August 26, 2009

BEFORE T H E UNITE D STAT ES DE PARTM E NT OF TR ANSP O RT ATION

FEDER A L AVIATION ADMINIS TRATION

)

IN RE OVERFLIGHT FEES )

AVIATION RULEMAKI NG COMMITTEE ) )

CONDITI ONAL “RE C OMMENDATIO N” OF THE INDUST RY

MEMBERS OF THE FAA AVIATION RULEMAKING

COMMITTEE ON OVERFLIGHT FEES

The industry m e m b ers of the U.S. Federa l Aviation Adm i nistration (“FAA”) Avi a tion

Rulem a king Comm ittee for ove rflight fees (the “A RC”) 1 pres ent th is c ondition a l

recomm endation on user fees charg e d by the FAA fo r the provision of air traffic control services

to airlines that neither take off nor land in the United States (see app e ndix I for a histo r ica l background).

The industry m e m b ers of the ARC have engaged in constructive discussions with the FAA in a n

attem p t to reach a suitable ad justm e nt for th e increase in f ees th at was orig inally p r oposed by FAA during the first m eeting of the ARC. As a result of those discussi ons – and conditional upon acceptance, representations and ex pectations that th ey have re ceived in connection with th e increased fees, – the industry m e m b ers will not object to a change in fe es as outlined below.

2. CURRE NT ECONOMIC RE ALI T Y

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The industry ARC m e mbers urge FAA to r ecognize the worldwide ai rline industry is under unprecedented negative financial pressure as the result of a confluence of factors. In 2008 and 2009 year to date alone, over 14 airlines have been forced to cease operations altogether. Other carriers have been forced to reorgani ze under bankruptcy law protections. As IATA

Directo r General and C E O Giovanni Bisign ani recently stated: “T hese are extrem ely challenging

tim es for airlines; there are no si gns of an early econom ic recove ry. Other external risks are potentially great, including risi ng oil prices and the im pact of Influenza (H1N1) on dem a nd. Cash flow is threatened by weak dem a nd, exagge rated by reduced fares; after years of cost reduction, the scope for further cuts is lim ited.”

1 The industr y mem b ers of the ARC are Air Canada, Air France, Air Transat, Air Transport A ssociation of Canada, Ass o ciation of Asia Pa cific Airlines, Brit ish Airway s, Plc, Cathay Pacific Air w ay s Lim ite d,

International Air Tr ansport Associ ation, KLM R o y a l Dutch Airlines, Luf t hansa G e r m an Airlines, Mexicana Airlines, Natio nal Airlines Council of Cana da, Sky S e r vice Airlines, Inc., Sunwing Airlines,

WestJet and Virgin Atlantic Airway s Ltd.

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According to IATA’s most rec e nt forecas t, airlin es could suffer losses of US $9 billion this yea r

. IATA has also adjusted its estim a tes for losse s in 2008, from US $8.5 billion to US $10.4 billion. In addition to the global downturn, a num b er of airlines overflying the US ha ve been hit

extrem ely h a rd by the H 1 N1 pandem i c; this is agai n forecasted to be a fact or th is c o m i ng f a ll b y the W o rld Health Organization. As the FAA can well appreciate, in this challenging

environm ent any inc r eas e in ove rf lig ht f ees will be m a terially detr im ental to the f i na nces of the affected carriers; exposing the industry stakeholder to further econom ic risk.

We recognize the desire to update the overflight fees but, at the same tim e, we must rem a in dilig ent in o u r oppositio n to changes that would discourage already depressed traffic levels and the future growth of the industry and which w ould not be reasonably related to the cost of providing the underlying ATC se rvice. Even in the current environm ent we the carriers represented by the ARC are at pe ril of a declin e of traffic a nd reduced revenue. We therefore request FAA to review the overflight fees based on our recomm endations in order to reflect the

curren t econ o m i c reality.

3. COST ACCOUNTING SYSTE M

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The industry m e mbers of the ARC are conditio nally not challenging the use of the CAS

at this tim e , with the hope and understand ing that the FAA will continue ongoin g efforts to continually improve the accuracy an d integ r ity o f the CAS. The ARC ac knowledges that, for th e purpose of this exerc i se, the FAA’s Cost Accoun ting Syste m (“CAS”) will be the basis f o r the

FAA’s determ ination of costs for delivery of ai r navigation services to overflights. Although the industry m e mbers continue to believe that it is more accurate to rem ove the FAA’s overhead an d other non-related costs for the overflight fee cost base

, and therefore does not endorse this

m e thodology as a whole.

The ARC records dem o nstrate that FAA is seeking to recov e r m o re than the reason ably related costs for providing ATC and related services to overflights. By cont rast, costs for providing

ATC and related se rvice s to f lights that take of f or land in th e United Sta t es in lieu of overflight fees are partially recovered th rough a contribution from the Ge neral F und. Accordingly, it is clear that the propos ed overflight fees will be assessed on term s that are “less favorable” to foreign airlines which do not take of f or land in th e United States, than to th eir U.S. counterparts.

4. CONDITI ONAL ACCEPT A NCE OF INCREASE I N OVERF L IGHT FEES.

The industry m e mber’s acceptance of an increa se in overflight fees is condition e d u pon certain f acto r s, inc l uding the lack of any incr e a se until com p letion of the NPRM process, and a cap on the increase as set forth herein. The industry m e mbers have provided this consent pursuant to their des i re to work in a collabo rativ e effort with FAA to reach a m u tually agreeable resolution with regard to FAA’ s desire to increase the fees. However, if, for a ny reason, the

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reasonab l e c onditions w h ich the ind u stry m e m b ers have pla ced on their consent ar e not f u lf illed,

the m e m b er s would be free to return to their m u lti-p r onged o b jections to the fee increase sought by FAA, wit hout lim itation. (See appendix II).

Assum i ng that FAA would im ple m ent an equal a nnual increase through use of a standard noticeof-proposed rulem a king and comm e n t period (“NP RM”), the ARC m e mbers would not object to

an annual increase of 13.9% for En route fees and 8% for Oceanic fees over four consecutive years beginning in October 2011.Given the m a gnitude of the increase dictat ed by an update from 1999 to 2008 data, it is critical that any such change abide by the ICAO principles of gradualis m in im ple m e n ting this fee increase over a m u ltiple year period. This agreem ent is conditioned upon the understand ing that the in crease would not go into effect until after the iss u ance of a final rule following the NPRM, and not before October 1, 2011, and that there would be no

further increase until FY2016.

The following charts s how increases in ov e rflight fees for which the ARC provides its conditional acceptance.

A RC Pr opose d Ra tes

33 .72 43.7 5 49.8 3 56

. 8 0

1 5 .9 4 1 5. 94 17. 20 18 .57 20 .04 21 .6 4 33. 72 38. 41

0 10 20 30 40 50 60

2 009 2 010 O C T 2 011 O C T 2 0 12 O C T 2 0 13 O C T 201 4 O C TUnitRates

Enr o ut e u n it r a t e O c ea nic u n i t r a te

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5. DEVELOP M ENT OF UNIT COSTS

The FAA’s operational costs hav e been in creasing at a steady pace b e tween 1999 and 2009, which partially resulted in the need to adjust the overflight fees. As a com p arison, fees for ATC providers such as Nav Canada have only increased 5% over the period betw een 1999 and 2009, 19% below inflation. The average unit ra te for EUROCONTROL between 2002 and 2009 has decreased by 1.9%.

W ith a single user group paying user fees and a direct relationship between FAA’s cost base and

a f ee f o r th e serv ices pr ovided, it is im perative that fut u re focus of t h e FAA be di rect ed t o wards

sustain e d growth and measurab le co st-efficien cies.

The ARC mem b ers urge the FAA to estab lish a fo r m al financial user consultation process prior

to f u ture a d justm e nts of the cost base, in line with in ternationally accep ted p o licy on Ai r Navigation Service Charges, de veloped by the International Ci vil Aviation Organization ICAO

in Doc 9082 and to aim for a tim e over tim e re duction of the unit costs through cost containm ent and traffic growth, in line with the trend w ith other leading A T C Providers around the world.

6. CONCL US ION

We acknowledge the cooperative attitude FAA has de monstrated during this ARC process and the opportunity to provide our recomm endations to FAA. De spite the issues that the

ARC m e mbers s t ill h a v e with rega rd to FAA’s intention to increase the overflight fees, the

m e mbers of the ARC, in the spirit of good faith cooperation and collaborati on with the FAA, will

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conditionally not object to the fee increase set forth above, assum i ng that the above stated

conditions are fulfilled.

W e assum e that FAA will r econsider the i r ov erf light f ee struc t ure as a whole if a politica l

decision would be m a de to start collecting user fees for all u s ers while removing the existing tax

system , in which case an equitab l e an d truly cos t related charging system would becom e easier to

achieve.

In the m eantim e, please feel free to contact the undersigned or any of the other ARC m e m b ers if

there are an y further qu estions.

Respectf u lly subm itted:

Cyriel Kronenburg

Vice Chairm an, Aviation Rulem a king Comm ittee,

Intern ational Air Transpo r t Associatio n, IATA

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APPE NDI X 1: HISTORICAL BACKGROUND

In October 1996, Congress enacted section 273 of the Federal Aviation Reauthorization Act of 1996, Pub. L. 104-264, codified at 49 U.S.C. § 45301, whi c h, for the first tim e , authorized the

FAA to i m pose a user fee for the provision of air tr af f i c control and related se rvice s to air c raf t
that neither takeoff nor land in the United States. In March 1997, the F AA issued an “Interi m Final Rule” which sought to im pose nearly $100 m illi on in o v erflight fees, fifty m illion of which was set aside by Congress to fund t h e Essential Ai r Services program i n the United States. In January 1998, the U.S. Court of Appeals for the D.C. Circuit vaca ted the IFR, ruling that the f e es did not com p ly with the statutor y d i rective that they be “direc tly re lated ” to FAA’s costs of providing services to overflights because of FAA’ s use of “Ram sey pr icing” to determ ine the fees (footnote 2).

In June 200 0 the FAA issued a n e w IFR which sought to recover app r o x im ately $4 0 m illion per year in overflight fees. In July 2001, the D.C. Circuit vaca ted the 2000 IFR because the FAA did not show that the fees were directly related to costs, in that FAA pr ovided no basis for its

assum p tion that FAA incurs the same level of co sts to provide services to overflights as to nonoverflights.2 The following m onth ( A ugust 2001), F AA iss u ed a final rule for overflight fees (the “Final Rule”) whic h continu e d to assum e th at th e agen cy incurred the sam e lev e l of cos t s to provide ATC and related services to overflights as to non-overflights.

In April 2003, the D.C. Circuit vacated the Final Ru le (footnote 3). The C ourt sta t ed that: “For

the third tim e, we m u st r e view the lawf ulness of a Federal Aviation A d m i nistration regulation

estab lish i ng fees for air traffic contro l serv ices fo r ‘overflights’ . . . . For the third time, we find that the FAA disregarded its statutory m a ndate.” The Court found that the airlines’ experts had

m a de “a substantial cas e refuting th e agency’s unexplained insistence that m iles of overflights and non-overflights in the Enroute and Oceanic airsp aces are approx imately equivalent in th eir

per-m ile generation of costs.” T h e Court acknowledged the FAA’s assertion that some overflights spend som e tim e at low altitudes, but pointed out that this did “no t underm ine petitioners’ claim that they fly predom inately in the high altitude s e c t or , t o a de gr ee fa r gr e a t e r than do non-overflights.” The Cou r t a l so re jec t ed FAA’s c ontention that fixed and comm on costs dom inate, and therefore any difference in the m a rginal cost of servic ing an additiona l overflight v e rsus an add ition a l non-overflight is imm a terial.

During the interim between the July 2001 and Ap ril 2003 D.C. Cir c uit decisions, Congress enacted Section 119(d) of the Aviation T r ansportation and Secu rity A c t of 2001 (“ATSA”). Section 119(d) am ended the 1996 over flight fee statute to provide th at (1) overflight f ees m u st be

“reason ably rela ted” ( r a t her than “d irectly re late d”) to the F AA’s costs of providing servic es to overflights, and (2) the FAA’s dete rm ination of its costs for providi ng services to overflights is not subject to judicial review. Although the D.C. Circuit, in its April 2003 decision, ruled that

2 Air Transport Association of Cana da v. FAA , 254 F.3 d 27 1 (D.C. Cir. 2001)

.

3 Air Transport Association of Cana da v. FAA , 323 F.3 d 10 93 (D.C. Cir. 2003)

.

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Section 119(d) did not apply re tr oactiv ely to the FAA’s f i nal rule on overf lig ht f ees, in

Decem ber 2003 Congress enacted certain legislat ive langu age in Section 229 of Vision 100,

which was intended to retroactiv ely nullify th e Ap ril 2003 Court ruling . Section 22 9 states: “The

inte rim f

i nal rule and f i nal rule ref e rr ed to in subs ection ( a ), in cluding th e f e es issued p u rsuant to those rules, are adopted, legalized, and confirm e d as fully to all intents and pur pose s as if the

sam e had, by prior Act of Congress, been specifically adopted, aut horized, and directed as of the date those rules were originally issued.” The ne w law also purported to m a ke ATSA Section 119 applicable to the overflight fees.

Pursuant to a settlem e nt reached between FAA a nd the parties that had successfully challeng ed

the 2000 IF R and the 2001 Final Rule, FAA agreed to “m ake paym ents to th e litigating [carriers]

from previously collected fees” based on a form ula agreed to by the parties “in addition to

whatever refunds and credits” were otherwise available to the li tigating carriers. F o llowing the

settlem e nt, FAA resumed assessm ent and collecti on of overflight fees based on the m e thodology

of the Final Rule. As a result, the carriers have been paying $33.72 pe r 100 nautical m iles for

Enroute serv ices, and $1 5.94 per 100 nautical m iles for Oceanic serv ices.

As part of the settlem e nt with the litigating carri ers, the FAA agreed to the creation of the ARC, which was to consist of FAA and industry repr esentatives working to exam ine in depth the

FAA’s m e thodology for overflight fees and to r ecomm e nd whether it s hould be m odified.

Section 4 of the ARC Charter s t ates that th e “Co mm ittee’s p r im ary task is to id entif y the se rvic es rendered to overflights by the FAA, to determ in e the FAA’s costs of pr oviding services to overflights, and, based upon that determ ination, to m a ke recomm endations to the Adm i nistrator regard ing th e lev e l of f

u ture overf lig ht f ees tha t would be consistent w ith the provisions of the
1996 Act, as am ended.” Section 5(a) of the Ch ar ter s t ates that th e “Co mmittee is to evaluate

inform ation regarding the services rendered to overflights by the FAA and the costs of providing those services to overflights, and, based on that evaluation, to m a ke r ecomm endations regarding

future overf light fees, including po ssible m odificat ion to, o r rep l acem ent of, the fees currently being charged by the FAA.” Section 6(h) stat es tha t “Comm ittee re commendations to the

Adm i nistrator m u st be approved by at least a two-thirds v o te of the mem b ers. The Chair shall have the right to subm it a separate repor t or recommendation to the Adm i nistrator.”

The first m eeting of the ARC occurred in April 2005. It was followed by a visit of the ARC to the Enroute center near Cleveland, Ohio, in Ju ne 2005. In Decem ber 2008, the F AA issued a Federal Reg i ste r notice to recons titu te the ARC. The recons tituted ARC held f o rm al m eetings in April and July of 2009. During these m eetings FAA has discussed with the industry m e m b er s possible ran g es of increases in the overflight fees to be paid by affected carriers. FAA also provided certain item s of infor m ation to the ARC industry m e mbers in connection with the increase in overflight fees which FAA announced it intended to seek. Also in 2009, both Houses of Congress proposed or otherwise considered statutory language for an update in the overflight

fees.

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APPE NDI X II

1. The FAA is utilizing a m e thodology which the U. S. Court of Appeals for the D.C. Circuit

ruled in 200 3 f a iled to c o m p ly with the statuto r y standard th at the fees b e “directly related” to FAA’s costs of providing ATC and r e lated services to overflights. The fact that the language has been changed to “reason ably related ” from “direc tly related” does not change the core fact that the FAA incurs a lower level of costs (in term s of m a npower and otherwise) to provide ATC and

rela ted serv ices to ove rf lights th a n to aircr a f t that oper a te at lowe r, trans i tion al altitude s throughout the air traffic control system . This evidence was clearly placed before the FAA in connection with the litigation ov er the second IFR and the Fina l Rule, and there has been no developm ent that has changed this fact or the import of the Cour t’s 2003 decision. In sum

, in order for the fees to be truly cost based, the f ee m e thodology would need to reflect the fact that the ag ency incurs m o re costs to provide servic e to non-overflights than to overflights. The

m e mbers als o believe th at the r e is n o basis f o r including the cost of overhead in the overflight

fee m e thodology.

2. The industry m e m b ers object to th e m u ltiple e fforts to deprive airlines of the rig h t to obtain judicial review of FAA’s derivation of the overfli ght fees. Following the first two successful legal challenges to overflight fees , and comm encing with S ection 119 of ATSA in

Nove m b er 2001, and continuing with Section 22 9 of Vision 100 in December 2003 and language in proposed legislation being considered by Congr ess at this tim e, the FAA appears to have sought and obtained language to depr ive airlines subject to overflight fees of the right to seek and obtain judicial review with regard to certain as pects of the fees. The tim ing of Se ction 119 of ATSA and Section 229 of Vision 100 appears to i ndicate that the legislation was intended to change the result of independent decisions of th e judiciary branch, which would not have been appropriate. Beyond that, it is contrary to international norm s a nd good policy to prohibit airlines from being able to obtai n judicial review of user fe es. The fact that Article 84 of the Convention on International Civil Aviation (“Ch icago Convention”) and various bilateral and

multila ter a l air s e rvices agreem ent to which the Un ited Sta t e s is a p a rty provide f o r independent review of user charges dem onstrates the in ternational consensus that no State should be

perm itted to dictate th e user charges imposed on fo reign airlin es without h a ving a suitable rev i ew process before a disinterested dispute resoluti on body. However, the dis pute resolution rem e dies

in the international air services agreem ents are com p lex and tim e consum ing. It is incum b ent on
each State that im poses user charg e s on aviation to provide for independ ent judicial review in the courts of that nation, so that the dispute reso lution provisions which are binding on each State do not need to be needlessly invoked. Stated sim p ly, the international ai rline comm uni ty m e rely wants the ability to have an independent na tional judiciary review com p liance by the feecharging en tity with app licab le legal requirem e nts. That should not be objectionable to FAA or the U.S. Congress.

3. Finally, the proposed ov erflight fees are not con s isten t with bilate ral and m u ltilateral air services agreem ent (with which the United States is a signat ory), which require, among other things, that foreign airlines (w hich are th e carriers subject to overflight fees) be assessed use r charges on term s “not less favorable than the m o st favorable term s available” to oth e r carriers.

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See, e.g., Article 12(1) of the “Air Transport Agreem ent” between the E u ropean Union and the United States (April 25, 2007) (“User charges th at m a y be imposed by the com p etent charging

authorities or bodies of each Part y on the airlines of the other Party shall be just, reasonable, not unjustly discrim i natory, and equi tably apportioned am ong categories of users. In any event, any

such user ch arges shall b e assessed o n the airlin es of the other Party on term s not less favorable

than the m o st favorab le term s availab l e to a ny other a i rlin e a t th e tim e the c h arges are assessed ” ); Artic le 9(1 ) of the “Air Trans port Agreem ent Between The Governm e nt of the

United States of Am erica and The G overnm e nt of Canada” (February 24, 1995) (“User charges

that m a y be im posed by the com p etent charg i ng authorities or bodies of each P a rty on the

airlines of the other Party for th e u s e of air na vigation and air traffic c ontrol services shall be just, reasonable and not unjustly discrim i natory. In any event, such user charges shall be

assessed on the airlin es of the other Party on term s not less favorable than the m o s t favorable

term s available to any other ai rline”); see also Ar ticle 15 of the Chica go Convention (“like

uniform conditions shall apply to the use, by aircraft of every contracting State, of all air navigation facilities . . . which m a y be provided for public use for the safety and expedition of air navigation”) (“charges . . . im posed . . . for the us e of air navigation facil ities by the aircraft of any other contracting State hall not be higher . . . than those th at would be paid by its national aircraft engaged in sim i lar in terna tio nal air se rvices”).

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