BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C.

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1 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF THE SECRETARY FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C In the matter of: ) ) Notice of Proposed Amendments ) To Policy Regarding ) Docket No. FAA Airport Rates and Charges ) COMMENTS OF THE AIR TRANSPORT ASSOCIATION OF AMERICA, INC. Communications with respect to this document should be sent to: DAVID A. BERG Vice President & General Counsel KATHERINE B. ANDRUS Assistant General Counsel Air Transport Association of America, Inc Pennsylvania Ave., N.W. Washington, DC 2004 (202) dberg@airlines.org kandrus@airlines.org April 3, 2008

2 I. The Proposal is A Misguided Attempt to Encourage Airports to Impose a Form of Congestion Pricing a. Congestion Pricing is Ineffective in Addressing Airport Congestion... 5 b. The Proposal Does Nothing to Address the Cause of Congestion....9 c. The Proposal Ignores the Views of Industry Stakeholders d. Airports Do Not Have Authority to Impose Congestion Pricing...12 II. III. The Proposal Fails to Provide Meaningful Guidance...13 Each of the Proposed Amendments is Individually Flawed a. The Dual-Element Landing Fee b. Pre-Payment of Capital Improvements c. Subsidizing Secondary Airports IV. The Applicability of the Proposed Amendments is Unclear.32 a. Definition of Congested Airport...33 b. Periods of Congestion c. Secondary Airports...36 d. Portions of Allowable Costs...37 V. Conclusion..38

3 BEFORE THE U.S. DEPARTMENT OF TRANSPORTATION FEDERAL AVIATION ADMINISTRATION WASHINGTON, D.C In the matter of: ) ) Notice of Proposed Amendments ) To Policy Regarding ) Docket No. FAA Airport Rates and Charges ) The Air Transport Association of America, Inc. ( ATA ), on behalf of its airline members, 1 respectfully offers the following comments on the amendments proposed by the Department of Transportation and the Federal Aviation Administration (hereinafter collectively referred to as DOT ) 2 to the 1996 Policy Regarding the Establishment of Airport Rates and Charges. 3 The proposed amendments would: 1) explicitly authorize airports to establish a two-part landing fee consisting of both a weight-based charge and a per operation charge that would serve as an incentive for carriers to use larger aircraft ; 4 2) permit airports to charge users for airfield projects under construction, and potentially to impose these charges only during periods of congestion, thus providing financial incentives to users to consider alternatives to using the airfield when congestion is present ; 5 and 1 ATA is the principal trade and service organization of the major scheduled air carriers in the United States. ATA airline members are: ABX Air, Inc.; AirTran Airways; Alaska Airlines, Inc.; Aloha Airlines; American Airlines, Inc.; ASTAR Air Cargo, Inc.; Atlas Air, Inc.; Continental Airlines, Inc.; Delta Air Lines, Inc.; Evergreen International Airlines, Inc.; Federal Express Corporation; Hawaiian Airlines; JetBlue Airways Corp.; Midwest Airlines, Inc.; Northwest Airlines, Inc.; Southwest Airlines Co.; United Airlines, Inc.; UPS Airlines; and US Airways, Inc. ATA Airline Associate Members are: Air Canada, Air Jamaica Ltd. and Mexicana. Southwest Airlines does not join in these comments to the extent they discuss DOT's proposal for two-part landing fees Fed. Reg (Jan. 17, 2008) (hereinafter referred to as proposed amendments or proposal ). 3 Department of Transportation, Office of the Secretary and Federal Aviation Administration, Final Policy Regarding Airport Rates and Charges, 61 Fed. Reg (June 21, 1996); vacated in part by Air Transp. Assoc. of America v. Dep t of Transp., 119 F. 3d 38, as amended by 129 F. 3d 625 (D.C. Cir. 1997) ( Rates and Charges Policy ) Fed. Reg Fed. Reg

4 3) allow users of a congested airport to be charged for costs of a secondary airport in the same system in order to provide incentives to aircraft operators to shift service away from congested times at congested airports. 6 For the reasons detailed in these comments, ATA urges DOT to withdraw its proposal and focus its attention on addressing the real causes of congestion and the solutions that have already been identified as part of the Next Generation Air Transportation System ( NextGen ). Although the proposed actions are characterized in the Federal Register notice as merely two modifications and one clarification, taken together they represent a concerted effort to effect a significant policy change. It is no secret that DOT has a strong interest in using market mechanisms as a means of addressing congestion and delay in all modes of transportation, 7 but the agency itself has acknowledged that it lacks the statutory authority to impose congestion pricing at airports: FAA currently does not have the statutory authority to assess market-clearing charges for a landing or departure authorization. 8 The FAA currently does not have full legislative authority to employ [auctions or congestion pricing] at LaGuardia or at other airports Fed. Reg See, e.g., Remarks of the Honorable Mary Peters, Secretary of Transportation, Phoenix Sky Harbor International Aviation Symposium, Phoenix, AZ (March 27, 2008), available at ( Pricing is the quickest and most effective approach to help spread flights throughout the day and alleviate congestion at peak hours. It can generate new revenues that airports can use to expand and accommodate the forecasted passenger growth. ); Remarks of the Honorable Mary Peters, Secretary of Transportation, FAA Forecast Conference, Washington, D.C. (March 10, 2008), available at ( [P]roperly pricing air traffic services to costs can help ensure the most efficient use of existing airports, airfields, and airspace and provide the surest path to expand capacity and put desperately needed technology in place. ); Remarks of0 the Honorable Mary Peters, Secretary of Transportation, JFK Scheduling Meeting, Washington, D.C. (Oct. 23, 2007), available at ( I have been very candid about our strong preference for using market mechanisms like congestion pricing to preserve passenger choice while reducing delays. ). 8 Congestion Management Rule for LaGuardia Airport, Notice of Proposed Rulemaking, 71 Fed. Reg , (August 29, 2006) Fed. Reg

5 Yet in the face of these admissions DOT is attempting an end-run around the limits on its statutory authority by cobbling together various amendments to its Rates and Charges Policy that would allow airports to adopt a truncated form of congestion pricing. Section I of these comments explains that the proposal as a whole is ill-advised because the collective purpose of the amendments is to allow airports to implement a form of congestion pricing intended to influence the schedules and equipment choices of air carriers in a manner prohibited by the Airline Deregulation Act (ADA) 10 and in a way that DOT and FAA lack the authority to do themselves. 11 DOT s attempt to substitute pricing mechanisms for airspace and airport capacity improvements in the absence of evidence that such pricing mechanisms are effective in an airport context amounts to nothing more than an additional tax on passengers and airlines. 12 Section II sets forth the ways in which the proposed amendments are deficient for 1) failing to provide meaningful guidance to airports on how to implement these broadly stated policies consistent with controlling law that requires airport fees to be reasonable and not unjustly discriminatory, and 2) actually encouraging airports to include costs in their rate structures in a manner that would clearly violate DOT s fundamental principles that reasonable fees be based on the capital and operating costs of the facilities for which the fees are assessed, 13 and that these costs be limited to services used and 10 Section 105(a) of the ADA prohibits state and local regulation relating to the rates, routes, or services of any air carrier. Airline Deregulation Act, Pub. L. No , 105(a), 92 Stat (1978); codified at 49 U.S.C (b)(1). 11 See Memorandum from Theodore B. Olsen, Gibson, Dunn & Crutcher LLP, to David A. Berg, ATA (Nov. 14, 2007) and Memorandum from Theodore B. Olsen, Gibson, Dunn & Crutcher LLP, to D.J. Gribbin, DOT (Dec. 3, 2007), attached as Appendix A to these comments. 12 See Aviation Daily (Oct. 5, 2005), quoting Eclat Consulting ( The real question for mainline carriers confronting the payment of a peak-hour fee is whether they would move a peak flight based on a $300- $2,100 cost difference or whether the peak fee would simply result in shifting a portion of the profits from the profitable peak-hour flight to the airport or government. ) Fed. Reg

6 useful by the rate-payers. 14 Far from providing guidance to clarify DOT s interpretation of the existing law governing airport rates and charges, the proposal invites future disputes and controversy between airport proprietors and airline users and would undermine DOT s policy of supporting negotiated agreements by allowing airports unilaterally to impose conditions that otherwise would be subject to negotiation. Section III details the legal and policy flaws in each of the three elements of the proposal, while Section IV notes that, due to ambiguous, confusing or insufficient definition of terms used in the proposal, the applicability of specific provisions and the way in which they might be implemented at specific airports is unclear and likely to lead to future controversy between airports and airlines. Section V concludes that the proposal s attempt to impose congestion pricing on airports is inconsistent with deregulation of the airline industry, and should be withdrawn on legal and policy grounds. I. The Proposal is A Misguided Attempt to Encourage Airports to Impose a Form of Congestion Pricing Although DOT claims that [t]he proposed actions do not represent true congestion pricing, 15 the amendments are in fact a backdoor effort to approximate congestion pricing by misusing tools designed for other purposes. DOT s general discussion of the proposal makes its overarching purpose abundantly clear: The effect of each of these modifications would be to allow the airport operator to increase the cost of landing at a congested airport during periods of congestion, even if congestion lasts through much of the day. By raising the costs of congested facilities, the airport operator would provide an incentive for current or potential aircraft operators to (1) adjust schedules to operate at less congested 14 Id. 15 Id. 4

7 times (if they exist); (2) use less congested secondary or reliever airports to meet regional air service needs; or (3) use the congested airport more efficiently by up-gauging aircraft. 16 DOT s attempt to shoehorn congestion pricing into the existing airport rates and charges scheme fails as a matter of law and policy. As detailed below, this attempt is ill-advised because 1) congestion pricing is not effective in the airport context; 2) congestion pricing does not address the root cause of congestion and delay; 3) congestion pricing has been rejected by virtually the entire U.S. and international airline community; and 4) to the extent that airport-imposed congestion pricing could influence the business decisions of air carriers it is preempted by the ADA. a. Congestion Pricing is Ineffective in Addressing Airport Congestion Despite DOT s entrenched commitment to congestion pricing, the concept has proved to be unworkable at airports. Unlike frequently-cited examples such as highway tolls or electricity rates, where the driver or utility customer pays directly, congestion fees at airports would be imposed on the service provider (the air carrier) rather than the ultimate consumer of the services (the passenger or shipper). This means that an airport congestion fee must work indirectly, if at all, to influence the behavior that contributes to congestion: customer demand for flights at certain times of day and at specific airports. 17 Airlines strive to satisfy passenger demand as efficiently as possible in order to provide competitive products and schedule certainty. These criteria are predominant in airline scheduling and equipment decisions. Because landing fees are just a portion of the costs that air carriers incur in operating a given flight, and because air carrier service Fed. Reg (emphasis added). 17 In contrast, the yield management system employed by most airlines, which is sometimes cited as an example of congestion pricing, provides pricing options to consumers directly. 5

8 decisions are based on a complex analysis in which the cost of operation is just one factor, it would be almost impossible to significantly affect congestion through a simplistic approach such as that proposed here by DOT, particularly where, as DOT has acknowledged, the charging scheme must be revenue neutral. 18 Consumer demand is the overwhelming factor that drives airline schedules, and the cost of a regulatory-imposed landing fee surcharge would have to be punitive and excessive in relation to actual cost to force a flight out of the preferred time channel. Even if a landing fee were high enough to influence some carriers to shift operations out of a peak period, other carriers likely would come in to fill unmet demand for flights during that time, thus undoing any congestion relief the airport hoped to obtain through pricing. Moreover, the corresponding reduction in fees during other periods may actually induce demand by other carriers. In fact, the negative cost to an airline of moving a flight is directly reflected in global distribution systems ( GDS ) search algorithms which prioritize flights based on requested passenger itinerary attributes. For example, if passengers ask their agent to book an ORD-LGA flight at 9:00AM (to generate a desired arrival time of 12:00 noon), a flight will receive a penalty (in the algorithm that determines where a flight will be displayed relative to competitors) the further it deviates from the passengers desired departure time. So if carrier AB offers a flight at the desired time of 9:00 and carrier CD offers a flight at 9:30, the AB flight will show up ahead of the CD flight in the GDS display. Furthermore, because many flights are interdependent, changing the time on one flight could substantially lower the connecting traffic on others, particularly on domestic flights that feed international departure banks. A desirable schedule is just one Fed. Reg

9 of many factors that will likely prove to be more meaningful decision criteria for passengers and airlines than a higher landing fee at a particular time during the day. A market-based approach that relies solely on landing fees also ignores the relationship between airlines investment in physical assets including terminals, gates, hangars and aircraft and the services they offer. Few airlines are in a position to park aircraft in their fleet solely to save money on landing fees at one airport, or abandon costly infrastructure at a congested airport in order to take advantage of lower landing fees at a secondary airport. Airlines would not be using the airports they serve with the equipment they use if there were not a market for that service, and whether that market can be served profitably is based on consideration of many factors. DOT is proposing to influence market-based behavior by changing one portion of one factor. It is equally unlikely that airport congestion pricing would influence passenger behavior. Whereas a single driver on a highway can make an isolated decision to pay a higher toll or take an alternate route, and an individual homeowner may choose to run the dishwasher at night when electricity is cheaper, a single air traveler is unlikely to be dissuaded from traveling at a convenient time merely because the airline is charged a higher landing fee to provide that service. Even a cursory examination of online travel services shows that airlines are already pricing services in accordance with the marketplace, and that passengers already balance cost and convenience when choosing a flight. A relatively minor increase in the costs that an airline incurs to operate a particular flight, which may or may not be reflected in the fare, is unlikely to change this. Furthermore, with respect to distances over 500 miles and especially overseas trips there 7

10 are few substitutes available for air travel, leaving prospective passengers in the position of paying higher fees or foregoing the trip altogether. Although in some cases the higher landing fee may be passed along to the traveler in the form of a higher fare, this is not necessarily the outcome. The airline may spread the cost over a greater number of flights, offset it by savings elsewhere, or absorb the cost and further reduce already thin (or nonexistent) profit margins. Rather than cut back frequencies on a key route, airlines rationally could decide to eliminate flights that serve marginal markets, including service to small communities. Flights to small communities could be especially hard-hit because much of this service is conducted using smaller aircraft (regional jets or turboprops) and schedules are often dictated by the need to connect to other flights. Furthermore, since small communities rely on connecting service to reach a large number of destinations, shifting operations to secondary airports is rarely feasible. Finally, there are fewer people coming out of small communities to absorb the higher costs. For these and other reasons, congestion pricing has not been successful at airports where it has been tried, 19 or has not been adopted at other airports where it has been considered. A 2005 survey of the literature addressing congestion pricing along with an analysis of peak pricing schemes in Boston, New York and London concluded that institutional barriers prevent peak pricing from being used effectively in the airport context. 20 Chief among these is the lack of real alternatives to air travel: Without 19 The Port Authority of New York and New Jersey adopted the first peak pricing system in 1968, which is largely in effect today, but the airports subject to the scheme remain some of the most congested in the U.S. Similarly, the British Airports Authority implemented a peak pricing program at London Heathrow International Airport in 1972, a version of which remains today, yet the airport continues to experience congestion. 20 Joshua L. Schank, Solving airside airport congestion: Why peak runway pricing is not working, Journal of Air Transport Management 11 (2005)

11 adequate substitutes for air travel, it is unlikely that an airport authority will be able to implement peak pricing, and one might question whether doing so is good policy. 21 b. The Proposal Does Nothing to Address the Cause of Congestion Tampering with rates and charges policies affecting individual airports does nothing to address the capacity shortfalls of the national airspace system ( NAS ) and the critical need for Air Traffic Control (ATC) improvements. The proposal suffers from a fundamental disconnect between the problems identified and the solution proffered. As ATA has consistently maintained, 22 any attempt to manage demand through pricing simply masks airport capacity shortfalls and the need for ATC modernization. Congestion pricing is not a substitute for addressing insufficient runway or airspace capacity. Congestion occurs not just at an individual airport, but within a region and throughout the system. This has been painfully evident in the past year, when congestion at one airport or in one region has had ripple effects across the country. Encouraging airport operators to take a piecemeal and uncoordinated approach to managing congestion by using price to shift operations to other times or other airports in the region is almost guaranteed to lead to unintended results 23 without relieving the system-wide problem. DOT and FAA need to take a holistic approach to managing congestion 21 Id. at See, e.g., Comments of the Air Transport Association on Dep t of Transp., Notice of Market-based Actions to Relieve Airport Congestion and Delay, Docket No. OST (July 22, 2002); Statement of James C. May, President and CEO, Air Transport Association of America, Inc., Before the Subcommittee on Aviation of the Committee on Transportation and Infrastructure, United States House of Representatives (April 1, 2004); Comments of the Air Transport Association on Massachusetts Port Authority s Proposed Peak Period Surcharge Regulation (Nov. 15, 2004); Letter from James C. May, President and CEO, Air Transport Association of America, Inc., to Mary Peters, Secretary of Transportation (Sept. 27, 2007); Letter from James C. May, President and CEO, Air Transport Association of America, Inc., to Mary Peters, Secretary of Transportation (March 31, 2008). 23 For example, shifting flights to off-peak early morning or late evening hours may have negative noise impacts, while communities in which secondary or reliever airports are located may not welcome additional flights or the associated surface traffic. 9

12 particularly with respect to the impact of shifting operations on regional airspace in the most congestion-prone metropolitan areas. Rather than looking for ways to dampen demand for air travel, DOT should be focusing on deployment of the NextGen system. As former Administrator Marian Blakey noted in her introduction to the most recent FAA analysis of demand and capacity: The anticipated benefits of NextGen are critically important as efficiency enhancements for airports with planned runway improvements and even more so for airports in the National Airspace System where geographic and other constraints prevent physical expansion of the airfield. In addition, NextGen is critical to handling traffic volume and ensuring smooth, high capacity aircraft flows between airports. 24 Unless funding is made available to implement NextGen, no amount of congestion management will avoid future gridlock in the sky and at our airports. Consistent with the prior recommendations of ATA and the NYC ARC participants, DOT should adopt a comprehensive approach to managing congestion. c. The Proposal Ignores the Views of Industry Stakeholders In September 2007 the Secretary of Transportation chartered an Aviation Rulemaking Committee (ARC) to explore options for addressing congestion and delay in the New York area. The ARC brought together representatives from agencies, airports, airlines and consumer groups with experts in economics and air traffic control who spent nearly three months in intensive discussions. The ARC created working groups to explore and refine specific policy ideas. Working Group 2 was charged with looking at 24 MITRE Corp., Capacity Needs in the National Airspace System, An Analysis of Airports and Metropolitan Area Demand and Operational Capacity in the Future (May 2007) (FACT 2 Report). 10

13 pricing and auctions as a means of reducing congestion and efficiently allocating scarce resources at the New York area airports. As fully documented in the ARC s final report, members of Working Group 2 raised concerns about the ability of congestion pricing to work in the aviation environment. 25 Most of these concerns are not specific to the New York area but are equally applicable to any airport. 26 These include: The absence of a proven track record for congestion pricing at airports. The fact that both airports and the FAA are monopoly providers and thus poor candidates for market-based pricing schemes. The risk of disruption to consumers, airlines, and airports. The disproportionate impact on airlines serving international routes. The lack of recognition of airline investment in airport infrastructure. The potential cost to consumers. The disincentive to increase capacity. The potential impact on small communities and general aviation. The likelihood that any economic solution would be compromised by exemptions. The costs and burdens of implementation. The potential loss of service/frequency to mid-size markets. The potential for reduction in domestic operations systemwide. The impact on new entrants and limited incumbents. While DOT made a brief presentation to the ARC on potential changes to the existing Rates and Charges Policy that included the proposed amendments, there was little explanation of how these changes in policy would address congestion in the New 25 New York Aviation Rulemaking Committee Report (Dec. 13, 2007) at 30-35, available at 26 In fact, of the 19 separate concerns noted in the ARC report, only the last the lack of a viable reliever airport in the New York region cites circumstances specific to the area (and this concern certainly could apply in many other regions as well). 11

14 York area and virtually no discussion of their merits or deficiencies as applied elsewhere. Additionally, the discussion between DOT and the stakeholders in no way addressed the means by which such policy changes could be implemented consistent with other regulatory requirements. DOT s responses (as documented in the ARC report) to the concerns raised by stakeholders about congestion pricing generally did not address the proposed amendments at issue here and were little more than a restatement of DOT s policy goals. Having convened the ARC and expended significant resources in agency and stakeholder time, it appears that DOT has chosen to ignore the very real concerns expressed by members of Working Group 2 and to go forward with its pre-established bias towards congestion pricing as a theoretical market-based mechanism. 27 d. Airports Do Not Have Authority to Impose Congestion Pricing Airports are federally preempted from attempts to regulate a price, route or service of any air carrier. 28 Whether or not the individual amendments as proposed could be justified under existing law and the following comments will show that there are numerous legal flaws in each provision the intended collective effect of enabling airport proprietors to modify air service is patently inconsistent with the ADA as well as with case law interpreting its application to airport rates and charges. The intent to influence airline business decisions is the very basis on which Massport s earlier attempt to impose a market-based pricing scheme at Boston Logan 27 Indeed, the very outcome of the proposal now before the public appears to have been predetermined to some extent. In an article about the extension to the comment period, a DOT spokesman was quoted as saying "Our intention remains to move forward as quickly as possible with this policy once the comment period closes." Dan Caterinicchia, Delayed: Airport Delay-Reduction Plan, Associated Press (Feb. 7, 2008) quoting Transportation Department spokesman Brian Turmail U.S.C (b)(1). 12

15 International Airport failed. As the First Circuit stated unequivocally in striking down that scheme: It appears beyond cavil that Massport could not pass a direct regulation prohibiting the use of Logan by small aircraft or decide upon the type of aircraft that could land there, or the times when such activities could take place. Can Massport do indirectly what it cannot do directly? * * *... [T]he new landing fee regulations appear to be an attempt to modify conduct (e.g., control air traffic) rather than to recover operational costs, and are thus an incursion into an area of regulation preempted by [the ADA]. Massport cannot do indirectly what it is forbidden to do directly. 29 DOT cannot delegate authority it does not have, and airports cannot do indirectly what they are prohibited from doing directly regulating the routes and services of airlines. 30 II. The Proposal Fails to Provide Meaningful Guidance In 1994, Congress directed the Secretary of Transportation to establish the standards or guidelines that shall be used by the Secretary in determining... whether an airport fee is reasonable. 31 In 1996, DOT issued its final Policy statement, which was subsequently challenged and vacated in part by the U.S. Court of Appeals for the D.C. Circuit. 32 Until now, DOT has not issued any further guidance in response to the court s decision. This proposal fails to tackle the difficult issues left unresolved by the vacation 29 New England Legal Found. v. Mass. Port Authority, 883 F.2d 157, 174 (1 st Cir. 1989) (internal citations omitted). 30 The so-called proprietor s exception to the ADA, 49 U.S.C (b)(3) does not provide an alternate source of authority for airports to manipulate the routes and services of airlines through congestion fees. That provision allows airport proprietors to recover costs, but its scope is limited and is subject to curbing if it transgresses into the general field reserved for federal interest. New England Legal Found., 883 F.2d at Federal Aviation Administration Authorization Act of 1994, 113, Pub. L. No , 108 Stat (1994) codified at 49 U.S.C (b)(2). 32 Air Transp. Assoc. of America v. Dep t of Transp., 119 F. 3d 38, as amended by 129 F. 3d 625 (D.C. Cir. 1997). 13

16 of large sections of the 1996 Policy, and instead attempts to fill some of the gaps by twisting provisions of the policy to purposes they were never intended to achieve. The Rates and Charges Policy requires that fees for the use of the airfield... be established on the basis of costs. 33 Historically this has been understood to mean the actual costs of operating and maintaining the airfield and capital costs associated with providing airfield facilities, although the specific provision defining allowable costs was one of those vacated by the court. 34 DOT acknowledges the limitation of cost-based fees in stating that the proposed amendments do not authorize airport proprietors to set fees to balance demand with capacity without regard to allowable costs of airfield facilities and services. 35 Furthermore, DOT confirms in this notice that the proposal does not alter the principle that fees be based on the capital and operating costs of the facilities for which the fees are assessed. 36 However, the proposal goes on to suggest that airport proprietors would be able to assign additional, but still appropriate, costs to the airfield to better reflect the cost of using congested airfield facilities. 37 We are left to guess at which additional costs might be appropriate in these circumstances. The lack of guidance regarding what costs are allowable and how they may be reasonably allocated is not merely an academic issue. Massport s 1988 attempt to implement a dual charging scheme was found unreasonable by DOT a finding affirmed by the First Circuit in large part because of improper cost allocation methodology Rates and Charges Policy, Preamble, 61 Fed. Reg (June 21, 1996). 34 See Rates and Charges Policy 2.4, vacated by Air Transp. Assoc. of America v. Dep t of Transp., 119 F. 3d 38, as amended by 129 F. 3d 625 (D.C. Cir. 1997) Fed. Reg. at 3313 (emphasis added) Fed. Reg. at Id.(emphasis added). 38 Massport Opinion at , aff d New England Legal Found., 883 F.2d

17 And the D.C. Circuit found that a central flaw with the 1996 Rates and Charges Policy was a lack of guidance on what would constitute reasonable airport fees: The Secretary s guideline seems to be missing a line. The regulation merely states that any reasonable methodology will serve as a basis for non-airfield fees. That concept does not seem to add much if anything to the statutory requirement that airport fees be reasonable. 39 The proposed amendments simply perpetuate the ambiguity of the vacated portions of the 1996 Rates and Charges Policy, and fail to fulfill the statutory mandate that the Secretary establish standards or guidelines to determine whether an airport fee is reasonable consistent with applicable law. III. Each of the Proposed Amendments is Individually Flawed As noted, the proposed amendments, in view of their intended collective effect, are inconsistent with the ADA and relevant case law. On an individual basis, each proposed change suffers from its own legal infirmities and problems in practical application. Importantly, the complexities introduced by the proposed amendments and alternative landing fee calculations make it much more difficult for airlines and the Department to uphold the most fundamental tenet of the Rates and Charges Policy namely, to ensure that fees do not generate revenue in excess of the allowable costs of the airfield 40 e. The Dual-Element Landing Fee The proposed addition to subsection 2.1 of the Rates and Charges Policy is intended to clarify the [Rates and Charges] policy by explicitly acknowledging the ability of airport operators to establish a two-part landing fee structure consisting of both 39 Air Transp. Assoc. of America v. Dep t of Transp., 119 F. 3d at Fed. Reg

18 an operation charge and a weight-based charge. 41 The proposal further notes that [t]his authority exists today for airports with or without congestion. 42 The proposed amendment not only fails to clarify existing authority, but injects new uncertainty into the rate-setting process. The proposal cites DOT s opinion in the Massport case, 43 in which the Secretary of Transportation concluded that landing fee structures that vary from the traditional weight-based approach are permissible so long as the approach adopted reasonably allocates costs to the appropriate users on a rational and economically justified basis. 44 However, the proposal offers no guidance as to what might constitute a reasonable cost allocation or even what kinds of costs may be allocated in a two-part fee structure. 45 DOT previously found (as the court upheld) that Massport s two-part fee structure was unreasonable because it was not scientifically derived. 46 Proposed Section 2.1 sheds no light on what type of science might be invoked to justify a dual-element landing fee in the future. To further cloud the issue, the proposed amendment would expressly authorize the operator of a congested airport to consider the presence of airfield congestion when determining the portion of allowable airfield costs to be allocated to the per operation charge during periods of congestion. 47 DOT offers a strong hint as to what it might consider a rational and economically justified basis for a two-part landing fee by Fed. Reg Fed. Reg Id., citing Investigation into Massport s Landing Fees, Opinion and Order, FAA Docket (Dec. 22, 1988)(Massport Opinion), aff d New England Legal Found., 883 F.2d Massport Opinion at The existing Rates and Charges Policy states that a properly structured peak pricing system... will not be considered to be unjustly discriminatory but like the current proposed amendment, the purpose of this provision was not to break new ground but simply to confirm the policy expressed in the Massport Opinion. 61 Fed. Reg. at 3202, Massport Opinion at 8, aff d New England Legal Found., 883 F.2d Proposed 2.1.4, 73 Fed. Reg

19 explaining that, although the provision would apply to any airport, the presence of congestion and the potential to serve more individual travelers if larger aircraft are used... would be the most obvious circumstance for the justification of a dual component fee. 48 Yet this is precisely the sort of attempt to modify conduct... rather than recover operational costs that the court found impermissible in the Massport case. 49 As DOT reminds us, fees and charges for the use of the airfield not only must be reasonable, they cannot be unjustly discriminatory. 50 The current version of the Rates and Charges Policy states that a properly structured peak pricing system... will not be considered to be unjustly discriminatory but fails to explain what a properly structured system would look like. 51 Similarly, the proposal offers no guidance on how to avoid unjust discrimination in a dual-element landing fee scheme that is designed to disproportionately affect certain users of the airport to such a great extent that it distorts market signals from consumers and influences their business decisions. As expressly contemplated by DOT, such a fee structure would clearly disadvantage smaller aircraft and would also have a much greater impact on airlines with a business model dependent on the use of certain size aircraft flying at certain times of day or with certain frequencies (e.g., network carriers and shuttle operations). 52 The proposal offers no further insight into how an airport should structure a dualelement landing fee to avoid unjust discrimination, other than reiterating the position it took in the Massport case that landing fees based on something other than weight are not Fed. Reg New England Legal Found., 883 F.2d at Fed. Reg Rates and Charges Policy, 3.2, 61 Fed. Reg See 73 Fed. Reg ( If an airport assesses a per-operation charge as a component of a landing fee, the cost of operating a smaller aircraft will increase, and the cost per seat of operating smaller aircraft will increase. ); id ( The degree to which aircraft operators reschedule [in response to pricing] will depend on their network structure and access to secondary airports. ) 17

20 necessarily unjustly discriminatory. 53 Apparently further elucidation must await another test case. Indeed, FAA has stated that, while a flat fee per operation would not be found per se unjustly discriminatory, we cannot make a final determination on unjust discrimination until we are able to consider a particular fee amount in the actual circumstances in effect at the time the surcharge is assessed. 54 The proposed amendment does nothing to spell out the circumstances under which a non-weight-based landing fee might be upheld against a challenge of unjust discrimination. As a practical matter, since landing fees are imposed on arrivals but not departures, it is unclear whether a landing fee could ever serve as a vehicle to reduce airport congestion during a specific period of the day. Even if a differential landing fee were high enough to dissuade carriers from scheduling arrivals during a congested period, it would do nothing discourage departures during that time. Moreover, carriers who paid higher fees for arrivals during this period could end up subsidizing other aircraft departing during the same period, even though both operations contribute to congestion. If airports are limited to cost recovery consistent with the Rates and Charges Policy and prior case law, as they must be, a dual landing fee would allow little more than a minimum fee, reflecting fixed costs, as is already in place at many airports today. Even if it were legally permissible to manipulate landing fees to provide incentives and disincentives to airport users to modify their equipment or their schedules, it is unlikely that an airport could identify sufficient appropriate costs that could be reasonably Fed. Reg Letter from David L. Bennett, Director, Office of Airport Safety and Standards, FAA to Thomas J. Kinton, Jr., Director of Aviation, Mass. Port Authority (June 10, 2004) at 4. 18

21 allocated in a way that coincided with the desired result of charging significantly higher fees during congested periods. In addition to this practical impediment, the undisputed requirement for revenue neutrality 55 means that any increase in landing fees during congested periods would be offset by a reduction in landing fees at other times. In such a situation, aircraft operators with discretion to fly during off-peak hours could end up paying less than their properly allocated share of overall airfield costs. The accounting complexity of a scheme under which dual-element landing fees would be imposed at some times of the day but not others may be enough to render it unworkable. Even assuming that an airport proprietor could come up with a reasonable allocation between weight-based and movement fees, ensuring that these fees do not generate revenue in excess of the allowable costs of the airfield 56 would require near-constant adjustment of the formula. Where the per operation charge is imposed only during congested periods, the airport would face the further challenge of adjusting weight-based charges during non-congested periods to offset the increase in revenue from congestion fees. f. Pre-Payment of Capital Improvements The proposed amendment to allow pre-payment of capital improvements is a regulatory fix to a capacity expansion problem that does not exist. There is no evidence that financing problems are responsible for difficulties that airports face in expanding capacity. Indeed, congested airports where demand exceeds supply face 55 See Proposed (... the total revenues from the two-part landing fee do not exceed the allowable costs of the airfield... The proposed amendment is consistent in this respect with prior DOT policy. It should be noted that nothing in this provision or in the other proposed amendments would create an exception for airports that are grandfathered under 49 U.S.C (b)(2) and from the prohibition on revenue diversion. It is ATA s understanding that these airports may not use the dualelement landing fee to generate revenue in excess of allowable costs, even though they may lawfully divert revenue to certain off-airport purposes Fed. Reg

22 neither a cash flow problem nor difficulty raising funds in the capital markets to finance the reasonable costs of needed airfield improvements that will be paid for by users once the improvements are placed in service. The pre-payment proposal is merely another incremental and unsubstantiated step towards congestion pricing. DOT proposes to allow proprietors of congested airports to include in the rate base a portion of the cost of airfield projects under construction. This could be done for any project as soon as 1) planning and environmental approvals have been obtained; 2) financing has been secured, and 3) construction has actually commenced. 57 Two versions of this provision are offered for comment: Option One, under which proprietors of congested airports could include these costs in only the landing fees charged during periods of congestion, and Option Two, under which these costs would be included in the charges applicable at all times. 58 DOT s stated intent is to allow the airport proprietor to raise the cost of using congested airfield facilities which in turn would provide additional financial incentive to users to consider alternatives to using the airfield when congestion is present, including shifting operations to off-peak periods or to less congested airports... or to serving the airfield more efficiently such as with up-gauged aircraft. 59 Again, this is just the sort of impermissible interference with the deregulated air transportation industry that the First Circuit criticized in the Massport case. Moreover, if this approach were successful in influencing airline business decisions (which we doubt it would be) the desired result addressing congestion by shifting or reducing operations could obviate the need for some of the very projects that 57 Proposed 2.5.3, 73 Fed. Reg Id Fed. Reg

23 would be financed through this mechanism. This is precisely why opponents of airport capacity projects often seek to promote demand management, including congestion or peak-period pricing, as an alternative to capital improvements. 60 In fact, congestion pricing is often promoted as a means of avoiding capital investments. Secretary of Transportation Mary Peters, in congressional testimony last year, noted that as expected DOT s preliminary analysis confirmed that universal congestion pricing, by improving the performance of our current highway system, could significantly reduce the level of future highway investment that would be required to maintain or improve the condition of our highways. 61 This further calls into question the rationale for imposing the capital costs of an as-yet unbuilt capacity project on users of a congested airfield during periods of congestion. Either of the proposed options would replace a provision of the 1996 Rates and Charges Policy vacated by the appeals court in 1997, which prohibited the inclusion of facilities not yet in service from being included in the rate base, unless by agreement with the airlines using the airfield. 62 The original provision stated that the debt-service and other carrying costs incurred by the airport proprietor during construction may be capitalized and amortized once the facility is put in service. 63 As DOT notes, the court s action did not necessarily represent a determination that the provision was erroneous, 60 For example, Massport s most recent attempt to adopt a peak-period pricing scheme was in fact required as a condition of settlement of a challenge to a runway project. See Federal Aviation Admin., New England Region, Record of Decision, Airside Improvements Planning Project, Logan International Airport (Aug. 2, 2003); Mass. Port Authority v. City of Boston, Massachusetts Superior Court, C.A. No (Final Judgment May 26, 2004). 61 Statement of the Honorable Mary E. Peters, Secretary of Transportation, before the Committee on the Budget, U.S. House of Representatives (October 25, 2007). 62 See Air Transp. Assoc. of America v. Dep t of Transp., 119 F. 3d 38, as amended by 129 F. 3d 625 (D.C. Cir. 1997) (vacating Section of the Rates and Charges Policy which stated that subject to very limited exceptions or as otherwise agreed by airfield users, the cost of facilities not yet built and operating may not be included in the rate base. ) 63 Id.(emphasis added). 21

24 per se, nor did the court s decision vacate the principle that airfield fees are limited to an amount that recovers the costs of operating and maintaining the airfield. 64 Indeed, in its current proposal, DOT confirms that limiting costs to services used and useful by the rate-payers remains one of the fundamental principles of the cost of service approach to setting fees. 65 Capitalizing the debt-service and other carrying costs and placing them in the rate base to be amortized over the useful life of the facility once it is put into service, as authorized under the 1996 Rates and Charges Policy, is the traditional and universally accepted method of recouping such costs under a cost of service pricing regime. Inexplicably, DOT has chosen not to reinstate the 1996 provision, which it continues to defend as consistent with public utility regulation theory, 66 but instead turns it on its head by allowing the very thing that the prior provision prohibited: inclusion of the cost of facilities not yet built and operating in the current rate base. Notwithstanding DOT s characterization of its proposed amendment as a modest departure from the used and useful principle, 67 its adoption would represent a radical change from the policy historically and consistently applied to airport rate-setting by both DOT 68 and the courts Fed. Reg Id. 66 Id. 67 Id. 68 The closest that DOT has come to departing from this principle is its decision in the Second Los Angeles International Airport Rates Proceeding, DOT Order (Dec. 22, 1995), where the airport was permitted to include a portion of the debt service charge for uncompleted capital projects in the current rate base because the projects were expected to be completed during the year in which the charges were levied. Since the projects at issue would benefit current users during the year for which the rates were set, this is not really a departure from used and useful rate-making principles. 22

25 The Supreme Court has articulated a three-part standard to assess the reasonableness of landing fees and other airport charges. 69 One factor is whether the fee discriminates against interstate commerce, a consideration that would not apply as long as the increased landing fees are imposed on intrastate as well as interstate and international operations. The other two whether the fee is based on some fair approximation of use of the facilities, and whether the fee is excessive in relation to the benefits conferred on the user are directly relevant to the question at issue here. Since an uncompleted project, by definition, is not being used at all, a fee levied on current airfield users to recover the project s costs does not bear a fair approximation to its use by those paying the fee. To the contrary, since the uncompleted project confers no benefits on current airfield users, fees imposed on them to cover the project s costs far exceed the benefits conferred (which are non-existent). 70 The exceptions to the used and useful principle that DOT identifies as having been recognized in unusual circumstances, 71 simply are not applicable here, nor are the cases DOT cites to support its departure from accepted practice and policy. In Consumer Protection Board v. Public Service Commission, 72 the Commission permitted inclusion of financing costs for Construction-Work-In-Progress ( CWIP ) in the rate base as an extraordinary remedy for cash-flow problems that had created a compelling need to 69 See Northwest Airlines, Inc. v. County of Kent, 510 U.S. 355, (1994); citing Evansville- Vanderburgh Airport Authority Dist. V. Delta Airlines, Inc., 405 U.S. 707, (1972), 70 See City and County of Denver v. Continental Air Lines, Inc., 712 F. Supp. 834, 840 (D. CO. 1989), (court applying the Anti-Head Tax Act concluded that since the airlines are unable to use airport facilities which do not yet exist, Denver cannot charge them and their passengers for any costs connected with a replacement facility before that facility is in use. ); Raleigh-Durham Airport Authority v. Delta Air Lines, Inc., 429 F. Supp (E.D.N.C. 1976) (court applying a state statute requiring that airport landing fee charges be reasonable finds it would be unreasonable to include in the current rate base the costs of acquiring property that is not yet in use) Fed. Reg A.D.2d 65, 434 N.Y. Supp. 2d 820 (1980). 23