skies agreements with the United States as a prerequisite for their airlines receiving antitrust immunity from the U.S. Department of Transportation. Following the historic 2007 U.S./EU Air Transport Agreement, the world's three major alliances - Star, SkyTeam and oneworld - developed deep integration plans that raised the eyebrows of consumer groups, antitrust authorities at the Department of Justice, and non-alliance airlines. Even so, the DOT proceeded to garland all three alliance plans with immunity. The European Commission opened its own investigation into the alliances, though the impact of these proceedings was negligible. After a handful of slot surrenders at congested EU airports and some other, minor concessions, the transatlantic alliances were free to work closely on rates, routes, scheduling and revenue sharing. Following the 2009 U.S./Japan Open Skies accord, the transpacific market appeared ripe for alliance dominance. It appeared the emergence of three "global brands" in the airline industry was a Hegelian inevitability.

Now Canada has stepped into the fray, though its motivations remain unclear. Few analysts deny the proposition that the alliance have an adverse impact on competition, or to use an antiquated phrase, constitute a "restraint on trade." However, government authorities, particularly the DOT, have been willing to tolerate the alliances' supposed anti-competitive effects in exchange for the public benefits of creating worldwide route networks and pooled perquisite programs. Has the Canadian Competition Bureau had a change of heart? If so, what impact will it have on the alliance system? Should the Competition Tribunal come down against Star, the immediate effect would be to exclude Air Canada - a longtime partner of United - from the full integration benefits of the Star Alliance. Arguably, this would be detrimental to Air Canada's immediate commercial interests and perhaps compromise the airline's ability to compete effectively at the global level.

Potentially more troubling, the proceedings may inspire other jurisdictions to open their own, disparate investigations. While it is likely that many countries will continue to embrace airline alliances, others - depending on regulatory temperament - may be inclined to eschew the DOT's favorable disposition to the alliances in favor of stricter conditions or, perhaps, ordering full de-integration of the investigating States' airlines from the alliance system altogether. The result could be an effective "de-globalizing" of the three major alliances.        



August 30, 2011 | Permalink | Comments (0) | TrackBack (0)

Friday, August 26, 2011

Opposition to United/Continental/Air Canada Alliance Worth Watching

Despite increased liberalization efforts over the last two decades, international mergers and truly globally integrated carrier networks remain blocked by the nationality rule. As such, the primary mechanism by which airlines have pursued global integration has been through alliances with foreign carriers, enabling coordination on ticketing, scheduling, brand identity and more. The U.S. DOT has promoted these alliances by aggressively granting antitrust immunity to the allying carriers. While some concerns have been raised about the potential impact these alliances may have on competition, before this year no other single State jurisdiction (setting to one side the general investigations conducted by the European Commission) had stepped in to seriously scrutinize any of these arrangements in a way that might jeopardize the entire endeavor. Thus, the June decision by the Canadian Commissioner of Competition to file an application with Canada's Competition Tribunal opposing the planned United/Continental/Air Canada joint venture in is both novel and possibly portentous. United, Continental and Air Canada had already been working together under the antitrust immunity granted by the U.S. authorities to the Star Alliance. Following the United/Continental merger in early 2010, United/Continental and Air Canada announced plans late last year for enhanced coordination between the companies including a new revenue sharing agreement. It is this latest joint effort to which the Commissioner of Competition objects. Air Canada and United/Continental filed their responses to the Commissioner's application earlier this month. A few days ago Air Canada competitor WestJet filed a request to intervene in opposition to the alliance. Those interested in following the case can do so at the Competition Tribunal's website (available here). Over the coming weeks the blog will contain further analysis of the opposing briefs and any new developments in the case.

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

Thursday, August 25, 2011

Hurricanes and Regulations

Many of the major domestic carriers will waive specified fees and rules attached to rebooking or changing flights for customers whose travel plans are likely to be impacted by Hurricane Irene. See Ben Mutzabaugh, Airlines Waive Fees, Rules Ahead of Hurricane Irene, USA Today Travel, Aug. 25, 2011 (available here).  This is fairly common in the industry for severe weather events and only seemed worth mentioning in light of yesterday's post on the new passenger protection rules. For those who view the DOT's regulations as unnecessary and burdensome, this serves as a timely example of a passenger-friendly accommodation offered by airlines without the need for regulatory prompting. Those that welcome the passenger protection regulations are likely to counter that the airlines might have avoided government involvement had they been more proactive about adopting common sense measures such as this to respond to customer inconvenience.

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

Wednesday, August 24, 2011

New Passenger Protection Rules Expand Reach of Existing Rules and Increase Fines

As a follow up to yesterday's post, here is an expanded description of the new DOT rules that just took effect. The main takeaway is that these new restrictions do little to regulate the airline industry in new ways, but instead apply existing regulations to previously unaffected entities and increase the penalties for violating certain regulations. Broken down by category, here are the changes:

Expansions of existing regulations

  • The required compensation for lost, damaged or delayed luggage must now include a refund of any baggage fees paid on the affected luggage.
  • Airlines must now disclose all optional fees on their web sites.
  • The three-hour limit on tarmac delays for domestic flights now applies to flights at small-hub and non-hub airports.
  • The four-hour limit on tarmac delays for international flights now applies to foreign carriers (mentioned in yesterday's post).

Fine increases for violating existing regulations

  • Passengers who are bumped and delayed for a short time will now be entitled to compensation equal to double the price of their one-way ticket, up to $650. Previously the compensation had only been equal to the price of the ticket and capped at $400.
  • Bumped passengers who experience longer delays will now be entitled to compensation equal to four times the price of their one-way ticket, up to $1,300. Previously the required compensation was for twice the price of the ticket with a limit of $800.

Aside from the potential implications, noted yesterday, of extending the tarmac delay requirements to foreign carriers, these new rules hardly break new ground. Unless one has strong feelings about the optimal penalty amounts opinions of the latest rule are unlikely to be much different than when the DOT first entered this area in late 2009.

August 24, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 23, 2011

Newest DOT Passenger Protection Regulations Go Into Effect

The most recent passenger protection regulations, announced earlier this year (covered in an April 20 blog post), are now in effect (DOT press release available here). Notably the DOT has extended the so-called "tarmac delay rules" to international flights by foreign carriers operating at U.S. airports. With the next few months likely to be dominated by discussion of the EU's (legal or aeropolitical) ability to sweep foreign carriers into its carbon emissions trading scheme, the U.S. will need to be prepared to distinguish these latest unilaterally-imposed regulations from any (legal or aeropolitical) objections it makes to the EU scheme. 

August 23, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 17, 2011

Toward a Global Aviation Emissions Agreement

Blog readers may be interested to read a draft copy of Brian F. Havel and Gabriel S. Sanchez's most recent article, Toward a Global Aviation Emissions Agreement at SSRN here.  The article has been accepted for publication in the 36th volume of the prestigious Harvard Environmental Law Review.  Readers with any comments and/or criticisms of the piece may send them to Gabriel Sanchez.

August 17, 2011 | Permalink | Comments (0) | TrackBack (0)

Thursday, August 11, 2011

BBC Take on ETS

The BBC has an excellent story detailing the controversy over the European Union's plans to bring aviation into its Emissions Trading Scheme in January 2012.  See Damian Kahya, Air Wars: Fear of Trade War Over EU Airline Carbon Cap, BBC News, Aug. 10, 2011 (available here).

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

Wednesday, August 10, 2011

LAN/TAM Merger Hurdles

Consolidation in the Latin American aviation market may be put on hold as Chile's Constitutional Court has been asked by Pal Airlines to block the pending merger between Chile's LAN and Brazil's TAM.  See Anthony Esposito, Chile LAN, Brazil TAM Merger Could Face New Roadblock, Wall St. J., Aug. 9, 2011 (available here).  Chilean antitrust authorities, which are already reviewing the merger, are expected to rule on the deal later this month.

If the merger proceeds, TAN/TAM will become Latin America's largest airline and one of the ten largest carriers in the world.  The deal is also historic since it marks one of the largest crossborder consolidations in the airline industry without the aid of a supranational governance authority.  European air carrier mergers and acquisitions, such as Air France/KLM or Lufthansa's purchase of Austrian Airlines, were facilitated by the Union's common air transport regulations and the creation of a single aviation market.  In most areas of the world, however, crossborder mergers are severely limited by national investment caps and treaty-based restrictions which require a State's airlines to be owned and controlled by its citizens before the carrier is eligible to perform international services.  The pending LAN/TAM merger constitutes one of the most significant departures from this nationalistic norm since the creation of the Chicago Convention in 1944.

August 10, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, August 8, 2011

Emirates Against the ETS

Not surprisingly, the Arab world's largest air carrier, Emirates, has attacked the European Union's Emissions Trading Scheme on the ground that it will cost the carrier up to $1 billion over the next decade.  See Emirates Eyes EU Carbon Tax of $1 Billion Over 10 Years, Reuters, Aug. 8, 2011 (available here).  Moreover, the Arab Air Carriers Association has asked the EU not to include aviation in the ETS.

It's unlikely that Emirates' criticisms will do much to dissuade the EU.  Emirates is one of the few leading international airlines which does not enjoy open access to the Union's 27 Member States.  In fact, EU airlines such as Lufthansa and Air France have lobbied to block the Dubai airline from receiving additional traffic rights.  Moreover, several EU airlines are upset that Emirates utilizes the unofficial "sixth freedom" to move European passengers to its hub in Dubai for final transit to destinations in Africa and Asia.  Emirates has also been subjected to the charge that it relies on illegal subsidies to keep costs down, including export credits to purchase state-of-the-art aircraft.

Even if Emirates alone cannot change the Union's regulatory course, it can contribute another high-profile voice to the already powerful criticisms which have been mounted against the ETS.  Though some airlines are hanging their hopes on a successful outcome to the Air Transport Association's legal challenge which is currently pending before the Court of Justice of the European Union, there's a greater chance that the matter will ultimately be settled in the diplomatic arena. 

August 8, 2011 | Permalink | Comments (0) | TrackBack (0)

Saturday, August 6, 2011

Lex Aviatica in SSRN Top 10

Brian F. Havel and Gabriel S. Sanchez's latest article, The Emerging Lex Aviatica, 42 Geo. J. Int'l L. 639 (2011), is among the Top 10 Downloads for Antitrust & Trade Regulation from SSRN.  For those who have not read the article, it is available here.  

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

Friday, August 5, 2011

Air Transport Capacity

Blog readers may be interested in Tay Koo et al.'s Airport Capacity and Tourism Demand Interaction (July 31, 2011) (available from SSRN here).  From the abstract: 

The co-movement of air transport capacity and tourism demand are well-recognised. However, there exists a gap in understanding the relation between air transport capacity and demand such that the causal nature of these variables is rarely examined. The goal of this paper is to impose a cause-effect structure into the relation between tourism demand and air transport capacity. Specifically, we apply a vector error correction model (VECM) to help assess whether, and to what extent, capacity or passenger demand are first-movers that return long-run equilibrium following an event that punctuates the established equilibrium. Using data on international aviation between Australia and our test cases of China and Japan, we find that demand on Japan-Australia market correct for short-run deviations from the long-run equilibrium quicker than in the China-Australia market. Reasons for such variation in adjustment speeds are discussed and we show that the results are robust to the phenomenon of airlines pre-empting demand when setting capacity.

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

Monday, August 1, 2011

Balancing Capacity and the Environment

Blog readers interested in the role of environmental regulation in the aviation sector may want to read Timothy R. Wyatt's paper, Balancing Airport Capacity Requirements with Environmental Concerns: Legal Challenges to Airport Expansion (July 4, 2011) (available from SSRN here).  From the abstract:

Regulatory agencies such as the Federal Aviation Administration (FAA) must balance the need to expand airport capacity with concerns about environmental impact. This balance is governed by the National Environmental Policy Act (“NEPA”), which establishes the environmental review procedures governing airport development activities that receive federal funding. This paper presents a comprehensive empirical study of legal challenges to airport expansion, focusing on the influence of environmental procedural statutes such as NEPA, as well as substantive environmental law including requirements in the federal airport funding statutes to minimize adverse environmental impacts. All known reported court opinions since the enactment of NEPA involving environmental challenges to airport construction and physical expansion were reviewed and characterized with respect to the factual background of the case, the form of the legal challenge, and the disposition of the reviewing court. A statistical regression analysis was performed to determine which factors significantly influence a court’s decision to approve the environmental review or to enjoin airport expansion pending further environmental review. The analysis demonstrates that environmental challenges to airport expansion have become significantly less likely to succeed over time, due in part to 2003 legislative changes requiring a coordinated environmental review process coordinated by the FAA, and granting exclusive jurisdiction to the U.S. Courts of Appeals for review of FAA final decisions. Environmental plaintiffs facing such a difficult judicial forum should focus their legal challenges on the most statistically effective arguments: that the FAA failed to adequately consider cumulative environmental impacts, and to a lesser degree, that the FAA or airport proprietor has failed to take every reasonable step to minimize the adverse environmental impact of airport expansion.

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