IATA Legal Symposium 23 Feb 2017

L iA N C E io 2 SP DiT UE E S iS

I N T E R N AT I O N A L DA I LY 23 FEBRUARY 2017

LEGAL SYMPoSiUM 21-23 February 2017 | Washington DC

DAY 1 H I G H L I G H T S

The airline business

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panel on Projections for Aviation in the Trump Administration agreed that airlines being allowed to function as normal businesses would be a positive step forward for the industry.

Already, the Trump administration has been talking about aviation and airline CEOs have met with the President. James Burnley, Partner at Venable LLP, said he expected a dramatic turn in aviation policy following the Obama Administration’s involvement in airlines’ consumer and business relationships.

The previous administration, for example,

had “put its fi nger on the scale of the airline-global distribution system (GDS) relationship in favor of the GDSs,” said Sharon Pinkerton, Senior Vice President, Legislative & Regulatory Policy, A4A. Karen Walker, Editor in Chief, Air Transport World, summed up heavy-handed approaches to aviation when she declared that “everybody thinks they know how to run an airline better than an airline CEO.” But the panel warned that it wouldn’t be easy to undo regulations that are already on the books. While they concurred that the Trump Administration is unlikely to do

further harm to aviation, it will be tough to roll back the harm done in previous years, they suggested.

Two major talking points were the Executive Order (EO) that changed entry requirements to the United States without prior warning and the future of air traffic control.

The EO caused considerable confusion.

Passengers that had boarded planes legally found they were illegal on arrival. However, while the public debate focused on the human element, the EO also contained a clause that asked for the capture of passengers’ biometric data to be expedited.

Pinkerton noted that airlines were being made responsible for the collection of the biometric data and its associated costs. “That should be a government function,” she said.

“It is security and should be handled by the federal government.”

Doug Lavin, IATA’s Vice President for Members and External Relations in North America and the panel moderator, advised that a new EO is expected shortly. It is expected that this EO will give airlines time to comply.

Meanwhile, Burnley led the calls for air traffic control to be liberated from the federal government. President Trump has already indicated a desire to modernize US airspace.

Overall, the panel called for a US aviation policy that recognizes aviation as a major driver of economic growth and job creation and allows it to move forward.

K e e p u p T o DAT e W I T H A l l T H I n g s A I R l I n e s R e l AT e D AT A I R L I N E S . I ATA . O R G

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DAY 1 H I G H L I G H T S

Reshaping the industry

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number of conflicting factors are influencing air travel’s future, said Brian Pearce, IATA’s Chief Economist.

World growth remains lacklustre, but demand for air connectivity is still strong.

Consumers are seeing increasing value as fares fall in real terms, and investors are experiencing returns above the cost of capital. But the industry’s profits are not spread evenly.

Pearce called the 2% world growth “stall speed” and suggested that positive forecasts may be premature. Debt overhang and a retreat from globalization continue to dampen prospects. “As an industry, we need to extol the virtues of open borders,” he said.

There are pockets of strong aviation growth, however, and price stimulation has worked better than expected.

In six or seven years’ time, it is likely that Chinese outbound tourism will leap ahead of outbound tourism from Germany or the United States. This emergence of what Pearce described as “remarkable growth” is shifting aviation’s center of gravity further eastward.

In 2004, it was over the North Atlantic, giving significant advantage to European hubs.

Today, it is closer to the Gulf.

But all consumers are getting everincreasing value from air travel. Fares have more than halved in real terms in the past 20

years even as the number of unique city pairs has more than doubled. This increased choice not only improves the flow of people but also the flow of trade, capital, and ideas.

Profit is still hard to come by for an airline, though. US carriers are doing well but Latin American and African carriers are struggling.

“Balance sheets are slower to repair than profit and loss accounts,” Pearce noted. “Balance sheets are vulnerable because there is a lot of debt out there.”

IATA’s Chief Economist concluded with a key question: is the industry in for a period of normality or will disruptive influences take hold? He suggested three possible factors that may shape the next few years.

The first is whether airlines in other regions can replicate the success of US carriers. Consolidation is a major theme in this regard, which led to Pearce’s second consideration; ownership and control rules.

Cross-border joint ventures have happened in Asia and Latin America and there is continued pressure on restrictive ownership regulation.

Finally, Pearce suggested the empowered consumer could be decisive. Fortunately, IATA’s New Distribution Capability (NDC) is opening up new ways for airlines to do business.

Transparency and personalization could be vital to future success.

Airline profitability still challenged outside the US Net post-tax profit margins

15%

2015

10%

2016

5% 0% -5% -10% N America

Europe

Asia Pacific

Middle East

L America

Source: IATA Economic Performance of the Airline Industry, End-Year 2016 report

Africa

Antitrust and the aviation value chain

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plenary panel on antitrust concentrated on three main areas of contention: airline distribution, credit card policies, and the original equipment manufacturer (OEM) aftermarket.

Ian Giles, Partner, Norton Rose Fulbright, led the discussion on the OEM aftermarket. The Maintenance, Repair, and Overhaul (MRO) sector is worth more than $60 billion annually, he said, with the cost to airlines escalating well above the rate of inflation.

In 2016, IATA become a complainant in an investigation being conducted by the European Commission’s Directorate General for Competition into alleged abuses of dominant positions by manufacturers of aviation equipment.

Giles explained that range and performance rather than MRO costs are necessarily the main influences on aircraft choice. But an airframe often comes with a single choice of engine and components. In such a case, airlines are effectively locked into long-term deals with these suppliers as well as the airframe OEM. The fact that fleet is not renewed often, reduces airlines’ bargaining power further.

Giles pointed out that IATA’s aim is not retribution, but rather to rebalance airline-OEM relationship so that competition can thrive and airline costs are lowered.

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Going, Going, GonE

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n 2008, the US Federal Aviation Administration (FAA) proposed an auction process for slots at New York airports. The opposition was strong enough to take the proposal to a Court of Appeal and eventually the FAA relented.

But with traffic increasing and infrastructure development failing to keep pace, the slot auction concept continued to lurk in the background. Recently, China experimented with the idea, putting a selection of slots on the market at Guangzhou Baiyun and running a slot lottery at Shanghai Pudong. This raised a substantial amount of cash but, according to an IATA assessment, that is part of the problem.

“The experiment showed that paying a large amount of money for slots is not sustainable,” says James Wiltshire, IATA’s Senior Economist. “If you boil down the money paid for the Chinese slots to a per passenger basis, it pretty much wipes out the anticipated $4.44 per passenger average profit for Asia-Pacific carriers in 2017, and that’s only for slots at one end of the route.”

In other words, even a smallscale slot auction can be the dif-

ference between profit and loss for an airline. Lara Maughan, IATA’s Head of Worldwide Airport Slots, says having a “For Sale” sign on slots would have a detrimental effect on the dynamics of the industry.

One fundamental concern is that slot auctions would accelerate an already worsening congestion problem. As it stands, at the 177 airports where IATA’s Worldwide Slot Guidelines (WSG) are used, demand outstrips infrastructure supply. This makes slots a scarce commodity. Airport owners, government or private, would have an incentive to keep slot prices high by drip-feeding capacity. Long term, that is not in anybody’s interest.

Slot auctions would affect airlines more directly too. “It is fairly certain that regional and cargo carriers will be the also-rans in slot auctions,” informs Maughan.

“Think how that would affect operations, not to mention consumer choice and competition.”

Basic operational problems would accompany this industry stranglehold. Every journey has a beginning and an end. An auction process at one end and the WSG at the other wouldn’t work. An

airline could get a slot under the WSG but then lose an auction for its “partner” slot at the destination. That would throw networks and schedules into disarray.

“One set of rules is essential,” stresses Maughan. Outside of plentiful, cost-effective airspace, terminals and runways, the best way of ensuring passengers the connectivity they crave is to use the WSG. These global guidelines maximize capacity and give airlines the certainty and flexibility they need to meet demand in fair and transparent way.

Some 43% of all passengers use a slot-constrained or Level 3 airport. For ultra-long-haul passengers, it’s 60%. Pretty much every A380 route has a Level 3 airport at one end, usually both.

Deviations from the WSG are being tackled by IATA. In Brazil, punctuality forms part of the slot allocation process even though the WSG incorporates various means to address poor performance. It means an airline could lose a slot in Brazil while retaining it at the other end of the route.

Elsewhere, one airport is reported to be using aircraft size as a factor in allocating slots. This equates to dictating an airline’s

commercial strategy. Airlines must be free to choose the size of aircraft to fit their commercial model and the needs of the route.

In Greenland, meanwhile, three airports were made slot coordinated even though this was unnecessary given traffic levels.

Using slots needlessly is just as bad as divergence from the rules.

“We have to fight any divergence from global standards and guard against the idea of auctions spreading to other areas of the industry,” Maughan sums up.

Competition at CapacityRestricted Airports Today, 10:50-12.05 The Panel: Dr. Neil A. Campbell, Co-Chair, Competition & Trade, McMillan LLP – Moderator D. Bruce Hoffman, Partner, Hunton & Williams LLP John Middleton, Assistant General Counsel, IATA William H. Stallings, Partner, Mayer Brown Fred Andreas Wister, Managing Director, Airport Coordination Norway AS; Chairman, European Airport Coordinators Association (EUACA)

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Legal Symposium Networking Dinner – River Cruise

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Photos: Eddie Arrossi Photography W W W. I A T A . o R g

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How to deal with sanctions The plenary panel on economic sanctions will look at the impact of these stipulations, especially in Cuba and Iran

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he United States-Cuba relationship has been thawing and scheduled commercial air services between the two countries are now up and running from the likes of JetBlue and United.

Charter air service has been available for decades.

That is not quite the whole story, however.

Americans can only travel to Cuba if the trip is for one of 12 defined purposes, such as visiting close relatives, academic programs for which students receive credits, professional research, journalistic or religious activities and participation in public performances or sports competitions. Visits to Cuba purely for tourism are still prohibited.

Meanwhile, it used to be possible for Americans to travel freely to Iran but that changed

when President Trump’s Executive Order barred travel from seven predominantly Muslim countries and Iran then barred some American travel in response.

“The primary change regarding Iran was the easing of secondary sanctions due to the Joint Comprehensive Plan of Action, commonly referred to as the Iranian Nuclear Deal, which allowed companies to sell only single aisle commercial passenger aircraft and associated services to Iran,” explains David M. Hernandez, Shareholder, Vedder Price and Moderator of the Plenary Panel.

“However, the Iranian Nuclear Deal did not expressly permit the financial transaction associated with such deals, which complicates transactions because financial institutions are very reluctant to participate in such deals.”

Hernandez says that the effectiveness of economic sanctions is significantly affected by the willingness of major economies to participate in such sanctions. Most countries never participated in United States’ sanctions against Cuba, for example, and many nonU.S. citizens and airlines freely travelled to Cuba and did business with Cubans.

“Similarly, many airlines still operate to/ from Iran, but no companies subject to US export control law sold US contents aircraft or parts to Iran without a license exemption,” says Hernandez.

There are tools available for airlines to ensure they are complying with sanctions.

Various government confidential lists are available to airlines to screen passengers, for example. The United States publishes all the

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persons and entities subject to US export control sanctions online. It also has a Consolidated Screening List that searches 11 screening lists at once, which is located at www.export.gov/csl-search. Other nations have similar information available. “And a wide variety of commercial services exist that specialize in performing export control due diligence,” says Hernandez.

The changes implemented in 2016 are complex and significant restrictions remain in place. Airlines, suppliers, and consumers must remain vigilant to ensure they do not contravene applicable regulations and that impact travel and trade with Cuba and Iran.

Grand debate Economic Sanctions Update: Cuba and Iran Today, 09:00-10:15 The Panel: David M. Hernandez, Shareholder, Vedder Price – Moderator Leslie Lugo, Assistant General Counsel, IATA Larry B. Pascal, Partner, Haynes and Boone LLP Zia Ullah, Partner, Eversheds Éric Vallières, Co-Chair, Aviation, Quebec, Competition, & Dispute Resolution, McMillan LLP

The Symposium will close, in style, with its grand debate on a matter of controversy in aviation law.

Spirited argument will be had between an affirmative and negative team, subject of course to strict rules of procedure. You, through a poll, will decide who wins the day!

Today, 16:25-18:00 Jeff Shane, General Counsel, IATA (Introduction) Zia Ullah, Partner, Eversheds (Debater) Laurent Chassot, Partner, PhD, gbf Attorneys-at-law (Debater) Mark Mackrell, Partner, Norton White (Debater) Allan Mendelsohn, Law Offices of Allan Mendelsohn (Debater) Eric Vallières, Partner, McMillan (Debater) Peter Coles, Partner, Holman Fenwick Willan LLP, (Debater) Robert Lawson, QC, Partner Clyde & Co LLP (Adjudicator)

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