Airport Incentive Programs: Federal and Other Restrictions and Recent Developments

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1 Airport Incentive Programs: Federal and Other Restrictions and Recent Developments G. Brian Busey Co-Chair Airports and Aviation Group ACI-NA Spring 2009 Legal Issues Conference May 13, Morrison & Foerster LLP All Rights Reserved

2 Federal Restrictions Relevant to Airport Incentive Agreements Primary Issues - Prohibition on unlawful diversion of airport revenue no direct subsidies to carriers Economic nondiscrimination grant assurance Self Sustaining grant assurance Exclusive rights grant assurance Sources Airport and Airway Improvement Act of 1982/Airport Improvement Program ( AIP ) and related grant assurances FAA s Final Policy on and Procedures Governing Use of Airport Revenue ( Revenue Diversion Policy ) DOT Policy Regarding Airport Rates and Charges 2

3 Revenue Diversion Prohibition 49 U.S.C (b) restricts use of airport revenue Acceptable Uses - capital and operating expenses of the airport or airport system In 1994 Congress directed FAA to tighten enforcement of the prohibition and specifically prohibited use of airport revenues for general economic development In response, FAA issued Final Policy and Procedures Concerning Use of Airport Revenue in 1999 Policy confirms that airport proprietors may use airport revenues to promote the airport, subject to certain limits 3

4 FAA Revenue Diversion Policy What Incentives Are Allowed? What Are Limitations? Policy permits use of airport revenues [D]irected toward promoting competition at an airport... [including] new air service and competition at the airport Also permits cooperative advertising, where the airport advertises new services... and advertising of general or specific airline services to the airport No direct subsidies are allowed, but airports may offer credits 4

5 FAA Revenue Diversion Policy What Incentives Are Allowed? What Are Limitations? HOWEVER, the Final Diversion Policy specifically prohibits the direct subsidy of air carrier operations Direct subsidies are considered to be payments of airport funds to carriers for air service. Since discounts/waivers involve no expenditure of airport funds, FAA s position is that revenue use policy is not implicated The Policy specifically states subsidies do not include waivers of fees or discounted landing or other fees during a promotional period... 5

6 What is an Acceptable Promotional Period? FAA concerned that indefinite landing fee waivers/discounts may subvert the self-sustaining grant assurance FAA has explicitly declined to define acceptable period General Rule: 2-year waivers/discounts appear presumptively valid (program under which the incentive is offered may last longer) Exceptions for special cases, i.e. post-hurricane Katrina efforts to increase travel to New Orleans area More than a decade ago, FAA approved Portland International Jetport (ME) 90-day landing fee waiver for new service but cautioned against use of such waiver over the long term FAA advises that promotional periods longer than one year are unnecessary but has declined to oppose two-year waivers at many airports including HNL, PDX and BWI 6

7 Unjust Discrimination AIP grant assurances prohibit unjust discrimination among airport users in terms of conditions and fees (49 U.S.C (a)(1)) Nevertheless, airports may make reasonable distinctions between classes of users (FAA Rates and Charges Policy) Typical example is charging non-signatory carriers higher fees than signatory carriers FAA has indicated it would not disapprove incentive program based on opposition from 1 or 2 nonsignatory carriers; if most carriers approve, FAA unlikely to oppose 7

8 Potential FAA Concerns Relating to Discrimination Gaming the system Example - If program provides discount for service between new city pairs, carrier should not be able to drop existing service, replace with new service and obtain benefit Cross-subsidization If incentive program fails to generate additional revenue that is shared among carriers, existing carriers may pay more in fees to make up the deficit FAA has suggested that airports set aside nonaeronautical/discretionary revenues to avoid cross-subsidization charge by carriers Airports with residual-based rates and charges methodology may be able to argue that benefits of additional landing fees and other revenues inure to benefit of all carriers 8

9 What Qualifies as Promotion of Air Service? Common scenario: an airport learns that a carrier is discontinuing service. Can an airport sponsor offer incentives to retain air service? Yes, provided that the incentives otherwise satisfy FAA requirements FAA does not require an airport to first lose air service; program aimed at preservation of service is acceptable; in the current economic environment, FAA is likely to be sympathetic Example: Airports may consider offering discounts to avoid losing international service 9

10 Other Restrictions Limitations in Lease and Use Agreements Example: Most Favored Nations Clause City covenants and agrees that in the event it enters into any lease, contract or any other agreement with another airline containing more favorable terms than this Agreement, or grants to any airlines rights, privileges, or concessions with respect to the Airport which are not accorded Airline it shall advise Airline of such action and this Agreement shall, at Airline s option, be amended to incorporate such rights, terms, privileges and concessions 10

11 Recent Example: Pittsburgh/Delta Agreement In February 2009, Allegheny County Airport Authority and Delta entered into an Incentive Agreement Key features: Delta committed to provide Pittsburgh to Paris R/T flights at least 4 times per week In exchange for: 2 year waiver of landing fees $300,000 per year marketing funds 11

12 Recent Example: Pittsburgh/Delta Agreement (cont d) Separately, the Allegheny Conference for Community Development entered into an agreement with Delta Providing a subsidy of Delta s shortfall below a revenue target on the Paris service up to $5 million for the first year and up to $4 million for the second Backed by a letter of credit Key features: non-airport source of funding no airport control over such funds 12

13 Example SFO s Market Stimulus Program In August 2003, SFO implemented a market stimulus program including a landing fee waiver program Program consisted of a waiver up to 50% of landing fees during introductory 12-month period Requirements Carrier had to establish non-stop SFO- new destination service between 9/1/03-4/1/04 New destination was defined as a city not served by that carrier (or commuter affiliate/codeshare partner) between 2/1/03 and 6/30/03 Carrier had to commit to operate the service for at least one year (repayment required in event of early termination of service) 13

14 Example SFO s Market Stimulus Program (cont d) Any carrier, existing operator or potential new entrant, was eligible Program also involved joint marketing arrangement between SFO and relevant carrier Results were positive: ATA, America West and AirTran are participated with 9 qualifying flights representing 56 weekly frequencies Competitive response qualifying flights: seven flights with 41 weekly frequencies 14

15 Steps Taken by SFO to Ensure FAA/DOT Compliance Discount period limited to one year (presumptively valid) To discourage gaming: Participating carrier must produce a net increase in the number of its total departures from SFO for a given month (compared to the same month the previous year) carrier must also maintain existing flight services (i.e., a nonqualifying flight may not be cancelled to initiate a qualifying flight) To ensure non-discrimination: Programs available to all scheduled carriers new entrants, incumbents adding new service Carriers providing service in a market may obtain benefits of incentive by adding flights in that market in response to new destination service (provided carrier satisfies requirement that there be a net increase in its total SFO departures) 15

16 Example Indiana Airport/Fed Ex Several airlines filed Part 16 complaint (Northwest Airlines et al., FAA Docket , Director s Determination) against Indianapolis Airport over an agreement with FedEx for financing of new aircraft parking apron. While not a traditional short-term airport incentive program, FedEx received Landing Fee Rent Credits to facilitate a multi-year facilities expansion. Director agreed with the Airport that technically the Credit is not a subsidy within the meaning of the Revenue Use Policy because the Airport is not directly paying airport funds to FedEx to operate. Nonetheless, the Airport cannot impose the cost of FedEx's rent Credit on other carriers even if the other carriers benefit from the additional operations by FedEx as a result of having the airfield costs spread over more operations, and even if the other carriers actually pay less as a result of the overall deal. Director noted that it is never reasonable to make other carriers to bear costs of promotional fee waivers, either in a 2-year program or over a longer duration. FAA found this case not ripe for review, because the other carriers had not yet suffered harm; the costs were not going to be passed through to other carriers until after

17 Other Developments FAA restricts airport sponsors use of non-airport revenues for airport incentives Letter from D. Bennett to Wichita Airport Authority, Nov. 18, 2003 (financial incentives offered by City to AirTran for daily jet service to specific city pairs) Letter from D. Bennett to City of Tallahassee, Dec. 22, 2003 (financial incentives offered by City to AirTran for daily jet service to specific city pairs) FAA s message: even if non-airport funds are used, the airport sponsor is still subject to federal restrictions including economic nondiscrimination and exclusive rights grant assurances if it has involvement with such funds 17

18 Recommendations Before implementing an airport incentive program, it is advisable to confer with FAA to identify potential issues/problems Review incentive programs with signatory airlines; emphasize net benefits to all carriers; prepare traffic/market studies to demonstrate such benefits Ensure no direct subsidies Discounts/waivers can be in place for two years, but three year discounts or waivers may draw FAA objection Review program for possible gaming/cross-subsidization traps Consider any potential issues under local law or lease and use agreements 18

19 Looking Ahead FAA plans to release written guidance on airport incentive agreements in late 2009; format likely to be Q&A brochure AIC survey indicates that substantial numbers of airports have incentive programs; airports that do not use them report impediments such as: lack of funds; legal issues with signatory agreements; and concerns about objections from other carriers 19

20 The End (Thank You) Questions? dc Morrison & Foerster LLP All Rights Reserved