Regulatory bodies and laws
Aviation in the United States is regulated primarily by the Department of Transportation and the Federal Aviation Administration (FAA) pursuant to Title 14 of the Code of Federal Regulations (the Federal Aviation Regulations, 49 USC (the Transportation Code) and the corresponding regulations.
The FAA regulates the safety of commercial and private air transport. Screening passengers and ensuring onboard security is the responsibility of the Department of Homeland Security’s Transportation Security Administration. The National Transportation Safety Board conducts non-criminal aircraft accident investigations.
The Federal Aviation Regulations (14 CFR Section 1.1) define a ‘commercial operator’ as:
“A person who, for compensation or hire, engages in the carriage by aircraft in air commerce of persons or property… [W]here it is doubtful that an operator is for ‘compensation or hire’, the test applied is whether the carriage by air is merely incidental to the person’s other business or is, in itself a major enterprise for profit.”
An ‘air carrier’ means “a person who undertakes directly by lease, or other arrangement, to engage in air transportation”. The operations of US air carriers and commercial operators are regulated by Parts 119, 121 and 135 of the Federal Aviation Regulations.
All other private operations are regulated under Part 91. Large private operations are also regulated under Part 125.
Applicants seeking air carrier operating authority must acquire a certificate of public convenience and necessity, granted by the Department of Transportation under Chapter 411 of the Transportation Code and Part 201 of the Federal Aviation Regulations. For certain smaller operations, an exemption application may be filed pursuant to Part 298 of the Federal Aviation Regulations. Application for a certificate of public convenience and necessity must be made in writing and verified, and the carrier must demonstrate that it is “fit, willing and able” to provide the proposed operations and comply with the rules and regulations. The applicant must:
have the managerial skills and technical ability to provide the service;
have access to financial resources to begin operations without posing undue risk to consumers; abd
show a willingness and ability to comply with applicable regulations.
If the applicant certifies fitness and the Department of Transportation learns of any special issues, the application is handled with a show cause order. The certificate specifies the terminal and intermediate points between which the air carrier is authorised to engage in transportation. The operating authority is not effective until the applicant has been certified by the FAA to conduct operations under the relevant category andcategory and it has obtained adequate liability insurance.(1)
If seeking an exemption, the applicant may file an application pursuant to Part 298 of the Federal Aviation Regulations, which establishes a class of air carrier known as ‘air taxi operators’ and provides certain exemptions from the economic regulations of the Transportation Code. An air taxi operator:
does not generally use large aircraft;
does not hold a certificate of public convenience and necessity;
has liability insurance; and
has registered with the Department of Transportation as an air taxi operator.
Financial fitness requirements
To acquire a certificate of public convenience and necessity, an applicant must demonstrate financial fitness. The Department of Transportation has not identified specific financial fitness criteria. However, for a new applicant, the Department of Transportation imposes a 90-day ‘zero revenue’ test. This test requires proof of available funding to cover pre-operating costs plus a working capital reserve adequate to fund projected expenses for three months of flight operations without revenue.(2) Filing for bankruptcy is grounds for enhanced scrutiny by the Department of Transportation.
Nationality of ownership and control requirements
The Department of Transportation requires that an applicant for a certificate of public convenience and necessity be a US citizen. The president and two-thirds of the board of directors and other managing officers of the corporation must be US citizens and 75% of the voting interest in the corporation must be owned or controlled by US citizens.(3) The Department of Transportation has interpreted this requirement to mean that US citizens must also be in actual control of the carrier and must have control of at least 51% of non-voting equity and 75% of voting equity.(4) Foreign entities may control up to 25% of the stock and no more than 49% of the combined stock and debt. Furthermore, the air transport agreement executed by the United States and the European Union in 2007 provides that an EU national’s ownership of more than 50% of a US carrier will not be deemed itself to constitute actual control of the US carrier and each situation is to be considered case by case.
Route approval and licensing procedures
Part 121E of the Federal Aviation Regulations prescribes rules for obtaining approval for routes by certificate holders conducting domestic or flag operations. The certificate holder must show that it can conduct satisfactorily scheduled operations between each regular, provisional and refuelling airport over that route, and that the services and facilities are available and adequate. International routes are governed by the relevant bilateral or multilateral aviation treaties. In line with these treaties, the Department of Transportation issues international routes in competitive proceedings, and the president approves them in light of foreign policy and national defence considerations.(5) The factors that the Department of Transportation considers in making this determination include:
are and service proposals;
the speed at which the applicant could enter the market.
There are requirements that affect and limitations on the number of flights that airlines may operate out of certain high-density airports. Part 302 of the Federal Aviation Regulations establishes procedures for the conduct of all aviation economic proceedings before the Department of Transportation. This includes, among other things, US air carrier certificate procedures, foreign air carrier permit licensing and certificate cases involving international rates. Administrative law judges recommend or make initial decisions that are subject to approval by the relevant Department of Transportation decision maker, which is generally the assistant secretary for aviation and international affairs. The secretary of transportation may exercise the authority of the assistant secretary if the secretary believes that a decision involves an important question of national transportation policy.(6)
Like other US industries, the airline industry is subject to US federal antitrust law, which is intended to preserve competition and open markets. Thus, as a general matter, the strong US policy of protecting and maintaining open, competitive markets applies to aviation. In addition to the application of basic antitrust principles, the Department of Transportation has authority over airlines operating in the United States. It is also authorised to apply antitrust-type policies and principles in its regulatory role to ensure that airlines operate in the public interest.
Foreign air carriers
The Department of Transportation must grant economic authority to a foreign air carrier navigating foreign aircraft in order to operate flights in the United States. Under Section 41301 of the Transportation Code, the Department of Transportation may award a foreign air carrier permit. Alternatively, the Department of Transportation may grant an exemption from this permit requirement pursuant to Section 40109 of the Transportation Code.
Part 211.20 of the Federal Aviation Regulations establishes the specific details that an applicant must provide to obtain a foreign air carrier permit or exemption. The applicant must comply fully with the requirements of this regulation, and the Department of Transportation may require an applicant to provide additional information as necessary. The air transportation proposed must either be covered by an air transport agreement between the United States and the applicant’s home country or be available in the home country on the basis of reciprocity or comity. Once an application is filed, the applicant must serve a copy of the completed application to US carriers that serve the applicant’s home country. The Department of Transportation further publishes public notice of all applications so that any interested party may comment. Although opposition to an application will not be cause for the Department of Transportation to deny the application, the Department of Transportation will consider such opposition in rendering its decision.
An applicant will obtain a foreign air carrier permit or exemption if granting such will serve the public interest. The Department of Transportation sets forth a number of factors that it evaluates in determining whether the value of an applicant’s service to, and within, the United States serves the public interest. These include whether an effective aviation security agreement is in place between the United States and the home country, and whether the FAA has identified any safety problems with the carrier.
Pursuant to Part 129, a foreign air carrier, in addition to receiving its exemption or permit from the Department of Transportation, must obtain FAA operations specifications. Applications must be submitted to the applicable FAA Flight Standards District Office, the location of which is based on the principal place of business of the applicant. Part 129 of the Federal Aviation Regulations also requires that the foreign air carriers operate in accordance with the minimum international standards of the Convention on International Civil Aviation Organisation, such as:
airworthiness and registration certificates;
flight crewmember certificates;
aircraft communication and navigation equipment;
collision avoidance systems;
air traffic rules and procedures; and
aircraft and flight deck security.
Additional rules in Part 212 of the Federal Aviation Regulations may apply to charter flights originating in the United States that are conducted by a foreign air carrier. Prior authorisation is required for such charter flights, but the Department of Transportation may issue a blanket authorisation or grant a waiver of such requirement if the waiver is in the public interest.(7)
Services to remote destinations
Chapter 417(2) of the Transportation Code provides for subsidised basic essential air service to underserved rural markets. This service ensures transport to a hub airport with convenient connecting flights to a number of destinations. The minimum requirements for basic essential air service include:
two daily round trips, six days a week;
flights at reasonable times, considering the needs of passengers with connecting flights; and
prices that are not excessive compared to the prices of other air carriers serving similar places.
With certain exceptions, service must be provided in an aircraft with an effective capacity of at least 15 passengers, and at least two engines and two pilots. The requirements for essential air service in Alaska are less stringent.(8) The FAA Modernisation and Reform Act 2012 (HR 658) was signed by the president on February 14 2012, and Section 421 of that act limits the programme’s eligibility to airports (other than those in Alaska and Hawaii and those located more than 175 miles from the nearest large or edium hub airport) that have an average of 10 enplanements per service day or more. The secretary may waive this requirement in certain circumstances.
In addition to acquiring a certificate of public necessity and convenience from the Department of Transportation or an exemption under Part 298 of the Federal Aviation Regulations, a charter service provider must comply with the operating rules for charter services under Part 135 of the Federal Aviation Regulations. It contains some rules in addition to Part 91, which governs the operation of all aircraft.Section 41104 of the Transportation Code imposes additional restrictions on charter services. The secretary of transportation may restrict the marketability, flexibility, accessibility or variety of charter air transportation (where a certificate of public convenience and necessity has been issued), but only to the extent required by the public interest. An air carrier may not provide, in an aircraft designed for more than nine passenger seats, regularly scheduled charter air transportation, unless such transportation is to and from an airport with an operating certificate issued under Part 139 of the Federal Aviation Regulations. This restriction does not apply where the departure time, departure location and arrival location are negotiated with the customer or the customer’s representative. This restriction does not apply in Alaska.
Regulation of airfares
Domestic airfares are not regulated. International fares are regulated pursuant to Chapter 415 of the Transportation Code and international rate proceedings are conducted in accordance with Part 302E of the Federal Aviation Regulations. Rates must be reasonable and not unreasonably discriminatory, and every air carrier and foreign air carrier must file tariffs with the secretary of transportation showing the prices for foreign air transportation. The secretary of transportation may not decide that a fare is unreasonable on the basis that the fare is too low or too high if the proposed fare is neither 5% higher nor 50% lower than the standard foreign fare level established by the secretary of transportation.(9) Tariffs must be filed and maintained pursuant to Part 221 of the Federal Aviation Regulations.
Registration of aircraft
The registration of aircraft is the responsibility of the FAA. Under the Transportation Code and the Federal Aviation Regulations, an aircraft is eligible for registration only if its owner is a US citizen and the aircraft is not registered under the laws of a foreign country. The citizenship requirement applies to individuals and partnerships, provided that each member thereof is a citizen. It also applies to corporations provided that the president, at least two-thirds of the board of directors and other managing officers, and owners of at least 75% of the voting stock are citizens.(10)
An aircraft may be registered only in the owner’s name; the term ‘owner’ includes a buyer or a lessee under a conditional sale contract. Under Part 47.9 of the Federal Aviation Regulations, the owner need not meet the US citizenship requirement if:
it is organised and doing business under the laws of the United States or any of its states;
the aircraft is based and primarily used in the United States (which the FAA has
interpreted to mean that 60% of flight hours are accumulated during non-stop flights between two points in the United States in each six-month period); and
the owner or lessee certifies as to the use and submits semi-annual reports to the FAA as to actual flight hours.
Under Part 47.8 of the Federal Aviation Regulations, a shareholder voting trust may also be used to qualify a domestic corporation that is owned by foreign shareholders as a US citizen for the purpose of registration of an aircraft. The applicant must submit to the FAA registry a copy of the voting trust agreement, which identifies each voting interest of the applicant and is binding on each voting trustee, the applicant corporation, all foreign stockholders and each party to the transaction. The applicant must submit affidavits from each voting trustee, wherein he or she represents that he or she is a US citizen and that there is no reason why any other party to the agreement might influence his or her independent judgement. The voting trust agreement must provide for the succession of a voting trustee; if the voting trust is modified such that US citizens hold less than 75% control of the voting interests, the holder loses citizenship.
Pursuant to Part 47.7 of the Federal Aviation Regulations, an owner’s trust over the aircraft may also be used to satisfy the US citizenship registration requirements. In this case, the foreign beneficial owner of the aircraft places the aircraft in a trust with a US citizen owner trustee. The trustee must also submit an affidavit to the FAA stating that it is not aware of any reason or relationship as a result of which the non-US citizen beneficiary would have more than 25% aggregate power to influence or limit the trustee’s authority. The trust itself must contain similar provisions.
Finally, Part 47 of the Federal Aviation Regulations was amended in October 2010 so that, over a three-year period, the registration of all aircraft registered before October 1 2010 will terminate, and such aircraft will be required to renew their registration to maintain US civil aircraft status. Furthermore, for all aircraft registered on or after October 1 2010, the registration will have a recurrent three-year expiry.
Registering aircraft mortgages and charges
Section 44107 of the Transportation Code provides for a system for recording conveyances, bills of sale, mortgages, contracts and other instruments affecting interest in or title to an aircraft. Part 49 of the Federal Aviation Regulations covers the recording of title and security documents. There is no US citizenship requirement or other limit as to who may be a mortgagee. To be recorded, the instrument must identify all aircraft by make, model, serial number and US registration number. The fee for recording any conveyance or instrument is $5. No fee is required for recording a bill of sale that accompanies an application for aircraft registration and the proper fee under Part 47 of the Federal Aviation Regulations.
Recorded documents may be amended, and any amendment must be signed by both parties to the original instrument and filed with the registry. Each mortgage or other conveyance filed with the registry is valid and perfected from the time of filing as to all persons with whatever priority is given by state law.
The United States has also ratified the Convention on International Interests in Mobile Equipment, which permits liens, contracts for sale and international interests in aircraft objects to be perfected by notation on an electronic international registry. The convention creates an international interest that is recognised in all contracting states and provides creditors with a range of default remedies.
The convention applies to transactions involving aircraft objects concluded after March 1 2006 and where, at the time of the transaction closing, either the aircraft is registered in the United States or the debtor is situated in the United States. Aircraft objects include fixed-wing aircraft certificated to transport at least eight persons or more than 6,050 pounds (lbs) of goods and airframes for helicopters certificated to carry at least five persons or goods in excess of 990lbs. All aircraft engines producing at least 550 horsepower, whether jet or propeller driven, must also be recorded.
Part 49F of the Federal Aviation Regulations sets out the requirements for authorisation to transmit information to the international registry. Persons wishing to file their interest with the international registry must first obtain an access number, which is done by filing Form 8050-135 with the FAA along with any documents representing the transaction that meet the requirements of Part 49C. These documents include an aircraft bill of sale, contract of conditional sale, a mortgage, an assignment of a mortgage or other instruments affecting title to, or an interest in, aircraft. Once an access number has been authorised, parties may list their interest in an aircraft on the electronic international registry without filing any documents thereto (ie, bill of sale or aircraft registration).
Right to detain aircraft
Air navigation authorities in the United States generally have no specific rights to detain aircraft for unpaid navigation charges. To the extent that an air carrier has unpaid debts to any party and is not otherwise under bankruptcy court protection, creditors that obtain a judgment against an aircraft operator have the same rights as any other judgment creditors under applicable state or federal law. Aircraft creditors that are consensual lien holders of aircraft also generally have the ability to foreclose on their liens on the occurrence of an event of default and seize the aircraft, again subject to applicable state laws and federal bankruptcy laws. Furthermore, under Section 46304 of the Transportation Code, an aircraft may be subject to a lien if involved in a violation for which a civil penalty is applicable. The violations include failure to comply with a number of parts of the Transportation Code, including the proper procedure for certification. Any aircraft subject to a lien may be seized and placed in the custody of the FAA or the Department of Transportation until the amount is paid or another solution has been arranged.
Maintenance of aircraft
Part 43 of the Federal Aviation Regulations prescribes the rules governing the maintenance, preventive maintenance, rebuilding and alteration of aircraft, and stipulates that any aircraft repair requires the services of a certified mechanic or repairman, as provided in Part 65 of the Federal Aviation Regulations. The holder of an air carrier operating certificate or an operating certificate issued under Part 121 or 135 may perform maintenance, preventive maintenance and alternatives as provided in Part 121 or 135.(11)
Airports in the United States are both privately and publicly owned, although the vast majority of airports that significantly contribute to air traffic are publicly owned and perated. Most of the privately owned airstrips and airfields are closed to public air traffic. Generally, a county, municipality or sub-governmental entity owns or licenses the public airport. A few state-owned airports present exceptions to this rule.
Airports must be certified by the FAA, which in turn has promulgated rules in Part 139 of the Federal Aviation Regulations setting forth the procedures required to receive an operating licence. Although the procedures depend on the size and type of the airport up for certification, all potential airport administrators must submit a written application and an airport certification manual or airport certification specifications to the FAA. The manual contains a description of operating procedures, facilities and equipment and responsibility assignments, along with other specific details depending again on the size and type of the proposed airport. Additionally, the airport must submit to a blanket inspection provision.
Even after satisfying federal requirements, airports may still be subject to state or other local municipal regulation providing for, among other things, site approval.
Federal oversight of airport administration is animated by the concern that airports might use airport revenue for non-airport purposes. To that end, several federal laws have been enacted providing economic regulation for airports.
The Anti-head Tax Act 1973, found in Section 40116(e)(2) of the Transportation Code, permits state and local governments to collect “reasonable” rental charges, landing fees and other service charges from aircraft operators for using facilities owned or operated by that state. Building on this provision, the Airport and Airway Improvement Act 1982(12) implemented a fee and rental structure that makes the airport as selfsustaining as possible, insisting that charges be reasonable and used only for airport purposes. Also, in order to receive federal funding, airports must promise that they “will be available for public use on reasonable conditions and without unjust discrimination”.(13)
The Supreme Court answered the question as to what constitutes a ‘reasonable’ airport charge in 1994. Such a charge is reasonable when “(1) it is based on some fair approximation of the use of the facilities, (2) is not excessive in relation to the benefits conferred, and (3) does not discriminate against inter-state commerce”.
This test permits broad discretion on the part of airports as to how to collect fees and set rates.(14)
The Federal Aviation and Administration Authorisation Act 1994 requires that airport charges, fees or taxes be used for airport or aeronautical purposes only, again predicating federal funding on an affirmative recital by the airport similar to that required by the Airport and Airway Improvement Act.
The Federal Aviation and Administration Authorisation Act contains a provision that authorises the secretary of transportation to determine whether airport fees are reasonable, although this power does not extend to the setting of fee levels. Either an airline or an airport may trigger this provision by filing a complaint or making a request for review. Once the act has been triggered, an administrative law judge makes a finding that, in the absence of a contrary statement by the secretary of transportation within a set period of time, becomes the final decision of the Department of Transportation on the matter.
In 1995 the Department of Transportation issued a policy capping airport charges by requiring airports not to charge any more than was required to break even. Under this policy, the department ordered refunds of certain airport fees determined to be excessive.
The FAA also imposed restrictions on any airport accepting funding coming from federal taxes on tickets. Such an airport must spend its revenues exclusively on capital or operating costs, the local airport system or facilities owned or operated by the airport directly and substantially related to the air transportation of people and property.
Additionally, the FAA regulates airport access projects, requiring that such projects preserve or enhance the capacity, safety or security of the national air transportation system, reduce noise or provide an opportunity for enhanced competition between carriers. Access projects must be for the exclusive use of airport patrons and employees, be built on airport-owned land or rights of way and be connected to the nearest public access of sufficient capacity.
Finally, airport sponsors may charge fees to recoup operation costs.
Access to airports
Two types of regulation restrict or qualify access to airports, although the recent trend has been towards their elimination.irst, runway time is divided into specific periods called slots, whereby air carriers reserve time on airport runways to accommodate their flights. Slots are the traditional means by which the government has restricted or qualified access to airports, originally to reduce air traffic congestion and delay.
Second, the government has utilised perimeter rules to restrict access to certain airports. For example, under the Washington Metropolitan Airports Act 1986, Congress restricted all air traffic taking off from or landing at Ronald Reagan Washington National Airport to flights taking off from or landing at an airport within a 1,250-mile radius.
Many of these restrictions were relaxed by the Aviation Investment and Reform Act for the 21st Century 2000. The act eliminates a number of the previously imposed slot rules and permits discretionary exceptions to specific perimeter rules.
The first way in which slots at certain congested airports are allocated is under the High Density Slot Rule. Originally introduced in 1968, this rule identified a number of highdensity airports and imposed specific slot restrictions. Administrative oversight is delegated to scheduling committees, which often feature representatives from incumbent airlines, although the FAA has the power to intervene if necessary. The number of slots under this scheme varies from airport to airport and slots are allocated among specific classes of user. Additionally, slots must be used 80% of the time over a two-month period or they will lapse, though certain exceptions are sometimes granted in the case of bankruptcy.
The second way in which slots are allocated is under the Buy-Sell Slot Rule. This rule permits airlines holding slots in identified high-density airports to sell them at marketdictated rates. The use provision found in the High Density Slot Rule also applies to this rule. Any lapsed or newly available slots may be distributed by the FAA via lottery. Additionally, the FAA may revoke or seize traded slots. The rule treats international and general aviation slots separately. Non-carriers are permitted to hold slots, making them available to be used as collateral on loans for financing purposes. Finally, slot owners may lease their slots to avoid the lapse provision.(15)
Ground handling is typically carried out by fixed base operators. They may be privately owned or operated by a department of the municipality that the airport serves. The fixed base operators service the military and commercial airlines, and are tenants within the publicly held airports. Because the government landlord is partially insulated from liability arising from its actions, fixed base operators are afforded limited opportunities to negotiate what they might consider ideal rental terms and conditions.
Often, only one fixed base operator services a particular airport. This gives rise to a potential special relationship between the airport sponsor and the fixed base operator, which has raised the concern of possible competition stifling preferential treatment. On the other hand, if the fixed base operator falls out of the sponsor’s good graces, the fixed base operator might be the target of discriminatory treatment.
While a provision of the Transportation Code (49 USC Section 47107(a)(4)) expressly prohibits exclusive partnerships, the FAA unofficially supports a protectionist policy for fixed base operators and other airport operators.(16) The tension between fostering an environment of open competition while desiring to protect certain businesses has made this area exceptionally litigious. Accordingly, Congress granted airports limited immunity from resulting antitrust lawsuits, only permitting awards of injunctive relief.(17)
In 2007, the Transportation Security Administration launched the Secure Fixed Base Operator Programme in partnership with the private sector. This initiative provides additional security for US-bound flights.
Air traffic control
Air traffic control services are primarily administered through the FAA. The FAA directly employs nearly all air traffic controllers and any new controllers must enrol in an FAAapproved training programme after passing a pre-employment exam. The agency also put into place a number of policies setting forth the specific procedures to be followed.
Liability and accidents
Domestic carriage rules
Under tort law, common carriers or other tortfeasors may be found liable for death or injury to passengers and property. A ‘common carrier’ is defined as one which engages in the transportation of persons or things from place to place for hire, and which holds itself out to the public as serving it indiscriminately. Courts have held that common carriers have a duty of care to their passengers that is higher than reasonable care. In order to demonstrate negligence, the plaintiff must show duty, breach, causation and damages.
If the negligence of any employee of the federal government, acting within the scope of his or her employment, is alleged to have caused injury or death, the Federal Tort laims Act provides a judicial remedy against the United States for damage claims.
Under Part 254 of the Federal Aviation Regulations, airlines must pay for lost or damaged luggage, and may not limit their liability to less than $3,300 per passenger. The Department of Transportation reviews the minimum limit on liability every two years.
Section 44112 of the Transportation Code should provide aircraft financiers with immunity from liability for aircraft accidents, provided that such financing party was not involved in the direct operations of the aircraft. However, the immunity granted in Section 44112 has recently been denied by some state courts and the state and federal courts are now split on the scope of the immunity provided by Section 44112.
Liability for surface damage
In May 2009 two new conventions in regard to surface loss and damage were adopted at an International Civil Aviation Organisation conference – the Convention on Compensation for Damages to Third Parties Resulting from Acts of Unlawful Interference Involving Aircraft and the Convention on Compensation for Damages Caused by Aircraft to Third Parties, which seeks to modernise and superseded the Rome Convention 1952. Each convention is based on strict and limited liability. However, neither the Rome Convention nor the two new conventions adopted at the conference have been adopted in the United States.
Pursuant to Chapter 11 of the Transportation Code, the National Transportation Safety Board (NTSB) is responsible for investigating accidents involving civil aircraft.(18)Accident investigations are conducted pursuant to Part 831 of Title 49 of the Code of Federal Regulations (the Department of Transportation Regulations). Public hearings may be conducted as provided for in Part 845 of the Department of Transportation Regulations. The NTSB must report the facts, conditions and circumstances relating to each accident and the probable cause. The results are presented to an examiner, who later prepares a report to aid the NTSB in preparing its required final report. This report, which is usually released six months after the accident, will describe the probable cause and identify problems and propose changes so the same type of accident does not recur. The NTSB is not responsible for prosecuting criminal behaviour or assigning blame.
All reports of investigations and findings are made public, and NTSB reports relating to any accident or investigation may be admissible into evidence in actions for damages subject to certain constraints.Accident and incident reporting system Part 830 of the Department of Transportation Regulations requires aircraft operators to notify the NTSB of aviation accidents and certain incidents. An ‘accident’ is an occurrence associated with the operation of an aircraft that occurs between the time when any person boards the aircraft with the intention of flight and the time when all such persons have disembarked, and in which any person suffers death or serious injury, or in which the aircraft receives substantial damage. An incident is an occurrence other than an accident that affects or could affect the safety of operations.
The report should be filed with the nearest NTSB regional office. An initial phone call is sufficient, but must be followed up in writing.
The aviation sector is governed by both US antitrust law rules and sector-specific competition law rules, which are similar to basic US antitrust principles. The primary US antitrust laws, the Sherman Act and the Clayton Act, both apply to aviation. However, the US Federal Trade Commission is not empowered to enforce the Federal Trade Commission Act’s prohibition of unfair methods of competition and unfair or deceptive acts or practices against air carriers subject to the Transportation Code. Nor does the Robinson-Patman Act’s prohibition of certain kinds of price discrimination apply to airlines. The Transportation Code, which is enforced by the Department of Transportation, contains airline-specific antitrust rules similar to those contained in Section 5 of the Federal Trade Commission Act.
The Sherman Act prohibits all contracts, combinations and conspiracies that unreasonably restrain trade. Price fixing, market allocation and customer allocation agreements are classic examples of such illegal agreements. The Sherman Act also prohibits monopolisation and any attempts to monopolise. The Clayton Act is the primary antitrust tool used to attack mergers and acquisitions that are anti-competitive.The Department of Justice has criminally prosecuted price fixing by airlines involved in providing air cargo services. The prosecution has resulted in charges against 22 airlines and 21 executives, with over $1.8 billion in fines imposed to date, the largest total of fines ever imposed in a single criminal antitrust investigation. Following the nnouncement of the criminal investigation, antitrust class actions were brought by purchasers of air cargo services seeking treble damages from the airlines for price fixing. The cases were consolidated in the US District Court for the Eastern District of New York and are currently pending.(19) To date, 17 airlines have paid or agreed to pay a total of approximately $485 million to settle the class action claims against them.
The competition laws exclusively applicable to the aviation sector are the Transportation Code and the Airline Deregulation Act. Section 41712 of the Transportation Code grants the secretary of transportation the authority to enjoin air carriers from engaging in “an unfair or deceptive practice or unfair method of competition” either domestically or internationally, or both, if he or she finds that such would be in the public interest. The Department of Transportation also has the authority to issue regulations under this provision, governing the display of code-sharing agreements in computer reservation systems.
In addition, the Airline Deregulation Act gives the Department of Transportation the discretionary authority to grant antitrust immunity to anti-competitive carrier agreements if it determines that such agreements are “necessary to meet a serious transportation need” or to achieve an important public benefit that cannot be achieved by reasonable and less anti-competitive alternatives.(20) Thus, for example, the Department of Transportation has granted limited antitrust immunity to code-sharing agreements between US and foreign air carriers because it has determined that such agreements were beneficial to the public. In this connection, airlines have continued to pursue new code-sharing agreements in the past year.
For instance, in July 2010 the Department of Transportation granted approval for American Airlines and four of its Oneworld international partners – British Airways, Iberia Airlines, Finnair and Royal Jordanian Airlines – to coordinate international servicesmore closely. The Department of Transportation determined that the integrated global alliance would provide travellers and shippers with a variety of benefits, including lower fares in some markets, new non-stop routes, improved services and better schedules. In addition, the Department of Transportation determined that the integration would enable the alliance to compete more vigorously with Star Alliance and SkyTeam. To address a potential loss of competition on select routes between the United States and London Heathrow Airport, the Department of Transportation requiredthe applicants to make four pairs of Heathrow slots available to competitors.
In June 2011 the Department of Transportation approved a revised antitrust immunity application by Delta Air Lines and affiliates of the Virgin Blue Group, allowing the carriers to establish a joint venture to provide service between the United States, Australia and the South Pacific. After an initial rejection of their request, the airlines submitted a revised application that expanded the scope of the alliance to include service to more passengers and ensured compatibility between the airlines’ reservation systems to provide consumers with a more seamless travel network. The Department of Transportation concluded that “the revised application demonstrated that the alliance would produce sufficient public benefits to justify a grant of immunity without diminishing competition”.
The two principal antitrust regulators of the aviation sector are the Department of Transportation and the Department of Justice. Neither the Federal Trade Commission nor the individual states have authority to enforce competition rules in the aviation industry.(21)
The Department of Transportation has three main areas of regulatory authority:
the discretionary authority to grant antitrust immunity to anti-competitive carrier agreements;
the authority to enjoin air carriers from engaging in unfair or deceptive practices or methods of competition, such as predatory pricing; and
the authority to oversee carrier joint venture agreements, such as code-sharing and frequent-flyer programmes.
The Department of Justice is responsible for enforcing the Sherman and Clayton Acts. Additionally, it is vested with the authority to review airline mergers and acquisitions.Relevant market
Competition assessment in the aviation sector focuses on the relevant geographic market and the relevant product market. The relevant product or service market will depend on the actual product or service being provided. The relevant product market in commercial aviation could, in the appropriate circumstances, be defined as scheduled passenger transportation. In other circumstances, it could be an air cargo transportation market. The actual relevant market will be determined by the unique circumstances surrounding the matter that is the subject of antitrust examination. The geographic market will also vary with the circumstances. However, in cases involving mergers, code-sharing alliances and joint ventures among carriers, competition will enerally be examined in each ‘city pair’ in which the merging, code-sharing or jointventuring carriers both offer service.
In a merger such as that between Air France and KLM in 2004, where the merging airlines were members of competing code-sharing alliances, the Department of Justice examined the merger as if it were a combination of the transatlantic operations of all alliance members and evaluated all of the city pairs in which the alliance members competed. Similarly, when it approved the 2007 merger between Delta Air Lines Inc and Northwest Airlines Corporation, the department determined that the two airlines faced competition from other carriers on most of the routes where they competed with each other.
In October 2010 UAL Corporation (the parent of United Airlines Inc) and Continental Airlines Inc closed their merger. Before the closing, the department found that the proposed merger would combine the airlines’ largely complementary networks, but would result in overlap on a limited number of routes in and out of Newark, New Jersey, where United and Continental offered competing non-stop service. To resolve the department’s competition concerns, the merging airlines reached an agreement to transfer take-off and landing slots at Newark Liberty Airport to Southwest Airlines Co.
Assessing competitive effect
The standard for assessing the competitive effect of an agreement examined under Section 1 of the Sherman Act is whether the agreement unreasonably restrains trade in the relevant market. The standard for assessing the competitive effect of conduct challenged as monopolisation is whether a firm with monopoly power in the relevant market has engaged in conduct that has the effect of expanding or maintaining that monopoly. For attempted monopolisation, the standard is whether a firm with substantial market (but not monopoly) power has engaged in conduct that creates a “dangerous probability of success” that it will monopolise the relevant market. For mergers and acquisitions, the test is whether the effect of the transaction “may be substantially to lessen competition, or to tend to create a monopoly” in the relevant market. Finally, the Transportation Code provides that a transaction is anti-competitive if it represents an unfair method of competition or a deceptive practice, and is against the public interest.
Both civil and criminal penalties can be imposed for antitrust violations. Violations of the Clayton Act can result only in civil liability, whereas violations of the Sherman Act can result in both civil and criminal liability. Criminal penalties can be as high as $1 million for individuals and $100 million for corporations for each violation. In addition, individuals can be imprisoned for criminal violations of the Sherman Act. Only the most serious violations of the Sherman Act – such as price fixing, bid rigging and market allocation – are prosecuted criminally. In addition, the Department of Justice can seek injunctive relief barring private parties from continuing to engage in conduct that violates the antitrust laws. Injunctive relief is the standard form of relief sought when the Department of Justice seeks to block a merger.
With respect to criminal penalties under the Sherman Act, the recent prosecution by the Department of Justice against the air cargo carriers has, to date, resulted in charges against 22 airlines and over $1.8 billion of aggregate criminal fines:
British Airways ($300 million, August 23 2007);
Korean Air ($300 million, August 24 2007);
Qantas Airways ($61 million, January 14 2008);
Japan Airlines ($110 million, May 7 2008);
Air France-KLM (two pleas reflecting their pre-merger activities with total fines of
$350 million, June 26 2008);
Cathay Pacific Airways ($60 million, June 26 2008);
Martinair ($42 million, June 26 2008);
SAS Cargo Group ($52 million, June 26 2008);
LAN Cargo SA and Aerolinhas Brasileiras SA ($109 million, January 22 2009);
El Al Israel Airlines ($15.7 million, January 22 2009);
Cargolux Airlines International SA ($119 million, April 9 2009);
Nippon Cargo Airlines Co Ltd ($45 million, April 9 2009);
Asiana Airlines, Inc ($50 million, April 9 2009);
Northwest Airlines LLC ($38 million, July 30 2010);
Polar Air Cargo LLC ($17 million, September 2 2010);
China Airlines Ltd ($40 million, September 27 2010);
All Nippon Airways Co Ltd ($73 million, November 1 2010);
Singapore Airlines Cargo Pte Ltd ($48 million, November 30 2010); and
EVA Airways ($13.2 million, May 27 2011).iolations of the antitrust laws can also create civil liability to third parties which are
injured by those violations. Injured parties may recover treble damages for injury to their business or property caused by an antitrust violation. They are also entitled to recover their attorneys’ fees. The civil class-action suits against the air cargo carriers have, to date, resulted in 17 airlines paying or agreeing to pay a total of approximately $485 million to settle the claims against them.
Finally, the Department of Transportation may enjoin activities that violate the Transportation Code.
Financial support and state aid
Although most airlines in the United Stated are held by private shareholders, they can receive federal subsidies in particular contexts:
Under the Air Transportation Safety and System Stabilisation Act, airlines were permitted for a period of time to apply for federal assistance in the aftermath of the terrorist attacks of September 11 2001. The act did not cover aid for damages incurred after December 31 2001.
The government currently provides for war-risk insurance.
Congress granted the Department of Transportation authority to exempt airlines from certain economic regulations, subject to the extent that the secretary determines necessary. Other exemptions are permissible, depending on public need.
Airlines serving certain small communities receive federal subsidies.
The Air Transportation Safety and System Stabilisation Act delegated the power to dispense funds – both direct compensation and lines of credit – to the Air Transportation Stabilisation Board. To qualify for a grant of direct aid, the air carrier is required to show the precise financial loss suffered, either through sworn financial statements or “other appropriate data”.(22) To qualify for a federal credit instrument, the board is required to determine that:
the applicant is an air carrier otherwise unable to secure credit;
the intended obligation is “prudently incurred”; and
the credit agreement would have been necessary to the maintenance of a safe, efficient and viable commercial aviation system.(23)
In addition, Congress created subsidies to airlines that provide service to specific small communities through its Essential Air Services Programme. This ensures that small communities that were served by certified air carriers before deregulation maintain a minimum level of scheduled air service.
There are no exemptions to the state aid rules owing to the specific and targeted nature of federal subsidies to airlines such as those found in the Air Transportation Safety and System Stabilisation Act and the Essential Air Services Programme.
In most cases, no clearance from the competition authorities is required before state aid can be granted. The Air Transportation Safety and System Stabilisation Act provided for a forward-looking application process by the Airline Transportation Stabilisation Board, while competition authority procedures permit backward-looking analysis of potential violations. Applications for Air Transportation Safety and System Stabilisation Act aid covering direct losses suffered after December 31 2001 are not permitted.
However, clearance is required for subsidies under the Essential Air Services Programme. This programme is regulated by the Department of Transportation.
Passenger protection legislation
Part 374 of the Federal Aviation Regulations gives responsibility to the Department of Transportation for enforcing air carrier compliance with the Consumer Credit Protection Act. A violation of the act is also a violation of the Transportation Code.
For carriers holding certificates of public convenience and necessity, Part 250 of the Federal Aviation Regulations provides that for oversold flights, carriers must ensure that the smallest number of passengers with confirmed reservations are denied boarding. The carrier should ask for volunteers to receive compensation for giving up their seats. For passengers who are denied boarding involuntarily, the carrier must pay 200% of the sum of the passenger’s remaining flight coupons up to his or her next stopover, up to a maximum of $800. The carrier’s liability will be capped at $400 if it arranges for comparable transport that will arrive no later than two hours after the planned arrival of the original flight, if domestic, and no later than four hours after the planned arrival of the original flight, if international. Carriers may offer free or reduced transport in lieu of the cash if its value is equal to or greater than the amount owed to the passenger. Every carrier must file a quarterly report of passengers denied confirmed space.Federal regulations and statutes also govern false and misleading advertising, lost and amaged baggage, disabled access, smoking aboard aircraft, gambling and code sharing.
Furthermore, in December 2009 the Department of Transportation adopted new consumer protection rules in regard to tarmac delays. Among other things, Parts 234, 253, 259 and 399 of the Federal Aviation Regulations were amended, with limited exceptions, to:
mandate that tarmac delays be limited to three hours;
require air carriers to provide adequate food and potable water for passengers
within two hours of an aircraft being delayed on the tarmac; andmaintain operable lavatories and provide medical attention if necessary.
Section 408 of the FAA Modernisation and Reform Act authorises the secretary of transportation to investigate consumer complaints regarding:
lost, damaged or delayed baggage;
incorrect or incomplete fare information;
frequent flyer mile rights; and
deceptive or misleading advertising.
To protect passengers that have purchased package holidays, Part 212.8 of the Federal Aviation Regulations provides that air carriers operating charter flights must file a currently effective agreement between the air carrier and a Federal Deposit Insurance Corporation-insured bank, stating that all advanced charter payments will be held in escrow by the bank with the Department of Transportation. The charterer is to make all advanced payments to the designated bank and the bank is to pay out the balance only after the carrier certifies in writing that the charter has been completed. Alternatively, the carrier may elect to file with the Department of Transportation a surety bond with guarantees to the US government for the performance of all charter trips. The bond must provide that the charterer has 60 days after the cancellation of a charter trip in which to file a claim against the carrier. If no such claim is made, the surety shall be released from all liability.
There is no specific passenger protection legislation in regard to domestic airfares, which are negotiated and international airfare is regulated as provided in Chapter 415 of the Transportation Code. However, the Department of Transportation does maintain jurisdiction over any unfair and deceptive trade practice.(24) In this respect, Section 41712 of the Transportation Code was amended in 2010 to make it an unfair or deceptive practice to fail to disclose the names of the actual carriers providing the transportation.
US and foreign direct air carriers must have aircraft accident liability insurance coverage that satisfies federal requirements. The minimum air carrier insurance requirements in the United States are $300,000 for bodily injury or death, or for damage to the property of others, for any one person in any one occurrence, and a total of $20 million per involved aircraft for each occurrence. However, for aircraft of 60 seats or fewer or 18,000lbs maximum payload capacity, carriers need only coverage of $2 million per involved aircraft. In regard to passengers, US and foreign air carriers must maintain accident liability insurance for injury or death with minimum limits of $300,000 for any one passenger, with a total per involved aircraft limit for each occurrence of $300,000 times 75% of the number of installed seats. Different rules exist for US air taxi operators and Canadian charter air taxi operators.
In addition to multilateral resolutions, the United States has internal legislation regarding aviation security. Among other procedures, screening of passengers and baggage for weapons is authorised and background checks for airline and airport employees and deployment of bomb detection technology for baggage are required. In 2002 the Homeland Security Act consolidated 22 agencies, including the Transportation Security Administration, into the Department of Homeland Security. The Department of Homeland Security is responsible for transportation security, customs, immigration and agricultural inspections. X-ray and metal detector devices are used at security checkpoints and there are detailed requirements for security personnel.
Chapters 449 and 463 of the Transportation Code contain various crimes that are either felonies or misdemeanours. These crimes include air piracy, interference with crew members, air sabotage, carrying weapons or explosives on the aircraft, receiving illegal rebates, violating the Hazardous Materials Transportation Act and falsifying records.Emerging trendshe FAA continues to review the use of non-citizen trusts authorised pursuant to Part 47.7(c) of the Federal Aviation Regulations to support the registration of aircraft at the FAA. A series of public meetings have been held and an industry group has formed under the auspices of the Aviation Working Group to respond to the concerns of the FAA. The matter has not yet risen to the level of an official rulemaking to alter the existing regulations, but the industry group has proposed to the FAA specific changes to the standard form of non-citizen trust that may included in future trusts to satisfy the concerns of the FAA.
Section 407 of the the FAA Modernisation and Reform Act authorises the comptroller general of the United States to conduct a study to assess the options for minimum compensation for delayed baggage. This will have to be watched in order to see whether it leads to any proposed regulatory changes.
(1) See Paul Dempsey and Laurence Gesell, Air Commerce and the Law (2004), 226–
(2) See, for example, Application of Sunbird Airways Inc, Department of Transportation
Order 94-6-30 (1994).
(3) See Part 204.2(c)(3) of the Federal Aviation Regulations.
(4) See, for example, DHL Airways Inc, Docket No OST-2002-13089-549
Recommended Decision of ALJ, pp35–38; Air Commerce and the Law at 232.
(5) Air Commerce and the Law at 233.
(6) See Part 302.18(c) of the Federal Aviation Regulations.
(7) See Parts 212.9 and 212.12 of the Federal Aviation Regulations.
(8) See also Part 271 of the Federal Aviation Regulations.
(9) 49 USC Sections 41501, 41504 and 41509.
(10) See Part 47.2 of the Federal Aviation Regulations.
(11) See Part 43.3 of the Federal Aviation Regulations.
(12) 49 USC Section 47107(a)(13).
(13) 49 USC Section 47107(a)(1).
(14) See Northwest Airlines v County of Kent, 510 US 355, 369 (1994); see also Air
Commerce and the Law at 474–75.
(15) See 14 CFR Sections 93.121-33 and 93.211-27.
(16) Air Commerce and the Law at 464.
(17) 15 USC Sections 34 to 36.
(18) 49 USC Sections 1101 to 1155.
(19) See In re Air Cargo Shipping Services Antitrust Litigation, MDL No 06-1775 (EDNY).
(20) (49 USC Section 41309(b)(1)(A), (B)).
(21) See 15 USC, Sections 45(a)(2), 46(a) and (b) (air carriers are exempt from the
jurisdiction of the Federal Trade Commission) and 49 USC, Section 41713(b)(1) (air
carriers are exempt from the enforcement of state antitrust laws).
(22) Section 103(a) of the Air Transportation Safety and System Stabilisation Act.
(23) Section 102(c)(1)) of the Air Transportation Safety and System Stabilisation Act.
(24) See 49 USC Section 41712.
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