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 19 a markedly different era with respect to airline competition. It is only in the past several years—as airlines have emerged from the crisis sparked by 9/11 and the global recession, and the com- petitive challenges created by increasing airline consolidation and hub concentration have gelled—that sponsors have begun assuming more proactive roles in remedying competitive defi- ciencies at their airports (beyond, as has traditionally been the solution, building expanded facilities). As a result, the extent to which many of the legal authorities discussed above will impact sponsors’ efforts to enhance airline competition are untested. Indeed, there are few, if any, final determinations of the DOT or FAA to analyze, and those that do exist involve unique factual scenarios. The following section is intended as a guide to the legal con- siderations likely to arise when sponsors undertake to influence airline competition through developing (1) alternative rates and charges methodologies; (2) air carrier incentive programs; and (3) common- or preferential-use gate or other facility protocols that accommodate new entrants. A. Alternative Rates and Charges Methodologies Airport sponsors’ terminal agreements (or “use and lease agreements”) with airlines are one of the broadest and most robust tools to foster competition (or at least ensure that it is not unnecessarily impeded). Use and lease agreements set out the terms and conditions of an airline’s use of and payment for airfield and terminal facilities, and often include terms regarding the financing of future (or recently completed) airport facilities.206 Because they are the primary mechanism for assign- ing and managing terminal facilities, use and lease agreements’ structure is critical to ensuring adequate facilities and access for competition among airlines. At the core of most use and lease agreements is the rates and charges methodology developed by the airport sponsor, i.e., the basis for how airlines will be charged for the space that they use. A comprehensive discussion of rates and charges methodolo- gies is well beyond the scope of this report.207 However, in gen- eral, methodologies are categorized as compensatory, residual, or hybrid.208 Compensatory methodologies refer to agreements under which the airport operator charges airline tenants fees and rental charges sufficient to cover costs of providing airport facilities for each user’s respective benefit, including operation and maintenance (O&M) expenses, associated debt service, and amortized capital expenses.209 The risk that revenues from other sources will not cover all airport expenses remains with the airport sponsor. In contrast, under a residual agreement, signa- tory airlines agree to backstop the capital and operating costs of the airport to the extent they are not recovered from other 206 FAA/OST Task Force Study, supra note 6 at vii. 207 For a more robust discussion, see generally, ACRP Report 36, supra note 196. 208 FAA/OST Task Force Study, supra note 6, at vii; 49 U.S.C. § 47129(a)(2). 209 FAA/OST Task Force Study, supra note 6, at vii. tion of new facilities in order to accommodate new entrants.199 This is the reason why FAA’s PFC regulations enable airports to use PFCs unencumbered by MII clause requirements. Since deregulation, the increasing ease of market entry and exit has caused pressure on airports to move from providing gates on an exclusive-use basis to preferential or common-use arrangements.200 Where this change has occurred, it has aided airport operators in their ability to accommodate new entrants, thereby improving the competitive environment.201 Accord- ingly, the FAA has endorsed the shift towards preferential and common use arrangements.202 Another use and lease agreement term impacting competi- tion at airports is the so-called “most favored nation” or “MFN” clause. An MFN clause entitles a lessee to the same or substan- tially similar rights and privileges offered to its competitors. While such a clause may appear to be facially neutral or could be viewed as a tool to improve the competitive landscape, it also may be used to inhibit competition by providing incumbent air- lines with a contractual right to inhibit airport efforts to attract new entrant carriers or FBOs. For example, as discussed below, airport proprietors may, and frequently do, offer incentives to carriers for new airline service, such as waived or reduced landing and/or terminal use fees. Depending on the scope and wording of an MFN clause, however, incumbent signatory air- lines may argue that the airport owner/operator has contractu- ally agreed to limit the authority it would otherwise have under the Grant Assurances. In the context of contracting with FBOs for service, similar contractual issues arise with respect to limiting the influence of incumbent lessees. Common issues include MFN clauses as well as options or rights of first refusal on airport development, all of which can be used by incumbent tenants to protect their estab- lished interests. As discussed above, options and rights of first refusal can lead to land-banking by incumbent FBOs, which can cause airport sponsors to run afoul of Grant Assurance 23’s prohibition against exclusive rights.203 Agreements with FBOs also need to reflect Grant Assurance 22’s requirement that air- port tenants provide services on reasonable terms and without unjust discrimination.204 Airport sponsors should also include subordination clauses in their agreements with FBOs that sub- ordinate the lease to the airport sponsor’s federal obligations.205 V. LEGAL ISSUES RELATING TO PROMOTING AIRLINE COMPETITION Except for the competition plan statute and its attendant reg- ulatory framework, most of the above-referenced legal authori- ties were drafted within the first several years after deregulation, 199 Id. at ix, 7-8. 200 ACRP Report 36, supra note 196 at 48. 201 Id. 202 See, id. 203 See, FAA AC 150/5190-6, supra note 17 at 5. 204 Grant Assurance 22(b). 205 FAA Order 5190.6B, supra note 56 at 12-3.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 20 ACRP LRD 37 Revised November 2019 examine traditional rate-making methodologies. This model predominately caters to leisure and discretionary travelers that do not necessarily value or desire frequency of service and are extraordinarily “no frills.” Correspondingly, many ULCC stations have little for long-term: branded gates, ticketing posi- tions, and/or staffing arrangements. And in many cases, requir- ing this sort of traditional arrangements would jeopardize the ULCC’s cost basis (it is frequently uneconomical, for example, to lease a full gate module if an airline intends to operate less than daily service). As discussed below, one way of accommodating ULCCs, as well as other types of non-traditional models, is through implementing protocols for common-use gate assignment or preferential-use gate sharing. However, sponsors and legacy carriers have had disagreements about rate-setting methodolo- gies that incorporate certain per turn options and allocation of joint use space that vary from long-standing methodologies that use a fixed component and a variable component that is based upon passengers (ex. the traditional “80-20” formula that allo- cates joint use costs via dividing 20% of the total costs among all carriers and 80% of the costs based upon the passengers flown by each carrier). In late 2014, Airlines for America, the most prominent U.S. airline advocacy group, requested an opinion from the FAA regarding what it alleged was discriminatory rate-setting at “a number of smaller airports.”216 A4A’s letter focused on whether the FAA Rates and Charges Policy permitted a range of hypothetical scenarios that reflected various airports’ efforts to accom modate the ULCC model. For example, A4A asked several questions regarding permis- sible means of calculating per turn fees, such as: • Does the Policy allow airports to calculate turn charges (whether at the gate or ticket counter) based on a meth- odology that does not achieve full cost recovery even if the facility is fully utilized? For example, an airport sets the turn rate assuming usage will be at the maximum of eight turns per day but even that usage would not achieve full cost recovery and actual usage may, in fact, be less. • When calculating facility charges, are airports required to use reasonable usage and space assumptions? For ex- ample, an airport sets the turn charge based on eight turns per day when actual and projected usage is four turns per day. • If an airport wishes to offer airlines rate methodology options, does the Policy allow an airport to discriminate between airlines by excluding an airline from an option made available to other airlines? For example, can an airport offer a turn charge methodology to some airlines but not others? If so, under what circumstances can an airport discriminate in this manner between operators? 216 Letter from Laura A. McKee, Vice President, Airline Services, Airlines for America, to Randall S. Fiertz, Director, Airport Compliance & Field Operations, Federal Aviation Administration, dated December 17, 2014. users or by non-airline revenues.210 Hybrid agreements refer to agreements that combine elements of both compensatory and residual agreements. The assumption of greater risk on the part of the air carrier(s) in a residual agreement is often mitigated by enhanced carrier control over capital expenditures through MII clauses. As noted earlier, MII clauses grant the signatory airline (or a majority of signatory airlines) power of approval over certain capital expen- ditures.211 The FAA and DOT have noted that the nature of control over airport operations allocated to tenant carriers under a residual (and to a lesser extent, hybrid) use and lease agreement can negatively impact competition.212 As a result, the FAA and DOT caution airport proprietors with residual or hybrid use and lease agreements to monitor the consequences of this form of agree- ment and its impact on competition at the covered airports.213 Increasingly, airport sponsors are moving away from purely residual agreements to maintain a maximum degree of control over new construction; in particular, new construction that would enhance competitive opportunities. Sponsors negotiat- ing new use and lease requirements that do not anticipate sig- nificant capital improvements or changes in the operation over the term (and may, accordingly, not need airlines to backstop substantial risk), should consider transitioning to a compen- satory methodology, or curtailing the scope of an MII clause. As discussed above, it is also important to recognize that PFCs, which are expressly available to finance terminal improve- ments that would enhance competitive opportunities, may not be controlled by the airline under the terms of a use and lease agreement.214 Of course, the cost of operating at a particular airport, re- gardless of the rates and charges methodology, is also an im- portant factor in providing for adequate competition. While airport rents and landing fees account for only approximately five percent of U.S. airlines’ expenses overall,215 carriers never- theless carefully examine the yields on a flight-by-flight basis and, if costs are too high at a given airport, may choose not to come, or to leave. Variables such as frequency (both flights per day or flights per week), aircraft size, and whether a mainline or a regional affiliate aircraft is used all impact the true cost associ- ated with flights for each airline. But, keeping costs low, as a general principle, is no longer enough to ensure competitive rates. As discussed above, the ad- vent of the ULCC model has forced airport sponsors to critically 210 Id. at vii. 211 Id. at 7-8. 212 See, id. at 8. 213 See, FAA Rates and Charges Policy, 78 Fed. Reg. 55,330, 55,336 (discussing additional information expected from airport proprietors with residual or hybrid use and lease agreements during consultation with FAA regarding airport rates and charges consultations). 214 14 C.F.R. § 158.7(b). 215 A4A Passenger Airline Cost Index (PACI), Airlines for America, http://airlines.org/dataset/a4a-quarterly- passenger-airline-cost-index-u- s-passenger-airlines/ (visited Nov. 27, 2018).

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 21 ple, differences in the carrier’s category of operation, difference in the condition, quality, or features of facilities, differences in the actual cost of providing the terminal facilities, or possibly the use of a blended rate to distribute capital improvement costs among all facilities over time.” The FAA also determined that, “[w]here there are differences in [a] carriers’ use of the airport, the airport sponsor may determine that those differences war- rant different approach to fee determination and not offer the use of every methodology to every carrier.”224 These responses largely bolster a position that airport spon- sors have reasonable discretion in setting rates and charges. In- deed, the FAA emphasized that the Policy “does not dictate a single approach to rate-setting, and . . . fees may be set using any rate-setting methodology . . . as long as it is ‘applied consistently to similarly situated aeronautical users and conforms’ with the Policy.”225 It remains to be seen, however, exactly how these stan- dards will be applied in the event the FAA is called upon to ad- judicate a particular case.226 In the interim, many airports have reported that legacy car- riers have been unwilling to sign on to use and lease agreements that incorporate alternative methodologies such as a per-turn option or an allocation of joint use space that considers opera- tions. This has led some airport sponsors to adopt alternative rates and charges methodologies by ordinance. The FAA has made clear that sponsors “have the same responsibility for con- sultation and transparency in adopting a fee by ordinance as in negotiation, [but] ultimately the sponsor can adopt the ordi- nance fee unilaterally.”227 B. Air Carrier Incentive Programs Airport sponsors and communities looking to enhance air service frequently develop risk mitigation or incentive pro- grams to entice carriers to develop new service at their airports. Recent research indicates that the success of such programs is mixed and highly dependent on the underlying market dynamics of the location being serviced.228 Generally, larger, fast-growing cities are the most successful at retaining regular scheduled service initiated under an incentive program, while smaller airports and those closer to larger hubs have been less successful at recruiting or retaining new air service under an incentive program.229 Anecdotally, carriers have often intimated that incentive programs are more likely to affect the timing of new service’s launch or a choice among viable alternatives than 224 Id. 225 Id. (quoting the Revenue Use Policy) 226 The law firm for which the author of this Legal Research Digest works provided advice and counsel to certain airports during late 2014 and 2015 regarding disputes with network carriers on topics that were included in the A4A letter to the FAA. The author, however, was not involved in any way with respect to those matters during 2014, 2015 or 2016. 227 Id. 228 Megan S. Ryerson, Incentivize It and They Will Come? How Some of the Busiest U.S. Airports Are Building Air Service With Incentive Pro- grams, 82 J. Am. Planning Ass’n 4, 303-315 (Autumn 2016). 229 Id. A4A also asked whether “a common use space/facility rate methodology that is strictly use-based and does not include a component to allocate some portion of fixed costs evenly to all users reasonable under the Policy when that methodology disproportionately shifts costs to signatory carriers and results in competitively advantageous charges for limited use per-turn users?”217 In other words, does the Policy permit an airport pro- prietor to allocate common use space entirely on the basis of either enplanements or operations (or both)? In response to A4A’s letter, the Airports Council Inter- national-North America (ACI-NA) and the American Asso- ciation of Airport Executives (AAAE) first noted the “skewed” nature of the questions, and urged the FAA not to take a con- crete positions regarding A4A’s questions for fear of “muddying” the waters on guidance regarding airport rates and charges.218 They emphasized, however, that the FAA Rates and Charges Policy allows airports to “adopt different ratemaking method- ologies as long as the fees imposed on airlines are reasonable and not unjustly discriminatory.”219 And, “the fact that one par- ticular methodology may be more appealing to certain types of carriers due to the nature of their operations does not mean that an airport must exclusively use that methodology.”220 The response stated that it was “important for the FAA to understand the facts and context out of which the facts arise, so that the agency can approach the issues with a balanced perspective.”221 The response went on to describe the loss of air service suffered by medium and small hub airports and an in- crease in air fares in “smaller and mid-sized markets,” and the need for the affected airports to be “creative in designing lease rates which recognize the financial reality of airline service in small markets. In particular, charging for airport facilities on a per use basis – rather than a typical exclusive/preferential lease basis,” and stating that this “can be a particularly appropriate means of rate-setting for low frequency service by carriers, in- cluding ultra-low cost carriers.”222 In early 2016, the FAA issued its response to A4A’s letter.223 While the FAA declined to opine on specific legal questions without a factual background to contextualize its decision, it did provide generalized responses to A4A’s questions. Regard- ing differences in rate-setting methodologies, FAA stated that “[t]here may be reasons why carriers would be charged different rates that are not unjustly discriminatory, including, for exam- 217 Id. 218 Letter from Thomas R. Devine, General Counsel, ACI-NA, and Melissa Sabatine, Senior Vice President, Regulatory Affairs, AAAE, to Randall Fiertz, Director, Airport Compliance and Management Analy- sis, Federal Aviation Administration, dated May 15, 2015. 219 Id. at 2. 220 Id. (citing Transport Association of America v. United States Department of Transportation, 613 F.3d 206, 214 (D.C. Cir. 2010)). 221 Id. at 3. 222 Id. at 4. 223 Letter from Byron Huffman, Acting Director, Office of Airport Compliance and Management Analysis, Federal Aviation Administra- tion, to Laura A. McKee, Vice President, Airline Services, Airlines for America, dated February 12, 2016.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 22 ACRP LRD 37 Revised November 2019 only new entrant carriers, then a participating carrier may not receive incentives, marketing support, or subsidy for longer than a one-year period.237 If, however, an incentive is offered to both new entrants and incumbent carriers—for example, for new non-stop service to an unserved destination—then the FAA views the new service as dissimilarly situated for two years.238 After these periods, continuing to offer an incentive would become unjustly discriminatory. Thus, sponsors must carefully consider—and clearly state—the eligibility criteria for an incentive; if it is not clear that incumbent carriers may par- ticipate by offering the incentivized service, then the FAA will likely find the incentive period of the program must be limited to a maximum duration of one year. The distinction between existing and new service only goes so far. The FAA does not permit sponsors to further limit the availability of incentives by offering them only to carriers that commit to flying a particular type or size of aircraft, or that op- erate under a particular type of business model (i.e., LCCs and ULCCs). Incentives may be designed for a particular frequency of service, however, and a sponsor may, in its discretion, either prorate the incentive for carriers flying less than the sponsor’s service target or refuse to offer an incentive for lesser service. Grant Assurance 25 and the FAA Revenue Use Policy, which generally restrict the use of airport revenues to the capital or operating costs of the airport, also feature prominently in the design of an incentive program. The FAA views incentives— discounted or waived fees for the use of airport facilities—as a permissible “expenditure” of airport revenue within the parameters discussed above.239 However, the principle of unjust discrimination, as applied to rates and charges, requires that cost of providing such incentives not be included in air carriers’ rate base without their specific consent (i.e., carriers not receiv- ing an incentive cannot be compelled to cover the cost of the incentive).240 Thus, as a practical matter, the cost of incentives will generally be covered by the sponsors’ non-aeronautical revenues. The marketing component of an incentive program must also be carefully structured to ensure that consistency with the FAA Revenue Use Policy. Federal law expressly prohibits “use of airport revenues for general economic development, market- ing, and promotional activities unrelated to airports or airport systems.”241 Through the FAA Revenue Use Policy and the FAA Incentive Program Guidebook, the FAA has interpreted this lan- guage to permit promotion of the airport, promotion of new air service and competition at the airport, and marketing of airport services.242 Permissible promotional expenditures may include, for example, the cost of employees engaged in the promotion of airport services, or cooperative airport-airline advertising of air service, provided that the airport is specifically included 237 Id. at 15. 238 Id. 239 Id. at 17. 240 See, id. at 17, 23. 241 49 U.S.C. § 47107(k)(2)(B). 242 64 Fed. Reg. at 7703. they are to influence new route decisions in the first instance. Incentive programs are therefore unlikely to substitute for ro- bust market opportunities but are nevertheless important com- ponents in enhancing competition. Incentives may consist of one or more of three basic compo- nents. Strictly speaking, an incentive component, in FAA par- lance, is one which offers discounts or fee waivers to air carriers providing new service in accordance with parameters defined by the airport sponsor. Permissible incentives “include, but are not limited to, waiving or reducing landing fees, rental fees, or fuel flowage fees.”230 Sponsors offering proprietary services, such as ground handling or de-icing, may waive or reduce these fees, as well. A marketing component is generally designed to enhance public and industry awareness of new air service and promote the use of the airport. A risk mitigation or subsidy component includes “providing aircraft parts, free fuel, interest-free loans, pay for service, or any other form of direct or indirect air car- rier subsidy.”231 As discussed below, each of these components is subject to a host of federal requirements and varying degrees of scrutiny, depending on their structure. One of the most important legal principles to consider in de- signing an incentive program is the principle of unjust discrimi- nation, embodied in Grant Assurance 22. An airport sponsor is, as discussed above, required to make the airport available on reasonable terms and without unjust discrimination among aeronautical users. Incentive programs are permissible notwith- standing this requirement because the FAA views “new service” to be dissimilarly situated from already existing air service;232 ≈˛recall that the principle of unjust discrimination requires similarly treatment of similarly situated users. The FAA has traditionally defined “new service” as (a) ser- vice to an airport destination not currently served, (b) nonstop service where no nonstop service is currently offered, (c) a new entrant carrier, or (d) increased frequency of flights to a spe- cific destination.233 More recently, the FAA has recognized that upgauging aircraft (i.e., using aircraft with a larger seating c apacity) can also constitute “new service”—akin to increased frequencies—as long as the net result of the upgauging is to add capacity.234 An airport sponsor may not, for example, provide an incentive for carriers to use a larger aircraft if the carrier would simultaneously reduce frequencies.235 New service is not dissimilarly situated from existing service in perpetuity, however. The FAA views new entrant carriers to be similarly situated with incumbent carriers after one year of service.236 Thus, if a sponsor’s incentive program is offered to 230 FAA Incentive Program Guidebook, supra note 136 at 17. 231 Id. 232 Id. at 7. 233 Id. 234 See, FAA, Policy and Procedures Concerning the Use of Airport Revenue: Petition of the Clark County Department of Aviation to Use a Weight-Based Air Service Incentive Program, FAA Docket No. FAA- 2011-0361, 77 Fed. Reg. 21148 (Apr. 9, 2012). 235 See, id. 236 FAA Incentive Program Guidebook, supra note 135 at 7.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 23 guarantee, reimburse airport fees, establish a ticket bank, or any number of other programs. It is critical, however, that the airport sponsor play no role whatsoever in delivering such an incentive. The airport sponsor may not be party to the incentive agreement, nor it may negotiate or monitor the airlines perfor- mance with the agreement in any manner.248 Finally, apart from any federal requirements that may be applicable, sponsors should take care to ensure that incentive programs and their implementing agreements are structured to ensure that the sponsor receives the full benefits of the service it is incentivizing. It is common for sponsors to require, as a con- dition of receiving an incentive, that the airline maintain good on-time performance and maintain a set schedule of flights for the duration of the incentive period. Additional guidance on in- centive program design may be found in the forthcoming ACRP publication, Building and Maintaining Air Service Through Incentive Programs. 1. Access to Airport Facilities and Sponsor Role in Space Allocation Access to airport facilities is, obviously, a critical compo- nent to competition in that carriers seeking to serve an airport in response to the demand for such additional service must be able to use facilities such as ramps and gates in order to serve the public. Issues arise when incumbent airlines (i.e., airlines already serving the airport) occupy but do not fully utilize air- port gates and other facilities. Even at airports that may have available space, barriers to entry may exist, such as financial re- quirements that have a de facto anticompetitive impact. Access to physical facilities is broadly guided by several important federal requirements, including the prohibition on exclusive rights and the requirement to provide airport facili- ties on reasonable terms and without unjust discrimination. In addition, operators can still influence elements of competition through air service incentive programs. A bulwark of the federal requirement to maintain competi- tive air service from the standpoint of airport operators is the prohibition against the granting of exclusive rights. The exclu- sive rights prohibition is provided for in federal law governing the use of federal land and funds for airport purposes,249 as well as the federal programs, agreements, and policies implementing those laws.250 This prohibition prevents airports operators from allowing air carriers to establish monopolies at particular air- ports or along certain routes. These requirements enlist airport operators in policing air carrier activity and prohibits contrac- tual arrangements that prevent airport operators from enforcing federal law, including the prohibition on exclusive rights. Airport sponsors can also influence air service competition by wielding their right and obligation to provide access to all qualified air carriers on reasonable terms and without unjust 248 Id. at 24. 249 49 U.S.C. §§ 47101 et seq., 40103(e), 47151-47153, 47125. 250 See, e.g., Grant Assurance 23; FAA Order 5190.6B, supra note 56 at 7-23, 8-4. FAA AC 150/5190-6, supra note 17 at 1. in market ing materials.243 However, marketing programs that focus on increasing regional revenue for the benefit of general economic development, such as destination or tourism market- ing, may not paid from airport revenues.244 Subsidies, defined by the FAA as the “payment of airport revenue to a carrier or to any provider of goods or services to that carrier, in exchange for additional service by the carrier,” are categorically prohibited by the FAA Revenue Use Policy. Thus, the sponsor may not lease property or equipment on behalf of a carrier, guarantee a minimum revenue to mitigate start-up risks, offer cash incentives to passengers, pre-purchase airline seats for use by community businesses, or participate in some other form of indirect subsidy using airport revenues.245 Sources of funds other than airport revenues, however, may be used for these and other forms of subsidy programs. For ex- ample, some sponsors may have access to funds from special taxing districts, either through their own taxing authority or that of a non-sponsor. Similarly, economic development corpo- rations or Chambers of Commerce may be willing to provide the sponsors with funds for these purposes. Provided these funds are not derived from airport users, the sponsor’s activi- ties at the airport, or taxes on aviation fuels (and access to the program is otherwise in accordance with the grant assurances), subsidy programs are permissible. Sponsors must ensure, how- ever, that their accounting systems maintain complete segrega- tion between airport revenues and non-airport revenues that are used for such purposes. Under normal circumstances, a sponsor must make an in- centive program available to all carriers that are willing to pro- vide the new service on the terms that the sponsor has identi- fied. There may be cases, however, where the sponsor desires to make the incentive available to a smaller number of carriers, or just one carrier. For example, the sponsor may not have enough funds to support more than one carrier in the program. In these cases, the FAA encourages airports to utilize a Request for Pro- posals (RFP) to ensure that all interested carriers have an equal opportunity to compete for the incentive.246 If this process is uti- lized, it is important that the sponsor structure and publicize the RFP so as not to discriminate against any carrier. The FAA is likely to scrutinize, for example, an incentive that was awarded to a single carrier which had the benefit of extensive consulta- tion with the sponsor prior to an RFP.247 It is important to note that all of the limitations discussed in this subsection up to this point are imposed on an airport spon- sor by virtue of its grant assurance obligations. The same limita- tions do not exist for entities other than airport sponsor, which are not bound by grant agreements with the United States. Thus, certain non-sponsor entities, such as Chambers of Commerce, may choose to work with a single carrier and provide a revenue 243 64 Fed. Reg. at 7703; FAA Incentive Program Guidebook, supra note 136 at 3, 20. 244 FAA Incentive Program Guidebook, supra note 136 at 3. 245 Id. at 21. 246 Id. at 13. 247 Id.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 24 ACRP LRD 37 Revised November 2019 sential for airport sponsors to enable them to accommodate new requests for air service, whether by a new entrant carrier or by an existing carrier seeking to expand its operations. Use of other airport space, such as ticket counters and bag- gage claims, may also be an area of consideration when it comes to promoting competition. Two central areas of concern exist for airport sponsors. The first is having space available for new entrant carriers that may wish to serve the station. This may be accomplished via a variety of means including carefully ex- amining existing airlines’ needs and narrowly tailoring leased space to those needs. In addition, an airport may reserve areas that will be used by airlines on a common basis. Many air- ports are examining whether it is advisable to convert all their preferential-use ticketing and baggage areas to a common use scheme. This enables the airport to shift the use of facilities as demand and carrier mix evolves. As mentioned elsewhere herein, many airports are required to have competition plans as a prerequisite to being eligible for approval of PFCs. Competition plans usually rely upon provi- sions of the airport’s agreements with airlines on important matters such as gate use policies, whether the airport’s gates are leased to airlines on an exclusive or non-exclusive basis and whether the airport has retained control over certain gates for use by new-entrant carriers. Thus, while the competition plan may outline an airport sponsor’s intentions with respect to maintaining availability of its facilities to a variety of air carriers, the competition plan in and of itself does not stand alone as an enforceable document. Instead, it relies upon the sponsor’s contractual obligations and has underlying it all of the above- referenced Grant Assurance-based obligations (such as the prohibition against granting exclusive rights, making facilities available on reasonable and not unjustly discriminatory basis). It is worth noting that, with respect to the general avail- ability of space for new entrant carriers, airports are expected to, at least eventually, have enough space to allow all carriers who wish to serve the airport to do so. As mentioned previ- ously herein, the prohibition against exclusive rights may arise in instances where an airport does not have existing capacity to accommodate another air carrier based on unavailability of facilities. The FAA’s position 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 ac- commodations if reasonably possible.”257 What this means for an airport sponsor is a matter of debate. Indeed, the FAA itself stated that such “access issues can often be complex and are not always easy to resolve.” 258 Generally speaking, much is left to the sponsor to accommodate such demand beyond capacity and it is, at least implicitly, expected that additional facilities will be constructed. However, it is noteworthy that between the exclu- sive rights, statements regarding “mandatory access,” and the availability of PFC funds for the promotion of competition, one could reasonably conclude that the expectation of the FAA is that those facilities will be constructed if demand so dictates. 257 FAA Order 5190.6B, supra note 56 at 9-10. 258 Id. discrimination.251 This requirement prohibits airport operators from the following activities: (1) Deny[ing] access by disapproving an otherwise- qualified air carrier’s application or by unreasonably delaying access; (2) Adopt[ing] unjustified standards prohibiting a certain class of carrier from operating at the airport or contain- ing criteria not relevant to operations, not reasonably at- tainable, not uniformly applied, or intended to protect incumbents; (3) Defer[ing] completely to incumbent tenants’ determina- tion on whether or not, and how, to accommodate re- questing airlines; (4) Permit[ing] unreasonable sublease fees or conditions to be imposed on new entrants; or (5) Unreasonably deny[ing] signatory status to an autho- rized air carrier willing to assume the obligations of a signatory carrier.252 With these prohibitions as a foundation, airport operators proceed to create the field upon which airlines will operate and compete via the policies they set and the contracts between the airport and airlines. The level of control over which the airport operator will retain will be a critical component in the competition equa- tion. With respect to gates, they are generally leased to airlines on one of several bases: exclusive, preferential, or common.253 Common-use gates refer to gates that are entirely controlled by the airport sponsor and that may be assigned to air carriers on a “temporary, per-turn basis or on a short term (e.g., 30-day) arrangement.”254 Gates leased on a preferential-use basis gener- ally mean that an airport tenant has leased a gate “on a prefer- ential basis where the lease requires the lessee to allow another to use the facility to the extent such use does not interfere with the lessee’s actual use of the facility.”255 An exclusive-use lease “typically assigns to one airline the right to use and occupy gates and facilities for a specified duration and the right to sublet or assign the facilities, conditioned on the prior written approval of the airport management.”256 (It is noteworthy that FAA strongly encourages transitions from exclusive-use gate agreements to preferential-use or even common-use gate agreements instead in order to increase airport control over facilities (i.e., comply with Grant Assurance 5) and to foster a more flexible and com- petitive environment.) If an over-abundance of unused gates exists at an airport, available space will not be a factor that could limit competi- tion. On the other hand, if most gates are occupied by airlines, this could have an adverse impact upon competition initiatives. Maintaining a certain level of control over gates is therefore es- 251 49 U.S.C. § 47107(a)(1); Grant Assurance 22(a). 252 FAA/OST Task Force Study, supra note 6, at 14. 253 Id. at viii. 254 Id. at 41. 255 Id. at 37 note 8. 256 Id. at 38.

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. Revised November 2019 ACRP LRD 37 25 prevent or delay projects that could be beneficial to new entrants or smaller airlines service their airports. • Using the tools provided by the PFC program to finance terminal expansion projects that provide greater oppor tunities for new entrants and increase airline competition.259 Of particular note in this arena, while an airport operator cannot disregard the terms of its agreements with carriers, even where carriers have exclusive use of gates the airport opera- tor retains the federal obligation to ensure new entrant access to the airport.260 This could potentially mean taking gates back and retaining them as common-use or subject to short-term agreements. Lastly, airport sponsors should also stay aware of anti- competitive activity related to tying the provision of services to subleases for gates and airport facilities. Unless there is a legiti- mate business reason for doing so, requiring use of ground- handling services as a condition of allowing use of a gate may be a violation of antitrust laws, depending on how much control the tenant air carrier has over the overall airport facilities.261 C. Recent Dispute/Litigation Regarding Gate Access A recent dispute at Love Field Airport (Love Field) in Dallas, Texas, provides an illuminating if tangled example of the com- plications of enforcing federal competition requirements at airports. The dispute arose between Southwest Airlines (South- west), the historically dominant airline operating out of Love Field pursuant to a long-term lease with the City of Dallas (City), and Delta Air Lines (Delta) who had operated a small number of flights out of the airport for several years under a month-to-month sublease with another airline. In late summer of 2014, unable to secure a continuing lease for gates at Love Field, Delta formerly requested that Love Field’s owner, the City of Dallas, make accommodations for it at Love Field. Southwest, who acquired a sublease for the gates Delta had been using, ob- jected to ceding any of its gates’ rights to Delta, indicating that it anticipated substantially increasing service at Love Field so as to take up any extra capacity there was for an additional carrier to serve Love Field. The legal circumstances framing the dispute are unique. Since 1979, Love Field has been subject to special federal legisla- tion limiting the number and composition of air carriers serv- ing it.262 This special status was borne out of a unique series of events during the transition of the majority of air service from Love Field to the newly built Dallas-Fort Worth (DFW) Air- 259 FAA/OST Task Force Study, supra note 6, at xiii-xiv. The FAA/ OST Task Force Study outlines the benefits of using PFC funds, which are less restrictive than AIP funds, for airport expansion that is not reli- ant on and tied to incumbent carrier funding and use. See id., at 56-57. 260 Id. at 15. 261 FAA Incentive Program Guidebook, supra note 136 at 27-28. 262 Wright Amendment Reform Act of 2006, Pub. L. No. 109-352, 120 Stat 2011 (Oct. 13, 2006) [hereinafter WARA]. Whether the FAA would step in if the sponsor failed to build new facilities to accommodate new carriers is unknown. For better or worse, simply setting the stage for robust com- petition may not end the airport sponsor’s involvement. Clearly, when an airport has gates and other space available to provide an airline wishing to initiate service (or expand an airline’s exist- ing presence), the airport simply provides access to those areas. However, issues arise when space is “occupied” by existing air- lines and operations. What “occupied” means may vary from situation-to-situation. For example, all gates may be leased by existing airlines, but the utilization of those gates may be low, thus allowing another carrier to use these unused time slots. In other situations, time may be available on airport-controlled common-use gates, but the available time may not fit an incum- bent airline’s desires. Furthermore, where gates may be available, an incumbent airline may seek to initiate service at a given air- port, but do so only infrequently (for example, only three days a week) such that its contracting for an entire gate (i.e., a gate that is primarily assigned to such airline) would be overkill and thus, too expensive to justify such infrequent air service. In these situations, it will be critical for the airport operator to have in place, in advance of such situations arising, clear poli- cies and procedures concerning how gates and other space will be allocated. It is critical that airport sponsors provide them- selves the leverage necessary, through agreement and agreed procedures, to be able to enforce their federal obligations, and to provide itself and existing and potential tenants with clarity regarding the process for enforcing these rights. This is most effectively accomplished via detailed contractual provisions in airline use and lease agreements. While the specifics of these provisions are beyond the scope of this report, some best practices for promoting competitive gate allocation provided by the FAA include: • Promoting new entry by becoming advocates for competition. • Continually monitoring gate-utilization practice of airlines. • Invoking “use-it-or-lose-it” authority if incumbent car- riers are not using their gates fully. • Providing clear guidelines and a timeline to prospective entrants on what they must do to gain access to an air- port and when they will be able to begin operations, and clear standards to incumbent carriers that seek addi- tional space to expand operations. • Monitoring all sub-lease agreements to ensure that fees are reasonable. • Creating an environment where third-party contrac- tors provide competitive ground-handling and support service. • Taking actions to recover gates when they become avail- able and to convert gates and other facilities to common- use status. • Working to ensure that any new [majority-in-interest] agreements entered into [with signatory airlines] do not

Legal Issues Relating to Airports Promoting Competition Copyright National Academy of Sciences. All rights reserved. 26 ACRP LRD 37 Revised November 2019 tion request by deciding or asserting, after a request is made, that it will expand service.”269 DOT left the responsibility of how to accommodate Delta up to the City, however.270 Southwest dis- puted DOT’s legal conclusions and petitioned the D.C. Circuit for review of DOT’s letter to the City, but the D.C. Circuit ulti- mately denied Southwest’s petition on the grounds that the letter did not constitute a final agency decision.271 With neither Southwest nor Delta willing to back down, and with agreements for temporary accommodation between the two airlines terminating, the City filed a suit in federal court against both Southwest and Delta seeking a determination about its required action.272 Southwest and Delta joined in the action, with both seeking preliminary injunctions with respect to temporary accommodation of Delta at Love Field.273 The City requested grant of relief to either party.274 Shortly thereafter, the FAA initiated a Part 16 proceeding to assess the City’s compli- ance with its grant obligations.275 In that proceeding Delta ar- gued that the City’s failure to accommodate Delta and its acqui- escence to the sublease of additional gates to Southwest in 2014 amounted to denial of open competition at Love Field in contra- vention of the City’s federal obligations.276 The City argued that the FAA does not have jurisdiction over the City’s accommoda- tion policy, given that the accommodation policy is provided under federally enacted lease terms pursuant to WARA rather than the more traditional Grant Assurance and competition plan bases.277 With respect to the City’s suit, the district court decided the preliminary injunction issue on contractual grounds, holding that Delta was a third-party beneficiary to the lease agreement between Southwest and the City and thus could enforce the accommodation provisions in that agreement. It furthermore determined that there was a substantial likelihood that Delta would succeed on the merits of its position with respect to ac- commodation under the terms of the agreement. On appeal, the Fifth Circuit affirmed the preliminary injunction in favor of Delta, but without ruling on whether Delta was in fact a third- party beneficiary to the lease agreement. Instead, the Fifth Cir- cuit granted relief based on the City’s request for relief.278 FAA has since withdrawn its notice of investigation under 14 C.F.R. Part 16 without prejudice, ostensibly pending the 269 Id. at 14. 270 Id. 271 Southwest Airlines Co. v. U.S. Dept. of Transp., 832 F.3d 270 (D.C. Cir. 2016). 272 Dallas I. 273 Id., slip op. at 15. 274 Id. at 17-18. 275 In re Compliance with Federal Obligations by the City of Dallas, FAA Docket No. 16-15-10, Notice of Investigation (Aug. 7, 2015). 276 Invited Brief of Delta Air Lines, Inc., FAA Docket No. 16-15-10, FAA-2015-3561-0011 (Filed Feb. 9, 2016) 277 Reply of the City of Dallas to the Invited Comments on the Notice of Investigation and to the Federal Court Preliminary Injunction Deci- sion, FAA Docket No.16-15-10, FAA-2015-3561-0013 (Filed Feb. 9, 2016). 278 Dallas II, 832 F.3d at 291. port in the 1970s.263 In essence, in order to protect the financial viability of DFW, which all relevant carriers except Southwest had agreed to utilize, Congress restricted the interstate routes that could connect directly with Love Field.264 This remained the situation until 2006 when, at the urging of Congress, the two major airlines operating out of Love Field pursuant to long- term agreements, Southwest and American Airlines, as well as the City of Dallas, the City of Fort Worth, and the DWF Airport Board entered into an compromise agreement providing for the reduction of gates at Love Field and the allocation of just over half of the remaining gates to Southwest on a “preferential-use” basis.265 The agreement also provided for a procedure for ac- commodating “new entrants” at the airport in the event such airlines could not arrive at a negotiated agreement between themselves. Finally, the agreement provided that restrictions on routes connecting with Love Field would be lifted in October 2014. Congress subsequently officially sanctioned this agree- ment by passing a law enacting some of its provisions. In addition to this unique legal history, the City was also subject to competition-related federal obligations, includ- ing its Grant Assurance obligations pursuant to receipt of AIP grants and competition plan requirements tied to receipt of PFC funds.266 Accordingly, when Delta submitted its request for accommodation in 2014, the City had to consider require- ments to accommodate air carriers relating to its agreements with the current carriers operating at Love Field and the federal government pursuant to Grant Assurances under its AIP grant agreements, as well as specific federal law sanctioning its airline agreements and general laws related to AIP and PFC funds. In addition, the DOJ effectively prohibited Dallas from consider- ing the only two of Love Field’s gates not under Southwest’s con- trol to Delta because they were part of an agreement regarding its settlement with American and U.S. Airways, and were allo- cated to another airline.267 Uncertain about the extent to which it could or was required to force Southwest to cede gates to Delta Airlines, the City of Dallas requested that DOT provide clarification on the City’s responsibilities under federal law. DOT responded to the city’s request by stating that Dallas was required to accommodate Delta pursuant to its competition plan under AIR-21 and its Grant Assurances under the AIP, and that it should expect to provide ongoing accommodation to Delta according to a similar pattern of service as existed before the dispute.268 DOT warned the City that it should not take into account an airline’s future anticipated use of airport facilities as doing so would “give a sig- natory carrier the ability to block a competitor’s accommoda- 263 For a broader history of the unique history of Love Field, City of Dallas v. Delta Airlines, Inc., Case No. 3:15-cv-02069-K (N.D. Tex. 2016) [hereinafter Dallas I], aff’d in part 847 F.3d 279 (5th Cir. 2017) [hereinafter Dallas II]. 264 See, WARA, supra note 254; Dallas I, slip op. at 3. 265 CITE 266 See, Dallas I, slip op. at 38. 267 See id., at 6. 268 Id. at 12.