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4 ACRP LRD 37 Revised November 2019 From the 1960s to the 1970s, however, this economic theory fell largely into disrepute. In its place, economists and policy- makers sought to frame the airline industry as a âcompetitiveâ or âcontestableâ market under a neoclassical economic analysis.4 This perspective posited that the ability of market participants to enter, exit, and compete in the market was sufficiently low that it approximated a âpureâ market in which no one entity could control prices.5 Under this standard, economic regulation of airline fares and routes was thought to inhibit the efficiency of airlines to meet the needs of the flying public. With limited exceptions, federal aviation policy continues to reflect the core tenet of competitive markets, asserting that deregulation can achieve better outcomes âonly if market forces can discipline the pricing behavior of all air carriersâ (i.e., only if true competition between carriers is achieved).6 The same eco- nomic logic suggests that âcompetition is strongest when there are many firms in a market, and no firm has a substantial share of that market.â7 The adequacy of competition, therefore, is often measured by referring to two elements of the market structureâ the concentration and number of effective competitors8âboth of which federal regulations generally attempt to maximize. Accordingly, rather than direct regulation through the sort of public convenience and necessity determinations that dominated the pre-deregulation era, today most federal influ- ence is exerted indirectly through agreements, incentives, and background laws that attempt to ensure adequately competitive environments in which market forces can act.9 Indeed, the U.S. DOT is directed to carry out its programs by âplacing maxi- mum reliance on competitive market forces and on actual and potential competition to provide the needed air transportation systemâ10 and to âencourage[e], develop, and maintain an air transportation system relying on actual and potential compe- tition to provide efficiency, innovation and low prices, and to decide on the variety and quality of, and determine prices for, air transportation services.â11 The shift in regulatory approach means that airlines are now largely free to enter and exit markets as they please, but it also places greater responsibility on airport sponsors to ensure that 4 Levine (1987), supra note 3 at 399; Goetz and Vowles, supra note 3 at 5. 5 Levine (1987), supra note 3 at 399. 6 FAA/OST Task Force Study, Airport Business Practices and Their Impact on Airline Competition, at ii (Oct. 1999) [hereinafter FAA/OST Task Force Study]. See also, U.S. Dept. of Transp., Docket OST-98- 3713, Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry, Findings and Conclusions on the Economic Policy, and Legal Issues 5 (2001) [hereinafter OST-98-3713]. 7 U.S. Govât Accountability Office, GAO-14-515, Airline Competition: The Average Number of Competitors in Markets Serving the Majority Of Passengers Has Changed Little In Recent Years, But Stakeholders Voice Concerns About Com- petition, 6 (June 2014) [hereinafter GAO-14-515]. 8 Id. at 8. 9 FAA/OST Task Force Study, supra note 6. 10 49 U.S.C. Â§Â 40101(a)(6). 11 49 U.S.C. Â§Â 40101(a)(12). elements at play. Next, this report details those aspects of the federal regulatory framework and other legal authorities most often implicated by efforts to promote competition. Finally, this report highlights common situations, the strategies and tech- niques that airports have developed to address them, and their attendant legal implications (and potential pitfalls) that airport sponsors must keep in mind. III. COMPETITION IN CONTEXT Airports occupy a unique position in the U.S. transportation system. Once viewed as simply a terminus for travel, airports now are looked upon as a key component in regional economic development, the âfront doorâ to a city or a region, a standalone enterprise that is expected to generate profits, a critical link to the rest of the United States or the world, and/or a quasi-public utility that exists as an essential service for the local citizens.2 One could certainly add to this list; however, it is clear that air- ports are tasked to serve multiple roles and, regardless of which of the above is most prominent at a particular airport, airports are no longer viewed as simply a place to board an aircraft. Airports, cities, and regions compete for air service and, in many cases, to be a destination for general aviation traffic. Within this broad competitive setting are the factors affecting competition among air carriers and on-airport businesses. The role of the airport proprietor in all of this is complex. Airport executives often find themselves being pulled in multi- ple directions depending upon which group may be attempting to influence policy at the moment. It is essential that personnel who are responsible for managing this set of complex and often competing factors has command of the legal, practical and his- torical context that must be considered. A. DOT/FAA Approach to Regulating Competition The roots of the modern approach to aviation policy and regulation in the context of ensuring adequate competition reach back to a 40-year-old, then-seismic shift in thinking re- garding the economics of the aviation industry and strength of the market forces in play. Prior to the 1970s, federal regulatory policy was based on the assumption that airline competition was characterized by unstable market characteristics, including monopolistic/ oligopolistic and destructive competition tendencies.3 As a result, federal regulation was thought necessary to serve as a countervailing force to these anticompetitive tendencies. 2 A deeper look at the role of airports in the United States can be found in a previous ACRP publication. See, Economic Development Research Gr., Inc., The Role of U.S. Airports in the National Economy, (Airport Cooperative Research Program Report 132, 2015). 3 Michael E. Levine, Airline Competition in Deregulated Markets: Theory, Firm Strategy, and Public Policy, 4 Yale J. On Reg. 393, 393 (1987); Michael E Levine, Revisionism Revised? Airline Deregulation and the Public Interest, 44(1) Law & Contemp. Probs. 179-195 (1981); Andrew R. Goetz and Timothy M Vowles, The Good, the Bad, and the Ugly: 30 Years of US Airline Deregulation, 17(4) J. Transp. Geography 251-63 (July 2009).
Revised November 2019 ACRP LRD 37 5 While some lawmakers have questioned the effectiveness or propriety of such programs in recent years, local stakeholders (including elected officials) are typically swift to object to any proposed reductions.15 As in the airline industry, federal policy with respect to FBOs also reflects an approach to ensuring competition through market-driven means. The federal government relies primarily upon âmarket supply and demand to determine the availability of commercial aeronautical servicesâ16 with respect to FBOs. For example, federal law prohibits an airport sponsor from grant- ing FBOs (or any other aeronautical service provider) exclusive rights, so as to âpromote fair competition at federally- obligated, public use airports for the benefit of aeronautical users.â17 Simi- larly, airport sponsors are required to ensure a sort of âlevel playing field,â by permitting access by FBOs and other aeronau- tical service providers on reasonable terms and without unjust discrimination. These restrictions are enforced through grant agreements between the federal government and the airport sponsor, and must also be embedded in the sponsorâs agree- ments with FBOs and in an airportâs governing documents. While the economic theory and federal policy with respect to FBOs tracks that of the federal governmentâs position on air- line competition, there are important differences between the two industries. First, unlike the airline industry, whose eco- nomic activity was historically subject to extensive regulation, FBOs have never been directly regulated (apart from antitrust laws of general applicability). Accordingly, the federal govern- ment has always âstrongly encourage[d] sponsors and users to resolve business and economic issues at a local level.â18 Second, the economics of the FBO industry, particularly at small, gen- eral aviation airports, often makes it difficult to retain enough FBOs to establish truly competitive local markets. The net effect of the federal governmentâs influential regula- tory approach with respect to FBOs is that the burden of en- suring successful market competition is largely placed on the airport sponsor. The sponsor may, of course, take into consider- ation its own unique facts and circumstances in this endeavor. Airport sponsors have generally turned to minimum stan- dards and negotiated terms of their agreements with FBOs to ensure adequate aeronautical services at airports. Because the economics regarding FBO competition vary greatly between 15 See, Jesse Paul, Essential Air Service, program that links small towns to hub airports, could be rescued from federal budget cuts, The Denver Post (July 14, 2017), https://www.denverpost.com/2017/07/14/ essential-air-service-federal-budget-cuts/. 16 FAA, ACO-100, Q&As â FBO Industry Consolidation and Pricing Practices 5 (2017) [hereinafter FBO Q&As]. 17 FAA, Advisory Circular AC No. 150/5190-6, Exclusive Rights at Federally-Obligated Airports, (Jan. 4, 2007). See also, FBO Q&As, supra at 4 (An airport sponsor is prohibited from granting an exclusive right for the use of the airport. Nor may an airport sponsor grant a special privilege to anyone providing aeronautical services on the airport or engaging in an aeronautical use. The intent of these restrictions is to promote aeronautical activity and protect fair competi- tion at federally obligated airports.â). 18 Id. at 5. the market provides adequate air service for their communities. In this context, the indirect tools of federal policy, implemented through contractual agreements that contain the conditions for receiving federal funding and land grant subsidies, become the critical foci for airports in balancing mandates to promote competition and serve the interest of the flying public. These contractual tools act both as constraints on airport sponsor con- trol over commercial aeronautical activities and as leverage that airport sponsors can use to guide and promote competition. The means, methods, and parameters which are employed in seeking additional providers (or for that matter, to entice exist- ing providers to expand service) are important variables in the competition equation. The contractual arrangements between the airport and the service provider also becomes an important variable. Both of these components must comply with applica- ble federal law, regulations, and guidance, address the current business environment, and anticipate what could change during the pendency of the contract. While largely outside the scope of this report, a robust body of antitrust law has also developed to control anticompetitive behavior regarding the use of limited resources, unreason- able concentrations of market share, price-fixing, and other practices. The most important federal antitrust statute in this context is the Clayton Antitrust Act of 1914,12 which prohibits mergers and acquisitions where the effect âmay be substantially to lessen competition, or tend to create a monopoly.â13 Although the Depart ment of Justice (DOJ) enforces the Clayton Act, the DOT conducts its own antitrust analysis on large airline mergers, which it shares with the DOJ. These antitrust restric- tions provide another tool to implement federal policy, although in a way less directly relevant to airport sponsors. Federal influence is also seen through programs to temper the impact of deregulated carriersâ profit-driven motives on service to smaller markets. For example, programs such as Essential Air Service (EAS) and the Small Community Air Ser- vice Development Programs, have been developed to facilitate service in areas where the market might not otherwise respond to available demand. For some remote or isolated communi- ties, subsidies through EAS or other programs may be the only mechanism of ensuring viable access to the National Air Trans- portation and, thus, access to essential services. These programs therefore seek to balance the desire for market-driven results with the need to ensure acceptable availability of and access to public commercial air service, as well as reasonable fares.14 12 Codified at 15 U.S.C. Â§Â§Â 12-27. 13 15 U.S.C. Â§Â 18. 14 The precise meaning and extent of the phrase âreasonable faresâ under these programs may be subject to different interpretations depending on context. Federal law defines basic essential services as including flights âat prices that are not excessive compared to the gener- ally prevailing prices of other air carrier for like service between similar places.â 49 U.S.C. Â§Â 41732(b)(2). In the context of markets with very low underlying passenger demand, application of this standard could mean that fares may be acceptably reasonable even if significantly higher than corresponding fares with stronger underlying passenger demand and corresponding volume of available seats.
6 ACRP LRD 37 Revised November 2019 service in 1978.27 However, nearly all of these exited the market or merged with other carriers by the end of the 1980s.28 Early on, federal regulators allowed for significant merger activity in the airline industry, in line with the market-oriented approach of the ADA. Mergers were (and remain) attractive to airlines because they generally increase profitability and finan- cial viability through cost reductions and increased revenues.29 Mergers may also result in cost reductions through the elimina- tion of duplicative operations or redundant city-pair service,30 and revenue increases through higher capacity, enhanced efficiencies, and greater market share.31 However, the relatively laissez-faire approach in the 1980s gave way to more significant oversight of mergers and acquisitions in the 1990s, as the fed- eral government took a stronger interest in regulating antitrust issues.32 At the turn of the century, the consolidation of major air carriers and their hub-and-spoke networks began to reveal po- tential flaws in the anticipated benefits of deregulation. By the late 1990s, hub airports dominated by a single carrier were in- creasing, and, as a result, fares between these airports were not dropping as anticipated.33 Thus, in 2000, as part of a broad pack- age of air travel reforms under the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21)34, Congress introduced new requirements for major hub airports to develop and implement competition plans based on findings that reflected large airports were increasingly dominated by one airline.35 Congressâ action reflected mounting concern with air- line consolidation, maintained a heavy reliance both on market forces and on the role of airport sponsors in ensuring adequate competition within the airline industry. The terrorist attacks of September 11, 2001, and the subse- quent global recession not only generated a great deal of anxiety regarding the viability of the airline industry, but dramatically altered the competitive landscape in the U.S. airline industry. Seeking enhanced cost efficiencies after emerging from bank- ruptcy protection, the late 2000s to early 2010s saw significant merger activity among major airlines. The DOJ allowed sev- eral mergers to proceed, including Deltaâs merger with North- west Airlines in 2008 (creating the then-largest commercial airline in the world), and Unitedâs merger with Continental in 2010. However, the increasingly narrow field of major air- 27 Borenstein and Rose, supra note 23 at 87. 28 Id. at 87-88. 29 U.S. Govât Accountability Office, GAO-08-845, Airline Industry: Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures, at 5 (July 31, 2008). 30 Id. 31 Id. 32 Borenstein and Rose, supra note 23. 33 See, OST-98-3713, supra at 25, 27. 34 Wendell H Ford Aviation Investment and Reform Act for the 21st Century, Pub. L. No. 106-181, 114 Stat. 61, 106th Cong. (Apr. 5, 2000) [hereinafter AIR-21]. 35 Id. Title V, Sec. 155, 114 Stat. at 88, codified at 49 U.S.C. Â§Â 40117 note. types and sizes of airports, as well as geography, airport spon- sors must be strategic, purposeful, and deliberate in promoting FBO competition. B. Airline Industry Trends The federal approaches to regulation discussed above have shaped and are in large part responsible for the competitive envi ronment that exists today. Before 1978, the Civil Aeronautics Board (CAB) regulated elements of commercial interstate air service including fares, routes, and entry into the airline market, on the premise that such service constituted a public utility.19 The CABâs oversight of air service ensured a strong governmental role in setting fares and routes for the public benefit, but resulted in sluggish regulatory processes and protectionist policies that benefited entrenched air service providers, and ultimately resulted in heightened fares and limited choice.20 While the CAB and many existing legacy carriers initially fought to maintain the status quo, federal policymakers in the mid-1970s looked increasingly to successful examples of unregulated intrastate air service, as well as contemporaneous moves to deregulate road- and rail- based transportation, for solutions.21 In 1978, responding to increasing dissatisfaction with the ser- vice and cost of air travel in the United States, Congress passed the Airline Deregulation Act (ADA),22 which set a schedule to sunset the CAB and close federal regulatory oversight over the routes commercial airlines served and the fares they charged.23 This watershed moment profoundly impacted the U.S. airline industry, leading to what many argue are lower average prices, better service, and more technological innovation.24 However, deregulation has created challenges in how to ensure adequate price and route competition to sustain a deregulated model.25 A flurry of market entry, mergers, and bankruptcies (both reorganizations and liquidations) reshaped the airline industry in the wake of deregulation.26 By 1984, forty-seven new entrants had joined the roughly two dozen âlegacyâ carriers providing 19 John W. Barnum, What Prompted Airline Deregulation 20 Years Ago?, Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association (Sept. 15, 1998), avail- able at http://corporate.findlaw.com/law-library/what-prompted-air- line-deregulation-20-years-ago-what-were-the.html (visited Mar. 2, 2018). 20 Id. 21 Id.; Levine, supra note 3 at 394. 22 Pub. L. No. 95-504, 92 Stat. 1705 (Oct. 24, 1978), codified at 49 U.S.C. Â§ 41713 et seq. 23 See, Severin Borenstein and Nancy L. Rose, How airline markets workâ¦ or do they? Regulatory reform in the airline industry, in Eco- nomic Regulation and Its Reform: What Have We Learned?, 63-135, at 75 (Nancy L. Rose ed., 2014). 24 See, id.; OST-98-3713, supra note 6 at 5. 25 See, Borenstein and Rose, supra note 23; Goetz and Vowles, supra note 3 at 10. 26 See, U.S. Govât Accountability Office, GAO-13-403T, Air- line Mergers: Issues Raised by the Proposed Merger of American Airlines and US Airways, at 4 (June 19, 2013).
Revised November 2019 ACRP LRD 37 7 Hub concentration and loss of service are of particular con- cern to airports, which must work to attract and maintain airline service and/or monitor competition among carriers. Although the market share attributable to one dominant airline, on aver- age, grew at all sizes of airports, the growth was most substantial at small-hub airports, which saw an increase from 28 percent in 2007 to over 45 percent in 2012.45 By 2015, a single airline dominated the majority of the air travel market of 40 of the 100 largest airports, and only one or two airlines controlled the majority of seats at 93 of the top 100.46 The dominance of one or two carriers at any particular airport is potentially concerning to airport sponsors because it challenges the premise of federal airline regulation that the indicia of successful competitive mar- kets are more airlines actually competing against one another. The presence of only one (or even two) dominant carrier(s) at an airport raises the specter of non-competitive markets which can cause airports consternation both because of its implication for improved service at its airport and because of the sponsorsâ responsibility for promoting competition under the current fed- eral regulatory regime. Airline consolidation, together with increased fuel costs and reduced demand due to struggling local economies, has resulted in reductions in air service to small communities.47 Many small- and medium-sized airports have lost non-stop service to certain destinations and instead are served via feeding a large carrierâs hub. This trend is visible in the data that shows that small- and particularly medium-hub airports have seen a broad decrease in service since 2005.48 Between 2005, the height of U.S. com- mercial air traffic to date, and 2016, the last full year of available data, scheduled departures at medium- and small-hub airports decreased over 24 percent.49 This compares with a much more modest 5.6 percent decrease at large-hub airports over the same period.50 Legacy carriers have been largely responsible for this difference.51 In other small- and non-hub airport markets, maintaining adequate air service can be a significant challenge. Particularly in markets supported under the EAS Program, larger airlines 45 Id. at 31. 46 David Koenig and Scott Mayerowitz, U.S. Airports Increasingly Dominated by 1 or 2 Carriers, Associated Press for USA Today (July 15, 2015), https://www.usatoday.com/story/todayinthesky/2015/07/15/ us-airports-increasingly-dominated-by-1-or-2-carriers/30152927/. 47 GAO-14-515, supra note 7 at 36. 48 TransStats â Aviation Data â T-100, Bureau of Transportation Statistics, U.S. Department of Transportation, https://www. transtats.bts.gov/Data_Elements.aspx?Data=2 (visited Mar. 6, 2018) [hereinafter BTS T-100 Data]. See also, Michael D. Wittman and Willian S. Swelbar, Trends and Market Forces Shaping Small Community Air Ser- vices in the United States, MIT Report No. ICAT-2013-02 (May 2013) (noting decline since 2007); W. Spitz, et al., Effects of Airline Industry Changes on Small- and Non-Hub Airports, (Airport Cooperative Research Program Report 142, 2015). 49 BTS T-100 Data, supra, note 48. See also GAO-14-515, supra note 7 at 35 (decrease of 24 percent at medium and small hub airports, com- pared to nine percent decrease at large hubs). 50 BTS T-100 Data, supra, note 48. 51 Wittman and Swelbar, supra note 48 at 8. lines compelled the DOJ to formally oppose the proposed US Airwaysâ American Airlines merger in 2012, based on concerns of reduced competition on a number of affected routes.36 The government ultimately reached an agreement that allowed the merger to occur, in return for measures meant to address the anti-competitive consequences (including the divestiture of landing slots and gates at key constrained airports to low cost carriers).37 Most recently, Alaska Airlines acquired Virgin America in 2016, with approval from DOJ, thus continuing the trend towards consolidation through merger.38 Overall, the increase in mergers and bankruptcies since deregulation have resulted in fewer airlines operating a larger share of service. In the period between 1979 and 2012, Airlines for America (A4A) estimates at least 194 airline bankrupt- cies occurred.39 Currently, the four largest domestic carriersâ American, Southwest, Delta, and Unitedâaccount for nearly 70 percent of the market share based on revenue passenger miles.40 Comparatively fewer numbers of carriers competing for market share, the increasing occurrence of airports dominated by one carrier, and loss of service at smaller airports characterize the current state of affairs in the domestic U.S. air travel industry. Yet these trends have not reduced capacity as measured by avail- able seat miles, which has steadily increased.41 With respect to competition among airlines, two major trends have emerged from these economic realities: (1) in- creased hub concentration among legacy carriers, and (2) the development of the predominately point-to-point, low-cost and ultra-low-cost carrier models. Legacy carriers have traditionally operated (and largely con- tinue to operate) so-called âhub-and-spokeâ service models.42 Hub-and-spoke networks operate by connecting âspokeâ loca- tions indirectly through a central network âhubâ. This system provides significant cost, demand, and competitive advantages, but also tend to result in less airline competition at hub air- ports because of the limited ability for most airports to accom- modate more than one large-scale home operation.43 Further- more, hub airline frequency and destination choice give the hub airline a demand advantage at its hub compared to non-hub competitors.44 36 See, United States v. U.S. Airways Group, Inc., 38 F.Supp.3d 69 (D.D.C. 2014). 37 See, id. at 72. 38 U.S. Airline Mergers and Acquisitions, Airlines for America, http://airlines.org/dataset/u-s-airline-mergers-and-acquisitions/ ( visited Mar. 1, 2018). 39 GAO-13-403T, supra at 4. 40 U.S. Bureau of Transportation Statistics, Homepage, U.S. Dept. of Transp., (2017) https://www.transtats.bts.gov (visited June 22, 2017) (statistics for April 2016 to March 2017). 41 GAO-13-403T, supra note 26 at 5. 42 See, Borenstein and Rose, supra note 23 at 88-89; OST-98-3713, supra note 6 at 19. 43 Borenstein and Rose, supra note 23 at 89; FAA/OST Task Force Study, supra note 4 at 1. 44 FAA/OST Task Force Study, supra note 4 at 1.
8 ACRP LRD 37 Revised November 2019 some airports have sought to accommodate a different business/ operating model by offering âper turnâ fees to airlines. These fee structures are intended to be a type of âa la carteâ proposition that take into consideration the carriersâ need for a more limited utilization of the airportâs facilities. C. FBO Industry Trends The term âFixed-Base Operatorâ or FBO is ascribed to pri- vately owned businesses granted the right to provide a variety of aeronautical services on airport property.56 The most basic (and generally most lucrative) FBO service is aircraft fueling, but FBOs typically also provide other aeronautical services, includ- ing hangar use, tie-down and parking, aircraft rental, aircraft maintenance, and flight instruction.57 In some cases, special- ized aviation service operations (SASO) may provide a single or narrow set of aeronautical services, such as stand-alone flight schools.58 FBOs provide critical services to the aviation commu- nity, particularly general aviation operators.59 Although FBOs are the most common aeronautical service providers for the general aviation community, at some airports the public airport owner may provide FBO services.60 The FBO industry dates back to the early days of the aviation industry, predating even the establishment of scheduled pas- senger service.61 As the aviation industry began to move away from use of farms, open fields, and other non-aviation-related facilities for non-flight activities and towards purpose-built facilitiesâthe first airportsâthe need for âfixedâ base operators providing supporting services to pilots and aircraft arose with it.62 Early FBOs coordinated services provided to visiting air- craft at their âhome baseâ airport, initially in a non-commercial manner.63 As the aviation industry in the United States grew over the course of the mid-twentieth century, so too did the number of FBOs providing aeronautical services at airports.64 By the 56 FAA Order 5190.6B, Airport Compliance Manual, 10-1, note 29 (Sept. 30, 2009). 57 Id.; See, National Air Transportation Association, Gen- eral Aviation in the United States: A Fact Book on General Aviation and the Aviation Service Businesses That Help It Take Flight, 10 (2009) [hereinafter NATA Fact Book]. 58 FAA Advisory Circular No. AC 150/5190-7, Minimum Stan- dards for Commercial Aeronautical Activities, 14 (2006) [here- inafter FAA AC 150/5190-7]; NATA Fact Book, supra note 57 at 11. 59 See, NATA Fact Book, supra at 10. 60 See, id.; FAA Advisory Circular No. AC 150/5190-6, Exclusive Rights at Federally Obligated Airports, at 21 (2006). The propri- etary exclusive right of airports, which allows the owner of a public-use airport to provide aeronautical services to the public on an exclusive basis, is discussed below in Sections 3.2.2 and 5.5. 61 Yu Wang, Identifying and prioritizing critical success factors for Fixed Base Operators in the United States: A mixed method approach, 1026 Purdue University Open Access Dissertations, 6-7 (2016), available at http://docs.lib.purdue.edu/open_access_dissertations/1026. 62 Id. 63 Adam Twidell, What is a FBO?, PrivateFly (Sept. 15, 2011) https://blog.privatefly.com/what-is-a-fbo (visited Mar. 3, 2017). 64 See, Wang, supra note 61 at 7-8. have ceded the market to âultra-regionalâ carriers (discussed further below). While such carriersâ comparatively smaller capacity planes are often a better âfitâ for the market demand at such airports, communities may lose network connectiv- ity unless such carriers have been able to negotiate interlining agreements with the larger network carriers.52 The GAO also noted that the percentage of flights that are canceled or diverted is higher at airports in small rural communities than in large metropolitan areas.53 In total, 24 small airports lost all service between 2007 and 2012.54 Legacy carriersâ hub concentration contrasts sharply with business strategies of Low-Cost Carriers (LCC) and, increas- ingly, Ultra-Low Cost Carriers (ULCC). Unlike the legacy carriers, which pursue hub-and-spoke service patterns charac- terized by consistent, high-frequency routes,55 ULCC airlines, such as Allegiant Air and Spirit Airlines, eschew hubs and focus near exclusively on point-to-point service in predominantly key leisure origin and destination markets. One potential explana- tion for this trend is that ULCCs have filled the void in leisure non-stop service created by the consolidation of airlines and their networks. ULCC air service targets the leisure traveler looking for value above all else, without the frequency, consistency, or perks offered by legacy network carriers. ULCCs also tend to avoidâwhere possibleâother costly industry standards, in- cluding branded ticket counters, baggage facilities, passenger clubs, as well as dedicated gates. In addition, ULCCs are gen- erally hesitant to make long-term commitments to a particular airport, so that they have the ability to shift service quickly as demand evolves. A similar situation exists for a new generation of on-demand charter services (e.g., OneJet, Cape Air, Surf Air, Boutique Air, etc.), whose lightly traveled, infrequent, non-stop flight schedules (and airport resource utilization) do not fit the legacy carriersâ mold. In light of the increased ease in market entry and exit, more reliance on potentially volatile market forces, and increased economic pressures from competing business models, airports and airlines have increasingly moved away from traditional airport leasing models. Traditional leases, which lasted for 20 or 30 years (often tracking the debt underlying large terminal improvements) and allocated a dedicated number of gates, have given way to much shorter agreements that grant fewer rights and often derive less revenue for the airport. As discussed below, 52 Id. at 11. 53 Id.; U.S. Govât Accountability Office, GAO-14-454T, Status of Air Service to Small Communities and the Federal Pro- grams Involved (Apr. 30, 2014). 54 Wittman and Swelbar, supra note 48, at 7. 55 With the exception of Southwest, the major carriers have followed this pattern for years. Southwest long avoided creating hubs and chose instead to focus its flights on âpoint-to-pointâ service. However, even Southwest has partially adopted a quasi-hub-and-spoke model utilizing airports at which they have established a major presence (such as Chicago Midway (MDW), Baltimore Washington (BWI), Dallas Love Field (DAL), Denver (DEN), Las Vegas (LAS)). Nonetheless, Southwest generally operates flights on a 7 day a week basis.
Revised November 2019 ACRP LRD 37 9 have become monopolies, and the other three duopolies where Signature would control at least an 80 percent market share. In February 2016, the DOJ approved the merger under the condi- tions that Signature divest its newly-acquired Landmark opera- tions at those six airports, and agree not to acquire any further FBOs at airports where it already operates in certain circum- stances.74 The net result of the transaction is that a single entity (Signature) operated at 189 locations, 133 of which were located in the United States. That number now stands at 204 total with 130 in the United States. Signature is also barred from acquiring any FBO at an airport in the United States where it already pro- vides FBO services, unless the operation is valued at less than $20 million, or there are at least two other full service FBOs at the airport. Despite the recent trend towards franchising and consoli- dation, most of the several thousand FBOs operating today remain small or sole-proprietor operations. Consolidation has also failed to significantly shift the level of actual competition between FBOs at airports, which has always been relatively low. Over the past twenty years, the number of public-use airports with only one or two FBOs has remained at around 80 percent.75 Nevertheless, the growth of larger FBO chains has led to increasing debate among aviation stakeholders regarding the impact on competition and the resulting level of service to aero- nautical service customers and the airports that serve them. For instance, larger FBOs argue that consolidation benefits airports by ensuring more economically stable FBO entities that can provide higher levels of service and more benefits to customers through scaled business models.76 This may be attractive to air- ports who are seeking to improve service and want to see greater investment in airport services and amenities.77 On the other hand, aviation user organizations such as the Aircraft Owners and Pilot Association (AOPA) argue that con- solidation means that aircraft operators have less choice regard- ing FBOs, and that larger FBOs use their size to force opera- tors to purchase bundled services that they do not need along with fuel at inflated rates.78 AOPA has also disputed the FBO Westchester County Airport (HPN) and Ted Stevens Anchorage Inter- national Airport (ANC). 74 See, Proposed Final Judgment, United States of America v. BBA Aviation PLC et al., No. 1:16-cv-00174 (D.D.C. February 3, 2016). 75 National Air Transportation Association, State of the FBO Industry, 2 (Mar. 31, 2017) [hereinafter NATA 2017 SOTI]. This figure applies to public-use airports with a 3000 ft. or greater paved run- wayâaccording to the report there are 3,537 of these in the United States. 76 See, Signature Flight Support, Session 5âUnderstanding General Aviation: The FBO & Business Aviation Perspectives, Presentation to the Georgia Airports Association, slide 16 (2016), available at http:// georgiaairports.org/site/file/2016/11/GAA-Session-5-Understanding- General-Aviation-FBO-Business-Aviation-Perspectives-Mike-French- Signature-Flight-Support.pdf (visited Sept. 10, 2018). 77 NATA SOTI, supra note 75. 78 AOPA, Informal Part 13 Complaint Against Asheville Regional Airport (Aug. 28, 2017); AOPA, Informal Part 13 Complaint Against Key West International Airport (Aug. 28, 2017); AOPA, Informal Part 13 Complaint Against Waukegan National Airport [hereinafter, late 1970s, estimates put the number of FBOs operating in the United States at an all-time high of around 10,000.65 However, since then the numbers have steadily dropped, with more re- cent estimates putting the number of FBOs at around 3,000.66 The causes of this change in trajectory are multifaceted, but generally reflect changing economic trends and conditions. For instance, volatile oil prices in the 1970s and increased aircraft liability for aircraft manufacturers in the 1980s contributed to less general aviation demand, which resulted in harsher eco- nomic conditions for FBOs.67 Another contributing factor to the decline in numbers of FBOs is the trend towards consolidation and franchising.68 External economic pressures and the attraction of outside in- vestment capital has led to increasing professionalization of FBOs and growth of larger corporate FBO chains operating in the market.69 The number of airports at which the largest FBO chains operate have increased dramatically.70 Meanwhile, sur- veys conducted by the National Air Transportation Associa- tion reveal the trend towards consolidation, with the number of regional and national chains decreasing by around 50 percent between 1990 and 2009.71 This trend has accelerated since the 2000s, with dozens of acquisitions by major FBO chains, includ- ing Signature Flight Support and Atlantic Aviation.72 The most recent significant consolidation within the FBO industry occurred in September 2015, when BBA Aviation/ Signature Flight Support announced its $2.1 billion acquisi- tion of Landmark Aviation, the biggest business deal in FBO history. Federal regulators took note of the dealâs potential lo- cal anti-competitive impacts and alleged that general aviation customers at six airports would likely see increased prices and decreased quality of service.73 Of those six airports, three would 65 Id. at 7. 66 Id. at 8-9; NATA Fact Book, supra no. 57 at 10. These figures are estimates, as the FBO industry is not well-tracked. See, John K. Voges, Michael F. Robertson, Matthew J. Romero, and David A. NewMyer, Estimating FBO Employment in the United States, 27(2) Collegiate Aviation Review 77, 84 (2009). 67 Wang, supra note 61 at 7-8. 68 Id. at 9; NATA Fact Book, supra note 57 at 11. 69 Wang, supra note 62, at 8-9. 70 In 2015 the largest FBO chain, Signature Flight Support, operated at over 100 airports. Robert W. Moorman, The State of FBOs: DÃ©jÃ vu All Over Again?, ShowNews (Nov. 15, 2015), http://www.aviationweek.com/ nbaa-2015/state-fbos-d-j-vu-all-over-again. 71 NATA Fact Book, supra note 57 at 11 (from 10 national and 12 regional chains in 1990 to four national and six regional chains in 2009). 72 Clayton Moore, Large and Small FBOs Find Niches in an Evolving Market, Airport Journals (May 1, 2008), http:// airportjournals.com/ large-and-small-fbos-find-niches-in-an-evolving-market/; Bram Hall, Managing Director BlackArch Partners, FBO M&A Market Activity and Valuation, Presentation to National Business Aviation Association Convention and Exhibition (Nov. 18, 2015). 73 See, Complaint, United States of America v. BBA Aviation PLC et al., No. 1:16-cv-00174 (D.D.C. February 3, 2016) (alleging that the Signature-Landmark merger would result in monopolies at Washington Dulles International Airport (IAD), Scottsdale Municipal Airport (SDL), Fresno Yosemite International Airport (FAT), and duopolies at Jacqueline Cochran Regional Airport in Thermal, CA (TRM),
10 ACRP LRD 37 Revised November 2019 D. Airport Sponsorsâ Role and Interest in Promoting Competition As the discussion above suggests, airport sponsors play a critical role in promoting and regulating competition under current federal policy regarding airlines and FBOs. In place of a centralized regulatory regime, individual airports play a key role in implementing and enforcing federal policy by negotiating and establishing the legal and operational relationship between the airlines and FBOs who conduct their business at airports and the airport proprietors who control the required space. While the emphasis that federal regulation of airlines and FBOs puts on market economies is clear, how well these markets function in practice is highly dependent on airport sponsors enforcing federal policy through the levers provided under federal and contractual law. In the context of the airline industry, airport sponsors have been placed in the role of directly engaging with airlines in order to ensure effective service through competitive markets, largely through contractual agreement. Airport sponsors are tasked with the challenge of helping to ensure that the theory of open competition among airlines is actually realized in practice. Their actions in monitoring the ability of new potential competitors to operate at an airport serves to provide a market within which to counter potentially monopolistic or anticompetitive activity on the part of existing carriers. Airport sponsors are not only required to fulfill the market- based policies of the federal government; they also have an interest in promoting competition for the benefit of the flying public and communities they represent. Airport sponsors and local governments may adopt a competitive market approach in order to improve responsiveness of airlines to passenger needs and to act as a driver of local economic activity. A wide selection of routes or marquee destinations can serve as a feather in the cap of local governmental entities, while the presence of mul- tiple airlines can provide more dynamic service. Owners/operators of different sized airports also need to understand how competition works in the context of existing market trends. The largest and busiest airports these days are often dominated by a single airline with a vested interested in maintaining its dominance. In these cases airports need to think carefully about how to allow for the possibility of new entrants while respecting the often significant investment and benefits that hub status can bring. Mid-sized airports may be able to leverage ULCC interest in order to provide more non-stop ser- vice and counterbalance overreliance on service through larger hubs. For the smallest and least busy airports, airport sponsors need to think strategically about leveraging some of the tools that the federal government provides in order to promote ser- vice to these areas.83 83 An in-depth discussion of some of these issues appears in a previ- ous ACRP publication. See, Michael J. Gordon & Melissa Galvan- Peterson, Strategies for Maintaining Air Service, (Airport Cooperative Research Program Report 68, 2015). industryâs argument that aircraft operators enjoy effective com- petition in fuel prices because they may choose between utiliz- ing airports within close proximity with each other, a position that DOJ has also appeared to endorse.79 AOPA has made FBO competition a centerpiece of its membership strategy, and has recently engaged in an aggressive campaign to force airports to address what it views as a lack of FBO competition.80 Airport owners are increasingly finding themselves in the middle of this debate, balancing the concerns regarding com- petition from FBO users with the tight economic circumstances within which FBOs often operate. As discussed below, AOPA has recently escalated issues of FBO competition at several air- ports, urging the FAA to force more FBO competition and filing informal complaints against several airports. In response, FAA initially issued a âQ&Asâ regarding âFBO Industry Consolida- tion and Pricing Practices.â81 The FBO Q&As reaffirmed FAAâs approach with respect to directly regulating relations between FBOs and airports (i.e., each airport presents unique facts and circumstances and solutions are best developed at a local level), but reminded airports of their federal obligations, particularly under the Grant Assurances, and provided a brief description of salient points that are relevant for dealing with competition and reasonable rates among FBO services. More recently, the FAA largely dismissed AOPAâs informal complaints of unreasonable pricing as unsupported.82 In any event, AOPAâs recent activities reflect a new sensitivity to FBO competition and indicate that airport owners need to consider how they ensure adequate FBO services. The increased pressure from aircraft users and calls for additional regulatory oversight are trends that sponsors need to understand. AOPA Complaints]. See also, AOPA Communications staff, AOPA Files Official Complaints Over FBO Fees Seeking Reasonable Access to Public Airports and Transparency of Pricing, AOPA (Aug. 28, 2017) https://www.aopa.org/news-and-media/all-news/2017/august/28/ aopa-files-official-complaints-over-fbo-fees. 79 In its 2016 complaint against the Signature-Landmark deal, DOJ wrote that âobtaining FBO services at another airport is not a meaning- ful alternative for most general aviation customers.â Department of Justice, Antitrust Division, United States v. BBA Aviation plc, et al.; Pro- posed Final Judgment and Competitive Impact Statement, 81 Fed. Reg. 7144, 7146 (Feb. 10, 2016). 80 AOPA Complaints, supra note 78. 81 FBO Q&As, supra note 16. 82 Letter from Heather A. Haney, Airport Compliance Specialist, FAA Southern Region Airports Division, to Kenneth Mead, AOPA (June 7, 2018) (dismissing complaint against the Greater Asheville Regional Airport Authority); Letter from Heather A. Haney, Airport Compliance Specialist, FAA Southern Region Airports Division, to Kenneth Mead, AOPA, (June 29, 2018) (dismissing unreasonable pric- ing allegations again Monroe County, Florida pertaining to the Key West International Airport, but preliminarily concluding that the County was in violation of Grant Assurance 22(f)âs requirement that an airport permit pilots to self-service their aircraft).