Legal Issues Relating to Airports Promoting Competition (2019)

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Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 3 LEGAL ISSUES RELATING TO AIRPORTS PROMOTING COMPETITION Eric T. Smith, Kaplan Kirsch & Rockwell, LLP, Washington, D.C. I. PREFACE/SUMMARY Competition among airlines and fixed-base operators (FBOs) at U.S. airports presents a myriad of issues for the air- port sponsor, its executives and for local elected officials—all of whom themselves often face multidimensional challenges and needs. U.S. airports, and especially those which have used federal airport improvement funds, operate within a unique atmosphere. Congress, through the enactment of airport funding legisla- tion, created a broad and general framework within which air- port sponsors must operate. Much of this general framework has been supplemented by United States Department of Trans- portation / Federal Aviation Administration (DOT/FAA) and provides airport sponsors with some further guidelines within which airports must operate. This framework/guidance, how- ever, relies largely upon general standards such as dealing with airlines and FBOs in a “reasonable” and “not unjustly discrimi- natory” manner. Given this fact, the resolution of competition issues at any particular airport is necessarily highly dependent upon the locally-derived factual context and, therefore, requires locally-derived solutions. This digest provides guidance for airport lawyers, manage- ment, and staff regarding the legally permissible means and methods of encouraging and accommodating competition at U.S. airports among air carriers and FBOs. It provides a road- map for understanding the theories, policy, and federal regula- tory framework1 for addressing competition-related concerns at U.S. airports, insight into industry standards and best practices, and guidance for how airport owners and operators may foster competition among air carriers and FBOs. II. INTRODUCTION The aviation industry and its competitive landscape in par- ticular has changed significantly over the past two decades. The consolidation of several major airlines, most following their emergence from bankruptcy, as well as the rise of several dif- ferent business models among air carriers, has fundamentally changed the nature of competition among air carriers at air- ports. At many airports, there is a concentration of air service 1 Where terms such as “regulatory” or “regulatory framework” are used in this digest, they are intended to encompass the full panoply of federal influence upon competition issues, ranging from federal legisla- tion, regulations issued by federal agencies, formal and information statements made by federal agencies (ex. FAA and DOT), and contrac- tual provisions included in grant agreements between the FAA and air- port sponsors. among one or more large carriers or an otherwise overwhelm- ingly dominant carrier. Other airports, particularly small and non-hub airports, have experienced significant declines in com- mercial air service or, in some cases, the departure of commer- cial air service altogether. At the same time, the number of FBOs operating nationwide has generally declined, in many cases also through industry consolidation. While the circumstances of each airport are unique, many of the challenges faced by airports proprietors seeking to fos- ter a robust competitive environment share common elements. The majority of public-use airports in the United States operate under a comprehensive regulatory framework that is imposed as a condition of receiving federal Airport Improvement Pro- gram (AIP) grants and/or collecting Passenger Facility Charges (PFCs). It largely consists not of direct regulations issued by the FAA, but rather federal influence exerted indirectly through agreements, incentives, and background laws. This framework not only requires airport sponsors to provide a competitive en- vironment in which aeronautical users and service providers have access to the airport, but also governs (and, in some cases, may limit) airport sponsors’ ability to respond to particular competitive concerns in important ways. For example, the AIP grant assurances requires airport sponsors to provide access to the public on reasonable and not unjustly discriminatory terms, and to refrain from granting “exclusive rights” to aeronautical service providers. But at the same time, the principle of un- just discrimination may restrict a sponsors’ ability to open up monopolistic or oligarchic markets. An airport’s ability to offer more favorable terms to a new entrant carrier or FBO on a long- term or ongoing basis, for example, is highly restricted and often subject to scrutiny by incumbents and the FAA. It is therefore important that airport sponsors understand this regulatory framework, as well as aeronautical service pro- viders’ economic motives, in order to address competitive issues and ensure the long-term viability of their airports. The authors intend this report as a guide to better understanding these fac- tors as they relate to managing competition between air carriers and FBOs at federally-obligated airports. It is specifically geared toward the legal implications of managing competition, in- cluding coping with concentrations of air carriers and FBOs, accommodating air carriers with differing business models, and avoiding exclusive rights violations as the result of aeronautical service providers’ merger or acquisition. This report begins with a historical introduction to air carrier and FBO competition at U.S. airports, including the devel- opment of the existing regulatory structure and mechanisms to ensure competition at airports and the various economic