Category AVIATION &ТНЕ ROLE OF GOVERNMENT

Deregulation had also produced the practice of code sharing between airlines domestically, in 1983. Code sharing allows an airline to advertise, as its own, a route from an origin to a destination, even though a part of that route is not actu­ally flown by the advertising airline. Usually unknown to the passenger, a part of the route is flown by a different airline using its own aircraft, its own pilots, and its own support infrastructure and staff, all of which entails utilizing its own procedures and rules. For many reasons, this is information that many travelers would like to know, but a primary reason is that major carriers and regional carriers (who code share) may have significantly different safety records, types of air­craft, and pilot hiring qualifications.

Code sharing also involves airlines jointly setting rates and fares, which is traditionally a big no-no since that kind of action fits exactly the definition of antitrust collusion and anti­competitive behavior. The antitrust laws of the United States apply fully to code-share arrange­ments, which are administered by the Department of Justice. Over the years, code-share arrange­ments have gone into effect without interference from the Department of Justice for the simple reason that these arrangements are seen by the DOJ as competitive overall and favorable to the consumer.

Code sharing between domestic airlines and foreign airlines is also subject to the antitrust laws of the United States, unless an express grant of statutory immunity is made by the Department of Transportation. The first foreign code-share arrangement was approved by the Department of Transportation in 1993 to allow KLM Royal Dutch Airlines to infuse capital into financially strapped Northwest Airlines. Although code sharing between airlines does not require a swap of assets or other financial investment between them, approval was initially given by the United States government to these arrangements in part due to the fact that additional financial stability was achieved in the domestic carrier. Following the KLM-Northwest code-share arrangement, approval was given for a United Airlines – Lufthansa pairing, and shortly thereafter British Airways bought into USAir for $400 million and began code sharing. Although these arrange­ments constituted, in many cases, a deception to the flying public, they were actually a first step in the globalization of the world air transportation market.

Airline alliances are an evolutionary devel­opment of code sharing. Beginning with code­sharing arrangements domestically and then internationally, alliances between domestic and foreign airlines have blossomed since the first group, Star Alliance, was founded in 1997. This alliance was followed by two others, One – World and SkyTeam, in 1999 and 2000, respec­tively. These antitrust immunized arrangements allow the alliance partners to provide a seamless travel experience as if there were a single carrier involved, to include benefits such as coordinated schedules at hubs to expedite interline trans­fers, integrated frequent flyer programs, and bag­gage check throughs. These alliances have been greatly facilitated by “Open Skies” treaties.

International alliances and Open Skies trea­ties, as part of global deregulation, will be further discussed in Part VI.

Led by Southwest Airlines, a class of new entrant discount airline began entering the industry shortly

Source: GAO review of airline Web Sites and interviews with airline officials.

aAlaska Airlines does not charge for the first 3 checked bags for trips wholly within the state of Alaska.

bSpirit revised its checked baggage fee for travel on or after August 1, 2010 to $25 for each of the first two bags, and $85 for each of the 3rd, 4th and 5th bags.

‘United also offers a $249 annual fee to check one or two bags per flight without charge.

TABLE 35-3 Domestic Checked Baggage Fees of 17 U. S. Airlines as of July 1, 2010

after 1978. Their distinguishing characteristic has been to provide a no frills, basic transportation service at the cheapest fare possible. They have sought to do this by concentrated efforts to reduce their operating and marketing costs by various means and practices uncommon in the traditional airline business. Primary among these airlines cur­rently are Southwest, JetBlue, AirTran (prior to merger with Southwest), Spirit, Frontier, Allegiant Air, Sun Country Airlines, and Virgin America.

Contrary to most airlines and to emerging trends, Southwest does not charge for baggage. It is also contrarian by the fact that it has never furloughed any employees and has never asked its labor workforce for wage concessions. It has, therefore, a high wage structure compared to other airlines. It has been able to maintain consistent profitability through the utilization of the various efficiencies discussed above. As the unit cost gap between the new legacy carriers and Southwest and the other LCCs narrows, it will be interesting to see how Southwest, in particular, is able to con­tinue its labor practices into the future competition.

The evolution of Southwest is further marked by its purchase of AirTran in 2011. AirTran has service to Mexico and the Caribbean, so part of the process of combining operations and expanding their route systems will involve

Southwest becoming an international carrier. This is far removed from the original discount carrier concept that Southwest pioneered and then carefully honed. In the process Southwest is becoming increasingly larger; as of 2102 it operated scheduled service to destinations in 42 states. Its size, number of enplanements (it carries more passengers than any domestic airline), and increased number of destinations, has caused it to change from a primarily point-to-point airline to one that must facilitate connections.

It now practices the “rolling hub” concept, which schedules a majority of flights into cer­tain designated airports for connection purposes, but it avoids arrival “banks” of aircraft at the same time to lessen congestion, rather schedul­ing arrivals over longer periods of time. With Phoenix having 181 daily departures, you might say that this is Southwest’s largest rolling hub, but it also has extensive departures from Las Vegas, Baltimore-Washington, Houston, Chi­cago-Midway, and many others. The AirTran merger will carry it into Atlanta in a big way.

Southwest pioneered the Internet reservation system in the 1990s and in the process personalized its service, made it transparent and readily accessi­ble, and saved a lot of money. Now, with its excur­sions into international passenger service (which is more lucrative than domestic service), it has partnered with a European global distribution firm known as Amadeus, which is seen as a major move toward transforming itself from a low-cost domes­tic carrier into a large airline in the global airline industry, probably expanding into South America.

The other primarily notable LCC is Jet­Blue Airways which, while still classified as a low-cost carrier, differs significantly from the Southwest model. JetBlue, for instance, began operations in 2000 at John F. Kennedy Interna­tional airport, a busy international hub centered in the most congested area of the country. It had to have slots to operate (which it got from the FAA) and it flew into other large airports, originally serving the east coast of the United States and then spreading across the country and internationally to Puerto Rico and 11 countries in the Caribbean and Latin America. While offering services at a discounted price, it differentiated itself by offering amenities like leather seats and DirecTV at every seat, and a personalized cus­tomer experience that has resulted in high satis­faction and a loyal customer base.

JetBlue sells only electronic tickets, primarily through its website. So far its workforce is entirely nonunion, so it has flexible work rules and effec­tively uses part-time employees. Its relatively new fleet consists entirely of two types of airplanes, the Airbus 320 and the Embraer 190. JetBlue car­ries high debt due to new aircraft acquisition, on a debt-to-value ratio between 65 and 75 percent, compared to Southwest’s 20-40 percent.

The company has a marketing program that is innovative yet inexpensive, using social media such as Facebook and YouTube at very little cost.

he concept of international air transportation emerged almost immediately with powered flight itself. Flight in lighter-than-air craft had been an international affair from the start. As the reality of powered flight neared, activity in both North America and Europe proceeded simulta­neously. After the Wright brothers’ success in 1903, Europeans immediately followed, develop­ing their own brands and models of airplanes.

International flight in heavier-than-air machines first occurred on July 25, 1909, when Louis Bleriot flew his monoplane across the Eng­lish Channel from France to England. William Boeing was carrying airmail between Seattle and Vancouver in his Boeing В-IE seaplane in 1919 under agreement with both the United States and Canada. The International Air Traffic Association was organized in 1919 by six Euro­pean air transport companies. It was obvious that mere boundaries could not contain the airplane and those who would use it in commerce. Still, under international law, borders could not be transcended with impunity, and it was clear early on that some kind of structure would have to be put in place to deal with the interaction between peoples of different cultures and different laws.

International Aviation Relations

Beginning in 1910 in Paris, international con­ferences between nations, attended by their appointed representatives, convened for the pur­pose of discussing and resolving issues related to international civil aviation. Representatives from 19 European countries assembled that year in a meeting, now known as the Paris Confer­ence, to consider the legal and practical requisites for international air commerce. Although little was immediately accomplished, a start had been made, and much of the work of that first confer­ence resurfaced in the conferences of the future.

It is important to note the international legal distinction between the words conference and convention. A convention, as used in interna­tional civil aviation, means an agreement between nations, not yet rising to the status of a treaty, the latter of which only occurs upon ratification by the signatory nations. The word conference is used to describe the assembly or gathering where a convention might be agreed on. A protocol is a major amendment to the regulations of the con­vention. An amendment is a minor change in the regulations enforced by the convention.

In 1919, after World War I, representa­tives of the victorious nations, as well as Brazil and Cuba, adopted the Paris Convention, which established for the first time several important foundations for civil aviation. First, the Conven­tion recognized that each nation has sovereignty over its own airspace, including its territories and colonies. Second, it followed the maritime law principle that each aircraft must have a national registration. Third, it established certain basic rules regarding the airworthiness of aircraft. Fourth, it adopted rules regarding the certifica­tion of pilots. Although the United States signed the Convention, it was not ratified. It would, however, become a model for the later enactment of statutes in the United States regarding the same subject matters.

In 1926, representatives from countries left out of the Paris meeting in 1919 adopted the Madrid Convention, which basically was the same agreement adopted in Paris in 1919. This agreement would have no substantial effect on later agreements in the field of civil aviation.

The Havana Convention of 1928 was an agreement between nations of the Western Hemi­sphere, and grew out of the Pan American Con­ference held in Santiago, Chile, in 1923. The provisions of this Convention were similar to those of the Paris Convention, but due to varia­tions between the two, this Convention caused some commercial and operating uncertainties in the international community until the differences were finally resolved in 1944 at the Chicago Convention.

A cornerstone of the dream of a unified Europe was that a reliable, common transportation sys­tem exist for the moving of people and goods. The Treaty of Rome incorporated this realiza­tion into Articles 85 and 86, which required the implementation of a common transport policy within the Community. Nevertheless, when the Council in 1962 adopted Regulation 17, which implemented those provisions of the Treaty, both air and sea transport were exempted.

The EC went further in 1968 and adopted a broad transportation policy applicable to commercial rail, road, and inland waterways, but not to sea and air transport. Air transporta­tion policy within the EC was a difficult issue since each of the member states had, since the Chicago Convention of 1944, regularly entered into bilateral agreements with other countries around the world. In addition, the airlines of Europe were heavily subsidized by their separate governments. They were gen­erally understood to be and were treated as public utilities, and were considered part and parcel of the national image projected by the government. There was, therefore, very little progress made in the area of air transportation policy prior to 1986.

The Treaty of Rome also incorporated into Articles 85 and 86 specific provisions prohib­iting anticompetitive activities and policies in the field of transportation by Member States. It was realized that any true integration of Euro­pean economies would be impossible unless and until barriers to the smooth flow of commerce between them were removed.

By the middle of the 1980s, the competition mles of the Treaty of Rome had been applied to other forms of transportation and to virtually all other areas of commerce. Within the international aviation community, pressure had been building for some time to apply these rules to commercial aviation. The fact was that commercial aviation in the European Community had been left out of the integration that had proceeded with all other forms of commerce. At the same time, the Community found it hard to ignore the competitive effects of deregulation in the United States as U. S. airlines adopted policies and procedures in the running of their companies that produced more efficient oper­ations, reduced overhead, and allowed reduced rates and fares. While some of the harsher realities of deregulation that had occurred in the United States were closely evaluated in Europe, it was realized by all concerned that Europe was going to have to compete with these American airlines on the international scene sooner or later. Next, we will look at the effect that American deregulation had on the European Union.

Endnotes

1. http://www. loc. gov/exhibits/marshall/m9.html.

2. http://www. loc. gov/exhibits/marshall/ml2.html.

3. France, Luxembourg, Italy, West Germany, Belgium, and the Netherlands.

4. Tom Reid, Washington Post.

5. In addition to the Six, there now were Ireland, Greece, Denmark, the United Kingdom, Spain, and Portugal.

6. Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia.

Before October 4, 1957, humankind had always conducted its affairs below this boundary. On that date, the Space Age began with the orbit­ing of the artificial earth satellite known as “Sputnik,” which was launched by the Soviet Union (Union of Soviet Socialist Republics, or U. S.S. R.) on a military rocket. This accomplish­ment, while heralded by the scientific commu­nity, caused considerable distress in the nations of the West.

After World War II, the Soviet Union had asserted dominion over the countries of Eastern

Europe, and it was the titular head of the Com­munist World. The People’s Republic of China, the name of the communist government that controlled that country beginning in 1949, and the People’s Republic of North Korea also fell into this camp. Communist-controlled gov­ernments, considered by the West to be bent on world domination, extended from North­ern Europe to the Pacific Ocean. The hostile relationship that emerged after World War II between the nations of the West and the Com­munist Bloc countries had been termed the “Cold War” by Winston Churchill in 1948, but there had been a shooting war on the Korean Peninsula between these factions from 1950 to 1953, and millions of people, both civilians and combatants, had died.

The Soviet Union had perfected nuclear weapon capability well before 1957, and with the launch of Sputnik, it was clear that the U. S.S. R. now had the capability to deliver these weapons on intercontinental ballistic missiles. Now also, for the first time since Roman law had estab­lished that national sovereignty extended from the ground upward to infinity, the sovereign skies of the Western countries were being violated every 90 minutes by the unauthorized passage overhead of the Russian satellite. Its “beeping” radio signal every few seconds only punctuated their helplessness.

The geopolitical contest between the West­ern powers and the Communist Bloc countries was one of brutal competition, and it was con­sidered a philosophical, social and, if necessary, a military fight to the death. But in the midst of this perilous world scene, there was some precedent for cooperation and good will among nations, based on scientific inquiry. Worldwide cooperative endeavors known as the International Polar Year in 1884, the Second International Polar Year in 1934, and the International Geo­physical Year beginning in 1957 stood as hope­ful examples of the advancement of humankind through peaceful cooperation.

People worried which way the Space Age would take them.

On January 18, 2006, NASA announced a new program to encourage the development of new spacecraft and launch systems designed to be able to supply the delivery of crew and cargo to the International Space Station. This need, of course, is due to the cancellation of the Shuttle program, which formerly performed that func­tion, among others.

The COTS program anticipates an extra dimension of precision needed by participants since delivery to the ISS requires exact orbit inser­tion, rendezvous, and docking with or proximity to the ISS or other spacecraft. The program includes the award of financial contributions and the trans­fer of proprietary NASA technical data to assist in the development of the participants’ vehicles.

More than 20 companies submitted propos­als under the COTS program in March 2006 and an additional seven by November 2007. The primary recipients of COTS awards have been Space Exploration Technologies Corporation (Space X) and Orbital Sciences Corporation. Space X has achieved success in reaching its milestones under the program (see below) and has received some $500 million from NASA.

When technological advances in the railroad industry introduced the diesel locomotive to ren­der obsolete the steam locomotive, and with it the firemen who had been necessary to stoke the steam locomotive’s fireboxes, the unions successfully fought the railroads’ attempts to eliminate the firemen’s position. The firemen thenceforth sat in the engine with little or nothing to do and were paid their regular wage. The name given to this development was “feather-bedding,” and it effectively reduced the productivity gains that diesel technology had produced.

When the DC-9 and the Boeing 737 were introduced into the airline fleet in the 1960s, the FAA certified these new types for operation with two-pilot crews. ALPA adopted a hard stance against the FAA certification on the 737, and refused to fly the aircraft with a two-pilot crew. United was originally the largest purchaser of the 737, and to avoid a pilot strike during the regu­lated 1960s, United agreed to binding arbitration to resolve the issue notwithstanding the FAA certification. In spite of the FAA certification and the proven experience of other airlines, like Lufthansa and Piedmont, that were flying the 737 with two-pilot crews with spotless safety records, the arbitration panel surprisingly ruled that safety concerns mandated that the United 737s be oper­ated with three-pilot crews.

ALPA’s stance was now further hardened and extended to the upcoming new Boeing types, the 757 and 767. At ALPA’s National Convention in 1980, the delegates voted for a nationwide strike by March 1, 1981, if the crew-size issue on the new aircraft types was not resolved in favor of a three-pilot crew by that date. Such a strike would be a blatant viola­tion of the provisions of the RLA, as ALPA well knew, and as the strike date approached, ALPA pressed for the appointment of a Presidential Task Force to review the FAA’s prior certifica­tions. In July 1981, the Task Force reported its findings that safety concerns did not justify the use of three-pilot crews on the new types of air­craft under consideration.

Prior to the publication of the Task Force report, United had concluded that its short-haul routes serviced by the three-man crewed 737 would have to be discontinued or severely cut back as too costly, with significant pilot fur­loughs. Although United had reported a profit in

1978 of $296 million, the subsequent years of

1979 and 1980 resulted in losses of $235 million and $65 million, respectively. In a first-of-its – kind turnabout, ALPA under these circumstances reversed its position on the crew size issue and announced that it would accede to the findings of the Task Force. Reminiscent of the days of old, however, ALPA did extract a concession from United, namely, that the airline would agree never to form a startup, nonunion subsidiary like New York Air.

One of the biggest reasons for the failure of deregulation to meet its promise of widespread competition has been the existence of barriers to entry of new airlines. Some of the barriers to entry were identified by opponents to deregula­tion, but some were not anticipated. After some 20 years of actual experience in the deregulated environment, the Government Accounting Office and the Transportation Research Board released the results of studies on anticompetitive develop­ments in the air carrier industry. These reports classified barriers to entry for new airlines as “operational barriers” and “marketing barriers.” Operational barriers include takeoff and landing slots at high-density airports, access to boarding gates, access to ticket counters, the availability of ground handling and airport apron facilities, baggage handling and storage facilities, and perimeter rules. Marketing barriers include strategies designed to bind travelers to a particu­lar airline through frequent flyer programs and loyalty incentives, computer reservation systems, and code-sharing alliances.

Slots

Historically, arrivals and landings at U. S. airports have been on a “first-come, first-served” basis. In 1968, the increase in commercial air traffic at the nation’s busiest airports caused the FAA to institute limitations on arrivals and departures under a regi­men known as “High Density Rules”(HDR). This procedure capped the number of hourly arrivals and departures at five airports, Washington National (now Ronald Reagan National—DCA), O’Hare (ORD), and the three New York City area airports, Kennedy (JFK), LaGuardia (LGA), and Newark (EWR). This system of required reservations was implemented at that time by scheduling committees set up by the airlines themselves to allocate “slots” for arrival and departure operations. A “slot” is a reservation for an instrument flight takeoff or land­ing by an air carrier. A small number of slots were set aside for general aviation use.

During regulation, the slot system worked well since the number of air carriers, routes, and access to these airports were controlled by the CAB. With deregulation, however, new startup airlines appeared and established airlines sought out new markets for themselves, greatly increas­ing the demand for access to these airports. In 1985, DOT revised its rules and procedures to allow slots to be bought and sold by airlines.1 Slots became a limited commodity, subject to being traded like a commodity. Under the buy/ sell rule, DOT explicitly stated that slots were not carrier property and that DOT retains owner­ship of the slots, so that they can theoretically be withdrawn at any time, but DOT grandfathered all slot allocations to airlines holding them as of December 16, 1985. Under the buy/sell rule, slots have taken on the look of property rights and ownership that resides with the airlines. DOT retained about 5 percent of outstanding slots and, in early 1986, distributed these in a random lot­tery to airlines having few or no slots.

After 10 years, by the end of 1996, the Gen­eral Accounting Office (GAO)2 found that estab­lished (grandfathered) airlines had increased their total number of slots, while airlines that went into business after deregulation had lost slots. Slots held by startup airlines that went out of business were often acquired by lenders (banks and other financial institutions) since these slots had been pledged as collateral to the lenders. The lenders were then free to transfer ownership rights in the slots to the highest bidders, which were often the established airlines, although Southwest was able to gain access to LaGuar­dia by purchase of AT A slots out of bankruptcy court. Established airlines also acquired slots by absorbing startup airlines by merger or buyout.

By 1999, slots had become concentrated among incumbent carriers. The four largest carri­ers controlled 87 percent of all slots, and the larg­est six airlines controlled 98 percent of all slots.3 Because the number of slots is limited, slots have become very expensive, even if they can be bought at all. This unforeseen development is a disincentive to competition.

As an alternative to sale, established airlines have leased slots to startup airlines. This proce­dure is anticompetitive, as well, since the estab­lished airlines often lease slots in order to avoid the “use or lose” rule, also known as the 80/20 rule, imposed by the FAA. This rule requires the airline to use the slot at least 80 percent of the time or the slot will revert to the FAA. When the established airlines do lease slots, they typically do so only on a short-term basis, from 30 to 90 days. Entrant airlines find it difficult to justify startup costs of new service at an airport with no guarantees of the right to continue to use slots, which are its only means of access to the airport and its market.

In 1994, by the FAA Authorization Act,4 Congress authorized DOT to grant slot exemp­tions to new entrants where DOT found it to be in the public interest and based on “exceptional circumstances.” Slot exemptions, unlike regu­lar slots, could not be transferred. DOT inter­preted this authorization narrowly and granted very few exemptions until GAO issued its 1996 report to Congress on the anticompetitive effect of the DOT’s failure to grant slot exemptions. By 2000, DOT had amended its criteria such that, for example, slot exemptions at LaGuardia had been awarded to startup airlines Frontier, Spirit, Pro Air, AirTran, and American Trans Air. DOT also awarded 75 slot exemptions to startup JetBlue. Although major airlines con­tinued to oppose it, the revised DOT practice of awarding slot exemptions stimulated competition at these airports.

In April 2000, Congress passed the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21). (See Figure 33-1.) AIR-21 mandated the phasing out of the slot rules at LaGuardia, JFK, and O’Hare. The effec­tive date for the elimination of all slot restrictions at O’Hare was July 1, 2002, and at the New York airports, January 1, 2007.

Upon expiration of slot controls at O’Hare in 2002, resulting congestion during peak hours caused serious delays at that airport. In consul­tation with affected airlines, the FAA issued an order limiting scheduled operations at ORD. This order is under periodic review, and the arrange­ment in place is not viewed as a long-range solu­tion to congestion nor a substitute for slots. The construction of a new runway (9L/27R) in 2008, however, provided significant relief to the prob­lem of congestion since there are now seven pri­mary runways. Pre-construction projections were that delays would be reduced by as much as 66 percent by this new runway.

This kind of renovation and reconfiguration is not an option at LGA (and possibly other HDR airports) due to physical land constraints. LGA is located eight miles from downtown Manhattan and bordered on three sides by water and by a multilane highway on the fourth side. It is, how­ever, central to flight operations in the United States. One study showed that on one particular day, “some 376 flights traveling to 73 airports experienced flight delays because their aircraft had passed through LaGuardia at least once that day.”5 It is clear that delays at LGA are propa­gated throughout the National Airspace System on a daily basis.

In October 2004, DOT and FAA contracted with NEXTOR6 a cooperative group of univer­sity departments named the “National Center of Excellence for Aviation Operations Research.” to carry out research on the question of congestion management alternatives, centered on operations at LGA. The NEXTOR results were reported back to the FAA in 2005.

As the date approached for expiration of slot allocations for the New York airports, mandated

by AIR-21 to take effect on January 1, 2007, it was clear to the FAA from prior experience that chaos would result if those expirations were allowed to go into effect as scheduled. On August 29, 2006 the FAA proposed new slot rules for the New York airports. Relying partly on NEXTOR study results, the proposed rules for LGA not only continued HDR caps, but also sought to impose minimum aircraft size require­ments for much of the fleet, to limit the duration of slots (OAs),7 and to employ market principles (probably auctions) for the reallocation of slots/ OAs. Under this proposal the stage was set for the airlines to not only lose their implied property rights in the slots/OAs (and their value) but also to be told how large their aircraft must be if they were to service LGA.

The storm of protest was universal, and it came from every quarter, including the Port Authority of New York and New Jersey, the air­lines, Congress, community groups concerned about losing service, and even the Canadian Embassy. Needless to say, this proposal would not fly. Fligh Density Rules, therefore, remained in effect either partially or completely for the HDR airports in spite of the provisions for lifting those allocations as required by AIR-21. This was done under the escape clause in the Act that implemen­tation of its provisions was subject to FAA discre­tion that placed safety in the National Air Space as a primary consideration under the Act.

In 2008, during the last year of the Bush administration, the FAA tried again to revise slot rules for the New York airports.8 As to LaGuardia, the FAA proposed to initiate a detailed non-mone­tary “leasing” arrangement for a majority of slots with “historic” operators for 10 years, coupled with an annual auction of additional slots. While too detailed for discussion here, the plan was a first step, to be reviewed over the 10-year period and discussed by all stakeholders over that term. The proposal made two uncontestable points: (1) LGA required a cap on operations and (2) the allocation of available slots needed to be more efficiently and fairly applied. But it also contained changes that the airlines were not ready to con­cede, including (1) that the FAA has authority to allocate slots in connection with its authority to determine the best use of the national airspace and (2) that the reallocation of slots by the FAA do not constitute a “taking” of property from the airlines in violation of the 5th Amendment.

This effort was met not only by objections, but also by lawsuits. In December 2008, a United States Court of Appeals entered a temporary stay order to the proposed rule pending further hearings on the effects of the rule. After the Obama Administration took over in 2009, Sec­retary of Transportation Ray LaHood unilater­ally rescinded the entire congestion management plan incorporated in the proposed rule. At LGA, slot authorizations established in 2006 remain in effect. Temporary slot extensions continue to be made at JFK and EWR.

It is clear that the airlines are asserting own­ership rights to slots in spite of the expressed reservation by the FAA at the time of their issu­ance that the FAA retained full authority over the allocation of all slots. This slot “property right” carries not only inherent value, but the right to make operating decisions incident to its use, like the size of aircraft the carrier wishes to use when filling the slot, where the airplane comes from when landing, and where it goes after takeoff. While the FAA has obviously not acquiesced in the airlines’ position, it does appear that the FAA is not, at this point, will­ing to completely contest the issue—witness the withdrawal of the proposed rule to modify the HDR regimen on at least the two occasions in 2006 and 2009.

As this contest plays out new developments continue, and in the process maybe some insight is being offered on the question of ownership and control of slots. In 2011, Delta Airlines wanted to expand its presence and create a hub at LGA. At the same time, US Airways wanted to grow at DCA. The solution was a swap of slots between

the two airlines; this was a deal that required DOT approval. Here is what happened: The DOT agreed to approve the Delta-US Airways pro­posal as long as the airlines agreed to give up and sell off, at auction, 8 daily slot pairs at DCA and 16 daily slot pairs at LGA, with the additional condition that bidders would be limited to air­lines with less than 5 percent of the slots at either airport.

In November 2011, it was announced that JetBlue had submitted the winning bids for the eight LaGuardia slots (for $32 million) and for the eight Reagan National slots (for $40 million). The other eight LGA slots went to WestJet (for $17.6 million).

Several things are obvious here; Two new entrant airlines got bigger at two HDR airports; that is good for competition. The DOT forced two big airlines to divest slots to smaller airlines, asserting government control over slot allocation; that is good for competition. The two big airlines got a big payday for something (slots) that they did not pay for and the purchasing low-cost carri­ers had to pay that bill; assuming those costs are to be passed on to the traveling consumer, that is not good for competition.

While the FAA-supervised slot control issue affects only designated high-density airports,9 congestion and delays are increasing through­out the National Airspace System. Because of this combination of issues, DOT and FAA have coined a new approach to the problem: conges­tion management.

“Congestion management” is a concept that encompasses a number of different poli­cies designed to reduce congestion and delay. Among these policies are (1) the imposition of landing fees during peak hours; (2) the expan­sion of the airside (runway) environment of the airport; (3) reconfiguring runways and taxi – ways, especially to eliminate or minimize run­way crossings; (4) incentives to airlines to use larger aircraft; and (5) the use of secondary and reliever airports.

The implementation of such a system will necessarily have to be the result of a cooperative effort among the DOT, the airlines, and the air­ports. Each of these entities has its own priorities and its own primary responsibilities. Revamping of the air traffic control system through NextGen, airport privatization or modification, and a work­able revision of the slot allocation program will all be necessary.

AIP funds are federal monies (derived from taxes and fees specifically collected for that pur­pose) administered by the FAA. These include a domestic ticket tax and flight segment fees on domestic flights, an international arrival and departure tax, a domestic tax on air freight, and a per gallon fuel tax on aviation fuels. The FAA distributes more than $3.8 billion annually out of AIP funds to airports. Airport owners and spon­sors provide a minimum of 10 percent share in any project funded by AIP grants.

Airport User Charges

Airport user charges are either (1) aeronautical user charges or (2) nonaeronautical user charges.

1. Aeronautical user charges include landing fees, apron, gate-use or parking fees, fuel – flow fees, and terminal charges for rent or use of ticket counters, baggage claim areas, administrative support quarters, hangars, and cargo buildings.

2. Nonaeronautical user charges include rentals to terminal concessionaires, automobile park­ing, rental car fees, and rents and utilities for hotel, gas station, and related facilities.

Passenger Facility Charges (PFCs)

In 1990, Congress authorized airports to charge a per-passenger enplanement fee to be used for the financing of airport capital improvements and the expansion and repair of airport infrastruc­ture. These are called Passenger Facility Charges (PFCs) and they are collected by the airlines as a part of the ticket price for the benefit of air­ports. As of 2012, the PFC program allows the collection of $4.50 for every boarded passenger at commercial service airports.4 These funds may be used for three specific purposes: (1) to

Interest

payments on outstanding debt for eligible capital improvements

FIGURE 33-5 98% of airport revenue comes from airport users: U. S. Airport Sources of Revenue, 2001.

preserve or enhance safety, security, or capacity;

(2) to reduce noise or mitigate noise impacts; and

(3) to enhance air carrier competition.

Over $84 billion in airport capital improve­ments have been made using PFC monies through September 2012. This amounts to over 30 percent
of all airport capital investment in the United States. PFC funds are used for airside projects; terminal area projects; interest costs on airport bonds; access projects such as roadways, people movers, or transit projects; and noise mitigation projects. They have been used specifically for new runway construction and new gate construction, but they are not permitted to be used for parking garages, terminal concession areas, or areas leased by a specific airline for more than five years.

The recession of the early 1990s began to abate toward the middle of the decade. And just as deregulation had produced the greatest losses in the history of the airline business just a few years before, now profits began to rebound under deregulation.

• In 1994, American Airlines saw the highest quarterly profit in its history and in the history of any airline since the beginning of commercial aviation.

• TWA emerged from Chapter 11 and restructured—with a 45 percent employee ownership.

• Northwest avoided bankruptcy with an employee trade-off of stock for concessions.

Beginning in 1995, the financial picture for most airlines markedly improved, and contin­ued to improve through the end of the decade. Net income for many airlines reached its peak that year as traffic figures spiraled upward in a continuation of a good economy and a cli­mate of stable wages and fuel prices. Each year from 1995 through 1999 were profitable ones for the airlines, reaching $5.6 billion that last year. Labor contracts were renegotiated, fleets were expanded, and employment rose. But there was trouble just over the horizon.

: Into the New Millennium

The airlines entered the new millennium riding the crest of the same wave that generally took the stock indices and corporate profits to their his­torical high point. The so-called dot. com computer and technological sector, now seen in context, pro­pelled an economic “bubble” that burst in the year 2000. That year a downturn began in the economy that produced concerns of a “bear” market, then turned to fears of a recession. Although passenger enplanements reached a then all-time high in 2000 of 693 million, the airlines, like everyone else, were now on the backside of the wave.

The year 2000 saw the end of six years of relative prosperity in the air carrier industry. The downturn in air carrier profits actually began in 1998 but it was not until 2001 that adversity took hold. As the year progressed, it was forecast that the industry, as a whole, would experience a loss of perhaps $3 billion. This projected loss was of a magnitude somewhat comparable to the early years of the 1990s, but less than either 1990 or 1992. While this projected loss was substantial, it was still within the bounds of the cyclical nature of the industry since deregulation.