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 11 introducing another could be a recipe for a failure of all FBOs. For those airports that are somewhere in the middle, the indi- vidual facts and circumstances will dictate how best to address competition and services issues. Clearly, airport sponsors play an important role in the regu- lation and promotion of competition within both the airline and FBO industries. Just as clearly, the unique circumstances of each sponsor’s airport will inform how the various mechanisms guid- ing competitive markets at airports play out. IV. RELEVANT LEGAL AUTHORITIES If airport operators are to act responsibly in their role as con- duits for federal aviation policy, and if they are to utilize market economics in order to best leverage available resources, then they need to understand the regulatory environment in which they can and must act. A better understanding of the various legal mechanisms put in place to facilitate and regulate com- petition is critical both to avoiding legal pitfalls and thwarting anti- competitiveness, inefficiency, and monopolistic behavior. A sound understanding of the regulatory environment is equal- ly important to leveraging these tools for the benefit of their airports and the greater community at large. Below is a broad summary of the applicable law. Of note is the fact that much of the legal authority is statutory, regulatory, or guidance materials issued by federal agencies and there is a relatively small set of case law on relevant topics that interprets all of these materials. Of course, each airport’s individual facts, circumstances and interests necessarily requires individualized analysis. Thus, ap- plication of the framework of relevant data points is somewhat of an art and the following discussion should be read with this in mind. A. Statutory Framework Federal aviation policy is expressly tied to the promotion of competitive markets. The provisions of the United States Code that set out federal policy concerning commercial aviation pro- vides that the Secretary of Transportation must consider it to be in the public interest to place “maximum reliance on competi- tive market forces and on actual and potential competition . . . to provide the needed air transportation system”87 as well as to “provide efficiency, innovation, and low prices.”88 Federal policy also privileges “entry into air transportation markets by new and existing air carriers”89 as well as “promoting, encouraging, and developing civil aeronautics and a viable, privately-owned United States air transport industry.”90 The vehicles for this policy framework are primarily executed through agreements for federal airport funding, as well as con- ditions for permitting exemptions from anti-head tax provi- sions (i.e., the permission to collect passenger facility charges). These measures ensure that airport sponsors are enlisted as 87 49 U.S.C. § 40101(a)(6)(A). 88 49 U.S.C. § 40101(a)(12)(A). 89 49 U.S.C. § 40101(a)(13). 90 49 U.S.C. § 40101(a)(14). With respect to the FBO industry, the federal government and airport sponsors share the same overriding concern regard- ing the adequacy and viability of FBO services. Most airports view the FBO as the “front door” not just to the airport, but to the community as a whole. Thus, the physical appearance, services available, and higher-end amenities are of concern to the sponsor. Furthermore, airport sponsors want competitive, market-priced fuel available for aircraft operators. This is par- ticularly so with respect to FBO services provided to the general aviation community. With this said, what “top-rate service” and “competitive, market-based fuel” means for a airport varies depending upon the airport. This is because the economic reality for operators varies just as much, with each airport attracting different levels of traffic and revenue. Larger airports often provide better ser- vice, at higher cost, while smaller airport FBOs can be more affordable. But many purely general aviation airports have their own challenges with lower traffic and fewer tenants. Marginal increases in fuel price are an attractive way to close such gaps between costs and revenue. Meanwhile, “top-rate service” may include “free” amenities ranging from a cup of coffee to a sleep room or crew car—oftentimes included with an FBO’s handling or facilities fee, which may be waived with a fuel purchase. Some operators complain that mandatory fees and inflated fuel prices are subsidizing these perks that only a small percentage of cus- tomers use. But others equally protest when these “freebies” are phased out while full- and self-service options attempt to better reflect costs for individual customers. 84 Industry leaders advise operators to compete on service in- stead of price, arguing that discounting fuel to attract business is a losing proposition for everyone.85 Likewise, a recent survey of the FBO industry found that “excellent customer services” ranked at the top of almost every respondent’s list of success fac- tors.86 “Fuel services” (including competitive pricing) was high on many lists, but still ranked behind service and “accessibility of the FBO.” Of course, such priorities can conflict as competi- tive fuel prices and “top-rate service” may place inverse pressure on the other. What is the take-away from all of this for the airport spon- sor concerned about competition at its airport? With respect to the larger airports and airports with a substantial amount of high-yield, high-volume traffic, economics alone will both attract and support multiple FBOs and, if properly monitored and addressed by the sponsor, result in meaningful competition. At smaller airports with limited turbine operations and less- substantial small general aviation activity relying on aviation gasoline sales, supporting just one FBO will be a challenge and 84 Jim Moore, FBOs in a Bind: No More Freebies?, Aircraft Owners and Pilots Association (Jan 30, 2014), https://www.aopa.org/news- and-media/all-news/2014/january/30/fbos-in-a-bind. 85 John Enticknap & Ron Jackson, FBOs to Compete on Service, Not Price in 2013–Steady 6% Growth Forecast for FBOs, National Air Transportation Association Safety First eToolkit (Issue 90 February/March 2013). 86 Wang, supra note 61.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 12 ACRP LRD 37 Revised November 2019 The FAA has promulgated a standard document containing all Grant Assurances,101 which obligate the grantee to comply with various federal requirements and policies as a condition of grant approval. The most up to date complete list of all 39 Grant Assurances for airport sponsors may be found on the FAA’s website (https://www.faa.gov/airports/aip/grant_assurances/). The FAA has also published several guidance documents covering compliance with Grant Assurance requirements. These include: • Order 5100.38D, Airport Improvement Program Handbook (Sept. 30, 2014). • Order 5190.6B, FAA Airport Compliance Manual (Sept. 30, 2009) (“Airport Compliance Manual”). • Policy and Procedures Concerning the Use of Airport Revenue, 64 Fed. Reg. 7607 (Feb. 16, 1999) (“FAA Air- port Revenue Policy”) (also available as Appendix E to the Airport Compliance Manual). • AC 150/5190-6 - Exclusive Rights at Federally Obligated Airports (Jan. 4, 2007). • AC 150/5190-7 - Minimum Standards for Commer- cial Aeronautical Activities (Aug. 28, 2006). • Office of Airports, Airport Compliance and Field Operations, Air Carrier Incentive Pro- gram Guidebook, TC10-0034, FAA (Sept. 2010) (“FAA Incentive Program Guidebook”). A number of Grant Assurances, described below, touch upon matters related to competition at airports. They equip airport sponsors with tools to monitor and address airline and FBO markets while also restricting the scope of permissible air- port sponsor activity, both in the name of promoting competi- tion and leveraging federal support for the benefit of the flying public. 1. Grant Assurance 22, Economic Nondiscrimination Grant Assurance 22, concerning economic nondiscrimina- tion, is arguably the most pervasive of the Grant Assurances in managing competition. This Grant Assurance consists of nine subsections aimed at requiring the airport sponsor to prevent “unjust discrimination” among airport users and ensure “rea- sonable conditions” for public airport use. Grant Assurance 22(a) expresses this purpose most plainly, requiring that all fed- erally obligated airports “be available for public use on reason- able conditions and without unjust discrimination.”102 As this language suggests, the prohibition on unjust discrimination and the requirement that space and services be provided on a rea- sonable basis are expansive, extending to all aeronautical activi- ties taking place on a federally-obligated airport.103 101 See, 53 Fed. Reg. 3104 (Feb. 3, 1988), as amended by: 53 Fed. Reg. 34361 (Sept. 6, 1988); 54 Fed. Reg. 35748 (Aug. 29, 1989); 59 Fed. Reg. 14149 (June 10, 1994); 60 Fed. Reg. 521 (Jan. 4, 1995); 62 Fed. Reg. 29761 (June 2, 1997); 64 Fed. Reg. 45008 (Aug. 18, 1999); 70 Fed Reg. 15980 (Mar. 29, 2005); 76 Fed. Reg. 15028 (Mar. 18, 2011); 77 Fed Reg. 22375 (Apr. 13, 2012); 79 Fed Reg. 18755 (Apr. 3, 2014). 102 49 U.S.C. § 47107(a)(1); Grant Assurance 22(a). 103 FAA Order 5190.6B, supra note 56 at 9-1. policy enforcers. In addition, the federal government, through the DOJ with input from DOT, also utilizes its antitrust powers under the Clayton Act. B. AIP Grant Assurances The most significant source of regulation with respect to managing competition at airports – and, indeed, most aspects of airport development and operations – are the statutorily required contractual obligations with the federal government, known as “Grant Assurances,” to which participating airport must agree in order to receive funding through the AIP.91 The AIP was originally established under the Airport and Airway Improvement Act of 1982 (AAIA) and has been sub- sequently amended and codified in the U.S. Code.92 Airport owners and operators who apply for and receive AIP funding are known as “airport sponsors.”93 Public airport sponsors are eligible for AIP grants for air- port planning, airport development, noise compatibility plan- ning, and noise mitigation.94 While most Grant Assurances apply for 20 years after receipt of funds, others are valid in per- petuity.95 Furthermore, because many, if not the vast majority, of public airports generally receive AIP funding on an annual or nearly annual basis, the duration of the Grant Assurances is for all practical purposes permanent at most airports.96 Under 49 U.S.C. § 47122, the FAA is statutorily mandated to ensure that airport sponsors comply with the Grant Assurances.97 Due to the contractual nature of the Grant Assurances, the FAA prefers to enforce them by encouraging voluntary airport sponsor compliance, and will normally seek non-regulatory means of resolving instances of non-compliance.98 Otherwise, the FAA will pursue an administrative process to assess whether any Grant Assurances have been violated, and order corrective actions if necessary.99 The core enforcement tool of the FAA would be the threat of withholding of additional AIP funding.100 91 See, Airport Improvement Program (AIP) Grant Assurances, 79 Fed. Reg. 18755, 18755 (Apr. 3, 2014) [hereinafter Grant Assurances]. 92 Pub. L. No. 97-248, 96 Stat. 324 (Sept. 3, 1982), codified as amended at 49 U.S.C. § 47101 to 47175. 93 See, Barry Molar, James Borsari, Rose Agnew, and Firelli Pitters, Understanding FAA Grant Assurance Obligations Volume 1: Guidebook, ACRP Project 03-38, S-1 (2015 [hereinafter ACRP Project 03-38]. 94 Grant Assurances, 79 Fed. Reg. at 18755. 95 FAA Order 5190.6B, supra note 56 at 4-2 (“Where land is acquired with federal assistance under AIP, the federal land obligations remain in perpetuity.”). 96 See, Nat’l Bus. Aircraft Ass’n, et al. v. City of Santa Monica, FAA Docket No. 16-14-04, Director’s Determination (Dec. 4, 2015) (holding that amendment to AIP grant extended compliance dates to 20 years after amendment). 97 See, Virginia One Development, LLC v. City of Atlanta, FAA Docket No. 16-12-09, Director’s Determination at 18 (Jan. 26, 2015). 98 ACRP Project 03-38, supra note 93 at S-24. 99 Id. 100 Id.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 13 stances.110 Reasonable bases for disparate treatment include the “period of lease, business plan proposed, location of facilities, level of service and amenities, scope of the services, invest- ment, market conditions, and reasonable actions by the spon- sor to promote and protect its ability to continue to serve the interests of the public in civil aviation, including the enlistment of prudent business practices that may change over time.”111 In order to show unjust economic discrimination, a party “must show that another party similarly situated to the [complaining party] received preferential treatment denied to the [complain- ing party] in similar circumstances.”112 However, differences be- tween agreements entered into at different times with the spon- sor may not necessarily indicate unjust discrimination, since changing circumstances at an airport may necessitate a different approach.113 In practice, however, determinations of reasonableness and unjust discrimination are highly fact-driven and legally nuanced. Distinguishing between meaningful and incidental differences between similar types of tenants, for instance, where differences exist in timing, available land, scope of services, etc. can be exceedingly difficult. The difficulty is exacerbated by the unique character of airports. 2. Grant Assurance 23, Exclusive Rights Grant Assurance 23 requires that AIP-funded airports not give any person providing or intending to provide aeronautical services to the public an exclusive right to do so at the airport.114 The prohibition against exclusive rights is the oldest federal ob- ligation affecting federally funded airports, dating back to the Civil Aeronautics Act of 1938.115 After World War II, the federal government implemented similar restrictions as applied to sur- plus military property provided for airport development under the Surplus Property Act.116 It does not matter how the exclusive right has been grant- ed—e.g., through express agreement, unreasonable minimum standards, action of a former sponsor, or otherwise—only that one has been granted.117 FAA guidance explains that Grant Assurance 23 is intended to avoid granting a special privilege or monopoly to any one aeronautical service provider in order to protect fair competition for these services.118 This is based on the position that “the existence of an exclusive right to conduct 110 See, ACRP Project 03-38, supra note 93 at 18-19 (discussing Grant Assurance 22(e)). 111 Id. 112 Alca v. Miami-Dade Cnty, 2010 WL 3826299, *33 (FAA Aug. 31, 2010). 113 SPA Rental, LLC v. Somerset – Pulaski Cnty. Airport Bd., FAA Docket Nos. 16-13-02, Final Agency Decision, at 22 (Aug. 4, 2016). 114 49 U.S.C. § 47107(a)(4); Grant Assurance 23. 115 FAA Order 5190.6B, supra note 56 at 8-1. The provision, Section 303 of the Civil Aeronautics Act of 1938, Pub. L. No. 75-706, 52 Stat. 973, is recodified at 49 U.S.C. § 40103(e). 116 See, Surplus Property Act, Pub. L. No. 80-829, as amended and codified at 49 U.S.C. § 47152(3). 117 FAA Order 5190.6B, supra note 56 at 8-4. 118 Id. at 7-23. Other provisions of Grant Assurance 22 expand and specify the obligation to provide airport access on reasonable condi- tions without unjust discrimination. Grant Assurance 22(b) requires any aeronautical business operating on the airport to agree to furnish services on a reasonable and no unjustly dis- criminatory basis.104 Grant Assurance 22(c) applies specifically to FBOs, providing that “[e]ach fixed-base operator at the air- port shall be subject to the same rates, fees, rentals, and other charges as are uniformly applicable to all other fixed-base opera- tors making the same or similar uses of such airport and utiliz- ing the same or similar facilities.”105 Similarly, Grant Assurance 22(e) provides that each carrier “shall be subject to such non- discriminatory and substantially comparable rules, regulations, conditions, rates, fees, rentals, and other charges with respect to [transportation-related] facilities.”106 Grant Assurance 22(i) makes clear that an airport sponsor may prohibit any type or class of aeronautical use at an airport if safety requires it.107 Unjust discrimination may occur against an individual or the provider of a type or class of service.108 Together, these provisions provide the groundwork for estab lishing a level playing field for businesses operating at air- ports to compete effectively with one another. The obligation to make the airport available on “reasonable” terms and condi- tions is critical to ensuring that the opportunity to compete for business on the airport is not restricted for anticompetitive pur- poses and that there is reasonable ease of market entry and exit. Likewise, the prohibition on unjust discrimination regulates the arms-length nature of economic interactions by requiring air- port sponsors to charge “comparable rates to similarly situated aeronautical users.”109 Grant Assurance 22’s requirements touch upon many aspects of economic competition at airports, from terms of access, to provision of available land and facilities, to the rates and charges that airport sponsors charge tenants. For instance, an airport sponsor’s determination regarding the rental fees for airport property for FBO purposes, or consideration as to whether another tenant can be accommodated, requires con- sideration of whether reasonable access is being provided, and whether different users (e.g., incumbent and new entrant busi- nesses) are being unjustly discriminated against. Grant Assur- ance 22 provides the backdrop for the airport sponsor’s nego- tiation of economic rights at the airport. In theory, the language of Grant Assurance 22 provides plain boundaries for assessing airport sponsor discriminatory activity. Airport sponsors may discriminate between two types of users if there is justification for doing so. For instance, an airport sponsor may establish different categories of users and treat those users differently based on their differing circum- 104 Grant Assurance 22(b). 105 Grant Assurance 22(c). 106 Grant Assurance 22(e). 107 Grant Assurance 22(i). 108 FAA Order 5190.6B, supra note 56 at 9-1. 109 Id.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 14 ACRP LRD 37 Revised November 2019 One way in which an airport can demonstrate that all quali- fied parties have had an opportunity to compete for service at an airport suitable for only one FBO is to engage in a competi- tive bidding process.125 Under a competitive bidding process an airport need not accept all qualified bidders without limitation. However, an airport sponsor cannot select only one FBO to pro- vide services at an airport purely as a matter of convenience and without respect to the circumstances present at the airport.126 Indeed, the FAA will permit an airport sponsor to refuse to permit a single FBO to expand at an airport, or exclude an in- cumbent FBO from participating under a competitive bidding process, in order to increase the chances that another competing FBO will establish itself on the airport.127 Another exception to the rule against granting exclusive rights is known as the proprietary exclusive right. This refers to the right of the owner of a public use airport to provide any or all aeronautical services itself.128 The critical difference here is that the airport sponsor, using its own employees and resources, not any third party, is providing the service.129 FAA guidance suggests that an airport sponsor may wish to assert its propri- etary right in circumstances where either there is insufficient economic incentive to attract a private FBO, or where demand is so high that the airport desires to control the market for the pur- poses of making the airport more financially self-sustaining.130 However, whether or not an airport sponsor asserts its proprie- tary exclusive right, an airport user is still entitled to “self-serve,” i.e., arrange for its own fueling needs using its own employees.131 3. Grant Assurance 24, Fee and Rental Structure Grant Assurance 24 requires federally obligated airports to “maintain a fee and rental structure for the facilities and services at the airport which will make the airport as self-sustaining as possible under the circumstances existing at the particular air- port, taking into account such factors as the volume of traffic and economy of collection.”132 In evaluating whether a contract or lease between an airport sponsor and airport business does not violate Grant Assurance 24, the FAA will assess “whether the fee or rate charged generates sufficient income for the air- port property or service provided, rather than looking at the financial status of the entire airport.”133 Economic conditions at a particular airport may not allow an airport sponsor to charge a self-sustaining fee, in which case the airport sponsor may 125 Id. 126 Id. 127 Id. at 6. 128 See, FAA Order 5190.6B, supra note 56 at 8-10; see also, Jodi L. Howick, Analysis of Federal Laws, Regulations, and Case Law Regarding Airport Proprietary Rights, (Airport Cooperative Research Program Report Legal Research Digest 10, 2010). 129 FAA Order 5190.6B, supra note 56 at 8-10. 130 Id. 131 Id. 132 Grant Assurance 24; 49 U.S.C. § 47107(a)(13)(A). 133 FAA, Airport Revenue Use Policy, Section VII.B., 64 Fed. Reg. 7696, 7720 (Feb. 16, 1999) [hereinafter FAA Revenue Use Policy]. any aeronautical activity at an airport limits the usefulness of the airport and deprives the public of the benefit of competitive enterprise.”119 The prohibition against exclusive rights may arise where an airport does not have existing capacity to accommodate another air carrier based on unavailability of facilities. The FAA’s posi- tion is that an airport sponsor “may not deny an air carrier access solely based on the non-availability of existing facilities” and “must make some arrangements for accommodations if reasonably possible.”120 One of the most common areas of dispute and uncertainty regarding exclusive rights is at smaller airports where the size of the market may only support one aeronautical business pro- viding a particular type of service. Federal statute articulates a particular standard where there is only one FBO operating at an airport. In this context, a right given to an FBO at an airport is not exclusive if “(A) the right would be unreasonably costly, bur- densome, or impractical for more than one fixed-base opera tor to provide the services; and (B) allowing more than one fixed- base operator to provide the services would require reducing the space leased under an existing agreement between the one fixed-base operator and the airport owner or operator.”121 The existence of only one aeronautical business providing most or all of a particular service at an airport does not by itself indicate that an exclusive right has been granted; rather, an ex- clusive rights violation occurs only if the airport sponsor denies other businesses the opportunity to compete for service.122 Accordingly, a single FBO may end up expanding to use up all of available space at an airport if the airport sponsor can dem- onstrate that it has not excluded other competitors from using or competing for that space.123 However, an airport sponsor can- not allow a single FBO to lease airport property without putting that property into productive use within a reasonable period of time—i.e., “landbanking.”124 It is noteworthy that pursuant to Grant Assurance 23, a sponsor may not, solely on the basis of the likelihood that the market will only support one FBO, deny an incumbent FBO to enter the market because that denial of access itself would be creating an “exclusive use” situation. If land is available and the incumbent FBO would meet the minimum standards, despite the potentially adverse impact upon the financial health of both FBOs, then the sponsor would have to allow that second FBO to enter the market. This poses an issue for the airport because both FBOs could potentially suffer economically in such situa- tions and, in the worst-case scenario, both could fail. However, this demonstrates the position of the sponsor in the competition scheme—a provider of access and opportunity to compete for the provision of aeronautical services. 119 Id. at 8-4. 120 Id. at 9-10. 121 49 U.S.C. § 47107(a)(4). 122 FAA Order 5190.6B, supra note 56 at 8-10. 123 FAA, AC 150/5190-6, supra note 60 at 5. 124 Id.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 15 One key issue arising under Grant Assurance 25 is distin- guishing between use of revenue for the benefit of the airport versus the benefit of a particular airport user or business. For instance, airport sponsors may not use funds to directly sub- sidize services, including air carrier operations.142 However, under Grant Assurance 25, permissible airport-related costs for which airport revenue may be used includes costs related to the public promotion of an airport’s facilities and services. This may include costs associated with advertising new air service at an airport, so long as the name of the airport is prominently fea- tured in the material.143 The FAA Revenue Use Policy,144 FAA Incentive Program Guidebook,145 and FAA/OST Task Force Study146 provide additional guidance on use of airport revenue. The requirements regarding airport revenue ensure that rents collected by the airport sponsor are reinvested in the air- port. This is for the benefit of commercial entities operating at the airport and, ultimately, the flying public. In order to attract sufficient private interest and investment in operating a business on the airport, airport sponsors must ensure fiscal responsibil- ity. On the other hand, using airport revenue to subsidize one particular private user or company would skew the competitive- ness of the market and dis-incentivize other potential market entrants from competing. Grant Assurance 25 denies airport sponsors the ability to use airport revenue in this manner, but does allow for limited expenses that promote the airport and also promote a particular service or offering. This exception pre- vents abuse of airport revenue for the benefit of one particular entity or service, or of activities unrelated to the airport. 5. Grant Assurance 39, Competitive Access Grant Assurance 39 requires medium- and large-hub airports that deny a request by an air carrier for access to gates or other facilities to file a report with the FAA.147 Such competitive access reports must include a description of the request, an explanation as to why the request could not be accommodated, and a time frame in which the airport sponsor expects that the request will be accommodated.148 In the event a request and denial triggers the competitive access reporting requirement, a report is due on the following February 1 or August 1, whichever comes first.149 Thereafter, the airport must file a competitive access report every six months until the request is accommodated. Grant Assurance 39 provides the FAA with a means of moni- toring compliance with the requirements that airport sponsors must make airports available to carriers. Grant Assurance 39 itself does not require accommodation of an airline; that re- 142 FAA Order 5190.6B, supra note 56 at 15-4 to 15-5; FAA Airport Revenue Use Policy, Section V.A.3., 64 Fed. Reg. at 7718. 143 FAA Order 5190.6B, supra note 56 at 15-4 to 15-5; FAA Airport Revenue Use Policy, Section V.A.3., 64 Fed. Reg. at 7696. 144 See, FAA Airport Revenue Use Policy 64 Fed. Reg. at 7696. 145 See, FAA Incentive Program Guidebook, supra note 136. 146 See, FAA/OST Task Force Study, supra note 6. 147 49 U.S.C. § 47107(r)(2); Grant Assurance 39. 148 Id. 149 Id. charge a lower rate or fee so long as it seeks to make the airport self-sustaining in the long run.134 The FAA Rates and Charges Policy sets out the FAA’s pol- icy and procedures regarding challenges to airports’ rates and charges on aeronautical users.135 Additional guidance on fee and rental structure is available in the FAA Revenue Use Policy, the FAA Incentive Program Guidebook,136 and the FAA/OST Task Force Study.137 Under Grant Assurance 24 and the FAA’s policy guidance, airport sponsors are not required to charge aeronauti- cal users fair market value rates, and in fact an airport sponsor may be prohibited from doing so due to its obligations under federal law and Grant Assurance 22 to make airports available on reasonable and not unjustly discriminatory terms.138 Instead, the FAA considers a self-sustaining fee to be one that “reflects the cost to the airport sponsor of providing aeronautical services and facilities to users.”139 The FAA has stated that fees based on a residual rate-setting methodology satisfies self-sustaining requirements.140 However, beyond this, few limits have been estab lished, leaving much up to the airport sponsor to craft. To understand Grant Assurance 24’s impact on competi- tion at airports, it is important to read its provisions along with Grant Assurance 22’s requirements regarding reasonable access without unjust discrimination. Whereas Grant Assurance 22 prevents unequal treatment and serves as a check against seek- ing excessive rates and charges from tenants and other users, Grant Assurance 24 ensures that the airport sponsor seek a responsibly sufficient amount of compensation for use of the airport to maintain the airport’s sustainability. Together, Grant Assurance 22 and Grant Assurance 24 provide mechanisms for ensuring that the economic relationships established at airports in order to serve the public resemble an open market with arms- length transactions, to the extent possible without undermining the need to serve the public. 4. Grant Assurance 25, Airport Revenues Grant Assurance 25 requires airport sponsors to use revenue generated from airport operations and local taxes on aviation fuel solely for airport-related costs. Specifically, federal law allows for airport revenues to be spent on: “the capital or oper- ating costs of the airport; the local airport system; or other local facilities which are owned or operated by the owner or operator of the airport and which are directly and substantially related to the actual air transportation of passengers or property; or for noise mitigation purposes on or off the airport.”141 134 Id. 135 Policy Regarding Airport Rates and Charges, 78 Fed. Reg. 55, 330 (Sept. 10, 2013) [hereinafter FAA Rates and Charges Policy]. 136 FAA Office of Airports, Airport Compliance and Field Opera- tions, TC100-0034, Air Carrier Incentive Program Guidebook (Sept. 2010) [hereinafter FAA Incentive Program Guidebook]. 137 See, FAA/OST Task Force Study, supra note 6. 138 FAA Revenue Use Policy, 64 Fed Reg. at 7720-21. 139 Id. at 7721. 140 Id. 141 Grant Assurance 25(a); 49 U.S.C. §§ 47107(b) and 47133.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 16 ACRP LRD 37 Revised November 2019 a tenant that itself provides aeronautical activities is an action may be particularly prone to anticompetitive abuse.158 C. Surplus Property Conveyances The receipt of federal property for airport use is another way in which the federal government can assert regulatory oversight over an airport. Under the Surplus Property Act of 1944,159 sur- plus government property may be transferred to a state or local public entity for use as a public airport, subject to a number of statutory conditions and restrictions.160 These statutory condi- tions and restrictions are contained in the instrument of con- veyance to the state or local authority, and generally run with the land.161 Subject surplus property must be available for aviation use, or for use to produce airport income, and cannot be leased or rented at a discount or for nominal consideration to subsidize non-airport objectives.162 Surplus property also cannot be used, leased, sold, salvaged, or disposed of for non-airport purposes without FAA approval.163 Surplus property recipients also may not grant any exclusive right in the property to conduct aero- nautical activities or aeronautical-related businesses.164 The fed- eral government may also convey non-surplus property to state and local entities for airport purposes,165 and the instruments conveying these properties also subject the conveyee to federal obligations, including the prohibition on exclusive rights.166 The form of restrictions in prior approved conveyances of federal property for airport use are not uniform and vary based on the context of property conveyance, as well as the period of conveyance (due to changing federal law and administrative oversight).167 However, the core requirements regarding compe- tition, including most notably non-exclusive use, are consistent across time.168 The FAA provides additional guidance regarding the rights and responsibilities of airport sponsors under the Surplus Prop- erty Act,169 and on non-surplus property conveyances for air- port purposes.170 158 Id. at 6-10. 159 Codified as amended at 49 U.S.C. §§ 47151-47153. 160 49 U.S.C. § 47151(a). 161 FAA Order 5190.6B, supra note 56 at 3-3, 3-7. 162 Id. at 2-16. 163 Id. at 2-16. 164 49 U.S.C. § 47152(3). 165 This may be under Section 516 of the AAIA, recodified at 49 U.S.C. § 47125, or predecessor statutory provisions, including Section 16 of the Federal Airport Act of 1946 and Section 23 of the Airport and Airway Development Act of 1970. 166 See, FAA Order 5190.6B, supra note 56 at 3-8 to 3-9. 167 See, id. at 3-5 to 3-7. 168 See, id. at 3-1, 3-9. 169 FAA Order 5150.2A, Federal Surplus Property for Public Airport Purposes (Sept. 19, 1972); FAA Order 5250.2, Applicability of Exclusive Rights Provisions of Public Law 80-289 to Previously Obligated Public Airports (Mar. 29, 1965). 170 FAA Order 5170.1, Transfer of Federal Lands, section 23 of the Airport and Airway Development Act of 1970 (Mar. 18, 1977). quirement falls within the purview of Grant Assurance 22.150 The requirement to submit a competitive access report can also help monitor compliance with Grant Assurance 23’s prohibi- tion against granting exclusive rights. The competitive access reporting requirements also serve to induce airport sponsors to expressly acknowledge and consider competitive conditions in responding to requests for access. The competition-oriented objectives intended through Grant Assurance 39 are reflected in its intended implementa- tion. Grant Assurance 39 does not, for instance, categorically require an airport sponsor to report a case where it refuses to accept a carrier’s terms for leasing or accessing space.151 So long as an airport sponsor is willing to negotiate for access within the parameters set by the other Grant Assurances, it will not trigger the competitive access reporting requirements. Likewise, an air- port sponsor is not required to report where it cannot provide a carrier’s request for precise flight schedules or other arrange- ments, or where it terminates a hangar lease while still provid- ing access to the terminal.152 However, where an airport sponsor cannot provide access to gates on a schedule that is reasonably close to an air carrier’s request, then it will likely require report- ing.153 As an example, an airport sponsor’s ability to accommo- date only four flights a day, where a carrier has requested five, may trigger the reporting requirement.154 Ever since enactment in 2003, the federal statutory provision providing for Grant Assurance 39 has included a sunset clause, which has continually been extended over the years.155 6. Grant Assurance 5, Rights and Powers Grant Assurance 5 requires an airport sponsor to retain “rights and powers necessary to perform any or all of the terms, conditions, and assurances” contained in the federal grant agreement.156 This requirement restricts airport sponsors from giving up rights that would, or could, unreasonably hamper the sponsor from providing aeronautical services to the public generally and further prohibits airport sponsors from granting tenants property interests that restrict an airport sponsor’s abil- ity to enforce federal laws on the airport.157 As it relates to managing competition, Grant Assurance 5 is often implicated when a sponsor contracts out the overall opera tion of the airport or significant portions thereof. In these circumstances, it is critical that airport sponsors retain sufficient rights to ensure that the airport or facilities are made available to the public on reasonable terms and without unjust discrimi- nation. Delegating operating, maintenance or similar rights to 150 ACRP Project 03-38, supra note 93 at 50-51. 151 Id. at 51. 152 Id.; Tropical Aviation Ground Serv., Inc. and Air Sunshine v. Bro- ward Cty. FAA Docket No. 16-12-15, Director’s Determination (2015). 153 ACRP Project 03-38, supra note 93 at 50-51. 154 Id. 155 See, 49. U.S.C. § 47107(r)(3), notes; Pub. L. 108-176, Sec. 424, 117 Stat. 2555 (2003). 156 49 U.S.C. § 47107(a); Grant Assurance 5(a). 157 FAA Order 5190.6B, supra note 56 at 6-2 and 6-4.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 17 regulations and PFC Assurances also state that the rates and charges paid by carriers using a facility that are paid for (even partially) with PFCs cannot be less than the fees paid by car- riers using similar facilities that were not paid for with PFCs. All of these factors should be kept in mind when structuring a rate-setting methodology to be paid by carriers for use of air- port facilities. FAA’s PFC regulations also prohibit any agreement between an air carrier and an airport sponsor to “impair the authority of such public agency to impose a PFC or use the PFC revenue” as provided under the regulations.180 This provision directly addresses the common practice at medium- and large-hub air- ports of including majority-in-interest (MII) clauses in lease and use agreements between signatory airlines and public airport owners. Traditional MII provisions require signatory airline approval of proposed capital projects financed through rates and charges assessed against those airlines.181 In the past, MII clauses have been identified as a potential source of anti- competitive behavior at airports, where incumbent carriers have delayed or prevented construction of new facilities in order to accommodate new entrants.182 FAA’s PFC regulations enable airports to use PFC unencumbered by MII clause requirements. E. Competition Plans and Competitive Access Reports In 2000, AIR-21 introduced new requirements that certain large- and medium- hub airport operators whose airports are dominated by one or two carriers develop and submit competi- tion plans.183 The purpose of a competition plan is to compel airport operators to consider and demonstrate how they will provide for new entrant access and expansion of incumbent car- riers.184 In order to ensure compliance, AIR-21 conditioned FAA authorization of imposition of PFCs, and award of AIP funding, on submission of a competition plan by covered airports.185 Competition plans must “include information on the avail- ability of airport gates and related facilities, leasing and sub- leasing arrangements, gate-use requirements, gate-assignment policy, financial constraints, airport controls over air- and ground-side capacity, and whether the airport intends to build or acquire gates that would be used as common facilities.”186 Generally speaking, the core aspects of a competition plan will point to specific aspects of the airline use and lease agreement 180 14 C.F.R. § 158.7. 181 FAA/OST Task Force Study, supra note 4 at ix. 182 Id. at ix, 7-8. 183 49 U.S.C. §§ 40117(k)(1), 47106(f)(1). 184 FAA Order 5100.38D, Airport Improvement Program Hand- book, App. X, X-2 (September 30, 2014). 185 See, 49 U.S.C. §§  40117(k) (condition for PFC authorization), 47106(f)(1) (condition for AIP funding). The separate statutory author- ity provides for similar but not identical reporting requirements depending on whether PFC or AIP funding is involved. See, FAA Pro- gram Guidance Letter 00-3, Requirements for Airline Competition Plans, 1 (May 8, 2000) (Canceled). 186 49 U.S.C. § 47106(f)(2). D. Passenger Facility Charges Passenger Facility Charges are charges imposed on enplan- ing passengers at commercial airports.171 Section 40117 of Title 49 of the United States Code grants the FAA authority to approve requests by airport sponsors to impose, collect, and use PFCs for projects that enhance safety, security, or capacity; re- duce noise; or increase air carrier competition.172 The PFC statute is an exception to the federal Anti-Head Tax Act,173 which otherwise prohibits states and local political sub- divisions, including airport authorities or city airport depart- ments, from imposing any tax or fee on a person conducting inter state travel by air. The PFC statute and associated regula- tions allow the local imposition of a charge up to $4.50 per en- planed passenger at an airport.174 PFC-approved projects serving to enhance competition often involve terminal development to provide more accessible space. Eligible costs include those concerning new construction, rehabilitation, or demolition of terminal facilities that directly affect the accommodation of air carrier at an airport.175 Pur- suant to FAA’s PFC regulations, any airport sponsor proposal for use of PFCs to fund terminal development project affecting gates, ticket counters, baggage carousels, or other air carrier op- erations must include consideration of the impact to competi- tion in the application.176 In keeping with the purpose of promoting competition at airports, the FAA’s approval of PFC authority is conditioned on certain limitations and requirements. These limitations are in- cluded in a list of assurances to which airport sponsors must agree in order to obtain PFC authorization (PFC Assurances).177 For example, no project funded with PFC funding may be sub- ject to an exclusive long-term lease or use agreement with an air carrier.178 In any lease or use agreement for PFC-funded facili- ties, the airport sponsor must also agree to include provisions allowing the sponsor to terminate the lease or use agreement if the carrier has an exclusive lease or use agreement for existing facilities at the airport, and any portion of its existing exclusive use facilities is not fully utilized and not made available to po- tential competitors.179 In addition, the PFC Assurances contain some financial re- strictions regarding how to account for PFC revenue (e.g., not treating PFC revenue as “airport revenue” for purposes of es- tablishing a rate, fee, or charge and prohibiting the airport from including the portion of capital costs of a project paid for with PFCs within a rate-setting methodology). Furthermore, those 171 FAA Order 5500.1, Passenger Facility Charge, 1-7 (2001). 172 49 U.S.C. §  40117; see also, 14 C.F.R. Part 158 (associated regulations). 173 49 U.S.C. § 40116. 174 49 U.S.C. § 40117(b); 14 C.F.R. § 158.5. 175 FAA Order 5500.1, supra note 171 at 55-56. 176 Id. at 56; 14 C.F.R. § 15.25(b)(7). 177 See, 14 C.F.R. Part 158, App. A. 178 See id., Assurance B.5. See also, FAA Order 5500.1, at 10. 179 14 C.F.R. Part 158, App. A, Assurance B.7.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 18 ACRP LRD 37 Revised November 2019 To the same extent that the federal deregulation enabled more open markets to help guide development and expand ser- vice, preemption of state regulation serves the same purpose. The broad preemption of commercial air service prevents local interests and agendas from overtly distorting the playing field set by federal law. G. Private Contracts In addition to statutory and regulatory requirements, pri- vate contracts also serve as an important legal mechanism for facilitating competition at airports. Indeed, the focus placed on setting the context for and guiding the terms and conditions of private agreements between airport operators and their tenants and users makes clear how foundational private contracting is in terms of the federal policy of promoting economic competi- tion. In both the airline and FBO contexts, certain contractual provisions have an outsized impact on competition at airports. Over the course of the modern aviation industry, complex contractual arrangements have developed between airport opera tors and tenant airlines. Historically, these agreements were often negotiated as part of the original financing for exist- ing airport facilities.195 One basic term of these agreements that impacted competition was the length—the duration of these agreements were normally termed for the useful life of the facili- ties. Such agreement durations made it more difficult for airport operators to adjust terms as needed in order to respond to new opportunities.196 The more recent trend towards shorter agree- ments has allowed for greater flexibility in adjusting terms.197 Similarly, in the FBO context, agreements were often linked to construction of general aviation facilities (such as terminals, hangars, ramps, etc.) where the non-airport party committed substantial capital for such constructions. Both because of the need to finance such investments and because of the need to realize a positive rate of return on such investments, the terms of those agreements were lengthy; usually in the 30 to 40-year range. These long terms in and of themselves create competi- tion-related concerns. Increasingly airports are reexamining the propriety of having such long-term agreements with FBOs and looking at other ways to finance needed capital projects with a goal of gaining more control over the competitive context with- in which FBOs operate. Traditionally, many airport use and lease agreements also contained majority-in-interest clauses. As discussed above, MII provisions require signatory airline approval of proposed capi- tal projects financed through rates and charges assessed against those airlines.198 In the past, MII clauses have been identified as a potential source of anti-competitive behavior at airports, where incumbent carriers have delayed or prevented construc- Cty. Pub. Airport Auth. v. FAA, 242 F.3d 1213, 1244 (10th Cir. 2001). 195 FAA/OST Study, supra note 6 at vii. 196 Joseph M Faulhaber, et. al., Airport/Airline Agree- ments—Practices and Characteristics, (Airport Cooperative Research Program Report 36, 47, 2010) [hereinafter ACRP Report 36]. 197 Id. 198 FAA/OST Task Force Study, supra note 6 at ix. or airport policies. For example, the use and lease agreement may only allow preferential use of gates (as opposed to exclusive rights) and have certain minimum utilization levels that, if an airline drops below, the gate reverts to the airport. Detailed con- tent requirements are listed in the FAA’s Airport Improvement Program Handbook.187 In the years since the implementation of AIR-21 and com- petition plans, the DOT Office of the Secretary (OST) and FAA have sought to streamline the competition plan review process.188 Among these reforms, FAA has amended its initial policy of periodic update reviews to be triggered only if the air- port sponsor (a) submits a competitive access report stating that it had denied access to an air carrier for gate or facilities within the last six months, or (b) executes a new master lease and use agreement, or significantly amends a lease and use agreement.189 The FAA has also significantly reduced the review period needed for reviewing submitted competition plans.190 The consequence of an airport operator failing to submit a competition plan as required is the potential withholding of authoriza tion to impose PFCs and withholding of AIP funding. Of course, a covered airport utilizing neither of these sources of funding would not be required to submit a plan. Given the widespread usage of these sources of funding, however, particu- larly with respect to AIP funding, the incentive to report is high. F. Airline Deregulation Act In addition to deregulating the airline industry on a federal level, the ADA also preempts state or local regulation of price, route, or service of air carriers.191 Congress’s primary purpose in doing so was to promote competition within the airline in- dustry.192 As federal courts have noted, “[i]n reducing federal economic regulation of the field . . . Congress obviously did not intend to leave a vacuum to be filled by the Balkanizing forces of state and local regulation.”193 Accordingly, where a state or local law has the effect of regu- lating an airline’s prices, routes, or service, it will be preempted unless the law comes within the narrow exception under Sec- tion 41713 for exercise of proprietary powers. Although state and local airport sponsors are not preempted from carrying out their proprietary powers and rights as airport owners, these proprietary powers must be carried out in a reasonable, non- arbitrary, and non-discriminatory manner.194 187 FAA Order 5100.38D, App. X. 188 FAA, Memorandum re: Program Guidance Letter 04-08 (Sept. 30, 2004) (Canceled) [hereinafter FAA Letter 04-08]. 189 Id., at 2-3; FAA, Competition Plan Covered Airport List for FY-2017 (Apr. 17, 2017), at 2 note 2. 190 FAA Letter 04-08, at 2. 191 49 U.S.C. § 41713(b)(1). 192 Am. Airlines, Inc. v. Dept. of Transp., 202 F.3d 788, 805 (5th Cir. 2000). 193 Id. quoting New England Legal Found. v. Mass. Port Auth., 883 F.2d 157 (1st Cir. 1989). 194 See, British Airways Bd. v. Port Auth. of N.Y. & N.J., 558 F.2d 75 (2d Cir. 1977), aff ’d, as modified, 564 F.2d 1002 (2d Cir. 1977); Arapahoe