Aviation Regulation

History and Practice

James Patrick Baldwin, J.D.

Adjunct Associate Professor, University of Maryland University College
Visiting Lecturer, University of Westminster
Visiting Lecturer, Emirates Aviation University
 Aviation Regulation
History and Practice

James Patrick Baldwin, J.D.

Adjunct Associate Professor, University of Maryland University College (UMUC)
Visiting Lecturer, University of Westminster
Visiting Lecturer, Emirates Aviation University

i
The contents of this book regarding the accuracy of events, people and places depicted;
permissions to use all previously published materials; and opinions expressed; are the
sole responsibility of the author, who assumes all liability for the contents of this book
and indemnifies the publisher against any claims stemming from the publication of this
book.

© 2016 James Patrick Baldwin

All rights reserved.
No part of this book shall be reproduced, stored in a retrieval system, or transmitted by
any means without the written permission of the author or the publisher.

International Standard Book Number

International Standard Book Number
Library of Congress Control Number

ii
 PREFACE

It would not be an overstatement to say that the history of Aviation Regulation can be a
history of commercial aviation. Indeed, the rules and regulations promulgated since the
Paris Convention of 1919 have been largely driven by the technological advances of
manned flight, beginning that December day in Kitty Hawk, North Carolina when the
Wright Brothers first went airborne with the powered Wright Flyer.

This history will be presented in parts. Part 1 will cover the early issues, conventions and
US Air Mail Contracts; Part 2 will cover US Foreign Air Mail Contracts and Regulation,
European Aviation and the Pre-World War II Situation. Part 3 will cover World War II, the
Chicago Convention and Beyond; Part 4 will cover Post War and the Regulated and
Protectionist Era; Part 5 will cover Deregulation and Open Skies; Part 6 will cover
Developments in International Commercial Aviation after the Cold War, Liberalization of
Air Transportation in Europe, Multilateral Liberalization of Air Transportation Agreements,
The US-EU Air Transport Agreement, the ASEAN Single Aviation Market, the Growth of
Sixth Freedom Air Carriers and Alliances; Part 7 will cover Current Regulatory Schemes;
and Part 8 will cover Current Regulatory Issues. The Conclusion is also in Part 8.

iii
iv
 TABLE OF CONTENTS

Preface iii
Dedication ix
Acknowledgements xi
Part 1
EARLY ISSUES, CONVENTIONS AND U.S. AIR MAIL CONTRACTS
Sovereignty over Air Space 1
Paris Convention of 1919 1
Havana Convention of 1928 2
Warsaw Convention of 1929 2
US Air Mail Contracts 3
Part 2
US FOREIGN AIR MAIL CONTRACTS AND REGULATION, EUROPEAN AVIATION
AND THE PRE-WORLD WAR II SITUATION
US Foreign Air Mail Contracts 7
US Regulation of Air Transportation 11
European Aviation – Early Operations 14
Consolidation 15
Expansion 16
Situation at the Eve of World War II 18
War Looms 18
Part 3
WORLD WAR II, THE CHICAGO CONVENTION AND BEYOND
The Road to Chicago 21
The Chicago Convention of 1944 23
The International Civil Aviation Organization (ICAO) 29
The Freedoms of the Air 31
Bilateral Air Services Agreements (ASA) 32
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 TABLE OF CONTENTS

The International Air Transport Association (IATA) 32

The Bermuda Agreement of 1946 33
The Chosen Instrument 35
Part 4
POST-WAR AND THE REGULATED AND PROTECTIONIST ERA
US Commercial Aviation 37
International Commercial Aviation 43
Government Role in International Commercial Aviation 45
Part 5
DEREGULATION AND OPEN SKIES
The Road to Deregulation 51
The Airline Deregulation Act of 1978 55
Increasing Competition in International Air Transportation 57
Open Skies Agreements 64
Part 6
DEVELOPMENTS IN INTERNATIONAL COMMERCIAL AVIATION AFTER THE COLD
WAR, LIBERALIZATION OF AIR TRANSPORTATION IN EUROPE AND
MULTILATERAL AGREEMENTS
Breakup of the Soviet Union 67
The Gulf Middle East 68
Liberalization of Air Transportation in Europe 69
Multilateral Liberalization of Air Transportation Agreements 73
US-EU Air Transport Agreement 74
The ASEAN Single Aviation Market 75
Growth of Sixth Freedom Air Carriers 77
Alliances 82

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 TABLE OF CONTENTS

Part 7
CURRENT REGULATORY SCHEMES
Montreal Convention 85
Consumer Protection 86
Consumer Protection Rules – US 86
Consumer Protection Rules – EU 89
Competition – US 91
Competition – EU 92
Antitrust Immunity 92
Airline Certification 93
Airline Certification – Economic Authority 93
Airline Certification – Technical 95
Certification to Operate to a Foreign Country 96
Accident Investigation 96
Part 8
CURRENT REGULATORY ISSUES AND CONCLUSION
Unmanned Aircraft Systems (UAS) (Drones) 99
The US-3 vs. the ME-3 101
The Norwegian Air International (NAI) Case 105
Forum Non Conveniens 106
Ownership, Control and Right of Establishment 108
Conclusion 109

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viii
Dedication

ix
x
ACKNOWLEDGEMENTS

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xii
 PART ONE

EARLY ISSUES, CONVENTIONS AND U.S. AIR MAIL CONTRACTS

Sovereignty over Airspace

Before manned flight, the “Air” was considered “free” and that no individual state had
authority over it. However, with no authority, state and national sovereignty, national
interests and security were compromised. This was most apparent during World War
I with the development of the flying machine as an instrument of war.

Paris Convention of 1919

The technical developments in aviation arising out of World War I created a completely
new situation at the end of the hostilities, especially with regard to the safe and rapid
transport of goods and persons over prolonged distances. However, the war had also
shown the ugly potential of aviation; it had therefore become much more evident that
this new and now greatly advanced means of transport required international attention
and an urgent need for some kind of international regulation of aviation. Thus, at the
Paris Peace Conference (Congrès de la
Paix) of 1919 the idea of international
collaboration in aviation matters was brought
forward, and on 13 October 1919 the
Convention Relating to the Regulation of
Aerial Navigation was signed by 27 States.
The convention also created the
International Commission for Air
Navigation (ICAN).

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The convention recognized a state’s full and absolute sovereignty over its airspace;
recognized the desirability of the greatest freedom of international air navigation
consistent with state sovereignty and security concerns;
and recognized the requirement that every aircraft possess
the nationality of the contracting state.
In addition, the convention provided for the safe conduct of
air navigation, including provisions for airworthiness
certificates, licenses for pilots and international rules for the
air, including signals, lights, collision prevention and
procedures for landing and moving on the ground.

Havana Convention of 1928

As a consequence of the failure of the United States to ratify and the join the League
of Nations, and therefore not joining the convention, the rules and provisions of the
Paris Convention did not apply to the Americas. As a result, there was a need for a
separate form of international cooperation on a regional American basis.
During the 5th International Conference of the American States in Santiago, Chile, in
1923, a resolution was adopted providing for the creation of an Inter-American
Commercial Aviation Commission to consider problems related to aviation. The Pan
American Convention on Commercial Aviation was finalized in Havana on 20
February 1928. The Havana Convention was modeled after the Paris Convention and
it applied exclusively to private aircraft (government aircraft were not included) and
laid down basic principles and rules for aerial traffic, recognizing that every State had
complete and exclusive sovereignty over the airspace above its territory and adjacent
territorial waters. Clauses also enabled US owned airlines to freely operate services
within North and South America.

Warsaw Convention of 1929

With the growth of commercial international air transportation in the 1920s, there came
a need to protect air carriers (at the time mostly state-owned with the notable
exception of the privately owned air carriers in the United States) from open-ended
liability in case of damage to or loss of cargo or baggage and injury or death of
passengers. And, on the other hand, shippers and passengers needed to be
reassured that if something went wrong they would have an effective remedy against
the carrier and be compensated.
Thus after a series of conferences starting in 1927, the Convention for the
Unification of Certain Rules relating to International Carriage by Air was signed
in Warsaw in 1929, known as the Warsaw Convention.

2
The Convention applied to any international transportation of persons, baggage or
merchandise by aircraft and provided for airline liability for death or injury to
passengers; loss or damage to baggage; and loss resulting from delay in the
transportation of passengers, baggage or merchandise. The dollar amount of liability
was limited.
The Convention has been amended, most notably by the Hague Protocol of 1955, but
will be superseded by the Montreal Convention of 1999 upon full ratification.

US Air Mail Contracts

Early US government involvement in aviation dealt with the issuance of airmail
contracts. The first act of Congress related to this was the Contract Air Mail Act of
1925 (Kelly Act) authorized the Postmaster General to award contracts to private
individuals or companies involved in the air transportation of the mail. Routes and
tariffs were established and the airlines were given subsidies that encouraged the
introduction of passenger service.

3
The Air Mail Act of 1930 (McNary-Watres Act)
changed the way air mail contracts were awarded and
eliminated competitive bidding. The Act encouraged
companies to buy large aircraft and also stimulated
the carriers to fill space on the aircraft with
passengers. The Act was a product of Postmaster
General Walter F. Brown’s request for legislation
giving him authority to change postal policy. As a
result, the Act gave Brown strong authority over the
nationwide air transportation system. There were three main provisions of the Act: The
first provision changed the way payments to airlines were calculated, rating them
based on volume of mail, rather than weight. It also set a fee on planes of a certain
size, whether it was flying mail or not, to discourage the flying of large amounts of junk
mail and to encourage the carrying of passengers to increase revenue.
The second provision allowed any airmail carrier with an existing contract of at least
two years standing to exchange its contract for a “route certificate” giving it the right
to haul mail for 10 additional years. The third and most controversial provision gave
Brown authority to "extend or consolidate" routes in effect according to his own
judgment.
Soon, at what later became known as
the “Spoils Conference” Brown invoked
his authority under the third provision to
consolidate the airmail routes to only
three companies, friends of the
administration of President Hoover,
forcing out the small competitors: Boeing
Air Transport (the northern airmail
route), Transcontinental Air Transport,
later Transcontinental and Western Air
(TWA), (the mid-United States route) and Robertson Aircraft Corporation, later
American Airways (the southern route). Brown
also extended the southern route to the West
Coast of the United States, and awarded
bonuses for carrying more passengers and
purchasing multi-engine aircraft equipped with
radios and navigation aids.
Although this led to increased productivity and
efficiency in the airline industry, the small airlines
complained that they were left out of Brown’s
scheme and a Congressional investigation

4
followed. The “spoils” were exposed and as a result, the legality of the contracts
awarded under Brown’s leadership were questioned.

On 19 February 1934, President

Roosevelt canceled all existing
airmail contracts, and, as a
temporary measure, directed Army
Air Corps General Benjamin D.
Foulois to organize a new airmail
operation using military planes and
pilots. It did not work. The airmen
were inexperienced in cross-
country flying and the aircraft were
ill-equipped. There were numerous crashes and the cost of flying the mail
skyrocketed. By 10 March, 12 pilots had died in 66 crashes or forced landings. Could
it be that these problems were a product of those provisions of the Havana Convention
of 1928 that excluded government aircraft from its application? On 8 May, Roosevelt
and then Postmaster General James Farley returned to private contract airmail.

The return to private airmail contracts came in conjunction with the Air Mail Act of
1934 (Black-McKellar Act). Under the Act, no airline that had held a contract before
the government takeover could bid for a
contract. To circumvent this, however, the
airline company simply changed their
names: Boeing Air Transport became
United Air Lines; TWA became TWA Inc.,
and American Airways became American
Airlines. The Act’s main provision broke
up the aviation holding companies, large

5
corporations that owned both aircraft manufacturing companies and airlines. The Act
also stated that the government would set airmail contracts, routes and schedules; fix
subsidy rates and airmail payments; and regulate the airways and license pilots. The
Interstate Commerce Commission (ICC) regulated rates and the Secretary of
Commerce specified the equipment to be used.

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 PART TWO

U.S. FOREIGN AIR MAIL CONTRACTS AND REGULATION, EUROPEAN

AVIATION AND THE PRE-WORLD WAR II SITUATION

U.S. Foreign Air Mail Contracts

The airmail legislation described above did not apply to air transportation of foreign
mail. Eventually, with the US government strongly supporting mail service between
North and South America, the US Congress passed the Foreign Air Mail Act of 1928
to regulate such international service. This, however, was preceded by the formation
of Pan American Airways and its inauguration of international airline services between
the US and Cuba.
Pan American Airways, Inc. (PAA) was founded on 14 March 1927 by Air Force Majors
“Hap” Arnold, Carl Spaatz and John H. Jouett, later joined by John K. Montgomery
and Richard B. Bevier, as a counterbalance to German-owned carrier “SCADTA”
(Colombo-German Aerial Transport Co) that had been operating in Colombia since
1920. SCADTA was viewed as a possible German
aerial threat to the Panama Canal. Eventually
Montgomery petitioned the US government to call
for bids on an US airmail contract between Key
West and Havana (FAM 4) and won the contract.
However, PAA lacked any aircraft to perform the job
and did not have landing rights in Cuba. Under the
terms of the contract, PAA had to be flying by 19
October 1927.
On 2 June 1927, Juan Trippe formed the Aviation
Corporation of America (ACA) with financially
powerful and politically well-connected backing, and
raised $300,000. On 1 July Reed Chambers and
financier Richard Hoyt formed Southeastern
Airlines. On 8 July Trippe formed Southern Airlines
and on 11 October Southeastern was reincorporated as Atlantic, Gulf and Caribbean
Airways. Trippe then proposed a merger between these three groups and in doing so
played a trump card: He and John A. Hambleton, one of his backers, traveled to Cuba
and persuaded the Cuban president to grant landing rights to the Aviation Corporation,
making Montgomery's mail contract useless as a bargaining chip. After much
wrangling between the groups, including a meeting on Hoyt's yacht during which
Assistant Postmaster General Irving Grover threatened that if there was no deal he
would not be awarding any contract to anyone, the Aviation Corporation of the

7
Americas was formed, operating as Pan American Airways, headed by Juan Trippe.
Later the corporation's name was changed to Pan American Airways.
The deadline of 19 October still loomed, however. A Fokker F-VII aircraft was selected
for the operation, but could not be used because Meacham's Field in Key West was
not completed and could not accommodate the aircraft. What transpired was an
eleventh hour miracle. Pan American's representative in Miami learned that a Fairchild
FC-2 monoplane was in Key West, sitting out a
hurricane threat. The aircraft was owned by
West Indian Aerial Express (the Fairchild
Group) and a deal was made to charter the
aircraft. The pilot was offered $145.50 to carry
mail to Havana that had just arrived on the
Florida East Coast and Atlantic Coast Line
railroads. The hurricane threat disappeared
and the trip was made. The rest is history.
On 28 October 1927, the Fokker finally left Key West on Pan American's inaugural
international flight, carrying 772 lb. of mail.

Under the Act, Foreign Airmail contracts (FAMs) were put up for bidding and Pan
American was able to win them, making it the only US-flagged carrier with authority
from the US government to carry mail to foreign countries on international
routes. Operating authority to these countries, however, needed to be secured and
at the time there was no framework within the US government to accomplish that. Pan

8
American's Juan Trippe was able to do it. He carried out then what the US
Departments of State and Transportation do today with respect to foreign routes.
Pan American established services first in the
Caribbean, the whole of Latin America and
eventually across the Pacific Ocean. Authority
across the Pacific, however, was not Trippe’s
original transoceanic ambition. It was the
Atlantic. However the geopolitical situation
coupled with technological limitations made that
option impossible. The path to Europe was
through Newfoundland. Unfortunately,
negotiations between Trippe, Britain, Canada
and Newfoundland in 1932 did not provide the
access desired, although some understanding
was achieved between Pan American and
Britain's Imperial Airways with regard to traffic
rights. Because Newfoundland appeared to be in
doubt, Trippe looked south. Unfortunately, the political situation in Portugal made it
difficult for Pan American to negotiate for traffic rights there as well.
What is interesting here, with respect to the negotiations over Newfoundland, is that it
was not the American government doing Pan American's bidding. It was Juan Trippe.
And it was Trippe who personally dealt with the governments of Britain, Canada and
Newfoundland, following a pattern used when he negotiated traffic rights to countries
in Latin America.
Any hope for trans-Atlantic operations, however, was dashed when, in April 1934, the
British government demanded reciprocity with the United States over traffic rights.
The British government spoke
for Imperial and questioned
why the US government did not
speak for Pan American, as
both entities were instruments
of national policy. Trippe had
overestimated his diplomatic
skills and his "go-it-alone
diplomacy" was not working.
He admitted that he did not see
much future for Pan American
in the North Atlantic. In addition
the British, in 1934, had nothing
like Pan American’s S-42, then
the most advanced aircraft in the world. Until Imperial Airways had a similar aircraft

9
that could cross the Atlantic to the United States, Pan American would find itself
blocked from operating to Britain.
The focus thus switched to the Pacific. After a "great circle" trans-Pacific route through
the north was ruled out due to issues between the United States and the Soviet Union,
it was decided to take the route that represented the longest distance between the
United States and the Orient: the mid-Pacific.
Here, the issue of traffic rights was not a problem for Pan American. The route involved
stops at Honolulu, Midway, Wake and Guam, terminating in Manila, all of which were
under US jurisdiction. At Guam and the Philippines, the US Navy had established
bases on the pretext of potential confrontation with Japan. Midway was being used by
the Navy for war games staged in the area. Wake, a tiny island, discovered by Trippe
in the New York Public Library, was an uninhabited coral atoll, was a minor trophy of
the Spanish-American War. It was a critical point for the trans-Pacific flight. Trippe
eventually got permission to use the island as a base.
On 24 October 1935 the US Post Office awarded Trippe the trans-Pacific FAM and on
22 November, the China Clipper inaugurated service from the mainland United States
across the Pacific.

10
 US Regulation of Air Transportation

The first instance of US regulation of aircraft and airmen was in the Air Commerce
Act of 1926. It defined “Air Commerce” as carriage by aircraft of persons or property
for hire, and the navigation of aircraft in the furtherance of or for the benefit of a
business. It established federal regulations regarding aircraft, airmen, navigational
facilities and air traffic, including the development and maintenance of airways and
aircraft altitude separation. The Act required that aircraft were to be inspected for
airworthiness and were required to have markings on the outside for identification. It
also provided the requirement that airmen be tested for aeronautical knowledge and
have a physical examination completed to insure their physical fitness.

The Act also promoted civil aviation to attract capital and provide a legal basis
necessary for its development. The Aeronautics Branch of the Department of
Commerce was established by an amendment to the Act in 1929 and was responsible
for overseeing and implementing the Act. The regulations promulgated would be
known as Civil Air Regulations (CARs).
In 1935, the Federal Aviation Commission (FAC), a board created by Congress in
1934 to study airline regulation and recommend policy called for creation of a
centralized and independent authority to regulate the airline
industry. As a result Congress passed the Civil Aeronautics Act
of 1938 that was signed into law by President Roosevelt. The Act
established the Civil Aeronautics Authority (CAA) and transferred
federal responsibilities for non-military aviation to that new
independent agency. The Act also gave the CAA quasi-judicial
and legislative functions related to economic and safety
regulation. This
included regulation of
fares and routes the air
carriers would serve. The CAA was also
responsible for aviation regulations,
airways, navigational facilities and air traffic
control.

The Act created a three-member Air Safety Board that investigated accidents and
made recommendations to eliminate the causes of accidents and also provided for an
Administrator, who performed executive functions related to the development,
operation and administration of air navigations, as well as the promotion of aviation.
Airmail contracts were replaced by “Certificates of Public Convenience and
Necessity”.

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In 1940, President Roosevelt split the CAA into two agencies, the Civil Aeronautics
Administration, which went back to the Department of Commerce, and the Civil
Aeronautics Board (CAB). The offshoot of the original CAA retained responsibility for
ATC, airmen and aircraft certification, safety enforcement, and airway development.
CAB responsibilities included safety rulemaking, accident investigation and economic
regulation of the airlines. The latter included passenger fares, air mail rates, route
entry and exit, mergers and acquisitions and inter-carrier agreements. The routes of
the then existing airlines were “grandfathered”
and these airlines became later known as
“trunks”, a term borrowed from the trunk
railroads of the day. These trunk airlines were
certified to operate on medium and long-haul
interstate routes under Section 401 of the
enabling legislation and were sometimes
referred to as “401 carriers”. In 1942, L.
Welch Pogue, Esq., was appointed Chairman
of the CAB and served until 1946.

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13
 European Air Transportation

Early Operations
In the United Kingdom, Aircraft Transport and Travel, a fixed-wing airline, operated
the first international route in the world between Hounslow Heath outside London and
Le Bourget near Paris. The airline also won the first British civil airmail contract
between Hawkinge and Cologne. Handley Page, another airline, operated a London-
Paris passenger service.
In France, Société Générale des
Transports Aériens operated flights
between Toussus, le Noble and
Kenley (near Croydon, outside
London), and Compagnie des
Messageries Aériennes operated
airmail and freight service between Le
Bourget and Lille.

In Germany, Deutsche Luft Hansa

was created in 1926 and became a
major investor in airlines outside Europe, particularly in South America. The German
manufactured Junkers, Dornier and Fokker aircraft were at the time the most
advanced in the world.

In the Netherlands, KLM, the oldest continuously operating

airline in the world made its first flight in 1920 between
Croydon Airport, London and Amsterdam.

In Finland, Aero O/Y (now Finnair) started operations in 1924

between Helsinki and Tallinn, Estonia.

And in the Soviet Union, the Chief Administration of Civil Air

Fleet was established in 1921. Later, a German-Russian joint
venture was established to provide flights to the west from Russia. Domestic
operations were begun in 1923 by Dobrolyot and from 1932, all operations were
carried under the name “Aeroflot”.

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 European Airlines Recognized as Airmail Carriers

The period of 1920-1927 was a period of

significant development for air
transportation but the postal
administrations and airlines were in the
dark as to future possibilities for
international airmail. By 1924, the idea of
using aircraft for the transportation of mail
began to gain momentum, and in
September, 1927, at a conference called at
the suggestion of the Air Transport
Committee of the International Chamber of
Commerce held at The Hague, an agreement was reached that established airlines
as officially recognized carriers of the mail. The Conference also initiated rules and
regulations concerning the acceptance and rapid delivery of airmail, a rate-making
structure, the expeditious handling of airmail by countries without air services, and the
basis of accounting procedures for international airmail. Another provision agreed was
that the PAR AVION labels should have a blue color and, when the mail did not
actually travel by air, such labels or annotations should be crossed out.

Consolidation

In the United Kingdom, there was a movement toward consolidation to compete with
the subsidized French and German airlines. In 1924, Imperial Airlines was formed
through a merger of four airlines, and was able to compete with these French and
German carriers. In addition the airline began survey flights to far-flung parts of the
British Empire. The airline also ordered the Handley Page W8f City of Washington.

15
In France, Air Union was formed in January 1923 and later merged with four other
airlines to become Air France in 1933.

Expansion

After consolidation survey flights, Imperial Airlines extended its operations during the
late 1920s and 1930s to the furthest reaches of the British Empire. Destinations
included South Africa, Australia, British India, Rangoon, Singapore, Basra, Karachi,
Hong Kong, etc. The aircraft, however, were small, with a capacity of fewer than 20
passengers, and the passengers consisted of the wealthy or British men doing colonial
administration, business or research.

Air France’s operations depended on links to points in North Africa and Indochina.

KLM in the Netherlands also depended on links to its far flung colonies, including the
East Indies.

Germany, however, lacked colonies but began expanding

services with the airship Graf Zeppelin in regular scheduled
passenger service between Germany and South America.
Airship Hindenburg entered passenger service and
successfully crossed the Atlantic 36 times before crashing at
Lake Hurst, New Jersey, in May 1937.

16
One point of interest here is that during this time the state-owned flag carriers of
several European nations were establishing “foreign routes” to their own colonies in
Asia, Africa and the Indian Sub-Continent, all without the need to obtain traffic rights.
Privately owned Pan American did not have this luxury and was required to obtain
traffic rights to operate not only to the European countries, but to their colonies as
well.

The maps below illustrate the typical route systems of two key international airlines
prior to and during World War II. The US carrier, Pan American, obtained its authority
through negotiating for landing rights at overseas destinations. The foreign carrier,
Imperial of Great Britain, offered overseas destinations through its colonies. As
previously noted, Pan American’s initial transpacific authority came about by virtue of
U.S. control of waypoints between San Francisco and Manila. The authority to Hong
Kong came about after Pan American’s Juan Trippe used his previously obtained
landing rights in Portuguese Macao to pressure the British to grant him landing rights
in Hong Kong. At the time, the China National Aviation Corporation (C.N.A.C.) was
yet another subsidiary of Pan American. Note the extent of operations in Latin
America.

17
 Situation at the Eve of World War II

By the late 1930s, Pan American had launched trans-Atlantic flights with the Boeing
314 flying boat. The British and French were operating trans-Atlantic flights as well,
but only under mail contracts. Pan American was the only airline with the capacity to
accommodate passenger traffic.

At the same time, US domestic airlines (and Pan American) were looking at high-
capacity-long range landplanes (DC-4 and Lockheed Constellation).

War Looms

War was looming in Europe and at the same time, Pan American began experiencing
problems with its Boeing 314 operation due to bad weather in the winter months. Both
these factors prompted a shift to a southern route that nearly doubled the flight time
between the European continent and New York. The route departed Lisbon and
stopped in Bolama, Port of Spain and Bermuda before arriving in New York.

On the eve of World War II, Juan Trippe recognized that a shift from flying boats to
landplanes on trans-Atlantic routes was inevitable. He was initially interested in
acquiring the pressurized Lockheed Constellation and was “given permission” by
Howard Hughes to acquire it. However, the war started and both DC-4 and
Constellation production was shifted to the war effort.

18
For all intents and purposes, the world’s airlines shifted their operations to wartime,
including Pan American and the US domestic airlines. Other than the US regulations
that governed the US carriers, international commercial aviation was governed by the
provisions of the Paris Convention of 1919 and the Havana Convention of 1928. It
would soon become obvious that both were obsolete.

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20
 PART THREE

WORLD WAR II, THE CHICAGO CONVENTION AND BEYOND

The Road to Chicago

Like World War I, aviation technology made tremendous gains during World War II
and these gains were enjoyed primarily by the United States, particularly in the area
of high-capacity and long range air transport. Why this happened was a result of an
agreement between US President Franklin D. Roosevelt and British Prime Minister
Winston Churchill: the US would focus on the manufacture of high capacity and long
range transport aircraft and bombers and the Allies would focus on the manufacture
of fighters and light bombers. As a result, as the war began to wind down, the potential
of United States superiority in the manufacture of transport aircraft became inevitable.

By 1944 defeat of Germany was all but certain. And by then, aviation technology had
developed to the point that no city in the world was more than forty hours away from
any other city by air. However, the round-the-world routes operated by the military air
transport would snap apart with the advent of peace and would be closed to
commercial planes unless the broadest traffic rights were obtained before the end of
the war. Airlines would be limited to flying within their own borders (and to/from
colonies) and in the case of the United States, under Pan American’s pre-war trans-
oceanic authority, unless the US engaged in nation-by-nation politicking as Juan
Trippe had done in South America. In addition, US airlines desiring to fly beyond the
coasts of Western Europe would require permission from the host governments of the
gateway countries, primarily Great Britain. The flag airlines of the Western European
countries did not have such a problem. They simply operated routes through their
colonies to Asia and Africa. The British carrier, BOAC, was already operating to areas
within the commonwealth where war had receded.

For the United States, a policy needed to be developed as to post-war international

aviation and it came in the form of government-to-government negotiations for landing
rights. This, in effect, ended Juan Trippe’s term as a “shadow” foreign minister for US
aviation. As put forth by President Roosevelt, “Juan Trippe can’t have it all”, and
indeed, as a reward for their support during the war effort, domestic airlines such as
TWA, American Overseas Airlines (formerly American Export Airlines until American
Airlines' merger with owner American Export Lines) and Northwest were granted
authority to operate international routes by the CAB.

21
However, what was clear as the end of the war approached, was that the United States
would have undisputed superiority in air transport to the extent that it was the only
country with the capability to operate a worldwide air transportation system. Two other
factors contributed: The US had long production lines capable of turning out four
engine, long range aircraft and the US was also capable of making immediate
commercial business, whereas the Allies, specifically Great Britain, were still geared
to military production and unable to make a swift change and, along with France, were
technologically injured. In addition, the defeated Axis powers were denied the
capability to manufacture and produce aircraft. The result was obvious: The US had
a virtual monopoly on the manufacture of transport aircraft.

22
This virtual monopoly, of course, did not sit well with the major powers, in particular
Great Britain, and it became clear that an international conference was necessary to
resolve the issues of international aviation and more importantly, the issues between
the United States and Great Britain.

As it was also clear that both the Paris and Havana Conventions were now obsolete,
there emerged a need for an international organization to maintain standards of safety,
communications, signals and weather reporting and also prevent destructive
competition breaking out of tariffs. As a result, with the urging of Great Britain, the
United States took the initiative and sent out invitations to the Allied Nations and the
neutral countries of Europe and Asia to meet in Chicago on 1 November 1944. Fifty-
four countries accepted and sent delegations to the Conference on International Civil
Aviation, to be known as the Chicago Convention of 1944.

The Chicago Convention of 1944

On 1 November 1944, delegates from fifty-four countries met at the Stevens Hotel in
Chicago to commence what was to become the most significant conference on
aviation regulation in history. The goal was to promote international traffic and develop
an entry procedure that would allow healthy growth in the industry. In addition, issues
such as routes, frequencies, pricing and fares, aircraft registration, navigational aids
and safety standards were to be discussed.

23
 At a Convention such as this, those
with the greatest bargaining power
could afford to make broad and
sweeping proposals, usually tailored to
their interests. The United States had
this bargaining power and the feeling
was it was going to be used to secure
a near monopoly in long-haul air
transport. What the US was advocating
was access to international routes,
minimal control of rates, frequencies
and capacity and an international organization with limited political and economic
authority. In essence, an “open skies” regime was being promoted.

While freedom of competition is a noble position to take, it seemed absurd that such
a position would be espoused by a competitor who had a commanding lead in an
industry that was characterized by considerable restriction to entry. The US position
was similar to the proverbial elephant who, while dancing through the chicken yard,
cried, “Everyone for Himself!”

Other countries advanced proposals

calling for more control, while the British
were calling for an international air
authority that would control frequencies,
capacities, rates and routes agreed upon
bilaterally or multilaterally between nations.
The authority would take action with a view
to maintaining a broad equilibrium between
the world’s air transport capacity and the
traffic offering. It would thus eliminate
wasteful practices, unfair competition and
control subsidies.

The British, while lacking bargaining power in the air transport aspect, did wield
considerable power from the political aspect. Through its vast number of overseas
colonies and commonwealth connections, Britain had the capability of denying landing
rights to, for instance, U.S. carriers. This was a major weakness for the United States:
the need to obtain landing rights in foreign countries to load and unload passengers
and cargo.

24
Delegates from other countries also submitted proposals calling for some sort of
control, including the possibility of a single international corporation as a World Airline,
with every nation participating. These suggestions were all unacceptable to the United
States.

What was emerging during the convention was that the nations in attendance were
there to strengthen their weaknesses.
Indeed, the US was present to secure
landing rights in foreign countries and that
was the goal in calling for the convention in
the first place. The US did not bring up
issues such as frequencies, traffic or
capacity. As the convention progressed,
however, it was clear that the US would
have to back down from its laissez-faire
position. This occurred when the Canadian
delegation proposed the “Four Freedoms of
the Air” that would be universally
acceptable:

First Freedom: The right to fly and carry traffic over the territory of another
partner to the agreement without landing.

Second Freedom: The right to land in those countries for technical reasons such
as refueling without boarding or deplaning passengers.

Third Freedom: The right of an airline from one country to land in a different
country and deplane passengers coming from the airline’s own
country.

Fourth Freedom: The right of an airline from one country to land in a different
country and board passengers traveling to the airline’s own
country.

For the United States, these did not meet its requirements for control on international
trunk routes. Accordingly, the U.S. added a “Fifth Freedom” to the Canadian proposal.

Fifth Freedom: The right of an airline from one country to land in a second
country, to then pick up passengers and fly on to a third
country where the passengers then deplane.

25
This proposal was not received well by the other major nations as it made quite clear
the US objectives: to dominate and monopolize much of the world’s traffic. As a result,
because the US was unable to get sufficient support from the delegates for the Fifth
Freedom rights, at the close of the convention, the economic issues such as fares,
frequencies and capacities were left unresolved.

The failure to resolve the economic issues left the question as to where an airline
could fly dependent on bilateral negotiations. And in these negotiations, the parties
would summon whatever power they had to secure the greatest contribution to their
national well-being. The convention amplified the importance of bilateral negotiations.
The reality was that no strength in technical matters, no amount of operating know-
how or superiority in quality can overcome the inability to reach a market. The British
may not have been technically superior to the United States, but they did have control
of one end of a large number of international journeys. This was sufficient to negate
much of the US superiority, and the failure of the British to sign-off on the Fifth
Freedom addition was considered the major reason for the inability of the US to secure
those rights.

One notable absentee at Chicago was the Soviet Union. While invited and actually
prepared to attend, a last minute decision was made not to attend. Considerable
speculation arose as to why. One reason suggested was a low priority given to
international civil aviation. Other reasons, however, were more feasible: First,
attendance might have forced the Soviets to grant the right of innocent flyover its
territorial air space. This would have been difficult to refuse since the Yalta and
Potsdam Conferences lay ahead. Another was that the Soviets might have been
forced into a premature disclosure of its plans for Eastern Europe.

The convention ended however, with three important accomplishments:

 Established the International Civil Aviation Organization (ICAO).

 Produced the Freedoms of the Air.

 Produced the criteria for Bilateral Agreements (Air Services Agreements – ASAs)

26
The Convention on International Civil Aviation was signed at Chicago on 7 December
1944.

27
 KEY PROVISIONS

Every state has complete and exclusive sovereignty over airspace above its territory.

The aircraft of states, other than scheduled international air services, have the right to make flights across state's
territories and to make stops without obtaining prior permission. However, the state may require the aircraft to make a
landing.

No scheduled international air service may be operated over or into the territory of a contracting State, except with the
special permission or other authorization of that State.

Each state shall keep its own rules of the air as uniform as possible with those established under the convention, the duty
to ensure compliance with these rules rests with the contracting state.

Before an international flight, the pilot in command must ensure that the aircraft is airworthy, duly registered and that the
relevant certificates are on board the aircraft. The required documents are:

Certificate of Registration
Certificate of Airworthiness
Passenger names, place of boarding and destination
Crew licenses
Journey Logbook
Radio License
Cargo manifest

The aircraft of a state flying in or over the territory of another state shall only carry radios licensed and used in
accordance with the regulations of the state in which the aircraft is registered. The radios may only be used by members
of the flight crew suitably licensed by the state in which the aircraft is registered.

The pilot and crew of every aircraft engaged in international aviation must have certificates of competency and licenses
issued or validated by the state in which the aircraft is registered.

Recognition of Certificates and Licenses. Certificates of Airworthiness, certificates of competency and licenses issued or
validated by the state in which the aircraft is registered, shall be recognized as valid by other states. The requirements for
issue of those Certificates or Airworthiness, certificates of competency or licenses must be equal to or above the
minimum standards established by the Convention.

No aircraft or personnel with endorsed licenses or certificate will engage in international navigation except with the
permission of the state or states whose territory is entered. Any license holder who does not satisfy international standard
relating to that license or certificate shall have attached to or endorsed on that license information regarding the
particulars in which he does not satisfy those standards.

The Convention is now supported by nineteen annexes containing standards and recommended practices (SARPs). The annexes
are amended regularly by ICAO and are as follows:

Annex 1 – Personnel Licensing

Annex 2 – Rules of the Air
Annex 3 – Meteorological Service for International Air Navigation
Annex 4 – Aeronautical Charts
Annex 5 – Units of Measurement to be used in Air and Ground Operations
Annex 6 – Operation of Aircraft
Annex 7 – Aircraft Nationality and Registration Marks
Annex 8 – Airworthiness of Aircraft
Annex 9 – Facilitation
Annex 10 – Aeronautical Telecommunications
Annex 11 – Air Traffic Services – Air Traffic Control Service, Flight Information Service and Alerting Service
Annex 12 – Search and Rescue
Annex 13 – Aircraft Accident and Incident Investigation
Annex 14 – Aerodromes
Annex 15 – Aeronautical Information Services
Annex 16 – Environmental Protection
Annex 17 – Security: Safeguarding International Civil Aviation against Acts of Unlawful Interference
Annex 18 – The Safe Transport of Dangerous Goods by Air
Annex 19 – Safety Management (Since 14 November 2013)

Units of Measurement to be used in air and ground operations: feet (for vertical distance/altitude), knots (for speed), and nautical
miles (for distance).

28
 The International Civil Aviation Organization (ICAO)

ICAO was formed to administer the Convention.

Key areas of interest:

 Establishment of international technical standards and recommended practices in the conduct
of international air operations.

 Standardization of procedures.

 Air navigation.

 Communications and air traffic management.

 Air safety.

 Development in aircraft design.

 Growth and development of airways and airports.

 Cooperation between member nations.

 Sets industry technical and legal standards for member states’ civil aviation authorities.

29
ICAO objectives:
 Insure the safe and orderly growth of international civil aviation throughout the world.

 Encourage the arts of aircraft design and operation for peaceful purpose.

 Encourage the development of airways, airports and air navigation facilities for international
civil aviation.
 Meet the needs of the peoples of the world for safe, regular, efficient and economical air
transport.

 Prevent economic waste caused by unreasonable competition.

 Insure that the rights of contracting States are fully respected and that every contracting
State has a fair opportunity to operate international airlines.

 Avoid discrimination between contracting States.

 Promote safety of flight in international air navigation.

 Promote generally the development of all aspects of international civil aeronautics.

30
 The Freedoms of the Air

First Freedom: The right to fly and carry traffic over the territory of another partner to the
agreement without landing.

Second Freedom: The right to land in those countries for technical reasons such as refueling
without boarding or deplaning passengers.

Third Freedom: The right of an airline from one country to land in a different country and
deplane passengers coming from the airline’s own country.

Fourth Freedom: The right of an airline from one country to land in a different country and
board passengers traveling to the airline’s own country.

Fifth Freedom: The right of an airline from one country to land in a second country, to then
pick up passengers and fly on to a third country where the passengers then
deplane.

Sixth Freedom: The right to carry traffic from one country through the home country of the
airline to a third country.

Seventh Freedom: The right to carry traffic from one country to another country without going
through the home country of the airline.

Eighth Freedom: The right to carry passengers between two or more points in one foreign
country with continuing service to or from one’s own country, known as
“True Cabotage”.

Ninth Freedom: The ninth freedom is a variation from the Eighth Freedom in that it is the
right to carry passengers within a foreign country without continuing service
to or from one's own country, known as “Stand-alone Cabotage” and almost
no country permits it.

31
 Bilateral Air Services Agreements (ASAs)

The criteria produced by the Chicago Convention included the following key
provisions:

 Exchange of air rights.

 Equality of treatment with respect to airport charges, customs duties and inspection fees.

 Mutual recognition of airworthiness certificates and personnel.

 Compliance with laws pertaining to entry, clearance, immigration, passports, customs,

etc.

 Regulations concerning ownership and control.

 The designated carrier/s (“Chosen Instrument”?), the routes served and tariffs.

The International Air Transport Association

Shortly after the Chicago Convention, a call was made for a meeting among airline
operators with a proposal to form a non-governmental organization of airline
operators. During this meeting, articles of association were drafted for consideration
at a conference to be held in Havana in April, 1945. On 19 April, the articles were
approved and enacted, forming the International Air Transport Association (IATA).

Focused on economic rather than technical issues, the purpose of IATA initially was
to to promote safe, regular and economical air transport for the benefit of the peoples

32
of the world; to foster air commerce and to study the problems connected therewith;
to provide the means of collaboration among the air transport enterprises engaged
directly or indirectly in international air transport services; and to cooperate with ICAO.
Today these functions largely remain the same:

 Sets economic standards for the orderly flow of air transportation throughout the world.

 Coordinates fares and rates among member airlines.

 Provides forum for industry agreements between airlines (interline, alliances).

 Conducts training for airline personnel.

 Provides clearing house for collections on interline international tickets.

 Holds semiannual “Slot Conference”.

 Assigns airline designators.

The Bermuda Agreement of 1946

The Bermuda Conference was held in 1946 and it was essentially a conference
between the two airline powers, Britain and the United States. There was a feeling of
urgency at the conference. Besides the aviation issues to be resolved, Britain was in
a severe crisis over its balance of payments and was then negotiating a $3.75 billion
loan on easy terms. At the same time, the US was engaged in discussions with Britain
and its commonwealth partners over telecommunications rights with the hope that
empire preferences disciminatory to the US would be eliminated. It was, however, the
principle aim of the conference to reconcile the widely divergent views held by the two
nations on the extent to which international air transport should be controlled.

The Bermuda Air Agreement, known as the Bermuda Agreement of 1946, was
accepted by both nations. Its provisions included criteria regarding Fifth Freedom
rights, including consideration of the traffic requirements between the country of origin
and the country of destination, the requirements of through airline operation and the
traffic requirements of the area through which the airline passes after taking account
of local and regional services.

33
The key provisions included:
 Provided for Fifth Freedom rights with reciprocity.

 Provided for extensive routes between the two countries with the requirement for
reciprocity.

 No arbitrary restrictions on capacity or flight frequencies.

 Procedures for rate-making and traffic rules assigned to IATA subject to government
approval.

 Disputes referred to the ICAO for advisory opinion.

 Pan American and BOAC were the designated carriers.

 Became model for future bilateral s.

This agreement enabled Pan American pick up passengers at London and other
European gateways for passage to points east. As the agreement also applied to
commonwealth countries, Pan American benefited from Fifth Freedom rights at points
in India and later at Hong Kong. This enabled Pan American to launch its round-the-
world services in 1947.

Below are pages from a 1948 Pan American time table showing its round-the-world
service and the scene in New York at the departure of its first round-the-world flight.

34
 The “Chosen Instrument”

The concept of the “Chosen Instrument” suggests that the national carriers designated
to operate international routes by their owning nations are instruments of those
nations’ foreign policy. Indeed, through the bilateral agreement system promulgated
by the Chicago Convention, that could ring true. However, the term preceded Chicago.

During the early years of Pan American’s growth, the US government looked very
favorably at the carrier, and viewed it as an “instrument” of foreign policy by using the
airline to facilitate business and tourism with Latin America and the Caribbean. The
US government, in fact, awarded Pan American every foreign airmail route for which
bids were invited. This was helped by provisions of the Foreign Air Mail Act that
provided that only airlines capable of operating on a scale and manner that would
project the dignity of the United States in Latin America would be granted the right to
carry international mail. Secondly, contracts would only be given to companies that
had been invited for operations by the host countries. In both cases, Juan Trippe made
sure that Pan American had no competition. He aggressively pursued friendly
relations with most countries in Latin America and the Caribbean and often personally
met with foreign leaders. Trippe was also the kind of entrepreneur who emphasized
elegance and grandeur in operating his airline. To enhance the stature of Pan
American, Trippe also invited the famous aviator Charles Lindbergh to serve as a
technical adviser.

35
In addition, there was concern over the German presence in South America in the
1930s. The German airline Lufthansa had established subsidiaries in various
countries and Sociedad Colombo-Alemana de Transportes Aéreos (SCADTA) was
formed by a group of Colombian and German businessmen, posing a threat to the
Panama Canal. This meant the presence of German propaganda and espionage. Pan
American proceeded to acquire SCADTA and other German subsidiaries to remove
the German presence and expand its Latin American route network. In essence, this
was carrying out US foreign policy to rid the continent of the German presence.

Up to World War II, because of its leadership and role in international commercial
aviation, Pan American was considered the “Chosen Instrument” for the United States.

While Trippe was largely successful negotiating on behalf of his airline and his
government, his stature as the “ad hoc” transport minister would soon come to an end
following his efforts to secure transatlantic authority from the British and the US
government’s eventual policy of government-to-government negotiations for foreign
landing rights. However, although Pan American no longer had a monopoly on
international routes, the airline was still considered the principal international carrier,
and indeed, the “Chosen Instrument”.

The “Chosen Instrument” survived up through the Cold War largely because of the
restrictive nature of the regulated and protectionist airline industry and the resultant
barriers to entry. With the advent of “Open Skies” and general liberalization of the
industry, this concept has faded away. Under the current regime, there is virtually no
airline that can really claim to be an instrument of its country’s foreign policy.

36
 PART FOUR

POST-WAR AND THE REGULATED AND PROTECTIONIST ERA

United States Commercial Aviation

Often referred to as the “glory days of airline travel”, the Post-War and the Regulated
and Protectionist Era witnessed the manufacture of large capacity, long-haul, piston
driven aircraft, the introduction of and transition to commercial jet airliners that ushered
in the “Jet Age”, and finally the development of high capacity, wide-bodied aircraft that
started the path toward the end to economic regulation of the privately-owned US
airlines.

In the United States, the trunk carriers began the transition to peace-time operations,
enjoying the technology developed during the war. There was a surplus of former
military transport and bomber aircraft that
were acquired by the trunk airlines and
modified for commercial service. These
surplus aircraft were also purchased by
entrepreneurs who began to transport
people and cargo on an ad hoc basis, with
no fixed routes or schedules. Thus
emerged a new type air carrier to be
known as the non-scheduled or “non-
skeds” to the public or as “large irregular carriers” to the CAB, which was powerless
to regulate them under the current statutes. This was remedied by an amendment to
the Civil Aeronautics Act that created supplemental air carriers and supplemental air
transportation requiring these carriers to possess certificates of public convenience
and necessity in order to operate as an air carrier.

In addition, the post-war years witnessed the granting of new “feeder” routes by the
CAB. Although the trunk carriers claimed a right to these routes under their
grandfather rights, the CAB nevertheless granted these new routes to another new
class of air carrier known as “Local Service Carriers”, each with a regionally centered
route system. Airlines such as Allegheny, Mohawk, Lake Central, Frontier, Bonanza,
Ozark and Southern were all certificated during the 1945-1951 period. Because of the
thin markets served by these carriers, they were awarded subsidies to keep operating
in these markets.

37
These new air carriers, added to the already existing trunk carriers, meant an
overcrowding of American airspace, and the regulation in place for air traffic control
was soon considered antiquated.

In 1956, US President Dwight D. Eisenhower appointed Edward Peck Curtis as

Special Assistant for Aviation and was named to head a commission to study the
dramatic increase in airline traffic and to propose ways to deal with airplane traffic
jams at airports. This was followed by and event, however, that shook the very
foundation of air traffic control.

On the morning of 30 June 1956,

United Airlines flight 718 collided
with TWA flight 2 over the Grand
Canyon. With 128 fatalities this was
at the time the largest loss of life in
an aviation accident. This high profile
accident, which took place in
uncontrolled airspace, raised public
concern for airline safety.

As a result, in 1957, Congress

passed the Airways Modernization
Act that established the Airways
Modernization Board (AMB)
headed by General Elwood
Quesada. The mandate of the Board was the development and modernization of the
national system of navigation and air traffic control facilities to serve the present and
future needs of civil and military aviation.

Two subsequent mid-air collisions between military aircraft and commercial airliners,
one near Las Vegas, Nevada (United Airlines flight 736) on April 21, 1958, where 49
died, and another involving Capital Airlines over Brunswick, Maryland a month later
on May 20 that cost 11 lives, showed further imperfections in the regulation of air
traffic, particularly the need for unified control of airspace for civil and military flights.

The day after the Brunswick collision, Senator Mike Monroney and Representative
Oren Harris introduced the Federal Aviation Act and two days after Brunswick, a
stopgap presidential proclamation was issued that (1) required military jet aircraft to
fly by Instrument Flight Rules while in the civil airways below 25,000 ft. (later reduced
to 20,000 ft.) and (2) prohibited jet penetration swoops from high to low altitudes
through civil airways.
38
Citing "recent midair collisions of aircraft occasioning tragic losses of human life,"
President Dwight D. Eisenhower announced the White House's support of the
legislation on 13 June 1958. The Federal Aviation Act of 1958 passed Congress and
was signed into law by Eisenhower on 23 August.

Taking a comprehensive approach to the federal role

in fostering and regulating civil aeronautics and air
commerce, the new law repealed the Air Commerce
Act of 1926, the Civil Aeronautics Act of 1938, the
Airways Modernization Act of 1957, and those
portions of various presidential plans dealing with civil
aviation. The legislation assigned the functions
exercised under these repealed laws to two
independent agencies — a new Federal Aviation
Agency (FAA) and a Civil Aeronautics Board (CAB).

Provisions of the Act included:

 Established the Federal Aviation Agency (FAA, later Federal Aviation Administration).

 Abolished the CAA, and empowered the FAA to oversee and regulate safety in the
airline industry and the use of American airspace by both military and civilian aircraft.

 CAB continued as an independent agency and retained jurisdiction over route

allocation, accident investigation and fare applications.

 International routes subject to bilateral agreements between the US and the country
involved and the CAB designated the carrier to operate the route.

The twenty years following the Federal

Aviation Act of 1958 was characterized as an
era of strict economic regulation in the United
States and government protectionism in the
rest of the world. The privately owned US
flagged airlines were restricted by the CAB as
to where they could operate and what fares
they could charge. Routes were awarded after

39
long and costly proceedings where a carrier needed to prove the
market applied for actually needed the service. Fares were also
subject to board approval and were calculated using a formula
known as the Standard Industry Fare Level (SIFL). A small
handful US carriers operated international routes, most notably
Pan American, TWA and Northwest, with Pan American being
the dominant carrier and considered the “Chosen Instrument” for
the United States.

Below are the regulated-era route systems and typical aircraft of

the US carriers American, Pan American, TWA and United:

40
41
On 15 October 1966, the United States Department of Transportation (USDOT or
DOT) was established as the federal Cabinet department of the US. government
concerned with transportation. It began operation on April 1, 1967 and is headed by
the United States Secretary of Transportation.

Prior to its establishment, the Under Secretary of Commerce for Transportation

administered the functions now associated with it. In 1965, Najeeb Halaby, then
Administrator of the FAA, suggested to President Lyndon B. Johnson that
transportation be elevated to a cabinet-level post, and that the FAA be folded into the
DOT.

DOT’s mission is to "Serve the United States by ensuring a fast, safe, efficient,
accessible, and convenient transportation system that meets our vital national
interests and enhances the quality of life of the American people, today and into the
future."

42
Provisions related to air transportation include:

 The FAA became an agency within the department.

 The CAB remained an independent regulatory agency with jurisdiction over economic
matters (routes and rates/tariffs).

 Established the National Transportation Safety Board (NTSB) that took over the
CAB’s accident investigatory function. NTSB was severed from DOT by the
Independent Safety Board Act of 1974.

International Commercial Aviation

In the international arena, the foreign flagged airlines in the Post War era were largely
state-owned and were controlled by their respective civil aviation authorities.
International routes were governed by bilateral agreements between the countries
involved and fares were agreed to at Traffic Conferences organized by IATA. The
airline of the Soviet Union, Aeroflot, and airlines of Eastern European countries were
also state-owned.

43
Foreign-flag carriers operating international routes were generally identified as being
the “Chosen Instrument” of their owning countries.

44
 Government Role in International Commercial Aviation

One very important factor during this era was the government role in international civil
aviation, best illustrated by how governments dealt with aviation issues in three main
areas: ICAO, IATA and bilateral ASAs. This era was dominated by the Cold War, and
the international airline industry was in many respects, though not obviously, a pawn
in the struggle between the super powers at the time.

Political considerations became apparent early, when, in 1947, ICAO became an

agency of the United Nations. In one case, as a condition of acceptance of ICAO into
the UN, the Soviet Union demanded the expulsion of Spain from ICAO. Spain was
then considered a key terminal and a source or destination for a substantial amount
of traffic, and its expulsion hampered the development of air facilities and aids to
navigation that were essential to orderly air transport. In another case involving South
Africa, thirty-one African nations demanded the expulsion of that country because of
its apartheid policy. The attempt failed because of failure to meet the required advance
notice.

Government involvement in IATA activities, although a non-governmental

organization, was also prevalent. Under its Articles of Association, traffic or rate
conferences were called
whenever necessary. Each
member had one vote, and
each member had veto
rights. These conferences
made a variety of decisions,
but only those that were
unanimously agreed on and
expressed in the form of a
resolution were binding.
However, because most international airlines at the time were state-owned, these
resolutions would not be binding on the international airline until its government
approved. Further, a member would not be bound if it certified the resolution was not
coincident with the laws or official policy of its government. Despite these restrictions,
however, government approval of IATA resolutions during this period was
overwhelming. This can be attributed to the fact that most international airlines
received instructions prior to attending the conferences and in some cases, airline
representatives were actually state or government employees disguised as officials of
the state-owned airline.

45
The government role in the industry, however, was most intense and interesting at the
bilateral level. This was particularly true during the Cold War and the role of
government was interpreted in terms of foreign policy. The international airline could
either be an instrument of foreign policy or it could reflect or parallel the foreign policy
of a country. A country may also use its international airline to gain political favors
from other countries. Here, the key to successful negotiations was bargaining power,
or the ability to influence other countries in a way that would contribute to the economic
success of the home country’s airline. It was also entirely possible that an airline’s
profitability could be damaged because something of value to a national airline could
be traded away by government to meet a governmental objective.

For the most part the countries of the international airlines exchanged routes on a
reciprocal basis and when both had equal bargaining power. A country with greater
power, however, can demand more for its routes. In a 1957 case, KLM Royal Dutch
Airlines applied for additional routes in
the United States. The US government
was not prepared to grant these
additional routes because the
Netherlands had nothing to offer in
return. To the Dutch, KLM was one of
the Netherlands’ biggest industries
that was a symbol of Dutch
internationalism and initiative. Thus, to
obtain the desired routes, the Dutch offered a continuing cooperation with the North
Atlantic Treaty Organization (NATO). This was acceptable to the US and the routes
were granted. The granting of airline rights to foreign governments in exchange for
political support, military bases or troop contributions to NATO were regular bargaining
tools of the U.S. in order to maintain its military superiority over the Soviet Union.

ASAs can also be subject to

disputes between the parties
and at times an injured party
might resort to counter-
measures to protect its
interests. This was illustrated in
a case between Pan American
and Air France in connection
with the bilateral ASA between
the US and France. Under that
agreement Pan American was

46
authorized a scheduled service between Paris and London. However, because of the
aggressive subsidies being provided by the French government to Air France, Pan
American decided to substitute a smaller, more economical aircraft for the 747 already
scheduled on that route (gauge change). The French government refused on the basis
ranging from assertions of national honor (Pan American flying anything smaller than
a 747 into Paris would be an affront) to the more pragmatic reason that Air France
would enjoy the prospect of forcing its competitor to run a grossly unprofitable route
(with the 747). Finally, the French compelled Pan American to cease its flights to Paris.
The US government proposed arbitration to resolve the dispute, but for two years the
French refused. The US eventually made a reprisal by suspending Air France’s Paris-
Los Angeles route, long established under the ASA.

This got the French

government’s attention and
France agreed to arbitration.
The issues were (1) whether
Pan American could change
gauge and (2) whether the
US could unilaterally
suspend Air France’s route
to Los Angeles. The first
issue was resolved in favor
of Pan American. In the case
of the second issue, the French argued that as the ASA provided for arbitration, it was
impermissible for the US to engage in unilateral self-help measures. The arbitrator
ruled, however, that it was France that had been setting up barriers by not agreeing
to arbitration and that it was only the US’s retaliatory move terminating the Los
Angeles route that brought France to the table. In short, the arbitrator ruled that
counter-measures were a necessary part of the punch and counter-punch often
needed to get parties to submit their disputes to arbitration or other method of binding
settlement.

One point made in this case was that in any use of counter-measures, there could
always be a risk of escalation. France could have cut off Pan American’s New York-
Paris route and then the US could have retaliated by economic sanctions outside the
air transport sector, and so on. The point here is that although the underlying reasons
for the dispute were aviation related, there could have been other non-aviation factors
driving the actions of the French government.

47
Beyond the government role in ASAs, and as alluded to above, an international airline
during this era could be a reflection or parallel the foreign policy of its country. A good
example of this is Aeroflot, then the only international airline of the Soviet Union. As
previously mentioned the Soviet Union did not attend the Chicago Convention. The
Soviet policy at the time was that of isolationism and civil aviation was kept at a low
priority. This changed in the 1950s when the Soviet government switched to a more
internationalist policy in relation to the Eastern Bloc countries, and it was reflected in
Aeroflot’s opening of new routes to capitals in Eastern Europe. The 1960s also
witnessed some dramatic changes after the switch from the Khrushchev regime to the
Brezhnev-Kosygin regime. Here the policy changed to greater flexibility toward the
Western powers, and Aeroflot began operating to countries outside the Soviet bloc
and by 1967 almost all Western European capitals. In 1968, after several years of
negotiations, service was inaugurated between the United States and the Soviet
Union. The agreement best illustrates the concepts of political considerations in
bilateral negotiations and the notion of the “Chosen Instrument”. The airlines involved
were Pan American and Aeroflot.

If there was any route in Pan American's history that could be designated as a
"Chosen Instrument" route, the US-USSR could be that route. Pan American was the
selected airline because it was recognized as the primary US-flag carrier as
manifested by the Soviet Union’s aviation officials making the initial contact directly
with Juan Trippe. After reporting the contact to the US State Department and the Civil
Aeronautics Board, Trippe was authorized to negotiate with the Soviets on key issues
for an ASA between the two countries. However, given the political climate, it can be
reasonably inferred that political considerations played a role in formulation of the final
agreement between the two countries and both Pan American and Aeroflot were
instruments of those considerations, and therefore instruments of both countries'
foreign policy, hence, "Chosen Instruments".

For Pan American, a private enterprise as opposed to the

state-owned Aeroflot, the operation was a money loser and
the competition was not on a level playing field. Quite
simply, Pan American could not sell tickets in the Soviet
Union and was at a tremendous economic disadvantage.
Unfortunately, there was no provision for a subsidy to a US
flag carrier operating at an economic disadvantage in an
international market at the government's bidding. Pan
American eventually suspended the losing operation but
did so when US-Soviet relations were souring. It was not
until relations began to improve between the two countries

48
in the mid to late 1980s did the service resume, in 1986, later crowned with the 747
non-stop service in 1988. From the late 1960s through the early 1970s, Aeroflot grew
rapidly and by 1973, had set a record for
route expansion, operating under sixty-five
bilateral agreements with other countries.
These changes from isolation to a world-
wide presence could be considered a
reflection of the Soviet Union’s foreign
policy at the time, or it could have been
viewed as a challenge to the US superiority
in air transport. Whatever the case, the
Soviet policy of détente was based on political and economic weakness. There were
three basic reasons for this: (1) the Sino-Soviet Conflict, in which China had survived
the Cultural Revolution and gained strength in the international arena; (2) the
avoidance of Western European unity, which could be a strategic threat and a threat
in itself to Eastern Europe and the Soviet control of Eastern Europe; and (3) the
weakened Soviet economy, which had found the Soviets lagging behind the US,
especially in consumer goods. The policy was designed to effect technological
cooperation with the West, avoid a political struggle on two fronts (China at one end,
the West at the other) and increase political influence in Europe. In 1973, Aeroflot
concluded a Trans-Siberian route exchange (connecting Europe and Japan through
Moscow, thereby saving time and mileage) with Japan Airlines, British Airways,
Lufthansa and Air France.

The Trans-Siberian route was considered important because it impacted the

bargaining power of both the U.S., where travel between Japan and Europe was
through Anchorage, Alaska, and the Middle East, which had bargaining power with
Fifth Freedom rights. By granting this route
to Japan Airlines and the European
airlines, the Soviet Union effectively
diminished the US and Middle East
bargaining power in this market. In
addition, this Soviet move made possible
increased influence in both Japan and
Western Europe.

Whether the Soviet activities at the time were a threat to US leadership is

questionable. First, the Soviet aircraft were well behind those of the US technologically
and were more expensive to operate; secondly, the airline service offered was not
consumer-oriented and was reputed to be deplorable; and third, Aeroflot was not a
member of IATA at the time. However, the view at the time was that the rapid Soviet
49
growth was a bid to engage in a contest for national prestige and political influence,
by using aviation as a means to an end.

One other event during this era, which occurred on board the fishing boat Wild Goose
in the Puget Sound, would set in motion a series of events that would rock the very
foundation of the industry:

As legend has it, Pan American’s Juan Trippe asked, “Would you build it if I bought
it?” to which Bill Allen of Boeing responded, “Would you buy it if I built it?”

What was it? The Boeing 747

50
 PART FIVE

DEREGULATION AND OPEN SKIES

The Road to Deregulation

In the United States, during the decades after World War II, the airline industry
experienced a veritable explosion of technological advances, growth and service
improvement. And in 1969, there emerged one aircraft that could be credited for
setting in motion moves to dramatically change the economic structure and rock the
foundation of the industry. That
aircraft would be the Boeing 747.
With its introduction, capacity tripled
on the routes on which it operated.
Originally deployed on Pan
American’s principle international
routes, it was soon seen on the
routes of the major U.S. domestic
airlines (the “trunk” carriers) and on
key international routes of foreign
flagged carriers. Soon thereafter,
the McDonnell Douglas DC-10 and
Lockheed L-1011 wide-body aircraft were pressed into service. This increase of
capacity created a need to “fill the seats” both domestically and internationally. On the
domestic side, it was increasingly obvious that the CAB’s regulatory functions were
seriously challenged due to the expanding scale of aviation markets. Pricing policies
were viewed as insufficient, resulting in high costs for the passenger. The focus began
shifting toward the consumer.

51
However, adversity struck when this new capacity coincided with a serious economic
recession in 1970. What resulted was widely criticized CAB regulatory policies,
including a four-year moratorium on all new route cases and approval of a series of
agreements among airlines to limit capacity over certain major routes. On top of that,
the CAB pricing policies were increasingly viewed as fostering inefficiency, higher
costs and higher prices. It was pointed out that the intrastate airlines in California
(Pacific Southwest Airlines) and Texas (Southwest), free from CAB regulation, were
charging lower per-mile fares than those CAB regulated airlines and were operating
profitably.

This situation was exacerbated in 1973 with the Arab oil embargo and the ensuing
massive increase in oil costs. This prompted a series of fare increases, but with cost
increases exceeding increases in yields, another period of poor airline earnings
followed.

In this atmosphere, two reports were released:

The first, from within the CAB, concluded that protective entry and exit control and
public utility-type price regulation were not justified by the underlying costs and
demand characteristics of commercial air transportation and that they should be
eliminated by statutory amendment.

52
The second report, from the Subcommittee on Administrative Practice and Procedure
of the US Senate Judiciary Committee, headed by Senator Edward Kennedy,
suggested that prices should and would be lower with a more competitive system and
that the CAB had not been effective in maintaining low prices. The report further stated
that it was economically and technically possible to provide air service at significantly
lower prices, bringing air travel within reach of the average American citizen.

This sudden growth of anti-regulation sentiment resulted in the introduction of the first
deregulation bills. This started the legislation that culminated in the Airline
Deregulation Act of 1978.

However, even before the Act’s passage, the CAB began its own
steps toward deregulation, when Chairman John Robson, who
took office in 1975, began relaxing the scheduled service route
moratorium. Also, the airlines were given greater flexibility to
reduce fares. With the appointment of Alfred Kahn as Chairman
by President Jimmy Carter in 1977, the policies of relaxation
escalated. Applications for new authority were processed and
approved, in particular those applications that promised lower
fares. At the same time, the Carter Administration was seeking
agreements with foreign governments to permit more international competition and
stood ready to authorize as much international service by US airlines as foreign
governments would accept. There was also far greater receptivity to fare reductions.

53
To kick it off, American Airlines introduced the Advance Purchase Excursion fare
(APEX), called the “Supersaver”, which offered deep discounts on regular coach fares
with restrictions.

The move to deregulation had begun, however, with reservations. There was
opposition from most airlines, as well as labor unions and financial institutions with
investment in the industry. The arguments in opposition covered a broad range of
concerns:

 Deterioration of the industry’s excellent safety record;

 Probable concentration of service in high density markets with a consequent deterioration

of service in others, and in particular, those serving small communities;

 Impairment of the air transportation “system”, with its conveniences of through baggage
handling, interline ticketing, etc.;

 Destructive and predatory price competition, resulting in earnings deterioration and,

ultimately, industry concentration;

 Reduced ability to re-equip and to finance other available technological advances; and

 Adverse impact on airline employees.

These arguments failed to halt the move to deregulation, and in fact, in 1977, with little
or no fanfare, the domestic all-cargo service was deregulated. It simply provided that
any airline operating under authority or exemption that had provided any scheduled
domestic all-cargo service could apply for any or all domestic all-cargo routes and the

54
CAB would grant the application unless the applicant was found not “fit, willing and
able” to provide such service.

The Airline Deregulation Act of 1978

On 6 February 1978, Senator Howard Cannon of Nevada introduced Senate Bill S.

2493. The bill passed both the Senate and the House of Representatives and was
signed into law by President Jimmy Carter on 24 October 1978. It became known as
the Airline Deregulation Act of 1978.

The Act dealt primarily with US

domestic air transportation,
recognizing that no one government
could by itself deregulate
international service.

The theme of the Act was that

maximum reliance on competition
would bring about the objectives of
efficiency, innovation, low prices and
price/service options while still
providing the needed air transportation system. At the same time, the Act recognized
the needs of the small communities and isolated areas in the US and provided for
direct federal assistance through the “Essential Air Service” provision. Restrictions on
domestic service entry were gradually lifted and the standard for granting route
applications was changed from the pre-existing requirement that the proposed
transportation was “required by the public convenience and necessity” to a finding that
it was “consistent with public convenience and necessity”. In addition, it was the
burden of opponents to prove lack of such consistency. The CAB, however, was still

55
required to determine that the applicant was “fit, willing and able” to provide the
service. By the end of 1981, for all intents and purposes, all airlines (and would-be
airlines) were free to serve, or cease serving, any and all domestic routes and cities.
This led to a flurry of start-up airlines, with few successes but many failures.

In the area of pricing, pending complete deregulation at the end of 1982, the “standard
industry fare levels” were retained and the CAB consideration in exercising its rate
regulation functions was amended to give more weight to the desirability of low fares
and increased pricing and service options. In the area of antitrust, certain types of
inter-airline agreements, actions and relationships were removed from CAB
jurisdiction and thus left to general antitrust laws. In addition the automatic “antitrust
immunity” for any CAB approved agreement or transaction was repealed. Other
provisions included the ending of the Mutual Aid Pact and provisions for the protection
of employees adversely affected by the Act. The Act (along with the Warsaw/Montreal
Convention with regard to international flights) also had the effect of preempting state
law with regard to claims against airlines for delays, discrimination, consumer

56
protection violations and other allegations of passenger mistreatment. Safety and
technical matters remained with the FAA.

The most important of the Act’s provisions, however, was the “sunset” of the CAB. On
1 January 1985, the CAB closed its doors and what remaining functions it had were
transferred to the Department of Transportation. These included international routes,
certification of new carriers, consumer protection and jurisdiction over airline mergers
and agreements.

A major product of deregulation was the development – and perfection – of the “hub-
and-spoke” route system. This transformed the domestic airline system from a linear
route system and resulted in greater efficiencies by feeding traffic to and from
strategically located hubs. A bi-product was the emergence of the fortress hub, where
an airline established such dominance that entry by new competitors were
compromised. The airlines that survived the early years of deregulation were those
that were successful in establishing viable hubs.

Below is a post-deregulation route map of United Airlines. Compare to its route map
during the regulated era on page 40.

Increasing Competition in International Air Transportation

As previously noted, it was beyond the power of any one government to deregulate
international air transportation. Therefore the policy of the US government was
focused on increased competition.

57
As background, as far back as the early 1960s, the US had a decided advantage over
the European (and other) airlines. Although these airlines were able to catch up at one
point, it was hardly at the expense of the US airlines. The lack of capacity controls,
coupled with the introduction of bigger and better aircraft, forced a downward pressure
on fares to fill these aircraft. However, in the spring of 1963, IATA, backed by the
European governments, increased fares when the CAB thought fares should remain
stable. IATA stood by its position and won the fight, but at a heavy cost. The CAB’s
response was to boost the supplemental carriers, the “non-skeds”, giving them
permanent certificates so that they could purchase jet aircraft. The CAB also
authorized split charters and inclusive-tour charters, enabling vacation travel to the
public at bargain prices. Because of this, the scheduled airlines’ traffic in international
markets declined although the overall market share stayed high as the supplemental
carriers were predominantly American.

The Europeans initially resisted the supplemental airlines because they were not
provided for in the post-war bilateral agreements. But because the Europeans were
not united, only those countries that could count on a separate and distinct market,
such as Israel, were able to avoid the charter problem. Travel to Europe, at least in
the tourist market, was not necessarily point-to-point. Rather it was more regional. It
did not matter what the port of entry was. Depending on the fare, a tourist could arrive
in Amsterdam, travel around the continent, and leave from Paris.

The response of the scheduled airlines in the late 1960s and early 1970s was to
develop a schedule of fares that were so complicated, hardly anyone could keep up.
Excursion fares, inclusive tour fares, advance purchase fares, off-peak fares, were all
introduced. In a sense, this was the beginning of price competition in international
aviation. However, under IATA rules, it was not possible for any single carrier or group
of carriers to experiment with a promotional fare to see if it would create new traffic.
Thus, if one carrier could offer a special fare, all could, and unless all would do it, none
could. And, by the time IATA was ready to invite the supplemental carriers to join, both
Pan American and TWA had started charter services in the North Atlantic.

58
For the scheduled airlines, load factors continued to fall with a resultant loss of profits.
The introduction of the wide body aircraft increased capacity, but did not produce the
traffic increases that were predicted. And in the face of this, no one airline was
prepared to curtail or reduce services for fear that its competitors would capture a
greater share of the traffic. The CAB did approve capacity-restraint agreements,
whereby Pan American would give up its Paris authority in exchange for TWA giving
up its Frankfurt authority. This was done with the express hope that the over-capacity
would come to pass. The prevailing view in
Washington was to adhere to the Bermuda
Agreement with no predetermination or no
interference by governments in matters of capacity.

In 1974, Pan American lost $80 million, its sixth

straight year of massive financial setbacks.
Meanwhile, fares that had gone down during the
1960s and 70s began to rise, and in 1974, up to 30% on some routes. The foreign flag
carriers also felt the pinch and like Pan American and TWA, began a retreat from
some of their hard-earned routes to the US, particularly to the west coast. It was during
this time the non-communist world felt the effects of inflation and recession, fuel
shortages, price increases and unemployment all impacting in the worst way,
discretionary travel.

In this setting, in 1975, President Ford called for a study on the possibility of regulatory
reform in international aviation. And while this study was being conducted, in mid-
1976, the British announced their intent to terminate the Bermuda Agreement. The
British were strongly committed to the protection of its own airlines (particularly
government-owned British Airways) and believed the agreement was inadequate to
prevent operation of excess capacity and that the agreement was also unbalanced in
favor of the US airlines. In particular, the British wished to reduce the authority of US
airlines to carry Fifth Freedom traffic. There were other issues, including the manner
in which the CAB exercised authority over rates, and, although not made explicit, a
high degree of British irritation at US public resistance to the introduction of supersonic
Concorde service.

59
Negotiations on a new agreement were difficult and were exacerbated by a change in
presidential administrations (from Ford to Carter) halfway through the 12-month
negotiating period. The British held firm and it was
not until the last moment when a new, more
restrictive agreement was achieved, signed on 23
July 1977 and referred to as Bermuda II. Among
other things, it limited the number of scheduled
carriers operating at London Heathrow Airport to two
from each side, enabled greater government control
over capacity, required government review of proposed fares and routes after review
by IATA, required government approval on pricing, reduced Fifth Freedom rights to
US carriers, granted additional US gateways, allowed new carriers to operate at
London’s Gatwick Airport and permitted Laker Airways to enter the north Atlantic
market.

In 1978, as domestic deregulation was

progressing, the administration of President
Jimmy Carter began examination of the Bermuda
II agreement with Great Britain. The finding was
that it was overly protectionist and gave an unfair
advantage to the British carriers. Encouraged by
the CAB’s deregulation of the domestic airline
industry and the success of Laker’s “Skytrain”, the
Carter administration began to push a policy of free-market competition in the
international arena. In a policy statement issued in 1978, the administration pledged
to “work to achieve a system of international air transportation that places its principle
reliance on actual and potential competition to determine the variety, quality and price
of air service. An essential means for carrying out our international air transport policy
will be to allow greater competitive opportunities for US and foreign airlines and to
promote new low-cost transportation options for travelers and shippers.”

60
As a result of this, the US government began considering a way to seek more liberal,
pro-competitive agreements with other governments.

These included:

 Unrestricted entry by an unlimited number of carriers;

 Unlimited authority to carry Fifth Freedom traffic;

 No government constraints on capacity;

 Carrier freedom on pricing, unless both governments disapproved; and

 Foreign government acceptance of US charter regulations.

The US government saw these agreements as a means to put pressure on

“recalcitrant” governments in the same general geographic area through an
“encirclement” theory. Thus, the United Kingdom would be pressured by expansion of
air service to and via Belgium and The Netherlands and Japan would be pressured by
a similar agreement with South Korea.

It should be noted that the ability to achieve these agreements was by giving greater
access to US cities and the resultant economic benefit derived therefrom.

Although there was opposition to this policy, liberal bilateral agreements were
achieved with a number of countries, and in 1980, the International Air
Transportation Act of 1979 was enacted by Congress. Although the Act was more
or less an international counterpart to the domestic Airline Deregulation Act, it did
implement US policy on international aviation.

61
Major provisions included:

 Strengthen the competitive position of US carriers to at least ensure equality with

foreign carriers;

 Freedom to offer consumer-oriented fares and rates;

 Eliminate marketing and operational restrictions, including capacity, routes and

operating rights for scheduled carriers;

 Eliminate discrimination and unfair marketing practices;

 Provide additional US gateways to foreign carriers; and

 Designation of additional US carriers in international markets.

In the early 1980s, a recession, rising oil prices and an air traffic controllers strike
disrupted the domestic market and the airline industry fell into a period of financial
losses. In addition was the first “casualty” of deregulation, the bankruptcy and shut-
down of Braniff Airways. As a result, the pursuit of a pro-competitive international
policy came to a temporary end, but there continued a view that this policy would
prevail over time.

The mid-1980s saw an economic turnaround and the US carriers began to experience
a recovery, particularly in the international markets. It was also becoming evident that
greater growth was being realized in the liberal markets, those with a liberal bilateral
agreement, than the more restricted markets. Although the liberal markets were not
large, trading open access in a foreign country for expanded access to the US
appeared to benefit the traveling public.

As the economy strengthened into the

late 1980s, the US looked to
aggressively pursue liberal ASAs,
and eventually implemented a policy
of negotiating “Open Skies”
agreements with foreign
governments.

62
In effect, deregulation took the political sphere out of the airline industry and replaced
it with a liberalized economic and
market sphere. The economic
liberalization of air travel was part of
a series of “deregulation” moves
based on the growing realization that
a politically controlled economy
served no continuing public interest.
This also put to an end the notion that
airlines were an extension of national
policy.

63
 Open Skies Agreements

By 1982 the United States had signed twenty-three liberal ASAs world-wide, mainly
with smaller nations. In the 1990s, similar agreements were achieved with individual
European states. A major breakthrough was achieved in 1992, however, when the
Netherlands signed the first Open Skies agreement with the United States, despite
objections by European Union authorities. The US subsequently granted antitrust
immunity to a code-share alliance between Northwest Airlines and KLM Royal Dutch
Airlines, which started in 1989 (when Northwest and KLM agreed to code sharing on
a large scale). This would be the first of the large airline alliances that would form in
later years.

The key provisions of Open Skies agreements include:

• Free market competition;

• No restrictions on international route rights, number of designated airlines, capacity,
frequencies, and types of aircraft;
• Pricing determined by market forces - “double disapproval” authorized:
• Designated carriers are free to provide their own ground-handling services
• User charges are non-discriminatory and based on costs;
• Computer reservation system displays are transparent and non-discriminatory;
• Cooperative marketing arrangements;
• Designated airlines may enter into code-sharing or leasing arrangements, subject to
usual regulations;
• Code-sharing between airlines and surface transportation companies authorized;
• Provisions for dispute settlement and consultation;
• Liberal charter arrangements;
• Each government agrees to observe high standards of aviation safety and security,
and to render assistance to the other in certain circumstances; and
• Seventh Freedom all-cargo rights.
• However:
• No Cabotage; and
• Restrictions on Ownership and Control.

64
The United States now has Open Skies agreements with 112 nations and cargo-only
Open Skies agreements with Argentina and Vietnam.

Below is a map of United Airlines international routes. Compare to Pan American’s

world routes on page 41. United acquired Pan American’s Pacific routes in 1985, its
London Heathrow route in 1990 and the remainder of its Latin America routes when
Pan American ceased operations on 4 December 1991.

65
66
 PART SIX

DEVELOPMENTS IN INTERNATIONAL COMMERCIAL AVIATION AFTER THE

COLD WAR, LIBERALIZATION OF AIR TRANSPORTATION IN EUROPE AND
MULTILATERAL AGREEMENTS

Breakup of the Soviet Union

With the breakup of the Soviet Union during 1990-1991, a flock of new entrants
emerged from the former Soviet Republics. For the most part, these were created by
the breakup of Aeroflot, which gave these former republics aircraft and a basic
infrastructure to establish a national carrier. Some were successful, others were not.
Some remained state-owned while others were replaced by more efficient, privately-
owned enterprises.

In Central Asia, airlines were formed in Kazakhstan, Kyrgyzstan, Tajikistan,

Turkmenistan and Uzbekistan. Many of these airlines operated on “shoe-string”
budgets and failed to comply with ICAO standards. These were “banned” from
operating in Europe. Others left a string of debts when forced to cease operations for
failure to meet financial obligations. When left to their own devices and without the
support from Moscow, these airlines suffered. In addition, these airlines met
competition from established European airlines who saw a ripe market for exploitation,
particularly in oil-rich Kazakhstan.

One operation that proved to be successful for Central Asian carriers Sixth Freedom.
This allowed these carriers to enter the European market and take advantage of the
large traffic demand in the Indian Sub-Continent markets and overcome a weak origin-
and-destination (O&D) market in their
home countries. An example of this type of
operation involved Tajik Air, the national
carrier of the Republic of Tajikistan.
Operating from its home base in
Dushanbe, the carrier operated Sixth
Freedom flights between London and
Delhi, India and Karachi, Pakistan. Using a Boeing 747SP leased from United Airlines,
the carrier picked up Fourth Freedom traffic in London, bound for Dushanbe for a short
stop that then became Third Freedom traffic to Delhi or Karachi. As the O&D traffic in
the London-Dushanbe market amounted to about six passengers a rotation, the Indian
and Pakistan traffic filled the seats of the Boeing. Unfortunately this operation was

67
short-lived, due to some poor decision making by management, but it certainly
provided to be a viable way to generate traffic. This type of operation enjoyed success
in Turkmenistan, Uzbekistan and Kazakhstan.

The Gulf Middle East

Up through the mid-1990s, air transportation in the Gulf Middle East (the Gulf
Cooperation Council (GCC) states of Kuwait, Saudi Arabia, Qatar, Bahrain, the United
Arab Emirates (UAE) and Oman) was dominated by Gulf Air, owned by the States of
Bahrain, Abu Dhabi, Qatar and Oman. Kuwait Airways and Saudi Arabian Airlines
operated international flights, but none in the GCC. The airports of Bahrain and Dubai
were important waypoints for flights between the Far East/Australia and Europe, and
provided for crew changes and embarkation/debarkation of 5 th Freedom traffic.

In 1986 the UAE and Germany entered into a liberal ASA providing for multiple
designations, a lifting of limits on frequencies and capacity, freedom on aircraft type
and scheduling, and unlimited Fifth Freedom rights. The only limitation was the
number of German points that could be served by UAE carriers.

In 1998, Britain agreed to a liberal ASA, replacing a restrictive bilateral. This was a
result of a policy decision in Britain to liberalize its bilateral arrangements. Thus the
new agreement removed all restrictions on flight frequencies, capacity and fares, and
Fifth Freedom rights were available to other Gulf points and Saudi Arabia, but not
between Britain and North America (where competition was substantially more
aggressive) nor from the UAE eastwards. In addition, by 1998, Emirates Airline was
beginning its expansion, and Virgin Atlantic was pressing for Gulf route authority.

The major impact

of liberalizing the
two ASAs resulted
in the expansion
of Emirates and
the development
of Dubai as a hub
for traffic between
Europe on one hand and the Far East and Australasia on the other. In addition the
rise of Dubai as a financial, trading and tourist center was an important factor that
sustained the rapid growth of the Emirates Airline.

68
 Liberalization of Air Transportation in Europe

The foundation for European airline deregulation was the 1957 Treaty of Rome that
gave the European Union (EU), then the European Community, the authority to
create the framework for a common transport policy. Although the policy at the time
was limited to rail, road, and inland waterway transport, it was stipulated that the
Council of Europe could extend the transport policy to maritime and aviation transport
by unanimous vote.

The passage of the Single European Act (SEA) in 1987 was instrumental for
European airline deregulation. The stated goal of the SEA was to create a common
market across the EU, by lifting all barriers to trade across the Member States. To this
end, the SEA amended the Treaty of Rome in order to strengthen the EU's ability to
direct common policies, including a common transport policy, for the EU at large.

However, the most significant change to the Treaty was the Council's decision-making
process, which was altered from a unanimous voting system to a qualified majority
voting system. This removed the veto power of individual Member States, enabling
the Council to adopt more stringent regulations against the Member States and
forcibly deregulate the EU internal market, including the aviation sector.

The approach toward liberalization in the EU was different from the U.S., which was
essentially bilateral, in that the development of a single open aviation market was
achieved through a comprehensive multilateral agreement among its member states.
This was driven by two complementary lines of approach. Starting around 1975, the
first driver, Directorate General for Transport, promoted liberalization through
proposals through the Council of Ministers. The second driver, the Directorate General
for Competition, began taking steps to eliminate anti-competitive practices by
government and industry. These two objectives of air transport liberalization and fair
and open competition were achieved in three stages or “packages”.

Although there was some liberalization already taking place, such as the
UK/Netherlands Agreement of 1984 and other limited community-wide agreements, it
was not until December of 1987 that the first important breakthrough came through
with the “December 1987 Package” of measures agreed by the Council of Ministers.
This “First Package” provided for wider Third and Fourth Freedom route access; a
more liberal fares regime; abandonment of the equal sharing of capacity on routes
served by airlines of the two states at either end of such routes; free entry of new
carriers into the market, but not yet an automatic licensing system; and more Fifth

69
Freedom traffic on scheduled intra-EU air services between hubs and regional
airports.

In June 1990, a “Second Package” was agreed by the Council of Ministers, further
loosening constraints on pricing, capacity restrictions and on market access. It also
allowed multiple designations of airlines on routes above a certain traffic density and
further opened up Third, Fourth and Fifth Freedom rights.

Formal EU airline liberalization occurred, however, in 1993, when the remaining

barriers of aviation measures to a free aviation market were removed. It came through
the “Third Package” of aviation measures approved by the European Commission,
acting through the Council of Ministers. This “Third Package” provided for unlimited
3rd, 4th, 5th, 6th and 7th Freedom rights, and, as from 1 April 1997, also 8th and 9th
(cabotage) Freedom rights thereby creating the second largest aviation area after the
United States.

This liberalization coincided with the creation of the single European market, which
also included the end of immigration and customs controls. Thus, for all intents and
purposes, the EU became a single “domestic” market for the free movement of goods,
services and people.

The Third Package also allowed cross-border majority ownership. It gave the right of
EU nationals or companies from any member state to set up and operate an airline in
any other EU member state. For example, British Airways owns and manages
Deutsche BA in Germany. There is however, a restriction on this right-of-
establishment, in that while such cross-border owned airlines can operate freely within
the EU, they are restricted from operating internationally due to traditional ownership
and control restrictions in international bilateral ASAs.

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With the liberalization, the European airlines, specifically the low cost or low fare
carriers, have practically unlimited freedom to choose routes, capacity, schedules and
fares with minimal interference of national governments. Commercial considerations
are the primary incentive for airline decisions.

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The full access to the EU aviation market also gave low-cost carriers the opportunity
to fully penetrate the European market, including the member states’ domestic
markets. The carriers took advantage of the opportunity to establish an ever
increasing number of bases throughout Europe, whereas the flag carriers remained
at their national home bases largely because of nationally restricted traffic rights with
regard to intercontinental routes. This also resulted in a declining number of intra-
European routes operated by these flag carriers. The low cost carriers also benefitted
with the introduction of direct Internet booking platforms, which enabled them to gain
market share quickly. In addition, these carriers did not create route density through
complex hub-and-spoke operations, but by serving an extended catchment area by
generating new market demand and serving routes at a lower frequency than the full
service carriers. Thus, the growth of the low-cost carrier segment took place by means
of quick expansion of the number of routes but at relatively low average frequencies.

For the established flag carriers, this period has been difficult, having lived with a
highly regulated market with strong government protectionism for decades. To
overcome declining growth, these carriers began rationalizing their networks in
response to increasing competition from the low-cost carriers. Some airline bases
have been de-hubbed or have been drastically downsized. In addition, route
frequencies have been stabilized, which also might have indicated a saturation of the
continental market.

In sum, the quickly growing low-cost carrier segment in combination with a decline of
flag full-service carrier share resulted in further growth of the intra-EU route network
but also in stagnating frequency growth and declining average route frequencies.

In 2002, the European Aviation Safety Agency (EASA) was established and is the
EU authority for aviation safety. Its
principal activities include strategy and
safety management, the certification of
aviation products and oversight of
approved aviation organizations and
EU member states. Headquartered in
Cologne, its staff is composed of over
700 experts and administrators from
EU Member States. There are
representative offices in Brussels,
Washington, DC, Montreal and
Beijing.

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EASA enjoys technical, financial and legal
autonomy and ensures the highest common
level of safety protection for EU citizens, the
highest common level of environmental
protection, avoids duplication in the regulatory
and certification processes among Member
States and facilitates creation of an internal EU
aviation market.

EASA also plays a leading role within the EU External Aviation Policy: the Agency is
a strong counterpart of other Aviation Authorities outside the EU and a major
contributor to the export of EU aviation standards worldwide, promoting the free
movement of EU aviation products, professionals and services throughout the world.

Multilateral Liberalization of Air Transportation

The United States has also been involved in air transport liberalization in a multilateral
basis and in 2001 the US signed the Multilateral Agreement on the Liberalization
of International Air Transportation (MALIAT).

This involvement had its genesis in the 1990s, when there was a move toward
acknowledgement of the need for a regime that might move air travel beyond bilateral
agreements and toward a multilateral approach. In 1995 a US Department of
Transportation policy statement spoke of the possibility of such an approach. And in
2001, the US signed a Multilateral Agreement on the Liberalization of International Air
Transportation (MALIAT) with Brunei, Chile, New Zealand, and Singapore. Since then,
the Cook Islands, Mongolia (cargo only), Samoa and Tonga have joined. MALIAT was
launched with much fanfare, but all its signatories were members of Asia-Pacific
Economic Co-operation and already had Open Skies with each other. MALIAT
remains open for others to join.

One of the keys to a successful multilateral approach is finding the common

denominator and keep it from being too little. Thus multilateral efforts seem more likely
to succeed among regional groups that share common geography and views. The
European Community is the poster child of such groups, even though it is the product
of economic and political integration that did not start with aviation. Multilateral aviation
in Europe stems from the November 2002 European Court of Justice ruling that
brought an end to third-country bilateral agreements with individual European states.

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 US-EU Air Transport Agreement

Over the years, the United States had enjoyed a powerful negotiating position vis-à-
vis Europe. However, with the liberalization of European air transportation and the
emergence of the single European market, it became clear that the bilateral ASAs
between the US and the individual Member States, albeit for the most part Open Skies,
were becoming obsolete. In addition, there was the highly restrictive Bermuda II
agreement between the US and the United Kingdom. This led to negotiations between
the European Commission and the U.S. government on a community ASA. These
negotiations led to the text of an agreement being initialed on 2 March 2007 and later
signed as the First Stage of a comprehensive agreement on 30 April 2007. It was
provisionally applied from 30 March 2008 for all EU Member States, and Amended by
a Protocol, signed as the Second Stage and provisionally applied on 24 June 2010.
Norway and Iceland accession to the ASA as amended by Protocol is provisionally
applied from 21 June 2011.

This agreement is the US-EU Open Skies Agreement, which is one of the most
significant open skies agreements concluded in recent years, applying to civil aviation
traffic between two of the world's three largest markets, the U.S. and the EU (the third
market, Asia, will be discussed below). The agreement authorizes every U.S. carrier
and every EU carrier to:

 Fly between every city in the EU and every city in the U.S.
 Operate without restriction on the number of flights, aircraft, and routes
 Set fares according to market demand
 Enter into cooperative arrangements, including code-sharing, franchising, and leasing
 The Agreement fosters enhanced regulatory cooperation in areas as diverse as
competition law, government subsidies, the environment, consumer protection, and
security
 The Agreement establishes a consultative Joint Committee through which the US and
the EU can resolve questions and further develop areas of cooperation
 Eliminated restrictions at London Heathrow
 Restrictions
o No cabotage
o Ownership and control

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 Under the agreement, London
Heathrow Airport was opened to full
competition and ended the restrictions
in Bermuda II limiting the authority to fly
transatlantic services out of Heathrow
to two US airlines and two UK airlines.

Third-country carriers with incumbent

Fifth Freedom rights to carry passengers between London Heathrow and the United
States continued under the agreement. These rights are exercised by Air New
Zealand (between Los Angeles-London Heathrow), Air India (between New York-
London Heathrow), and Kuwait Airways (also between New York and London
Heathrow). El Al also has such rights but has chosen not to use them, and Iran Air
technically also has similar rights, but is prohibited from flying to the US due to US
government economic sanctions against Iran.

While the ultimate objective of the EU is to create a

Transatlantic Open Aviation Area encompassing a
single air transport market between the EU and the
US, with free flows of investment and no restrictions
on air services, including access to the domestic
markets of both, this agreement does represent
important steps towards some sort of normalization
of the international aviation industry in the US and
EU markets.

Other regional groups have taken more modest steps. These include the Andean Pact
(Open Skies among Colombia, Ecuador, Peru, and Bolivia), Mercosur's Fortaleza
accord (Open Skies among secondary cities in Argentina, Bolivia, Brazil, Chile,
Paraguay and Uruguay), the Yamoussukro Decision in Africa, the Single Aviation
Market (reciprocal cabotage between Australia and New Zealand), and Southeast
Asia's Open Skies agreement amongst members of the Association of Southeast
Asian Nations (ASEAN).

The ASEAN Single Aviation Market (ASEAN-SAM)

The ASEAN Single Aviation Market (ASEAN-SAM) aims to develop a unified

aviation market among the nations that make up the ASEAN membership, which
includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), the
Philippines, Singapore, Thailand, and Vietnam. This involves the liberalization of flight

75
restrictions on carriers, allowing airlines from the 10 member states to fly freely from
their home country to any city within the association.

The ASEAN-SAM was initiated by the Multilateral Agreement on Air Services, along
with the Multilateral Agreement on the Full Liberalization of Air Freight Services
and the Multilateral Agreement on the Full Liberalization of Air Passenger
Services that were simultaneously approved on May 20, 2009 in Manila, Philippines.
These multilateral agreements, which took effect January 1, 2010, called for calibrated
and gradual implementation in each contracting state, allowing countries with a less
developed airline industry to maintain pace with more developed ones. This was part
of the broader ASEAN Air Transport Integration and Liberalization Plan to be
implemented by 2015 espousing an Open Skies regime.

Full implementation of the Open Skies policy, however, has been delayed because
two of the association’s 10 member nations have not yet ratified the arrangement.
Plans had called for Open Skies to be implemented by the end of 2015, but Indonesia
and the Philippines have yet to approve the scheme. So far, Indonesia has removed
restrictions on carriers only at Jakarta, the country’s capital. The Philippines has taken
the opposite tack, removing restrictions from all cities except Manila, its capital. The
two countries are the largest nations, by population, in ASEAN.

Open Skies is a key component of the ASEAN Economic Community (AEC), which
came into effect on 1 January 2016. The AEC is intended to transform ASEAN into a
region characterized by the free movement of goods, services, labor, and investment
capital, thus providing a boost to economic growth. Open Skies is critical to the long-
term economic development of the region because it removes restrictions on the
ability of airlines to operate from one ASEAN country to another. It will also result in
increased competition among airlines in the region, thus providing passengers and air
cargo customers with a wider range of transport options and lower prices. Flight

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frequencies will increase, and connectivity between the region’s aviation markets will
be enhanced. This will provide a boost to tourism as well as better economic
integration among the ASEAN nations.

ASEAN and the European Union have been discussing a bloc-to-bloc Open Skies
agreement, which would be world’s first-ever such agreement. However, ASEAN’s
own Open Skies arrangement will likely have to achieve full implementation before an
ASEAN-EU deal can come into effect.

Important as it is, ASEAN Open Skies may ultimately prove to be just the initial step
in the effort to develop the full potential of the region’s air travel market. Future actions
could involve the further removal of operating restrictions on carriers, changes in
airline ownership policies, formation of a region-wide regulatory agency (similar to
EASA), and establishment of an integrated air traffic management system.

Although Indonesia and the Philippine’s actions could be viewed as a setback, the
view is that ASEAN is moving in the right direction. Third and Fourth Freedom between
the capital cities (except possibly Manila) are now in effect. It also should be noted
that ASEAN is quite diverse, and given the diversity, it has moved as fast as it can. In
addition, because of its diversity, ASEAN does not have the supporting features of an
economic union such as the EU nor the level of sophisticated development of the US.
Further, ASEAN lacks authority to negotiate as a block or bind its members.

Thus, ASEAN's current aviation talks with China are for "a framework agreement".
Once that is concluded later this year, each ASEAN member will still need to sign its
own bilateral with China. After China, ASEAN is also looking to commence
negotiations with India on a similar air services agreement.

However, even if ASEAN cannot bind its members, it is still the only regional group
besides the EU to look outward. The rest focus solely on air rights among themselves.
ASEAN is no longer just a Southeast Asian organization. The rest of Asia realizes the
value of engaging with ASEAN as a group.

Growth of 6th Freedom Air Carriers

Sixth Freedom is the right of an airline to transport, via the airline’s home country,
traffic moving between two other countries. For example, hub carriers in Europe often
carry traffic from points in the Middle East or Gulf States to a hub in Europe for the
sole purpose of moving that traffic from its origin to another destination in Europe or

77
North America. The practice is common, often creates contentiousness and is not
covered by bilateral ASAs.

In the diagram above, two bilateral ASAs are involved with respect to country A. Traffic
traveling from B to A is Fourth Freedom traffic authorized by an ASA between A and
B. Traffic traveling from A to C is Third Freedom traffic authorized by an ASA between
A and C. These types of operations would be very difficult to restrict in an ASA
between any two countries. A traveler going from B to C (or vice-versa) would travel
through A and change planes (or stay on the same plane but with a change in flight
numbers).

Sixth Freedom has existed as long as a country and its airline had Third and Fourth
Freedom rights. Pan American, for example, could carry traffic between Europe and
Latin America with a change of plane in New York. In fact, such service was listed in
its timetables from the 1970s. Any European carrier, such as British Airways, Air
France, Lufthansa, etc., similarly had the ability to carry passengers originating in the
United States to points in their systems in Africa, Europe, Asia and the Middle East.
However, for the most part, passengers were loyal to their nation’s flag airlines and
would use them where possible on these routes.

From the US perspective, Pan American and TWA were the principal US-flag
international carriers with destinations around the world. Because of the geography
and economic considerations travel to overseas destinations beyond the gateway
cities required Fifth Freedom traffic rights. Otherwise, from an economic standpoint,
the carrier would not be fiscally able to carry traffic beyond those gateway cities. For
example, travel to a destination such as Istanbul on Pan American operating a Boeing
707 required additional stops beyond a gateway city such as London. Fifth Freedom
rights gave Pan American the ability to fill the seats emptied in London with revenue
passengers for points beyond London. Thus, these Fifth Freedom rights were critical
to both Pan American and TWA in their overseas operations.

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However, with deregulation and liberalization, and the resultant increased demand in
overseas travel, plus the development of long-range high capacity aircraft, such as
the Boeing 747-400, 777 and 787 and the Airbus A-330, A-350 and A-380, the focus
moved toward non-stop flights between international destinations. Thus, a trip to
Istanbul from a point in the United States is now nonstop on any number of air carriers
rather than the previous multi-stop trip. In addition, passenger allegiance is no longer
tied to their country’s flag airline, but to factors such as price and service offerings.
And, with “metal neutrality” associated with alliances, passengers booking flights
through their national carriers often end up traveling on a flight of a foreign carrier-
member of an alliance or code-share with that national carrier.

A comparison of Pan American’s route map from the 707 era on page 40 with a recent
route map of United on page 65 highlights these changes. Note the reliance of Pan
American on Fifth Freedom authority to complete its round-the-world flight as well as
flights deep into the European continent and beyond into Asia.

With these changes, the concept of Sixth Freedom operations as the mainstay of an
airline company began to emerge. The genesis of extensive Sixth Freedom operations
could very well have been the original code-share agreement between Northwest and
KLM, where Amsterdam served as a hub connecting passengers and flights between
Northwest’s US origins and KLM’s intercontinental destinations in the Middle East,
Asia and Africa. In addition, Singapore Airlines began operating a Sixth Freedom
flights between London and Sidney through Singapore.

However, what gave the biggest boost to Sixth Freedom operations was the ability of
airlines in nations with relatively small
Origin-and-Destination traffic to offer
intercontinental flights through their
home bases. Previously mentioned
was the Sixth Freedom operation of
Tajik Air between London and
Delhi/Karachi through Dushanbe,
Tajikistan. Currently, Turkmenistan
Airlines operates a similar operation
from its home base in Ashgabat as
illustrated in its route map.

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The biggest and “loudest” of the Sixth Freedom operators are what is known as the
“ME-3”, Emirates, Etihad and Qatar Airways. The former two are based in Dubai and
Abu Dhabi in the United Arab Emirates respectively and the latter in Doha, Qatar. The
growth of these airlines has been no less than phenomenal. In addition, Turkish
Airlines has made a significant impact in the competition for Sixth Freedom traffic as
well.

The Fourth Freedom capacity into the Middle East “hubs” and the Third Freedom
capacity out of these hubs is massive in comparison to the actual origin-and-
destination traffic (those actually traveling to Dubai on Emirates or Doha on Qatar
Airways, for example). These hubs are, for all intents and purposes, twenty-four hour
operations. And traffic continues to grow. For Turkish Airlines, Sixth Freedom
operations through Istanbul represents 25% of its traffic flow, and 12% of its revenues
is generated by its US flights. For the ME-3, US traffic alone has grown most
significantly since 2005:

The growth of these airlines is a relatively new phenomenon. In the middle of the
1990s, the principal airline in the Gulf Middle East was Gulf Air, jointly owned by
Bahrain, Qatar, Abu Dhabi and Oman. The “hub” was Bahrain and the route system
focused heavily on points in the Far East, the Indian Sub-Continent and Europe, with
London being the primary destination in that region. Emirates, Qatar and Oman Air
were relatively small, regional airlines and Etihad did not exist. By the middle of the
1990s, Emirates began to grow, and although in 1994 the fleet consisted of sixteen
aircraft, it was widely perceived that it was sixty. With its aggressive marketing
campaign, coupled with significant sponsorship of major sporting events, as well as
promotion of its Dubai hub Duty Free stores, the airline grew, and kept growing. The
focus was on Sixth Freedom. Not long after, Qatar followed suit along with the
establishment of Etihad. Turkish Airlines, joined the Star Alliance and by the early part

80
of the 21st Century, its Istanbul base has grown from a minor regional hub to a major
intercontinental hub.

What makes this all possible is the geography. Given current aircraft capabilities, the
geographic location of these hubs literally puts them in the center of the globe as a
connecting point between the continents.

The growth of these Sixth Freedom operators is undisputed and has brought
international commercial aviation to levels never before anticipated. A niche has been
created through clever use of the Third and Fourth Freedoms to establish a system
resembling the domestic hub-and-spoke systems in the US. on a global scale.
Because of the geographic advantage of these international hubs, the traditional
national carriers may consider themselves at a disadvantage competitively and may
be faced with a need to consider ways to remain competitive without the need to
compete head-to-head with these carriers.

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 Alliances

Airline alliances go back as far as the 1930s when Pan American World Airways and
Panair do Brasil agreed to exchange routes in South America. Since then other types
of alliances followed, such as the aircraft interchange, which was standard from the
post war up to deregulation and the code-share, now the most common.

The aircraft interchange involved the same aircraft operated by crews from different
airlines. For example, Pan American Grace Airways (PANAGRA) flight 701, a
PANAGRA DC-7B between New York and Buenos Aires, Argentina, was operated by
National Airlines from New York to Miami, by Pan American between Miami and
Panama, and by PANAGRA from Panama onwards to Buenos Aires. Probably the
most famous aircraft interchange, however, was the Braniff-British Airways/Air France
with the Concorde. British Airways or Air France flew the transatlantic, supersonic
sector to Washington Dulles Airport where Braniff took over and flew the aircraft,
subsonic, to Dallas. It was intended to paint the aircraft with Braniff livery, but the
operation was suspended after about 17 months due to high costs and low load
factors.

The codeshare is basically an arrangement where two or more airlines share the same
flight. One airline operates the flight as the “administrating carrier” and the others can
sell seats on that flight using their IATA designators. For example, United Airlines
flight 8826 from Washington Dulles to Frankfurt is a codeshare with Lufthansa’s flight
419, a Boeing 747-8 operated by Lufthansa.

These types of codeshares were primarily bilateral alliances. However, the most
successful bilateral liaison was the Northwest-KLM. Each had behind-gateway
operations that made their respective networks almost wholly complementary. That
partnership eventually led to what is now the Sky Team Alliance.

Today, there are three major airline alliances: Star, with 27 airline members, the
aforementioned Skyteam, with 20 airline members and Oneworld, with 15. These
alliances are more than simple marketing extensions complemented by bilateral airline
arrangements. The alliances are effectively a close substitute to a merger because
the alliance typically involves full coordination of the major airline functions on the
affected routes, including scheduling, pricing, revenue management, marketing and
sales.

Because of the impact on competition and the coordinated activity of the member
airlines, the regulatory authorities have required “metal neutral” antitrust immunity

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(ATI). The regulators’ goal, therefore, is to create a “neutral” situation where no airline
in the alliance gains anything by keeping passengers on its own flight – as opposed
to losing them to its alliance partners. This level of immunity comes with both privileges
and obligations. The airlines so immunized are not only permitted to cooperate
extensively as metal neutral, but they must do so. That is because consumers will not
otherwise be able to benefit from the combining of fares and routings, a key
component of the metal neutral concept.

There is no doubt the alliances have made a significant impact on international

commercial aviation. Offering seamless operations and a network to the traveler,
particularly the business traveler with high demands, the alliances themselves can
meet such demands that no individual carrier in most cases can achieve.

83
The global reach of the three major airline alliances:
Star

Skyteam

Oneworld

84
 PART SEVEN

CURRENT REGULATORY SCHEMES

Montreal Convention

The Montreal Convention (formally, the Convention for the Unification of Certain
Rules for International Carriage by Air) was signed on 28 May 1999 in Montreal,
Canada and took effect of 4 November 2003. It amended important provisions of the
Warsaw Convention's regime concerning compensation for the victims of air disasters
and established uniformity and predictability of rules relating to the international
carriage of passengers, baggage and cargo. Although it maintains the core provisions
of Warsaw, the new treaty protects passengers by introducing a two-tier liability
system that eliminates the previous requirement of proving willful neglect by the air
carrier to obtain more than US$75,000 in damages, which should eliminate or reduce
protracted litigation.

Under the Montreal Convention, air carriers are strictly liable for proven damages up
to 113,100 special drawing rights (SDR), a mix of currency values established by the
International Monetary Fund (IMF). Where damages of more than 113,100 SDR are
sought, the airline may avoid liability by proving that the accident that caused the injury
or death was not due to their negligence or was attributable to the negligence of a
third party. This defense is not available where damages of less than 113,100 SDR
are sought. The Convention also amended the jurisdictional provisions of Warsaw and
now allows the victim or their families to sue foreign carriers where they maintain their
principal residence, and requires all air carriers to carry liability insurance.

The Montreal Convention changes and generally increases the maximum liability of
airlines for lost baggage to a fixed amount 1,131 SDR per passenger (the amount in
the Warsaw Convention is based on weight of the baggage). It requires airlines to fully
compensate travelers the cost of replacement items purchased until the baggage is
delivered, to a maximum of 1,131 SDR. At 21 days any delayed baggage is considered
lost, even if the airline delivers it after that period.

As of the end of 2015, there are 119 parties to the Convention. Included in this total is
118 of the 191 ICAO Member States plus the European Union. The states that have
ratified represent 117 UN member states plus the Cook Islands.

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 Consumer Protection

Protection of consumer interests covers many elements, including air passenger rights
and the contractual relationship between airlines and their users. There may exist
some instances where competition does not necessarily guarantee a minimum level
of service levels that customers can expect, mainly because of the lack of information
available to them and their weak negotiating position. Certain elements might not even
be a matter of competition between airlines. Concerns about the limits of competitive
response have induced a number of countries to ask the industry to develop voluntary
commitments (non-legally binding self-regulation) and/or to take some direct
regulatory measures that address consumer interest issues such as denied boarding
compensation, flight cancellations and delays, advertising and fare disclosure
requirements.

Consumer Protection Rules – United States

In the United States, the USDOT has promulgated regulations that cover consumer
interests related to Denied Boarding Compensation (DBC), Advertising and the Full
Fare Passenger Rule, Tarmac Delays and Customer Service.

Part 250 covers DBC due to oversales or overbooking, but does not cover a refusal
to board for other reasons. It covers only denied boarding from airports in the US and
does not reach flights to the United States from Europe by US or non-US carriers. The
compensation paid if alternate transportation is offered, but does not arrive within one
hour of the oversold flight, is 200 per cent up to 400 per cent of the fare ($650 up to
$1,300) to the passenger’s destination or stopover, depending upon whether the
alternate transportation is more or less than two hours late. If alternate transportation
is provided to arrive at the airport within one hour of the oversold flight, no
compensation is paid. The fare for DBC purposes refers only to the price paid for air
transportation including all mandatory taxes and fees, and does not include ancillary
and fees and/or changes for optional services paid by the passenger. In addition, the
carrier is not obligated to pay compensation if the flight is cancelled.

A passenger may decline DBC and sue for breach of contract because a passenger
who has a confirmed reservation and has been denied boarding in the US has a
contract with the carrier which has been breached. The passenger will need to have
a strong case for substantial damages, a consequence of not arriving for an important
business meeting, for example. Otherwise, the DBC is a better, quicker and less
expensive option for the passenger. The DBC can be considered a form of liquidated

86
damages to compensate passengers for their inconvenience, loss of time, and other
consequential costs associated with the delay (food, lodging, ground transportation,
communication etc.).

USDOT has also promulgated the so-called "Full Fare Advertising Rule". This rule
states that an advertisement by an airline or its agent or a ticket agent for passenger
air transportation must state the entire price to be paid by the customer to the carrier,
or agent for air transportation. Charges like government taxes must also be included
in the single total price but may be stated separately.

Tarmac delays are also an issue of interest to the consumer, particularly since there
had been some instances involving long delays resulting in extreme discomfort and
inconvenience to the passenger. Rules have been established to protect passengers
in the event of such delays. These include the requirement that airlines adopt Tarmac
Delay Contingency Plans and not permit international flights to remain on the tarmac
for more than four hours and domestic flights for more than three hours. In addition,
airlines are required to give notice to passengers of any delay as well as make
available operable lavatories, medical assistance, if needed, and food and water no
later than two hours after the aircraft leaves the gate or touches down. The airline is
also required to keep detailed records of tarmac delays and submit reports on such
delays to the USDOT. Further, the airlines are required to post Tarmac Delay
Contingency Plans and Customer Service Plans on their websites.

87
The aforementioned Customer Service Plans are required of all US airlines and
foreign airlines operating to the United States. These require:

 Require the carrier to notify the customer that the lowest fare may be available
elsewhere than at the Carrier’s website or ticket counter.
 Require the carrier to notify the customer of known delays cancellations and
diversions.
 Require the carrier to deliver baggage on time, return mishandled baggage within
24 hours, and compensate the passenger for expenses due to delay in delivery
of baggage, and reimburse baggage fees, if baggage is lost.
 Instruct carriers how to respond to consumer complaints.
 Prohibit US carriers from including language in their contracts of carriage which
precludes a passenger from filing a consumer-related claim involving a domestic
(US) flight against the carrier in any court of competent jurisdiction. The forum
provisions in the Warsaw and Montreal Conventions should not be affected.
 Require carriers to notify passengers of known delays of 30 minutes or more and
within 30 minutes of the carrier’s becoming aware of the change. This rule
applies to both the marketing (codeshare) and operating airline.
 Prohibit carriers and sellers of transportation from increasing the price of air
transportation after the customer has completed the purchase, except for
increases in Government imposed taxes and fees.
 Require carriers to have a website accessible to the general public to disclose all
fees and increases in fees for baggage and optional services.
 Require carriers to provide refunds of flights in the event of cancelled flights
(including non-refundable tickets) and refunds of fees for optional services.

These requirements have been imposed on both US and foreign airlines. However the
extent of these rules suggest that US aviation policy is focusing on the micro-
management of the airline business in the interest if protecting the consumer. For
example, does it make sense for an airline to be required to tell a potential customer
to go somewhere else for a better price?

Government regulation by the USDOT has had the salutary effect of stopping unfair
and deceptive practices by airlines and unfair methods of competition. The USDOT's
authority to act in this regard is provided by Federal Law. What these rules do is
legislate service requirements on airlines, which, if not adhered to, will constitute an
"unfair and deceptive practice".

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 Consumer Protection Rules – European Union

The European Union's Regulation No. 261/2004 (EU 261) came into force on 17
February 2005. The regulation covers flight cancellations, flight delays and denied
boarding.

EU 261 applies to all flights from any airport in a European Union Member State and
all flights departing anywhere, operated by a European Community carrier. Thus, a
passenger departing New York for London on British Airways is covered by EU 261,
as well as by any US regulations that might be applicable.

Articles 4 and 5 of the regulation provides for compensation for a passenger who is
denied boarding against his will or subject to a flight cancellation. Pursuant to Article
7, the amount ranges from €250 to €600 based on the length of the flight. Where the
passenger is offered re-routing and the arrival time does not exceed certain
parameters from 2 hours to 4 hours, the compensation is reduced by 50%.

Article 9 requires that where a flight is cancelled or long delayed, the passenger must
be offered, free of charge, meals and hotel accommodation, transfers between the
hotel and airport, and two telephone calls. If the passenger on re-routing is
downgraded in class, the regulation provides for compensation for the downgrading.
Notwithstanding receipt of compensation under Article 7, the passenger can also
obtain additional compensation from the carrier from the exercise of other applicable
remedies such as breach of contract claims or claims under the Montreal Convention.
The operating carrier must also give notice to the passenger of his or her rights in the
case of denied boarding or cancellation. Finally, the regulation supersedes any
contrary provision in the contract of carriage between the carrier and the passenger.

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In March 2013, revisions were proposed for EU 261 intended to achieve a higher level
of consumer protection and incorporate some of the Tarmac Delay Rules of the United
States. Significant revisions include:

 Provides for compensation for long delays up to twelve hours.

 The right to care in all cases begins at two hours, for flights of all distances.
 Passengers have the right to care and in most cases compensation, if because of
delay, the passenger misses a connecting flight which is part of a single contract of
carriage.
 In the event of tarmac delay of five hours, the passenger has the right to disembark
and receive compensation as well.
 Airports, not just airlines, will be required to have a Contingency Plan to cover
tarmac delays and stranded passengers.
 It is the passenger’s choice, in case his or her flight is cancelled, whether he or she
wants to be reimbursed, continue travel by a re-routing or travel at later time.
 Passengers must be informed about procedures for submitting claims and
complaints and receive a reply within a reasonable time.
 Where there is a delay of five or more hours, passengers must be offered, free of
charge, re-routing or reimbursement of the flight price.

There is also a proposal to include a definition of "extraordinary circumstances", which

makes a national disaster, labor dispute, and security checks "extraordinary" while
technical problems such as problems discovered in a pre-flight check are not. This
seems to penalize an airline for caring about aviation safety.

As of this writing, these proposals are still pending.

EU 261 is not an exclusive remedy for compensation claims. Passengers also may
seek compensatory damages for delays through the Warsaw/Montreal Conventions.

Competition – United States

The Antitrust Laws of the United States govern competition between the airlines in the
US. There are two major pieces of legislation: The Sherman Antitrust Act, also
known as the Sherman Act, which deals with restraints in trade and monopolization,
and the Clayton Antitrust Act that supplements the Sherman Act in several areas
including mergers and acquisitions. The Sherman Act became law in 1890 as a result
of public antagonism towards corporate trusts and pooling arrangements that
permitted competitors to form combinations, to set prices and divide markets.

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Section 1 of the Sherman Act (“Sherman 1”) prohibits contracts, combinations or
conspiracies in restraint of trade. These acts include price fixing and division of
markets. Here, it would be unlawful for Airline “A” to agree with its competitor Airline
“B” to fix the fare they charge on a route they compete
on or for Airline “A” not to compete with Airline B on one
of its routes in exchange for Airline B not competing on
one of Airline A’s routes. For a violation to exist requires
concerted action of two or more parties. A unilateral act
is not unlawful.

There are reasonable “restraints” that are lawful. For

example, a trade association can be formed of
competitors, or competitors can exchange non-price
information, or competitors may enter into a joint
venture. Conscious Parallelism, where the unilateral acts of two competitors are the
same, is also allowed. For example, an airline may match the published fare of its
competitor. Airlines as a matter of course publish their fares, indeed they are readily
available on their websites, and there is nothing to stop a competitor from matching
the competition.

Section 2 of the Sherman Act (Sherman 2) prohibits acts of monopolization as well as

conspiracies to monopolize. This can be violated by the conduct of a one company.
Monopolization involves the power to control prices or exclude competition and is
measured by the market share the violating company has in the relevant market. A
typical act of monopolization is predatory pricing, where a competitor seeks to drive
out the competition by, in the airline industry, reducing fares in a market to the extent
that the competition cannot match them. In addition, in determining whether the pricing
is predatory, the competitor must be shown to be producing revenue below costs in
the particular market. Defining the relevant market as well as the costs is
problematical, and as a result it is often difficult to prove the violating party has in fact
engaged in the act of predatory pricing. Another example of monopolization is where
a competitor is so dominant in a market that entry is virtually impossible. The question
can be raised in circumstances where an airline is so dominant in a hub, known as a
“fortress hub”, that competition or potential competition is excluded or discouraged by
the virtual impossibility to penetrate the fortress walls.

Under the Clayton Act, it is unlawful for a person or business to acquire the stock or
assets of another where in the effect of such acquisition may substantially lessen

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competition or tend to create a monopoly. Airline acquisition, combinations or mergers
are subject to the provisions of this Act.

The USDOT has antitrust jurisdiction for joint ventures, alliances, code-sharing and
other combinations within the industry. The US Department of Justice (USDOJ) has
jurisdiction over airline mergers.

Competition – European Union

Competition Law in the European Union covers four main areas: Cartels, Market
Dominance, State Aid and Mergers.

Cartels, or control of collusion and other anti-competitive practices are covered by

Article 101 of the Treaty on the Functioning of the European Union (TFEU). Article
102 of the TFEU concerns market dominance and the prevention of abuse by
companies with dominant market positions. This includes unfair trade practices and
predatory pricing. This article applies to dominant market players with as little as 38%
of market share. Article 107 of the TFEU governs state aid and the direct or indirect
aid given by member countries to companies.

Council Regulation 139/2004 EC, the Merger Regulation, governs mergers, control
of proposed mergers, acquisitions and joint ventures involving companies that have a
certain, defined amount of turnover in the EU.

Antitrust Immunity (ATI)

Generally, airline mergers, alliances and other combinations are subject to the
Antitrust Laws. The criteria for determining whether these laws are violated revolves
around whether a monopoly situation is created that is so vast that competition is
denied, resulting in monopoly fares and/or services. However, the Federal Aviation
Act gives some leeway where a merger or combination, such as alliances and
codeshares, will result in a compelling consumer benefit. This leeway is manifested
through Antitrust Immunity (ATI), and the DOT is given jurisdiction to grant such
immunity.

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The concept of “metal neutrality”, discussed in Part Six, is most
often identified with ATI and is associated with the three major
airline alliances, Star, oneworld and Sky Team. The grant of ATI
for metal neutral operations allows immunized member airlines
to share information, pricing, capacity and frequency, as well as
route strategies. Metal neutral is the pinnacle of antitrust
immunity because it is effectively a close substitute to a merger.
It also means that an airline in an alliance should not gain anything by keeping
passengers on its own flight – as opposed to losing them to its alliance partners.

Where the US is concerned, full immunity to operate as metal neutral requires that an
open skies agreement be in place. The basis for this is that if there is a potential for
additional, unregulated competition, allowing consolidation of interests and thereby
reducing direct competition will less likely be anti-competitive overall. However, if entry
is restricted, where there were no open skies, that would not be the case.

This open skies condition, however, is by no means a standard requirement outside

the US, even though the broad principles may be similar. And this is a fault that can
impact the bilateral ATI approval process. Every country with competition laws
displays differences in approach and substance. Thus, while the competitive
assessments of different countries provide for the weighing of efficiencies and
consumer benefits, the approval process might involve completely different standards
of review.

One area of concern for independent (non-alliance) airlines is the measure of market
share. In determining dominance in a market, should the market share be measured
by the total collective share of members of an alliance or by that of individual airline
shares alone? The point here is that an independent airline might be seen as having
a dominant share in a market if measured against the shares of individual member
airlines, but if the shares of the member airlines were combined, the independent
airline will not be seen as having that dominant share and not open to possible charges
of monopolistic behavior.

Airline Certification

Licensing and certification of airlines is under the jurisdiction civil aviation authorities
of the counties in which the airlines are based. Generally, airline-applicants are
required to submit two applications for processing, one for economic certification and
the other for technical. The entire process can take several months, particularly if the

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airline-applicant fails to provide the required documents and manuals. In addition to
the review of submitted materials, the authorities may require senior management to
be subject of an oral examination.

Airline Certification – Economic Authority

Economic authority involves the business side of the airline’s application. In the US,
the USDOT receives and reviews such applications and if approved, grants a
Certificate of Public Convenience and Necessity (CPCN). The Civil Aviation
Authorities (CAA) of other countries, and EU Member States, issue the equivalent in
the form of an Airline Operating License (AOL). The requirements are the same
although there are in some cases minor exceptions that are unique to a specific
country.

The most important document

that an airline should submit is
a full and complete
comprehensive Business
Plan. This should detail the
first five years of operation
and also demonstrate that the
airline has adequate financing to cover 3-month’s operation with no revenue. This
financing is required by both the USDOT and EU CAAs. Other information required
includes corporate status, ownership information, including citizenship status, a
description of the proposed operations and fleet, ASA compliance, adequate
insurance cover and any additional requirements of the USDOT or CAA. US airlines
seeking international routes will also need to provide information concerning the ASA
status between the US and the country involved. In cases where there is no ASA the
route may be approved on the basis of “Comity and Reciprocity”. The approval
process may require an oral
examination of the management of the
airline-applicant. Final certification can
take several months, although an
exemption to operate may be granted in
cases where the applicant demonstrates
the ability to provide the services
proposed. This exemption would be tied
to the applicant’s completion of its
technical certification.

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 Airline Certification – Technical

Approval of economic authority does not give permission to an airline to operate. The
meeting of technical requirements as set forth by the USDOT and CAA is critical to
final approval as a certificated air carrier. The FAA has the authority to approve U.S.
airline applications for technical certification and is governed by FAR Part 121
(OpSpecs) for scheduled airlines. Completion of the OpSpecs meets the certification
requirements. For airlines outside the US, the appropriate CAA issues an Air
Operator’s Certificate (AOC) once the applicant fulfills all requirements of
Commission Regulation (EU) No 965/2012.

The most important document that an

airline is required to submit is the
Operations Manual. The FAA/CAA will
closely scrutinize the manual because it is
the one document that directs the entire
operations of the airline. In fact, the manual
is so important that the FAA/CAA will
generally assign a staff member to work
with the airline during the review process to
ensure the manual meets the requirements
of the governing rules. Other manuals will
be inspected as well, and these include the Training Manual, the Maintenance
Program, Aircraft Technical Logs and Crew Licensing. In addition, the names and
qualifications of key management staff are required, including the Chief Pilot, the
Flight Operations Manager, Maintenance Manager, Training Manager and Ground
Operations Manager.

Another important requirement is the

registration and airworthiness status of the
airline’s fleet. In order for an aircraft to operate
into a country, it must have an airworthiness
certificate that is recognized by that country.
Otherwise it will not be allowed to operate in
that country. While that can be considered a
“given”, there are instances where a specific
aircraft may not have an airworthiness
certificate on record in a country and therefore it is recommended that such certificate
be confirmed.

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 Certification to Operate to a Foreign Country

Established airlines desiring to operate to foreign countries are required to make

application to the appropriate authorities for permission. In the case of the U.S., the
USDOT has jurisdiction, as do the CAAs of EU or non-EU countries. The requirements
for approval are not as extensive as those for a start-up airline, however, a history of
satisfactory operations must be evident. At the minimum, a valid CPCN/OpSpecs or
AOL/AOC is mandatory. In addition, proof of insurance, proof of financial ability and
aircraft registration information must be made available. The proposed operations
must also be in compliance with the applicable ASA. In some jurisdictions, age and
noise restrictions may apply.

Accident Investigation

Nearly every country that has any sort of transportation infrastructure has in place a
system to investigate accidents. In the US, the National Transportation Safety
Board (NTSB) is tasked by law with that duty. Originally an agency within the USDOT,
it was severed from that agency by the Independent Safety Board Act of 1974 and
is mandated with maintaining independence and objectivity in carrying out its duties,
which include:

 Conducting objective, precise accident investigations and safety studies.

 Performing fair and objective airman and mariner certification appeals.
 Advocating and promoting safety recommendations.
 Assisting victims of transportation accidents and their families.
 Carrying out its mission of:
o Independently advancing transportation safety;
o Investigating every civil aviation accident; and
o Issuing safety recommendations aimed at preventing future accidents.

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The core of the NTSB are its “Go Teams”. These are the duty investigators who are
ready to deploy to an accident immediately upon learning of it. Consisting of up to a
dozen specialists, when on duty rotation, the teams are reachable at all times and
have at the ready their “tools of the trade”, consisting of such basic items as selected
wrenches, screwdrivers, flashlights, tape recorders, cameras and devices peculiar to
their individual specialty.

Each Go Team is led by an “Inspector-in-Charge” and each inspector is a specialist

responsible for a clearly defined portion of the accident investigation, including:

 Operations – accident flight history.

 Structures – airframe wreckage, impact angles.
 Power plants – engines.
 Systems – hydraulic, electrical, instruments and elements of the flight control
system.
 Air Traffic Control – ATC services, radar data, communications.
 Weather – pertinent weather data from National Weather Service, local TV.
 Human performance – crew performance and before accident factors (fatigue, etc).
 Survival factors – impact forces, injuries, evacuation, etc.

Because of the scope of many of its investigations, the NTSB employs a “Party
System” which allows for leveraging of resources by designating other organizations
or corporations as parties to its investigations. The NTSB has complete discretion over
the appointment of these parties and such parties must be able to provide expertise
and must have the requisite technical and specialized skills. By law, the FAA is
automatically a party and may be requested to collect factual information at the scene
of the accident. Persons in legal or litigation positions are not allowed, and all parties
report to the NTSB.

The NTSB may assist in incident and accident investigations outside the US, where
such incidents or accidents involve US-registered civil aircraft in foreign air space; US-

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owned civil aircraft in foreign air space; and US-manufactured aircraft or US-
manufactured components in foreign air space. In addition the NTSB may provide
technical support to transportation investigative boards in countries that do not have
the equipment or specialized technicians to undertake a complex investigation.

As part of its procedures, the NTSB may hold an investigative hearing as part of a
major transportation accident investigation to take sworn testimony. These hearings
are usually held within six months of an accident (maybe longer in complex cases)
and the public is allowed to attend to observe the progress of the proceedings.
Investigations involving criminal activity are not investigated by the NTSB. Generally
lead status is surrendered when, after consultation with the NTSB Chairman, the US
Attorney General notifies the Board that circumstances reasonably indicate that the
accident may have been caused by an intentional criminal act.

During the course of its investigations, the NTSB will make safety recommendations
based on its findings but often before completion of its investigation. These
recommendations may or may not be related to what is ultimately determined to be
the cause of the accident, but are an integral part of the NTSB mandate. As
investigations progress, the tests and analyses will eventually lead to the preparation
of a draft final report by the NTSB staff. The parties do not participate in the analysis
or writing phase, but are invited to submit proposed findings of cause and safety
recommendations that are made part of the public docket (case file). At a public Board
meeting, the NTSB will deliberate over the final report, although non-NTSB personnel,
including parties and family members, cannot interact with the Board during the
meeting. Once the report is adopted by the NTSB, an abstract of the report, containing
the Board’s conclusions, probable cause and recommendations, is placed on the
Board’s website. The full report appears several weeks later.

It should be noted that publication of the Final Report does not necessarily close an
accident investigation. Often, with advancing technology, a new cause for an accident
may emerge at some time in the future that can over-ride the cause determined in the
original investigation.

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 PART EIGHT

CURRENT REGULATORY ISSUES AND CONCLUSION

Recent developments in aviation has given rise to issues that have now become
subject to robust debate. These include regulation of Unmanned Aircraft Systems,
allegations of unfair competition against Emirates, Etihad and Qatar Airways (“The
US-3 vs. the ME-3”), the potential for future use of “flags of convenience” in
international air transportation, the abuse of Forum Non Conveniens in Montreal
Convention cases and Ownership, Control and the Right of Establishment.

Unmanned Aircraft Systems (UAS)(Drones)

The FAA refers to “Drones” as “Unmanned Aircraft Systems” (UAS), and defines them
as “aircraft operated without the possibility of direct human intervention from within or
on the aircraft.” There are two types: The Small UAS (sUAS) that weigh less than 55
pounds (including everything on board the aircraft), such as those flown by individual
hobbyists and by companies; and Large UAS that weigh 55 pounds or more, such as
military drones and border patrol UAS.

There are three types of UAS operations: Public, which is performed by government
agencies and organizations such as law enforcement, firefighting, and border patrol;
Civil Aircraft Operations, performed by private, nongovernmental organizations and
individuals and Model Aircraft Operations, performed by hobbyists or recreational
users operating sUAS flown for noncommercial purposes.

Currently, Federal regulation related to the commercial use of sUAS/UAS is a work in

progress. States are enacting a rapidly developing body of law related to sUAS/UAS
use; industry is heavily engaged in public strategies to shape the future of sUAS/UAS
laws and regulations; recreational use is skyrocketing, but commercial use is lagging
due to legal and regulatory constraints. Concerns about safety and liability threaten to
impede progress toward more widespread use of UAS for commercial purposes.

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Individuals who fly sUAS only for “hobby or recreational purposes” do not require FAA
licensing or permission to operate their sUAS. But such non-commercial operations
must fly below 400 feet and remain
clear of surrounding obstacles; be
within visual line of sight at all times;
remain well clear of and not interfere
with manned aircraft operations; and
avoid flying within 5 miles of an airport
unless they contact the airport and
control tower before flying. The
aircraft must weigh less than 55
pounds and the operator must not be
careless or reckless with their sUAS.

Public uses of UAS involve firefighting and disaster relief; law enforcement; border
security; military training; UAS testing and evaluation; and search and rescue
operations.

On the commercial side, there are numerous activities including real estate aerial
imaging services and marketing; university research into weather, agriculture, and
industrial uses; aerial surveys, inspection and data collection; motion picture and
television photo and video production; construction site
monitoring; energy industry inspections, mapping,
monitoring, and security of infrastructure; and crop
surveying. Of course, there is also package delivery,
which was first advanced by Amazon and which may
very well be looked at by other package delivery
companies.

The question is what is next with regard to regulation of sUAS/UAS. There is currently
a FAA Notice of Proposed Rulemaking that was published on 15 February 2015
proposing a rule to establish operating and performance standards for sUAS weighing
less than 55 pounds. After some delay FAA plans to issue a final rule in 2016. There
has been some contention, however, due to a fear of over-regulation or lack thereof.
Arguments are coming from all sectors and the delay in producing a final rule has only
exacerbated the situation.

In addition, The Air Line Pilots Association (ALPA) advocates that sUAS owners pass
an online training course before being allowed to operate their devices. The proposal
calls for sUAS owners to be required to gain a “key code” by passing an online training

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course. These sUAS, like those being sold by retailers, would not be able to be
operated until the correct key code is plugged into the device via a mechanism that
would have to be created by the manufacturers.

Outside the FAA, several states within the US have enacted their own legislation
including standards of state regulation; restrictions on law enforcement use;
prohibitions on voyeurism; restrictions on photographing persons, private property,
certain events or “critical infrastructure” without consent; establishment of rules for
state government oversight agencies, task forces or test sites; commercial agricultural
operations; and restrictions on use of sUAS for hunting, fishing, or trapping.

In the EU UAS are increasingly being used, but under a fragmented regulatory
framework. Basic national safety rules apply, but the rules differ across the EU and a
number of key safeguards are not addressed in a coherent way.

On 18 December 2015 EASA published a Technical Opinion on the operation of

drones, which lays down the foundation for all future work for the development of rules,
guidance material, as well as safety promotion to ensure UAS are operated safely and
their impact on the safety of the aviation system is minimized. The opinion includes
27 concrete proposals for a regulatory framework for low risk operations of UAS and
are operations centric, focusing on how the UAS will be used rather than their physical
characteristics. It establishes 3 categories of operation: “Open”, “Specific” and
“Certified” with different safety requirements for each, proportionate to the risk. EASA's
Technical Opinion mentions the use of new rules in combination with safety promotion
material to achieve a proportionate, safe environment.

In 2016 and 2017, new rules will be developed, or existing ones will be amended,
within the framework described in the Technical Opinion. Also, guidance material,
including safety promotion, will become available. All relevant work will be made
available on the EASA website.

In the Gulf, the United Arab Emirates (UAE) aviation regulator, General Civil Aviation
Authority (GCAA), has instructed all “leisure” users of UAS to operate them only within
GCAA-registered and authorized clubs. This instruction came about following the
closure of Dubai International Airport for a short period in January 2015 due to the
presence of a small UAS near the airport. Abu Dhabi, one of the seven constituent
emirates within the UAE, has also placed restrictions on the purchase of UAS.

In December 2015, neighboring Saudi Arabia banned the use of all UAS without
permits. As well as obtaining a general permit for the use of UAS, each individual

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usage of the vehicle will require a specific permit and this will only be granted for what
the Saudi regulator described as “strictly operational reasons.”

One matter of concern is privacy and the invasion of privacy. Commercial UAS may
be equipped with cameras and other data collection devices. Because of this owners
and operators may be subject to data liability for UAS that intentionally or inadvertently
capture or transmit confidential
personal/health information or privileged
business data, such as intellectual
property or trade secrets. There is a need
for secure data transmissions from UAS to
ground systems to prevent information
being disclosed to the public, and there is
a need for software to prevent risk of
hacking or malware.

The US-3 vs. the ME-3

On 28 January 2015, a White Paper “Restoring Open Skies: The Need To Address
Subsidized Competition From State-Owned Airlines in Qatar and the UAE” prepared
by Delta Airlines, American Airlines and United Airlines (US-3) was published and
raised the issue of whether subsidies are in fact provided by the Gulf nations of the
United Arab Emirates (UAE) and Qatar to their respective airlines (Emirates, Etihad
Airways and Qatar Airways) (ME-3). According to the paper, along with hundreds of
pages of supporting documents, the US-3 claim the ME-3 have received $42 billion in
subsidies, fueling a massive expansion in their fleets – and, in the case of Etihad and
Qatar, their continued existence – and seriously distorting the commercial
marketplace to the detriment of U.S. and third-country airlines.

The paper further states that the ME-3

have ordered hundreds of new
widebody aircraft, including at least 160
double-deck Airbus A380s, and given
their current order books, the ME-3 will
soon have a combined widebody
capacity greater than the entire U.S.
commercial widebody fleet. And, they
are deploying these aircraft
increasingly on routes to the United

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States. The fear is that they will take passengers and revenue from the privately-
owned US airlines, which must earn a sufficient return to cover their cost of capital.
The US-3 will be forced off routes on which they compete with the ME-3, or will further
reduce their services on them, and US workers will lose their jobs.

The argument goes further and suggests that as the ME-3 force US carriers to reduce,
terminate or forego services on international routes, the loss of these flights from the
US carriers’ hubs will reduce passenger flow to/from their domestic flights. Because
the economic viability of many domestic routes depends critically on passengers
flowing onto long haul international flights, reductions in international service will
negatively impact both the size and scope of their domestic networks, including the
potential loss of service to smaller communities.

Finally the paper notes that the Open Skies agreements have conferred enormous
benefits on Qatar and the UAE by opening the most lucrative market in the world to
their airlines, even though they provide essentially no benefits to US carriers in return,
given the low level of demand for
travel originating or terminating in
the two Gulf countries. But the
governments of Qatar and the UAE
must accept the obligations that
come with these benefits: in this
case, to reach agreement with the
United States on measures to
address the flow of subsidized Gulf
carrier capacity to the United States.

On this basis, the US-3 have called on the US government to renegotiate agreements
with the United Arab Emirates, where Emirates and Etihad are based, and Qatar.

Each of the ME-3 responded. Emirates’ responded by denying that it receives any
subsidies from the UAE Government and provided facts, figures and arguments in
support. The airline concluded its response by arguing that the relief sought by the
US-3 would defeat the fundamental principles of Open Skies.

The response of Etihad and Qatar echoed the argument of Emirates. In addition,
Etihad noted that the US-3 choose not to directly operate in its key Middle East and
Indian Subcontinent markets in any way meaningful but are routing US passengers
through European hubs and on to their European alliance partners to serve certain
destinations.

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The ME-3 also countered with calls on the US industry to do the following: compete
on service; invest in new modern aircraft; install state of the art In-flight Entertainment
systems (IFE) and improve customer service on board and on the ground. Do these
things, and passengers will come back, they argue.

Lufthansa and Air France/KLM, and their respective alliances, Star and Skyteam,
support the US-3 as do major aviation labor unions such as the Airline Pilots
Association (ALPA) and Southwest Airline Pilots Association (SWAPA). However, the
third airline alliance, oneworld, within which American Airlines is one of the
participants, and which includes the holding company International Airlines Group
(IAG) which owns British Airways, Iberia, Vueling and Irish Aer Lingus, supports the
views not of their fellow member American Airlines but rather of the Middle East
carriers. This would be expected because Qatar is a member of Oneworld. In addition,
it is noted that the Government of Qatar not only has a stake in IAG but in some
prominent properties in the United Kingdom. In addition British Airways’ CEO, Willie
Walsh and Qatar Airways’ CEO, Akbar Al Baker have had a long and personal
friendship.

Proponents of the US-3 position, notwithstanding the denial of the ME-3 that they do
not receive a cash subsidy, argue that because they do not pay a corporate income
tax, and because neither Qatar nor the UAE have any labor laws that protect the rights
of their airlines’ employees, the ME-3 do, in fact, receive a subsidy. This is based on
an analogy that ship-owners registering their vessels in countries with no corporate
tax and lax labor laws realize a large “subsidy” from this practice.

In the United States, the positions taken by the US-3 are opposed by several
segments of the industry from aircraft manufacturers, the travel and tourism industries,
airports and cities. In addition, Alaska Airlines, FedEx and Jet Blue have declined to
join the US-3 in this matter.

Throughout this all, the ME-3 continue to increase their services to US cities putting
the US market second only to the United Kingdom. US cities argue that this new
service has helped their economies and created jobs. A good example is Emirates
recent addition of Orlando, Florida as a US destination. In one day, Orlando began
enjoying the benefits of new tourists and business travelers originating in Dubai and
points beyond. As an aside, in the case of Orlando, in addition to the Emirates
services, there is a significant number of international operations involving long-haul
intercontinental and overseas routes. All of these are operated foreign-flag airlines.
Not one US-3 airline operates a non-stop intercontinental flight to or from Orlando.

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It should also be noted that the US-3 have considerable domestic route systems and
continue to focus these markets. For all intents and purposes, these routes are
immune from foreign flag competition because of cabotage rules.

Questions have been raised in this matter. One is, if the US does succeed in amending
the Open Skies agreements it has with Qatar and the UAE, whether it will open the
door for other countries to seek to amend their agreements. And, should the U.S. seek
to renounce or amend these agreements, would it be prudent given the political
support given the US by these countries in the Middle East region?

Others ask if this is the end of open skies ASAs and a reversion to the protectionist,
mercantilist “exchange of opportunities” Bermuda bilateral approach which open skies
was meant to eliminate.
Or, whether present and future open skies ASAs could see amendments incorporating
language stating that the provision of governmental financial support to one’s
homeland carriers will trigger an investigation into whether some offsetting remedies
are required?
Or, whether there will be amendments stating that the existence of an array of financial
considerations favoring one’s homeland carriers such as a lower wage structure, lower
tax structure, lower aircraft financing costs and large new aircraft orders will trigger an
investigation into whether offsets are required?

Or, in considering whether to add new and more restrictive language to current and
future open skies ASAs, how much consideration should be given to consumer
benefits in terms of the availability of lower fares/higher quality /more frequent service?

Finally, in terms of government subsidy, how should it be defined? Should one adopt
the WTO “direct payment” definition or should any and all forms of direct/indirect
governmental support be considered?
What is the endgame? Will it be the breaking from the ranks of one of the US-3 to
form an alliance with one of the ME-3?

The Norwegian Air International (NAI) Case

In December 2013, Norwegian Air International (NAI) registered for an AOL and AOC
from the Republic of Ireland and, as an Irish air carrier applied to the USDOT for
authority to operate certain routes into the United States. It soon became obvious why
a Norwegian company would operate under the Irish flag: (1) Norway has a higher tax
rate, 27% compared to Ireland’s 12.5% and (2) Ireland’s labor laws are lax compared
to Norway’s, which are strict and enforceable.

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The application has been opposed by a number of parties and is still pending. In
addition, Norwegian Air Shuttle’s United Kingdom subsidiary, Norwegian UK (NUK)
has also filed for authority to serve the US from the UK. This application is also still
pending after objections were raised by US labor unions, the European pilots' union
and some rival carriers. The unions have objected to Norwegian's use of some staff
on long-haul routes being
employed under Asian,
not European contracts,
and, backed by rival
carriers such as SAS and
Air France-KLM, have
called for clarity on how
Norwegian plans to staff
services to the United
States.

The concern here is that the NAI effort to change its flag of registration to avoid the
taxes and stringent labor laws of its home country is an effort to “reflag” for the purpose
of operating under a “flag of convenience”, a practice widely used in the maritime
industry. Labor’s concerns are obvious. However, should the NAI and NUK
applications be approved and authority granted by the USDOT, the fear is that air
carriers will follow the practice of steamship companies and reflag their registration to
avoid taxes and strict labor laws, thus reducing costs and enjoying a “subsidy”.

NAI’s pending application for permission to serve the US will be on the agenda at the
next U.S.-European Union aviation meeting, in April, 2016 in Washington DC.

Forum Non Conveniens

The Doctrine of Forum Non Conveniens is a discretionary power that allows courts to
dismiss a case where another court, or forum, is much better suited to hear the case.
Article 33 of the Montreal Convention provides for this doctrine in aviation litigation
cases and allows courts to dismiss and transfer claims filed in such courts to with
competent jurisdiction that have a relationship with the parties in terms of citizenship
and place of business.

The US courts have used this doctrine as a means of dismissing and transferring
cases that have no relation to the United States in terms of citizenship of the parties.

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It is quite common for parties to files claims in U.S. courts even though they have no
connection with the US

In 2006, a lawsuit was filed in a US court by the heirs of 152 victims of a crash in 2005
of a Columbian flag air carrier (West Caribbean Airways) over Venezuela. West
Caribbean Airways did no business in the U.S. and none of the 152 passengers were
US citizens. In addition the flight was operating between Martinique, a French
possession in the Caribbean and Panama City. The US court dismissed on the basis
of forum non conveniens, determining that the courts of Martinique were both
adequate and available. The plaintiff’s counsel then filed in court Martinique and
argued to that court that it had no jurisdiction under Article 33. The argument was
rejected by the trial court and its decision was affirmed on appeal at the French Cour
d’Appel, which was reversed by the Cour de Cassation, France’s highest court. This
decision by the Cour de Cassation endangers the forum non conveniens doctrine as
applied to the Montreal Convention.

What this means is that US courts may be barred from applying this doctrine in aviation
cases filed in US courts that have little or no relationship with the US In the West
Caribbean Airways case, the defendants were a US company named as a “contracting
carrier” because it had entered into a charter contract with West Caribbean to provide
the aircraft and crew to carry the Martinique passengers on the charter trip. The latter
moved to dismiss on the basis that it did no business in and was not licensed to
operate to or from the US Both defendants argued that the plaintiffs should be required
to file their claim in Martinique because it was adequate and available and, most
importantly, West Caribbean had consented to jurisdiction, and the passengers were
all citizens of Martinique. The US court agreed and dismissed.

Unfortunately, because of the French high court decision, this procedural tool, forum
non conveniens may be in jeopardy, allowing plaintiffs to assert jurisdiction in the U.S.
against defendants who had little or no relationship to the case in the US The obvious
reason for going for US jurisdiction is damages, and the propensity of US juries to
award large amounts of money damages, even though the domiciliary forum is more
appropriate to determine proper damage compensation for its citizens.

The US courts have upheld that forum non conveniens is an appropriate procedural
tool in aviation litigation cases under Article 33 of the Montreal Convention. The
French decision still stands and it needs to be revisited and revised.

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 Ownership, Control and Right of Establishment

The issue of Ownership and Control has been subject to vigorous debate and about
which has been a topic of a large body of written work. The current view is that airlines
operating under the flag of a country shall be owned and controlled by citizens of that
country. Indeed, a requirement in any application for an Air Operator’s License or
Certificate of Public Convenience and Necessity is the identification of the owners of
the air carrier applicant and that a majority interest is held by citizens of the country.
There are both political and economic reasons for this policy, based simply on the
notion of protectionism of a country’s own air carrier and also its role in advancing
national interests. Indeed, airlines certificated in the US assign aircraft from their fleets
to the Civil Reserve Air Fleet (CRAF), which may be activated in the event of a national
emergency.

Ownership and Control rules are largely rigid, although there has been some
relaxation within the EU, and this has been based on the Right of Establishment
exercised by some airlines. A notable example is the Norwegian Air Shuttle, which
has a license to operate under both the Irish registry and that of the UK and the Air
France/KLM merger.

Tied to Ownership and Control is the prohibition against Stand-Alone Cabotage. In

almost all ASAs, it is specifically stated that such cabotage shall not be exercised by
any party to the ASA.

Whether there will ever be a relaxation of these rules in the future is unpredictable,
although the idea of a “multinational airline” is now manifested in the three major airline
alliances.

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 Conclusion

This writing has covered nearly a century of airline regulation, starting in Paris in 1919,
followed by air mail contracts, economic regulation, government ownership, a period
of protectionism and finally deregulation, liberalization and the evolution of Sixth
Freedom operations and the establishment of airline alliances. One thing, however,
has always remained the primary concern of the regulators: Safety. It started with
Paris and became a matter of universal interest with the formation of the ICAO during
the Chicago Convention. Safety is paramount and there is no compromise. This is
why air travel, compared with the different modes of transportation available to the
public, is the safest and undeniably the most secure means of travel.

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