Tuesday, June 30, 2015

Jetstar Hong Kong Denied Operating License

Last week, the Hong Kong Air Transport Licensing Authority (ALTA) finally issued its decision rejecting Jetstar Hong Kong Airways Limited's (JHK) application for license to operate scheduled air services. This is a setback for Qantas which was attempting to add a Hong Kong-based LCC to its Jetstar Airways Group which includes subsidiaries in Australia, Vietnam, Singapore, and Japan. More broadly, the decision runs contrary to that airline groups business model that has become popular in Southeast Asia over the past decade, by which airlines such as  Jetstar, AirAsia, and others have operated foreign subsidiaries through the use of local shareholders to satisfy regulatory requirements for airlines to be owned and controlled by citizens of the licensing State. While this model has largely been successful in appeasing regulators, its legality has been questioned and occasionally used by some countries as an excuse for denial of the necessary regulatory permission. Often these denials are believed to have protectionist motives and many believe that ALTA was acting to protect Cathay Pacific in this case. Even so, most prior refusals have lacked any formal administrative record to scrutinize so ALTA's issuance of a written decision in this case is at a minimum highly beneficial to the development of law in this area.

While Hong Kong lacks specific requirements about ownership and control, it has a similar requirement that airlines have their principal place of business in Hong Kong to receive an operating license from the ALTA. Principal place of business had never previously been defined in Hong Kong, so the ALTA decision cited to a handful of English and U.S. cases and adopted from those decisions the view that day-to-day operational control isn’t decisive with regard to principal place of business. Jetstar Hong Kong’s majority shareholder (in voting rights), CEO, and business operations are all located in Hong Kong, but certain decisions can’t be made without input from the two important shareholders in Australia (Qantas) and China (China Eastern). ALTA appeared especially concerned about the external influence on Jetstar Hong Kong’s route network and pricing, but other examples include important personnel actions such as appointing board members and hiring and dismissing the CEO. From the decision, it doesn’t appear that ALTA would approve any type of franchise or subsidiary arrangement as there was a lot of concern that Jetstar Hong Kong could not possibly operate independently as tied as it was to the overall Jetstar brand.

ALTA chose not to rely on ICAO guidelines in determining the principal place of business, which is as follows: "Evidence of principal place of business includes: the airline is established and incorporated in the territory of the designating Party in accordance with relevant national laws and regulations, has substantial amount of its operations and capital investment in physical facilities in the designating Party, pays income tax and registers its aircraft there, and employs a significant number of nationals in managerial, technical and operational positions." ALTA correctly observed that the ICAO definition was intended for designating and authorizing airlines to serve international routes, which is a distinct process from receiving an operational license from a national aviation authority. But ALTA never explains why Hong Kong’s reasons for adopting a principal place of business test for licensing would be any different than the reasons for having such a test for authorizing or designating carriers to serve foreign routes, which make it difficult to understand if the factors ALTA has chosen to apply successfully advance the objectives of the
principal place of business requirement.

In addition, it isn't clear that Jetstar Hong Kong has a principal place of business under the test ALTA has devised. Neither the Australian or Chinese shareholders appear to have independent enough control from each other or Hong Kong to qualify. ALTA is clearly aware of this criticism and asserts that it doesn’t need to determine where the principal place of business exists, just whether it is in Hong Kong. But more consideration should probably have been given to the possibility that while Hong Kong may not satisfy all prongs of the test, relative to any other location it is the most principal place of business.

Ultimately, the decision is a defeat for those pushing against ownership and control restrictions, unless more of these results can convince affected parties that the proper response is to seek repeal of these regulations, as opposed to relying on creative corporate arrangements to work around them.

June 30, 2015 | Permalink | Comments (0)

Tuesday, June 23, 2015

LOT Hack

Polish national carrier, LOT Airlines, temporarily suspended service on Sunday because of an external attack on its computer systems. International aviation's various security treaties are often cited as a model for an international cybersecurity regime (see Hathaway, et al, The Law of Cyber-Attack). Presumably this attack would be covered by the 1971 Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation or its 1988 Supplementary Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation, but without more specific information about the attack it is difficult to assess the legal implications with certainty. The 1971 Convention covers acts that seriously endanger the safety of an aircraft while in flight, including damaging air navigation facilities or interfering with the operation of an aircraft. It would seem a good case could be made to include disruption of the computer system that produces flight plans for the operation of aircraft, which is reportedly what took place, under those categories. Even so, this incident should provide sufficient incentive for the international civil aviation community should to examine how well the existing security conventions cover all forms of attack on airline computer systems, even those less directly connected to the operation of aircraft.

June 23, 2015 | Permalink | Comments (0)

Thursday, June 11, 2015

Follow Up on Recent News Events

There were multiple developments today in news stories about which we have recently blogged, so we have decided to include a brief list of links to keep readers up-to-date on these items:

  • Portugal has chosen the investor group led by Azul's David Neeleman as the winning bidder for TAP. The group will be acquiring a controlling stake of 61 percent, so there are undoubtedly some European partners within the investment group to avoid running afoul of foreign ownership limits.
  • Ryanair says it will appeal the latest order by the UK Competition and Markets Authority to sell its stake in Aer Lingus, and suggested that it will likely wait to make a decision on selling to IAG until after the EU competition authorities have probed the deal.
  • Aviation officials in the EU and U.S. are struggling to determine how to better avoid a tragedy similar to the recent Germanwings 9525 crash. The EU appears to be giving stronger consideration to mental screening requirements, though it is possible the rules would be directed at flight schools and not airlines. U.S. officials sound more skeptical of additional mandated medical screenings, and are instead searching for ways to better facilitate self-reporting by pilots.

June 11, 2015 | Permalink | Comments (0)

Wednesday, June 10, 2015

EPA Proposes Endangerment Finding for Aircraft Emissions

The U.S. Environmental Protection Agency (EPA) announced today that it is proposing to find that greenhouse gas emissions from aircraft engines contribute to air pollution that endangers public health and welfare. In doing so, the EPA is acting under the authority provided it by Section 231 of the Clean Air Act, which directs the agency to study emissions from aircraft and to issue standards to control emissions "which may reasonably be anticipated to endanger public health or welfare." Such a finding has long been seen as inevitable. In 2007, the Supreme Court held in Massachusetts v. EPA that greenhouse gas emissions were covered air pollutants under the Clean Air Act. Subsequently, the EPA has found that greenhouse gases endangered public health and welfare when emitted by motor vehicles, leaving little basis to assert that these gases would not endanger public health and welfare when emitted by aircraft.

The EPA has, however, held off on issuing an endangerment finding until now, choosing to first act on emissions from other sectors such as motor vehicles, trucking, and power plants. This delay in addressing aircraft emissions, which has been challenged in court by environmental groups, is likely primarily attributable to the airline industry's relatively minor contributions to total greenhouse gas emissions compared to those other sectors. But a secondary reason for the timing of today's announcement is readily apparent from reading the text of the EPA's statement, a desire not to get ahead of ICAO. The EPA has joined the FAA in representing the U.S. at ICAO's deliberations over the development of international standards for greenhouse gas emissions from aircraft, which are scheduled for release next year. An endangerment finding is just a preliminary step the EPA must take before developing and issuing rules restricting aircraft emissions. The EPA's announcement today made clear that this endangerment finding is intended to lay the groundwork for the EPA to issue domestic rules conforming to the international standards agreed upon within ICAO. There is no indication at this point that the EPA intends to go any further in restricting aircraft emissions than the eventual international standards. A detailed account of the EPA's reasoning and analysis can be found here.

June 10, 2015 | Permalink | Comments (0)

Tuesday, June 9, 2015

FAA Expresses Skepticism About Anti-tampering Measures

Bloomberg is reporting that the U.S. Federal Aviation Administration (FAA) has advised the National Transportation Safety Board (NTSB) that it does not believe it is feasible to make black box recorders or other cockpit electronics impervious to pilot tampering. The FAA's primary concern, according to the report, is that pilots need to retain the ability to turn off certain electronic components in the event of a fire or other electronics malfunction. The issue of pilot misconduct has received increased attention following the disappearance of Malaysia Air Flight 370 and the crash of Germanwings Flight 9525.

June 9, 2015 | Permalink | Comments (0)

Monday, June 8, 2015

TAP Bidding Shows Lack of Concern for Foreign Ownership Rules

The Portuguese government appears to be proceeding with the sale of national carrier TAP despite the legal concerns about the bidding process that emerged last week. While the procedural improprieties raised by the administrative court are believed to be minor, a second area of potential legal concern has received less attention. The two leading bidders competing to acquire a controlling interest in the airline are investors associated with Latin American carriers Azul and Avianca. The European Union's requirement that community carriers be majority-owned by nationals of a European Union Member State would presumably prevent either of these bidders from obtaining the full 61 percent stake the Portuguese government is auctioning off. Foreign ownership and/or control would also endanger TAP's ability to operate international routes under Portugal's bilateral air services agreements  as well as the multilateral agreements to which Portugal is a party through its EU membership.

What explains the seeming lack of concern over TAP's likely sale to a non-European interest? In all likelihood, both the Portuguese government and the prospective buyers are confident a deal can be structured to evade the foreign ownership rules. Evidence of this attitude can be seen in a Wall Street Journal story from last week reporting that if Azul's investors, if successful in their bid for TAP, would keep the two airlines separate "for legal reasons" and coordinate their operations through an alliance. Local partners can probably be found to ensure sufficient European ownership of TAP, or perhaps the winning bidder will be content to take a 49 percent stake and exert significant managerial influence as Etihad has done with some of its recent European investments. Creative work-arounds such as these have become increasingly prevalent throughout international aviation. At some point policy makers need to consider the utility of maintaining foreign ownership restrictions that are only loosely enforced and add layers of complexity onto airlines' corporate structures to preserve a fiction of legal compliance.

June 8, 2015 | Permalink | Comments (0)

Thursday, June 4, 2015

Regulatory Restructuring in Thailand

A useful example of the ability of the international community to pressure a non-compliant state into reforms is currently underway in Thailand. Earlier this year, an ICAO audit revealed deficiencies in the country's safety oversight. That finding has jeopardized the ability of Thai carriers to operate charter flights to Japan and China, leading to a memorandum of understanding under which the Thai government will submit its reform proposals to the Japan Civil Aviation Bureau for review. The current plans for restructuring the Thai Department of Civil Aviation involve the creation of a separate airports authority and safety and licensing regulator, potentially funded by a direct levy on Thai carriers. Thailand appears to be feeling added pressure because of upcoming inspections planned by the U.S. FAA in July and another ICAO audit, this time of Thailand's aviation security practices, next year.

June 4, 2015 | Permalink | Comments (0)

Wednesday, June 3, 2015

Court Suspends TAP Sale

The Supreme Administrative Court of Portugal issued an injunction earlier today against the government's plan to sell national carrier TAP on the grounds that the government had failed to follow proper procedure under Portuguese law by neglecting to have the airline's finances independently evaluated. The government reportedly hopes to seek relief from the ruling and move forward with this plan accept bids this Friday.

June 3, 2015 | Permalink | Comments (0)

Tuesday, June 2, 2015

Brazil Scraps Plan for Regional Aviation Subsidies

According to a Bloomberg report, Brazil will not be moving forward with a proposal to subsidize operations to underserved airports and provide financing to regional airports. The plan had been under discussion by Brazilian officials for the past year, but budgetary concerns appear to have convinced the government to shelve the idea for at least the near-term.

June 2, 2015 | Permalink | Comments (0)

Monday, June 1, 2015

European Commission Questions German Compliance with EU Airport Security Monitoring Standards

Citing concerns about substandard oversight of airport security procedures by the German government, the European Commission has referred Germany to the EU Court of Justice for noncompliance with EU Regulation 300/2008. The EC was careful to state that it has no evidence that actual security practices at German airports have been inadequate, but that it believes the frequency and scope of monitoring by German authorities does not comport with EU requirements.

June 1, 2015 | Permalink | Comments (0)