Policy Regarding Airport Rates and Charges

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1 BEFORE THE FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C. Policy Regarding Airport Rates and Charges Docket No. FAA COMMENTS OF AIR CANADA Communications with respect to this document should be sent to: Anita M. Mosner Sophy Chen HOLLAND & KNIGHT LLP 2099 Pennsylvania Avenue, N.W., Suite 100 Washington, D.C Phone: (202) Fax: (202) Attorneys for AIR CANADA Dated: April 3, 2008

2 BEFORE THE FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C. Policy Regarding Airport Rates and Charges Docket No. FAA COMMENTS OF AIR CANADA On January 17, 2008, the Federal Aviation Administration ("FAA") published a Notice 1 concerning proposed amendments to its 1996 Airport Rates and Charges Policy ("1996 Policy"), 2 which sets forth the agency's policy for determining the reasonableness of airport fees charged to airlines under 49 U.S.C The proposed amendments include three elements. First, the FAA has endorsed the use of two-part landing fees that incorporate per-operation and weight-based charges and that would permit airport operators to consider the existence of airfield congestion when determining the portion of allowable airfield costs to be allocated to the per-operation charge during congested periods. Second, contrary to historical practice, the FAA would permit airport operators to include costs of airfield projects still under construction in the rate-base used to determine current airfield charges. Third, the FAA would permit airport operators to require airlines at one airport to pay for the airfield costs at a secondary airport, even if the airlines at the first airport do not use (or in certain cases, cannot use), or derive any 1 Policy Regarding Airport Rates and Charges, Notice of Proposed Amendment to Policy Statements, 73 Fed. Reg (Jan. 17, 2008) ("Notice"). 2 Policy Regarding Airport Rates and Charges, Policy Statement, 61 Fed. Reg. 31,994 (June 21, 1996). 3 Section 47129(b) requires the Secretary of Transportation to publish guidelines establishing "the standards or guidelines that shall be used by the Secretary in determining under this section whether an airport fee is reasonable." 49 U.S.C (b)(2). The Secretary has delegated this responsibility to the Administrator of the Federal Aviation Administration.

3 Page 2 benefit from, the secondary airport. The ostensible purpose of the amendments is to encourage airport operators to use landing fees to influence airlines at congested airports to operate at less congested, less desirable times; at less congested, less desirable airports; or both. Air Canada has grave concerns about the lawfulness of the proposed amendments. Among other things, the proposal is contrary to the cost-of-service approach to setting airport charges, which the FAA adopted in the 1996 Policy 4 and reaffirmed in the Notice. 5 Similarly, the proposal is contrary to longstanding principles of the International Civil Aviation Organization ("ICAO") that limit what airports may include in the cost basis for determining and allocating the total cost to be met by airport charges. 6 In addition, the proposal is contrary to statutory requirements that permit publicly-owned airport authorities to collect only reasonable rental charges, landing fees, and other service charges from aircraft operators for the use of airport facilities, 49 U.S.C , and require publicly-funded airports to be "available for public use on reasonable conditions and without unjust discrimination," 49 U.S.C Finally, the proposal also violates the obligations of the United States Government under its air service agreements with other nations. For example, under the U.S-Canada Open Skies Agreement, 4 See 1996 Policy, at 31,994 (col. 2). 5 See Notice, at 3314 (col. 2). 6 See Policies on Charges for Airports and Air Navigation Services, International Civil Aviation Organization, Doc. 9082, Seventh Edition (2004) (paras ).

4 Pages both nations have committed themselves to imposing only those user charges that are just, reasonable, not unjustly discriminatory, and equitably apportioned. 7 I. First Address the Primary Causes of Airport Congestion A. Only Solutions That Are Narrowly-Tailored to Address the Causes of Airport Congestion Are Justified. Air Canada is particularly concerned about the proposal because the congestion and delay problems at U.S. airports are caused largely by competition between domestic airlines rather than the limited operations of foreign airlines, such as Air Canada. Moreover, while there are certain congestion "hot spots" throughout the United States, it is universally recognized that New York lies at the hub of the problem. Indeed, the FAA notes that up to one-third of the nation's delays are centered on the New York area. As explained immediately below, Air Canada would urge both that the remedies be tailored to the markets that are most problematic, and to the carriers (or groups of carriers) that are contributing most heavily to the problems. By way of example, in August 2007 at New York's John F. Kennedy Airport ("JFK") (one of the most delay-prone airports in the U.S.), foreign airlines from 48 different countries operated only about 16% of the departing flights on a per week basis, which accounted for about 30% of the seats flown. In comparison, U.S. airlines operated for nearly 84% of departing flights on a weekly basis, which accounted for only 70% of the seats flown. In fact, 7 See, e.g., Article 9, Air Transport Agreement between the Government of the United States of America and the Government of Canada, signed in Washington on March 12, 2007 ("User charges that may be imposed by the competent charging authorities or bodies of each Party on the airlines of the other Party for the use of airport... and related facilities and services shall be just, reasonable, not unjustly discriminatory, and equitably apportioned among categories of users. In any event, any such user charges shall be assessed on the airlines of the other Party on terms not less favorable than the most favorable terms available to any other airline at the time the charges are assessed.").

5 Page 4 just two U.S. airlines alone operated nearly 60% of all the departures from JFK in August The two carriers at issue (including their affiliates) operated approximately 370 daily departures. Notably, this figure reflects a massive build-up of capacity by Delta over the period August 2006-August 2007, with Delta adding nearly 375 departures per week during that time, with 185 of these new flights being added to points Delta already serves from JFK. While Air Canada would not presume to dictate where carriers might choose to fly, and how to serve these markets, the equities dictate that the FAA consider remedies that are more closely tailored to the cause of the problem before taking a broad approach that would both unfairly penalize foreign air carriers and create severe competitive distortions. This data demonstrates that congestion is largely the result of operations by domestic rather than foreign airlines (and operations by domestic airlines using small aircraft rather than the large aircraft typically used by foreign airlines). Foreign airlines already operate larger aircraft with more seat capacity and would be unlikely to up-gauge (or be able to up-gauge) further. More importantly, Air Canada operates only two daily flights at JFK, which means that it has virtually no flexibility to shift flights to different times or to a different airport (largely because these flights are timed to connect to other flights). As a result, the congestion-related pricing schemes authorized by the proposal would likely result in potentially significant increases in Air Canada's costs at congested airports like JFK, without any corresponding benefit to the airline. This is unreasonable and unjustly discriminatory (at least in its impact). Accordingly, Air Canada urges the Department to consider less discriminatory alternatives that focus on congestion at the New York-area airports before considering any

6 Page 5 policy changes that would alter the rules for fee-setting at all U.S. airports. Moreover, the alternatives should be tailored more narrowly to address the predominant causes of congestion. B. The FAA's Proposal Fails Altogether to Address How Improvements in Air Traffic Control Could Reduce Congestion What also is of concern is the apparent assumption that groundside constraints lie at the heart of the congestion problem. To the contrary, it is widely understood that the cascading delays that have been seen are in significant part a result of Air Traffic Control (ATC) problems. While airport facilities in North America have consistently modernized over time, U.S. air traffic facilities are older and in need of streamlining and modernization. Any meaningful efforts to address congestion in the United States should include measures to update ATC with modern navigational and communications technologies. Air Canada applauds the FAA for recognizing the value of these technologies in reducing and avoiding congestion and for including them in its Next Generation Air Transportation System ("NextGen"). The FAA has stated that NextGen will reduce the impact of weather, which contributes significantly to delays experienced in the airspace system, by minimizing airspace limitations and traffic restrictions 8 NextGen is also expected to bring about a host of other congestion-relief benefits. Air Canada's view is that the FAA's efforts are best focused on these efforts, rather than on tinkering with airline incentives and disturbing the well-established and proven funding principles underlying airport rates and charges. NextGen, Fact Sheet, Federal Aviation Administration (Feb. 14, 2007).

7 Page 6 II. Specific Comments on the Proposal A. Two-Part Landing Fee Structure The Notice endorses the use of a two-part landing fee structure consisting of the traditional weight-based charge and an additional per-operation charge, which airport operators may use to charge airlines more for operating flights during peak hours. The proposal specifies that the two-part fee must reasonably allocate costs to users on a rational and economically justified basis. In brief, a two-part landing fee (like all landing fees) must be cost-based, fair and reasonable, and not unjustly discriminatory. The 1996 Policy made clear that U.S. airports are limited to including in their rate bases only the costs incurred in providing airfield facilities and services, 9 and the proposed amendments purport not to disturb this fundamental principle. 10 These costs may include operating and maintenance expenses (including certain environmental costs), capital costs of facilities and services currently in use, and current costs of planning future airfield facilities and services. 11 This list of allowable costs does not include any congestion-related factors, such as scarcity or inefficiency. The Notice nevertheless describes "assign[ing] additional... costs... to better reflect the cost of using congested airfield facilities." 12 Air Canada, however, fails to see (and the Notice fatally fails to explain) how the cost of providing airfield facilities during periods of peak 9 See 1996 Policy, at 32,019 (paras ). 10 Notice, at 3313 ("The three specific proposals [in the Notice] do not alter one of the fundamental principles of the 1996 Rates and Charges Policy: that reasonable fees must be based on the capital and operating costs of the facilities for which the fees are assessed."). 11 id. 12 Id. (emphasis added).

8 Page 7 usage would increase for airport authorities when no additional airfield facilities or services would be provided. In fact, it appears that, in the absence of this proposal, no nexus would exist between the cost that an airline would pay to use congested airfield facilities and the cost that an airport authority would bear to provide those facilities. Any fee structure that imposes higher prices during peak hours without any corresponding increase in airfield facilities or services fails to be cost-based and, therefore, would be unfair and unreasonable. Further, to the extent that it penalizes carriers, like Air Canada, who cannot readily shift operations to other times of the day or to other airports, such a fee structure would be unjustly discriminatory. B. Cost of Facilities Under Construction The proposed amendments also would permit airport authorities to include costs of facilities not yet built and operating in an airport's rate base. This would be more than a "modest departure" from the long-standing and fundamental principle that airfield fees are limited to an amount that recovers the cost of operating and maintaining the airfield. 13 As described above, an essential part of this principle has been a cost-of-service approach to setting fees. Under a cost-of-service approach, only the cost of facilities "used and useful" may be included in the rate base. 14 Regardless of whether an airport authority were to include costs for airfield facilities still under construction only when congestion is present ("Option One") or throughout the day ("Option Two"), the inclusion of these costs in the rate base would require present-day ratepayers to pay for facilities that are not available for them to use (and which they, in fact, may 13 See 1996 Policy, at 32,019 (para. 2.3); Notice, at 3314 (col. 2). 14 See Notice, at 3314 (col. 2).

9 PageS never use). Since facilities that do not exist yet are neither used nor useful to anyone, allocating costs for such facilities to present-day rate-payers is not fair or reasonable. It also fails to be cost-based, as required by longstanding rate-setting practice, and it is unjustly discriminatory as between current and future users of the airport. In addition, the U.S. Government's various air service agreements require that airport charges recover only cost associated with existing facilities and services. Article 9 of the U.S.- Canada Open Skies Agreement, for example, states: "User charges imposed on the airlines of the other Party may reflect, but shall not exceed, the full cost of to the competent charging authorities of bodies of providing the appropriate airport... facilities and services at the airport or within the airport system." This proposal to permit costs associated with projects still under construction to be included in the current rate base clearly is inconsistent with this obligation. To the extent airports are given any ability to include in their rates charges for long-term improvements at their airports (a proposition which causes Air Canada some concern), adequate steps must be taken to ensure that such charges are consistent with ICAO's Policies on Charges for Airports and Air Navigation Services. Specifically, the process for approving long-term projects must include consultations with all users, including foreign air carriers, and that the allocation of costs among various categories of users must be adequately disclosed and transparent. In addition, the use and expenditure of such fees must be both transparent and consistent with ICAO principles See Policies on Charges for Airports and Air Navigation Services, International Civil Aviation Organization, Doc. 9082, Seventh Edition (2004) (para. 24).

10 Page 9 Finally, Air Canada is concerned also that the proposal fails to establish any prerequisite connection between an airport charge that includes pre-completion costs for airfield projects and the purpose of the underlying project. The Notice asserts that early recovery of capital and interest carrying costs during construction could hasten the arrival of capacity expansions which benefit airlines by reducing future congestion, but this is insufficient justification to permit an airport authority to include costs for projects that will not relieve congestion in the rate base. If the FAA were to adopt this proposal, Air Canada urges the FAA to limit pre-completion costs that may be included in the rate base only those associated with projects that will relieve congestion at the airport. C. Costs of Facilities at Secondary Airports The third element of the proposed amendments would permit an airport operator to charge users at one airport the airfield costs at a second airport when the first airport is congested. The aim of this proposal is to raise the cost of operating at the first airport during peak periods and to lower costs of operating at the second airport, in order to encourage airlines to shift flights to less congested periods or to the second airport. As described above, however, Air Canada cannot readily shift flights to other time slots or to another airport. In some cases, Air Canada has found that secondary airports have limitations that hamper the initiation of air service, or economic factors make service to secondary airports undesirable (e.g., insufficient demand for service to secondary airports and additional costs associated with establishing new contracts and leases, obtaining new groundhandling services, and hiring or relocating employees). As a result, Air Canada expects that the

11 Page 10 landing fees it pays at congested airports would increase with no corresponding increase in airfield facilities or services. Moreover, the higher landing fees at congested airports would act as a subsidy to other airlines (most likely domestic operators with many flights) that can more readily shift operations to secondary airports. As is the case with the other elements of the proposal, higher fees that are not related to higher costs are unreasonable. Moreover, such fees would be unjustly discriminatory in their impact on Air Canada. It also is essential to note that many foreign airlines are as a matter of law foreclosed from using certain US airports because such facilities lack federal inspection facilities and Customs personnel. It is inequitable in the extreme to require foreign air carriers to pay for the use of these facilities when they will be completely unable to benefit from them. 16 While some might argue that improvements at a secondary airport may enhance capacity, any such benefits will be attenuated at best. In fact, it is more likely that domestic airlines will expand capacity at these airports, with no net benefit whatsoever to the foreign airline community. For the reasons stated above, Air Canada urges the FAA to re-evaluate the need at this time for a wholesale change to the policies concerning fee-setting at U.S. airports. The existing rates and charges policy incorporates many long-standing principles that protect against unfair, unreasonable, and unjustly discriminatory fees. Other alternatives that are less discriminatory than the proposed amendments exist (e.g., the flight limitation orders in place or proposed for LaGuardia, JFK, and Newark Airports, which together cause up to one-third of all delays across the country), and Air Canada would like to see the FAA focus on implementing those measures 16 Air Canada pre-clears passengers through Customs at airports in Canada. Despite this fact, Customs and Border Protection has limited Air Canada to serving only airports with Customs facilities.

12 Page 11 in the New York-area before disturbing well-settled rate-setting practices at airports in other regions. Respectfully submitted, Anita M. Mosner Sophy Chen HOLLAND & KNIGHT LLP 2099 Pennsylvania Avenue, N.W., Suite 100 Washington, D.C Phone: (202) Fax: (202) Attorneys for AIR CANADA # v6

BEFORE THE FEDERAL AVIATION ADMINISTRATION U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. COMMENTS OF CANADIAN AIRLINES INTERNATIONAL LTD.

BEFORE THE FEDERAL AVIATION ADMINISTRATION U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) 14 C.F.R. PART 93 ) Docket No. FAA-1999-4971 ) Notice No. 99-20 ) ) COMMENTS OF CANADIAN AIRLINES INTERNATIONAL