Februar y 14

, 2014

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- BEFORE THE UNITED STATES DEPARTMENT OF TRANSPORTATION

FEDERAL AVIATION ADMINISTRATION

)

IN RE OVERFLIGHT FEES )

AVIATION RULEMAKING COMMITTEE ) )

RECOMMENDATION OF THE INDUSTRY

MEMBERS OF THE 2013/2014 FAA AVIATION RULEMAKING

COMMITT EE ON OVERFLIGHT FEES

The industry members of the U.S. Federal Aviation Administration (“FAA”) Aviation Rulemaking Committee for overflight fees (the “ARC”) 1 present this recommendation on user fees charged by the FAA for the provision of air traffic co ntrol services to airlines that neither

take off nor land in the United States (see appendix I for a historical background).

The industry members of the ARC ha ve engaged in constructive discussions with the FAA in an attempt to reach a suitable adjustment for the increase in fees, following the previous 5 year adjustment set by the FAA ending in FY2015 . As a result of th e ARC discussions

– and conditional upon acceptance, representations and expectations that they have received in

connection with the incre ased fees,

– the industry members accept a change in fees as outlined

below

.

1

. COST ACCOUNTING SYSTEM & COST RELATEDNESS

Although t he industry members do not challenge the use of the C ost Allocation System (C AS ) a s a basis for setting the overflight ch arges, they remain critical regarding elements of the cost base, the traffic and consequently the level of the overflight fees allocated to airlines that neither take

off or land in the United States

. As an example costs included in the en

- route cost base such as flow control into major airports and costs associated with providing approach services at airports and airfields that are not served by a dedicated TRACON are not linked to services provided to overflying carriers and should therefore be removed. T he industry members therefore

recommend for the cost base to exclude certain elements of FAA’s overhead and other non

overflight related costs of the cost base

, and therefore do not endorse th e currently used methodology as a whole

.

1 The industry members of the ARC are Aeromexico, Air Canada, Air France, Air Transat, Air Transport Association of Canada, Association of Asia Pacific Airlines, British Airways, Plc, Cathay Pacific Airways Limited, Internati onal Air Transport Association, KLM Royal Dutch Airlines, Lufthansa German Airlines, National Airlines Council of Canada, Sunwing Airlines.Februar y 14

, 2014

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- Similar to the d ocumentation provided during the 2009 ARC, records continue to demonstrate that FAA is seeking to recover more than the reasonably related costs for providing ATC and related services to overflights , wh ile the actual revenues from the overflight fee are no t
reinvested in FAA services provided to overflights but rather are redirected to subsidize Essential Air Services (EAS)

. C osts for providing ATC and related services to flights that do take off or land in the United States in lieu of overflight fees are partially recovered through a contribution

from the General Fund and through taxes that remained unchanged for several years wh ile overflight fees have continued to rise in a steady pace between 2010 and 2014

. O verflight fees

therefore continue to be assess ed on terms that are “less favorable” to foreign airlines which do not take off or land in the United States, than to their U.S. counterparts.

2

. TRAFFIC

The industry members recommend FAA includes all traffic receiving services from FAA ATO personnel in en

- route and oceanic ATRCC’s in the determination of the total flight miles as basis

for the rate calculation. It is believed that currently only filed flight plans (IFR/VFR) in the system are being used to determine total flight miles while a signific ant portion of traffic consists of unfiled VFR traffic using flight following or being actively separated from IFR. Excluding this traffic from the total flight miles artificially increases the cost per NM for the en

- route and oceanic portion of the cost b ase and therefore inflates the rate for overflight fees.

3

. TRANSPARENCY / CONSULTATION

As the overflight fees remain the only fees in the FAA that are intended to be related to costs and

airlines that do not land or takeoff in the United States are s ubject to much more frequent changes to th eir fees . W ithout economic oversight or a direct influence on the cost base through

user consultation

, the industry members believe it is essential the FAA continues to engage in meaningful financial consultations with its Stakeholders and provides full transparency on its cost development through CAS. While the discussions with the FAA at the ARC have been constructive and provided the industry members with much needed background information on

the CAS and cost / t raffic development, the industry members recommend the FAA provides the industry (including the non

- ARC members) on an annual basis with year to year comparisons of costs and traffic in a manner that allows future ARC members to better track development an d

make informed recommendations. The industry members recommend that major changes in allocations between cost centers are accompanied by a high level summary justifying the changes similar to NAV CANADA’s Management Discussion & Analysis (MD&A)

4. DEVE LOPMENT OF UNIT COSTS & SEQUESTRATION

The information provided to the ARC clearly shows that ( excluding the effects of s equestration )

, t he FAA’s operational costs continue to increase at a steady pace while the industry as a whole still struggles with a sl uggish economic recovery

. ATC charges in neighboring States have remained flat in the past 5 years while the FAA raised its overflight fees with respectively 8%Februar y 14

, 2014

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- Oceanic charge and 14% Enroute charge per year during the same period, and is likely to

continu e to do so with the current cost development. The industry members recommend the FAA sets a target on its cost development that remains below inflation and takes into consideration the expected development of traffic.

Similar measures continue to be take n in other parts of the world challenging ATM providers to seek further efficiency and reduce unit costs or keep them flat. The industry members recommend the FAA take a similar approach to internal cost development especially for those

cost centers that a re directly linked to user fees such as the overflight fee.

5

. CONDITIONAL ACCEPTANCE OF INCREASE IN OVERFLIGHT FEES.

The industry member’s acceptance of an increase in overflight fees is conditioned upon certain factors, including the lack of any inc rease until completion of the NPRM process, and a cap on the increase as set forth herein. The industry members have provided this consent pursuant to their desire to work in a collaborative effort with FAA to reach a mutually agreeable resolution with reg ard to FAA’s desire to increase the fees. However, if, for any reason, the conditions which the industry members have placed on their consent are not fulfilled, the members would

be free to return to their multi

- pronged objections to the fee increase sough t by FAA, without limitation. ( See appendix II)

.

As the currently published fees are based on the 2008 cost base and the FAA’s growth of costs (CAGR) between FY08 and FY2013 was 1.72% (en

- route) and 3.76% (oceanic)

, the ARC

members would not object to an annual increase of 1.7% for e n

- route fees and 3.76 % for

Oceanic fees over three consecutive years beginning in October 201 5 (FY2016) and ending in

FY2018 , following FAA’s CAGR development

.

The industry members recommend a new ARC is to be convened to determine the need for a further change of rates for FY2019. As traffic is expected to increase beyond the actual numbers used for FY2012 and FY2013 to establish the fees, revenues from overflight fees are expected to exceed costs, which are expected to grow at a much lower pace

.Februar y 14

, 2014

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. CONCLUSION

The industry members would like to acknowledge the continued cooperative attitude FAA has demonstrated during this ARC process and the opportunity to provide our recommendations to FAA. Despite the issues that the ARC members still have with regard to FAA’s intention to increase the overflight fees, the members of the ARC, in the spirit of good faith cooperation and collaboration with the FAA, will conditionally not object to the fee

increase set forth abov e, assuming that the above stated conditions are fulfilled.

We assume that FAA will consider further changing their overflight fee structure as a whole based on the concerns mentioned and the ARC members would be more than willing to provide

an active ro le in this process.

In the meantime, please feel free to contact the undersigned or any of the other ARC members if there are any further questions.

Respectfully submitted:

Cyriel Kronenburg

Vice Chairman, Aviation Rulemaking Committee, International Air Transport Association, IATAFebruar y 14

, 2014

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- APPENDIX 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, which, for the first t ime, authorized the FAA to impose a user fee for the provision of air traffic control and related services to aircraft that neither takeoff nor land in the United States. In March 1997, the FAA issued an “Interim Final Rule” which sought to impose nearly $ 100 million in overflight fees, fifty million of which was set aside by Congress to fund the Essential Air Services program in the United States. In January 1998, the U.S. Court of Appeals for the D.C. Circuit vacated the IFR, ruling that the fees

did not comply with the statutory directive that they be “directly related” to FAA’s costs of providing services to overflights because of FAA’s use of “Ramsey pricing” to determine the

fees (footnote 2).

In June 2000 the FAA issued a new IFR which sought to rec over approximately $40 million per year in overflight fees. In July 2001, the D.C. Circuit vacated the 2000 IFR because the FAA did not show that the fees were directly related to costs, in that FAA provided no basis for its assumption that FAA incurs the same level of costs to provide services to overflights as to non

overflights. 2 The following month (August 2001), FAA issued a final rule for overflight fees (the “Final Rule”) which continued to assume that the agency incurred the same level of costs to provide ATC and related services to overflights as to non

- overflights.

In April 2003, the D.C. Circuit vacated the Final Rule (footnote 3 ). The Court stated that: “For
the third time, we must review the lawfulness of a Federal Aviation Administration r egulation establishing fees for air traffic control services for ‘overflights’ . . . . For the third time, we find that the FAA disregarded its statutory mandate.” The Court found that the airlines’ experts had made “a substantial case refuting the agenc y’s unexpl ained insistence that miles of overflights

and non

- overflights in the Enroute and Oceanic airspaces are approximately equivalent in their

per

- mile generation of costs.” The Court acknowledged the FAA’s assertion that some overflights spend some time at low altitudes, but pointed out that this did “not undermine petitioners’ claim that they fly predominately in the high altitude sector, to a degree far greater

than do non

- overflights.” The Court also rejected FAA’s contention that fixed and commo n costs dominate, and therefore any difference in the marginal cost of servicing an additional overflight versus an additional non

- overflight is immaterial.

During the interim between the July 2001 and April 2003 D.C. Circuit decisions, Congress

enacted Section 119(d) of the Aviation Transportation and Security Act of 2001 (“ATSA”). Section 119(d) amended the 1996 overflight fee statute to provide that (1) overflight fees must be “reasonably related” (rather than “directly related”) to the FAA’s costs o f providing services to overflights, and (2) the FAA’s determination of its costs for providing 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 Canada v. FAA , 254 F.3d 271 (D.C. Cir. 2001).

3 Air Transport Association of Canada v . FAA , 323 F.3d 1093 (D.C. Cir. 2003).Februar y 14

, 2014

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- Section 119(d) did not apply retro actively to the FAA’s final rule on overflight fees, in December 2003 Congress enacted certain legislative language in Section 229 of Vision 100, which was intended to retroactively nullify the April 2003 Court ruling. Section 229 states: “The

interim fin al rule and final rule referred to in subsection (a), including the fees issued pursuant to those rules, are adopted, legalized, and confirmed as fully to all intents and purposes as if the same had, by prior Act of Congress, been specifically adopted, aut horized, and directed as of the date those rules were originally issued.” The new law also purported to make ATSA Section 119 applicable to the overflight fees.

Pursuant to a settlement reached between FAA and the parties that had successfully challenged the 2000 IFR and the 2001 Final Rule, FAA agreed to “make payments to the litigating [carriers] from previously collected fees” based on a formula agreed to by the parties “in addition to whatever refunds and credits” were otherwise available to the litig ating carriers. Following the settlement, FAA resumed assessment and collection of overflight fees based on the methodology of the Final Rule. As a result, the carriers have been paying $33.72 per 100 nautical miles for

E nroute services, and $15.94 per 1 00 nautical miles for Oceanic services.

As part of the settlement with the litigating carriers, the FAA agreed to the creation of the ARC, which was to consist of FAA and industry representatives working to examine in depth the FAA’s methodology for ove rflight fees and to recommend whether it should be modified. Section 4 of the ARC Charter states that the “Committee’s primary task is to identify the services rendered to overflights by the FAA, to determine the FAA’s costs of providing services to

overf lights, and, based upon that determination, to make recommendations to the Administrator regarding the level of future overflight fees that would be consistent with the provisions of the 1996 Act, as amended.” Section 5(a) of the Charter states that the “ Committee is to evaluate information regarding the services rendered to overflights by the FAA and the costs of providing those services to overflights, and, based on that evaluation, to make recommendations regarding future overflight fees, including poss ible modification to, or replacement of, the fees currently being charged by the FAA.” Section 6(h) states that “Committee recommendations to the Administrator must be approved by at least a two

- thirds vote of the members. The Chair shall have the right t o submit a separate report or recommendation to the Administrator.”

The first meeting of the ARC occurred in April 2005. It was followed by a visit of the ARC to

the E nroute center near Cleveland, Ohio, in June 2005. In December 2008, the FAA issued a

F ederal Register notice to reconstitute the ARC. The reconstituted ARC held formal meetings in April and July of 2009. During these meetings FAA has discussed with the industry members possible ranges of increases in the overflight fees to be paid by affe cted carriers. FAA also provided certain items of information to the ARC industry members 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 s tatutory language for an update in the overflight

fees.Februar y 14

, 2014

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- APPENDIX II

1. The FAA is utilizing a methodology which the U.S. Court of Appeals for the D.C. Circuit ruled in 2003 failed to comply with the statutory standard that the fees be “directly relat ed” to FAA’s costs of providing ATC and related services to overflights. The fact that the language has been changed to “reasonably related” from “directly related” does not change the core fact that the FAA incurs a lower level of costs (in terms of manp ower and otherwise) to provide ATC and related services to overflights than to aircraft that operate at lower, transitional altitudes throughout the air traffic control system. This evidence was clearly placed before the FAA in connection with the litigat ion over the second IFR and the Final Rule, and there has been no development that has changed this fact or the import of the Court’s 2003 decision. In sum, in order for the fees to be truly cost based, the fee methodology would need to reflect the fact t hat the agency incurs more costs to provide service to non

- overflights than to overflights. The members also believe that there is no basis for including the cost of overhead in the overflight fee methodology.

2. The industry members object to the mult iple efforts to deprive airlines of the right to obtain judicial review of FAA’s derivation of the overflight fees. Following the first two successful legal challenges to overflight fees, and commencing with Section 119 of ATSA in November 2001, and conti nuing with Section 229 of Vision 100 in December 2003 and language in proposed legislation being considered by Congress at this time, the FAA appears to have sought and obtained language to deprive airlines subject to overflight fees of the right to seek a nd obtain judicial review with regard to certain aspects of the fees. The timing of Section 119 of ATSA and Section 229 of Vision 100 appears to indicate that the legislation was intended to change the result of independent decisions of the judiciary bran ch, which would not have been appropriate. Beyond that, it is contrary to international norms and good policy to prohibit airlines from being able to obtain judicial review of user fees. The fact that Article 84 of the

Convention on International Civil A viation (“Chicago Convention”) and various bilateral and multilateral air services agreement to which the United States is a party provide for independent review of user charges demonstrates the international consensus that no State should be permitted to dictate the user charges imposed on foreign airlines without having a suitable review process before a disinterested dispute resolution body. However, the dispute resolution remedies in the international air services agreements are complex and time consum ing. It is incumbent on each State that imposes user charges on aviation to provide for independent judicial review in the courts of that nation, so that the dispute resolution provisions which are binding on each State do not need to be needlessly invoke d. Stated simply, the international airline community merely wants the ability to have an independent national judiciary review compliance by the fee

charging entity with applicable legal requirements. That should not be objectionable to FAA or

the U.S. Congress.

3. Finally, the proposed overflight fees are not consistent with bilateral and multilateral air services agreement (with which the United States is a signatory), which require, among other things, that foreign airlines (which are the carriers s ubject to overflight fees) be assessed user charges on terms “not less favorable than the most favorable terms available” to other carriers.Februar y 14

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- See, e.g., Article 12(1) of the “Air Transport Agreement” between the European Union and the United States (April 25, 2007) (“User charges that may be imposed by the competent charging authorities or bodies of each Party on the airlines of the other Party shall be just, reasonable, not unjustly discriminatory, and equitably apportioned among categories of users. In any event, any such user charges shall be assessed on the airlines of the other Party on terms not less favorable than the most favorable terms available to any other airline at the time the charges are assessed”); Article 9(1) of the “Air Transport Agreem ent Between The Government of the United States of America and The Government of Canada” ( March 12, 2007 ) (“User charges that may be imposed by the competent charging authorities or bodies of each Party on the airlines of the other Party for the use of air navigation and air traffic control services shall be just, reasonable and not unjustly discriminatory. In any event, any such user charges shall be assessed on the airlines of the other Party on terms not less favorable than the most favorable

terms ava ilable to any other airline”); see also Article 15 of the Chicago Convention (“like uniform conditions shall apply to the use, by aircraft of every contracting State, of all air navigation facilities . . . which may be provided for public use for the safet y and expedition of air navigation”) (“charges . . . imposed . . . for the use of air navigation facilities by the aircraft of any other contracting State hall not be higher . . . than those that would be paid by its national aircraft engaged in similar in ternational air services”).