Category AVIATION &ТНЕ ROLE OF GOVERNMENT

The main provisions of the statute provide:

1. Direct payments and loan guarantees

a. All U. S. air carriers were eligible to share a $5 billion fund to compensate them for direct losses due to the federal ground stop order that resulted immediately after the terrorists’ attack, and incremental losses incurred between September 11 and December 11, 2001

b. Issuance of up to $10 billion in federal loan guarantees and credits to air carriers, subject to terms and conditions set by the president

2, Insurance and liability

a. Limited the liability of air carriers, certi­fied by the DOT as victims of an act of terrorism, for losses suffered by third par­ties to $100 million in the aggregate (due to the terrorist act) with provisions for the government to assume all liability over that amount

b. Prohibited the imposition of punitive damages against either the carrier or the government as a result of the terrorist act

c. Granted the DOT authority to reim­burse air carriers for insurance premium increases due to September 11

3, Tax provisions extending certain tax due dates for air carriers

4, Creation of a victim compensation fund to compensate individuals (or their survivors) for injuries or death caused by terrorist – related aircraft crashes on September 11 The Act established the Air Transporta­tion Stabilization Board, whose function was to administer the issuance of the $10 billion in federal loan guarantees to affected airlines. As a precondition to the issuance of any guarantees, the Board had to determine that:

1, Credit was not reasonably available to the airline at the time of the issuance

2, The intended obligation (the loan and the purpose for the loan) was prudently incurred

3, The transaction was a necessary part of maintaining a safe, efficient, and viable com­mercial aviation system in the United States

By the middle of 2002, some 400 air carriers had applied for compensation for direct losses as a result of September 11. The government had approved and paid $4.3 billion to 382 different carriers. The largest payments went to the larg­est airlines. United received almost $725 million, American received $656 million, and Delta got $595 million.

At the same time, the Stabilization Board continued to work through applications for loan guarantees. It quickly became clear that the Board was not going to rubber-stamp applications for the airlines. America West, the first to receive guarantees, was required to rework its application several times in order to satisfy the Board, and the guarantees were conditioned on the airline granting to the government a form of collateral
to guarantee repayment, warrants on one-third of the airline’s stock. Warrants are options to pur­chase stock at a predetermined price.

The Board rejected other applications, including Vanguard Airline’s request for just $7.5 million in guarantees. Eleven other small airlines made applications, with varying results.

Major airlines were slow to apply, primarily because of the rigid stance taken by the Board in evaluating applications. In addition to requir­ing security for the government guarantees, the Board also required the airlines to make operat­ing changes designed to increase the likelihood of repayment. US Air, for instance, received conditional approval for $900 million in guar­antees dependent on the airline securing size­able concessions from its employees. The labor unions would not agree, and U. S. Air went into Chapter 11 in August 2002. United Airlines also applied for guarantees in an amount of $1.8 bil­lion. Again, labor would not agree to the conces­sions required by the government. In December 2002, UAL filed for bankruptcy protection under

Chapter 11 of the Act. The other legacy carriers were just barely hanging on. Later in this chap­ter we will review the record of all remaining legacy carriers’ use of Chapter 11 since 2001.

A deregulated air transport system driven by consumer demand based primarily on price has emerged in the 21st century. It is a system that tends toward a low-cost approach as its first goal, and then tries to find ways to survive while provid­ing it. Airlines have not proven to be good invest­ments in an economically deregulated world. As of 2012, there is only one domestic airline that possesses investment grade credit, the minimum rating of BBB-, and that airline is the only airline that has been consistently profitable under the deregulated system. See Figure 35-29 for a com­parison of corporations and their credit ratings.

Airways flight 101, crashed in Miami, kill­ing 20. The NTSB cites Chalks’ inadequate maintenance program and the FAA’s failed oversight of the airline as probable causes.

• Aug. 27, 2006: Comair flight 5191, operat­ing under a code share as Delta Connection, crashed in Lexington, KY, killing 47 passen­gers and 2 crew members. One crew member survives. The final NTSB report cites pilot performance as the probable cause and non­relevant conversation by crews as a contrib­uting cause.

• Feb. 12, 2009: Continental flight 3407, a Col – gan Air-operated plane flying under a code share as Continental Connection, crashed out­side of Buffalo, N. Y., killing all 49 on board and 1 on the ground. NTSB cites the captain’s inappropriate response to a stall, unprofes­sional pilot behavior, and Colgan Air’s inade­quate procedures for flying in icing conditions as probable causes.

The last accident, Colgan Air flight 3407, was highly publicized in the news media and in aviation circles. The issues raised by this event concerned the adequacy of entry-level flight qualifications of pilots, the airline’s training stan­dards for all pilots, the acceptable level and qual­ity of crew rest, and pilots’ pay levels. The first officer of flight 3407, for instance, was paid a salary of $16,000 per year, lived with her parents in Seattle, Washington, and commuted to her home base at Newark by overnight deadhead­ing, at least partially due to financial constraints. It was said that she also had a part-time job in a coffee shop.

The airplane flown by Colgan Air was painted in Continental’s livery, including Conti­nental’s trademark globe on the tail, and only the fine print on the ticket gave any indication that this was not a Continental operation.

In February 2012, the FAA proposed to sub­stantially increase the qualification requirements for first officers consistent with a mandate in the Airline Safety and Federal Aviation Administra­tion Extension Act of 2010. The proposed rule is entitled “Pilot Certification and Qualification Requirements for Air Carrier Operations.” Among other things, this proposal would require an Air­line Transport Rating for first officers, completion of a new FAA-approved program for the ATP cer­tificate with enhanced training requirements, but contain allowances for reduced minimum flight time to qualify for the ATP rating under certain circumstances, including military training or a four-year baccalaureate degree program.

This rule seems to have stirred some contro­versy, with even the former FAA administrator Randy Babbitt on record as saying he does not think this is the best solution to the problem, cit­ing overall safety statistics. It must also be rec­ognized that the kind of flying that the regionals have to perform is not comparable with that of the mainline carriers. Regionals perform many more takeoffs and landings, thus more instru­ment approaches in IMC, fly at lower altitudes, use shorter and narrower runways at outlying air­ports, and often fly turboprop equipment.

Overall, according to the NTSB, from 2000 to 2009, it was more than twice as safe to fly as it was in the preceding decade, and more than seven times safer than in the 1970s. While these are impressive and reassuring statistics, unan­swered questions implicit in the foregoing illus­trations of regional practices remain.

In 1995, at the urging of the Department of Trans­portation, discussions were initiated between for­eign and U. S. carriers under the auspices of IATA and ATA, to reach voluntary agreement to waive the limitations of liability set out in Warsaw. Later that year, these carriers signed the IATA Inter-Carrier Agreement (IIA) that committed the airlines to take action to waive the limitation of liability provisions of the Warsaw Convention. In 1996, the second step was taken when many of

them signed the IATA Measures of Implementa­tion Agreement (MIA), which waived the War­saw limitations up to 100,000 Special Drawing Rights (SDRs). SDRs are monetary units repre­senting an artificial “basket” currency developed by the International Monetary Fund to replace gold as a world standard. Recently 100,000 SDRs represented approximately $130,000. By the mid­dle of the year 2000, 122 international carriers, comprising more than 90 percent of the world’s air transport industry, had signed IIA, with most of those also signing MIA. The effect of these developments was that any international passen­ger who qualified would have an absolute right to receive a payment of approximately $130,000 regardless of airline fault.

Although it had taken 30 years to accomplish, by 1987 the basis for broad European cooperation had finally been achieved. It had taken the sepa­rate efforts of all of the EC institutions to make it happen: the Commission, by its Memorandum No. 1 and Memorandum No. 2; the Parliament, by its civil action against the Council; the European Court of Justice, by its decision in the Nouvelles Frontieres case; and finally, the Single European Act. Henceforth, national autonomy would take a back seat to the unity of the European Union.

Competition Rules in Air Transport

Now it was the turn of the Council to take the leading role in implementing the goal of full economic integration by restructuring air trans­port policies. The Council, in 1987, adopted regulations (the Competition Rules) designed to apply the rules of competition, mandated by the Treaty of Rome, to scheduled air transport. These regulations applied only between Mem­ber States, not to internal domestic traffic nor to operations between a Member State and a non­Member State. Air transport operations to third – party states were, and had been, controlled by bilateral agreement beginning after the Chicago Convention in 1944.

The Council regulations came in three phases, or “packages” as they were called, between 1987 and 1993. The third set of regula­tions, effective on January 1, 1993, effectively satisfied the goal of air transport liberalization mandated by the Treaty of Rome. This group of regulations dealt with the important issues of fares, market factors (slot allocations, capacity, etc.), computer reservation systems, ground han­dling, cargo services, mergers, and subsidies.

In addition, by 1993 there had already begun a trend toward privatization of national airlines. British Airways was the first of the national air­lines to privatize, in 1987, followed by Icelandair, and others were well on the way to privatiza­tion, like KLM (39 percent government owned), Sabena (53 percent), SAS (50 percent), Lufthansa (48 percent). Still others, like Air France, Iberia, and Olympic remained wholly government owned, but the trend toward privatization had been started. By the end of 2002, KLM and Iberia were fully privatized. Privatization among other international airlines is shown in Figure 39-1.

Predation and Merger

The Council’s competition rules are mainly enforced by the Commission. Commission investigations of predation and mergers can be

compared to those of the United States Depart­ment of Justice. With respect to mergers, the EU and the United States agreed in 1991 to coordi­nate their activities so as to reduce the likelihood of significant discrepancies existing in their anti­competition rules and policies regarding transat­lantic mergers and acquisitions.3

Like the crossing of the Rubicon, traversing the Karman line marked a point of no return for humanity. In the context of the Cold War, the potential for disaster was palatable. ICBMs were now a reality, and there was no defense. Mutually Assured Destruction (MAD) was the acronym of the day, and it was a chillingly accurate description of what any miscalculation by either (later any) nuclear power would bring. This was the Wild West on an international level, without a sheriff.

In the context of international civil law, however, many people held out hope. It had been remarked by both astronauts (American) and cosmonauts (Soviets) that national boundaries on earth were not discernable from space. Boundar­ies on earth, of course, imply the sovereignty of nation-states, and they have been the cause of wars since time immemorial. But there was something about being in space that seemed to strike a humanistic, rather than a nationalistic, chord in those first space travelers.

In 1945, the United Nations was founded among the world’s sovereign states in the hope that it could provide a forum for the peace­ful consideration of issues between states as an alternative to war. The United Nations is large, and through its organizations (its commit­tee structure), programs (such as trade and food programs), and specialized agencies (such as WHO, the World Health Organization), it has assumed many and varied roles in the interna­tional community.11

In 1958, the United Nations set up an ad hoc committee called the Committee on the Peaceful Uses of Outer Space (COPUOS) consisting of 11 Member States. COPUOS became a permanent committee in the U. N. in 1959, with 24 mem­bers. Among the purposes of this body were the promotion of international cooperation in space, the encouragement of continued research and dis­semination of information concerning space, and the study of legal problems arising relating to the exploration of outer space.

The main question confronting CUPUOS was whether a coherent form of international law could be brought to govern human interaction in outer space. If so, what form should it take? In view of international tensions at the time, this was a daunting task.

April 1, 2004, FAA/AST granted the first license ever issued for a private, crewed, suborbital flight. The award went to a company founded by aero­nautical pioneer Burt Rutan, Scaled Composites, in conjunction with joint venturer Paul Allen. Rutan, an aerospace engineer, gained a reputa­tion for developing new, unconventional air­plane designs built of strong, light, composite materials. In 1986, his Voyager aircraft was the first to fly around the world without refueling.

Just one year before being awarded the fed­eral license, Scaled Composites revealed that it was working on a spacecraft design to compete
for the Ansari X Prize.33 At the time, there were 27 announced competitors for the prize. The Ansari X Prize, in the amount of $10 million, was offered by the X Prize Foundation for the first private, non­governmental launch of a reusable manned space­craft, capable of carrying three people into space with safe return, twice within a two-week period. The Ansari X Prize is patterned after the early 20th century practice of awarding monetary prizes to aviators in order to spur greater achievements in the then-nascent aviation field. In particular, it is reminiscent of the Orteig Prize of $25,000 that was posted by Ray Orteig in 1919 for anyone who suc­cessfully completed a nonstop flight between New York and Paris. The Orteig Prize was claimed by Charles Lindbergh in 1927. (See Chapter 13. See also the NASA Centennial Challenges below.)

The Ansari X Prize stipulated that the spacecraft exceed 100 kilometers as the

required threshold of space (the Karman line) at 62.1 miles above the earth. The SSI flights origi­nated from the Mojave Airport Civilian Flight Test Center (now Mojave Spaceport) in Califor­nia. SpaceShipOne was aerially launched from a specially Rutan-designed carrier jet called “White Knight.” The spacecraft was powered by a hybrid rocket engine that used nitrous oxide (laughing gas) as the oxidizer and synthetic rubber as the fuel. (See Figures 41-9, 41-10, and 41-11.)

The first competitive flight in the Ansari X Prize competition occurred on September 29, 2004, achieving an altitude of 102.9 kilometers and a maximum speed of 2.92 Mach. On Octo­ber 4, 2004, SpaceShipOne duplicated its earlier successful suborbital flight, this time to 111.996 kilometers and a maximum speed of 3.09 Mach, thereby completing all requirements for the Ansari X Prize. That date was the 47th anniversary of the first Sputnik flight.

SpaceShipTwo is a follow-on suborbital, air-launched space vehicle being developed by a joint venture between Scaled Composites and the Virgin Group (Virgin Galactic). The vehicle was introduced to the public in December 2009 and, as of July 2012, is undergoing glide tests. The company is taking bookings for suborbital flights set to start late in 2013 at a price of $200,000.

The joint venture plans orbital flights using its planned SpaceShipThree, assuming success in its Virgin Galactic project. Orbital flight is much more difficult to achieve than is suborbital flight since the speed necessary to gain escape veloc­ity is on the order of 7 to 8 times that required to reach suborbital altitudes. While SpaceShipOne reached the Karman line by accelerating to a little over 3 Mach, orbital vehicles will require 25 Mach to achieve escape velocity. Reentry is also much more complex, since all of the excess speed must be dissipated on reentering earth’s atmosphere.

Two-tiered wage agreements, or b-scale wages, are a form of concession bargaining that first arose at American Airlines in 1983. The b-scale refers to a wage rate applied to workers solely on the basis of their having been hired after a specified date. The plan is, therefore, prospective in benefit rather than immediate. Once in place at American, the two-tier system rapidly proceeded through the ranks of most carriers, and was readily adopted. By 1986, with the exception of Braniff and Con­tinental, all major carriers had the system in place for at least one craft of employees, and 70 percent of all union contracts carried b-scales.

The agreement typically involves a gradual “payoff,” or a limited period during which the new employee will be paid under the reduced pay scale. The plan typically will be merged with the higher wage scale, usually within five years. The wage reduction historically has ranged from 20 percent to 45 percent.

Code-sharing arrangements are devices used in advertising, sales, and reservations activities that allow originating airline designations to be carried through to connecting airlines’ flight segments, including to the destination. These arrangements are often entered into between domestic and foreign airlines, or other end-to – end airlines, and between commuter carriers and major airlines. The first code-sharing arrange­ment was approved by the United States govern­ment in 1983, when antitrust immunity was given
to Pan American to advertise origin and destina­tion points on international routes that actually lay on domestic inland routes operated by north­eastern U. S. regional carrier Empire Airlines, not Pan American. Empire Airlines became a feeder carrier to Pan Am, and was the first of many to come in the U. S. airline market.

Code sharing is also used to eliminate poten­tial competitors from picking up an airline’s customers at interchange points by reserving the customer’s seat for his entire trip, and by issuing his through ticket, utilizing only the code-sharing partners’ airlines. The code-sharing device is depicted in computer reservations systems in user-friendly ways that enhance the likelihood of selecting the code-sharing route from origin to destination. Often it is not readily apparent to the traveler that two or more separate airlines are involved in the itinerary.

«British Airways believes that it is intrinsically deceptive for two carriers to share a designator code.»

-British Airways, comment on PDSR-85, Notice of Proposed Rulemaking, Docket 42199,1984

Exclusive-use arrangements typically assign to one airline the right to use and occupy gates and facilities for a specified duration, as well as the right to sublet or assign those gates and facilities conditioned on prior consent of the airport. These types of arrangements are recognized to con­stitute potential barriers to entry based on com­plaints by new entrant carriers that incumbent airlines hoard gates, require substantial sublease premiums, offer access at less preferable times, force the new entrant to use the incumbent’s ground personnel, or refuse to sublease alto­gether. These arrangements also have the effect of hindering airport management from properly exercising its legislative mandate of providing equal, nondiscriminatory access to its federally funded facilities. Moreover, since gate leases are considered assets in law, secured creditors of bankrupt carriers, like banks, can wind up pos­sessing the proprietary rights to airport gates, and preventing recovery and use of those gates by airport management.

The prevalence of exclusive use gates has been in consistent decline since 1968, and because of the effects of deregulation on air­port traffic, that decline has accelerated. U. S. airports increasingly now prefer to maintain more control over gate access. This trend has been buttressed by the Wendell H. Ford Avia­tion Investment and Reform Act (AIR-21) that requires some airports to submit for approval “competition plans” to the FAA, more fully dis­cussed below.

Preferential-Use Arrangements

Preferential-use arrangements normally give the tenant airline the primary right to use the facil­ity only when it has operations scheduled. These arrangements constitute a shared control between the airport and the airline with an explicit con­tractual right remaining in the airport author­ity to allow use of the gate by other airlines. Importantly, this type of arrangement preserves the airports’ ability to honor the legislative man­date of providing nondiscriminatory access to its facilities and to use the tenant’s gates for new entrants.

Preferential-use agreements differ in their specifics, some containing “use-it-or-share-it” or “use-it-or-lose-it” requirements, as well as other types of recapture provisions. These types of gate arrangements have become more prevalent at large hub airports, increasing from 28 percent in 1992 to around 50 percent in 2004. For example, Reagan Washington National has reported a gate composition of all preferential-use gates, and Boston Logan has converted to all preferential – use gates or common-use gates. By 2005, Detroit Metropolitan Airport, with 16 carriers and 114 jet gates, had converted to all preferential-use gates, with the exception of 2 common-use gates.

The president of the United States signed the Avi­ation and Transportation Security Act on Novem­ber 19, 2001. The Act created the Transportation Security Administration (TSA) (see Ligure 35-3), which was originally placed in the Department of Transportation, and which is charged with insur­ing the implementation of a sequenced series of enhanced security measures applicable to both aircraft and airports. These measures include installation of fortified cockpit doors on aircraft, implementation of new standards for airport bag­gage screeners, revitalization of the federal air marshal program, and the strengthening of air­port perimeter areas. The TSA was moved to the Department of Homeland Security in 2003.

Fiscal year 2011 collections ($ millions) from airlines

DHS = $3.66B

A.

Y

FAA = $11.4B

O’

Passenger screening was previously the responsibility of the FAA, which was carried out by the airlines under FAA guidelines. The Act transferred this function to the TSA, which had to be organized, staffed, and trained at significant expense. The Act authorizes the TSA to impose user fees on both passengers and air carriers to help pay for these new security efforts, which added another level of stress on the struggling airlines, and which increases the cost of airfare for the passenger. See Figure 35-4 for a graphic repre­sentation of these taxes, fees, and unfunded man­dates. As of 2011, these impositions have added nearly $18 billion to aviation costs since 2001. Government taxes as a percentage of airfare have grown to 20 percent as of 2012. See Figure 35-5. Domestically, a base airfare has tacked onto it:

1, A 7.5 percent federal excise tax,

2, A $3.80 per segment federal tax (a segment is one leg of the total flight),

3, A $2.50 September 11 federal tax per seg­ment (to pay for security screening), and

4, A $4.50 passenger facility airport charge per departure.

The base fare is retained by the airline. The excise tax, the segment tax, and the 9/11 tax are paid to the federal government. The PFC charge is paid to the airport. Federal taxes are higher for international flights, which include departure, customs, immigration, and arrival taxes.

Although the idea of a federal security agency was popular immediately after 9/11 (the Senate voted 100 to 0 in favor), over the 10-plus years that enhanced federal aviation security has been in effect, mounting criticism has been lev­eled at the TSA. Complaints about long lines at airport screening points, rude treatment, and unnecessarily invasive searches of passengers by TSA workers, reactionary policies and proce­dures, and an increasingly wasteful bureaucracy have been lodged. Although the Aviation and Security Transportation Act provided for an “opt out” of federalized screening for airports, few took advantage of it. San Francisco Interna­tional Airport, however, is one that did; it hired a privatesecurity firm to conduct its screening.

A leaked 2007 TSA study found that San Francisco’s private screeners were twice as good at detecting fake bombs as TSA screeners. The private screeners were “friendlier” and “more helpful.”

Their lines were shorter and the private company used procedures to minimize wait times. A House Transportation Committee in 2011 found that the San Francisco screeners could process 165 pas­sengers in the same time that it took TSA screen­ers in Los Angeles International Airport to process 100 passengers. Scores of other airports have peti­tioned the TSA to allow them to switch to private screeners, without success. The TSA has responded exceptionally slowly, and when it has responded, it has denied the applications on the stated basis of “no benefit to the federal government.” New leg­islation is pending in an attempt to provide more transparency to such TSA decision-making.

There are good reasons to question the effi­cacy of TSA procedures. Richard Reid, the “shoe bomber” who attempted to bring down a trans­atlantic flight in 2002, was stopped by passen­gers on the airplane, not security forces. Yet, ever since this episode, all passengers have been required by the TSA to take off their shoes for x-ray inspection. The “New York Times Square bomber,” who botched his car bombing attempt in 2010, left the area and “ordered his ticket on the way to JFK, went through TSA, and got on the plane.”5 In 2011, a House Oversight and Government Reform Subcommittee found that there had been more than 25,000 documented air­port security breaches under TSA auspices.

The TSA also installed nearly 100 explo­sive detection machines at airports at a cost of $150,000 each, only to discover that they do not work. The TSA paid the Department of Defense $600 each to destroy them.6