AIR SERVICE INCENTIVE PROGRAMS

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1 AIR SERVICE INCENTIVE PROGRAMS Peter J Kirsch November 3, 2016

2 Today s presentation Basic background on airline incentives Legal structure Strategic and policy issues 2

3 Questions to ask For what Source of $$ To whom Lawful incentive program 3

4 State of play Airline industry (A4A) opposes Airlines are increasingly aggressive in seeking incentives An airline may demand an incentive from one airport and oppose the same incentive at another airport FAA is aggressively ambivalent 4

5 Incentives generally Makes complete sense 5

6 Basics Revenue Use Policy allows incentives for two express purposes: 1. Encourage new air service 2. Encourage competition 6

7 Sources 7

8 Sources Incentives Guidebook may provide helpful information but it is sometimes: Confusing Inconsistent Wrong 8

9 Sources Policy Regarding Airport Rates and Charges ( Rates and Charges Policy ) Policy and Procedures Concerning the Use of Airport Revenue ( Revenue Use Policy ) Airline Deregulation Act does not apply 9

10 Grant Assurances Prohibition on unjust discrimination/ exclusive rights (Grant Assurance 22, 23) Self Sustaining Requirement (Grant Assurance 24, 25) Violation if sponsor does not make incentives available to all similarly situated carriers 10

11 Four steps 1.Review and understand Grant Assurances, laws and policies 2.Identify goals and types of service to be covered 3.Define program timelines 4.Design incentive program 11

12 Duration of incentives Up to 1-year - new entrant incentives Up to 2-years - incentives for any carrier that meets service criteria Staggered OK so long as total time available does not exceed 1 or 2 years 12

13 Prohibitions Use of airport revenues for general economic development, marketing, and promotional activities unrelated to airports or airport systems. Indefinite fee waivers or discounts 13

14 Prohibitions Cash incentives to passengers using the airport Purchase seats from an air carrier or guarantee a number of seats will be filled 14

15 Subsidies v. incentives Subsidy: direct payment of airport revenue to a carrier or any provider of goods or services to the carrier in exchange for additional service by the carrier. 15

16 Subsidies v. incentives Incentive: any fee reduction, fee waiver, or use of airport revenue for acceptable promotional costs, where the purpose is to encourage an air carrier to increase service at the airport. 16

17 Confusion and nuances Incentives Guidebook States restrictions, often without underlying legal support May only be safe harbor FAA may be flexible If sponsor can demonstrate there is no legal prohibition. 17

18 By the book Guidebook = guidelines Not absolute prohibitions Think outside the box 18

19 Specific incentives 19

20 New service Service to an airport not currently served Nonstop service where no nonstop service is currently offered New entrant Increased frequency of flights to a specific destination 20

21 Up-gauging OK if combined with other elements Net increase required Jordan Tan / Shutterstock.com 21

22 Passenger-based incentives Probably (?) impermissible 22

23 Jet service Cannot limit incentives to jet service Can get creative in definitions (!!) 23

24 Low fare service Low fare carriers (or ULCC) are not a type of service Must have objective criteria that any carrier can meet 24

25 Type of cabin Distinctions such as coach, business, or first class may not be the basis for an incentive 25 Sorbis / Shutterstock.com

26 Impact on other carriers fees Incentive program may not negatively affect other carriers without their express permission Sponsor must make up waived fees from non-airline revenue source Residual methodology airports check agreement 26

27 Influence on fares Sponsor cannot tie incentives to ticket price. Violates Airline Deregulation Act (rates, routes, or services) 27

28 International service Bilateral or multilateral agreements New entrant vs. incumbent may raise potential concerns. 28

29 Third party incentives Community organizations or non-sponsor local governments may offer an incentive or subsidy Sponsor must not be involved in negotiating, implementing, or monitoring the program in any manner Sponsor may only provide technical assistance 29

30 Lease and Use agreements Most Favored Nation clauses Other provisions may limit airport flexibility Residual agreements 30

31 Conclusions Law is black-and-white But application is completely gray FAA will tell you what you can t do, not what you can do 31

32 Questions? Peter J. Kirsch (202)

AAAE Rates and Charges Workshop Air Service Incentive Programs. Thomas R. Devine KAPLAN KIRSCH & ROCKWELL LLP October 2, 2012

AAAE Rates and Charges Workshop Air Service Incentive Programs Thomas R. Devine KAPLAN KIRSCH & ROCKWELL LLP October 2, 2012 Overview Airports are under increasing pressure to preserve and enhance air