Amicus Curiae Brief — Northwest Airlines, Inc. v. County of Kent

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Table of Contents.

Table of Authorities Cited

Interest of Amicus Curiae

Summary of Argument 2

Argument 4

|. THERE IS NO EVIDENCE THAT AIRPORT

CHARGES ARE EXCESSIVE 4

A. Airport Charges Have Not Caused Massive

Airline Losses 5

B. Airport Charges Have Not Produced Finan-

cial Windfalls 6

Il. THE ACCUMULATION OF NON-AIRLINE

OPERATING INCOME IS CONSISTENT

WITH CONGRESSIONAL EXPECTATIONS &

lil. THE RELIEF SOUGHT BY THE AIRLINES

WOULD UNDERMINE THE FINANCIAL IN-

TEGRITY OF THE NATION’S AIRPORTS 10

Conclusion 13

Table of Authorities Cited.

CASES.

Northwest Airlines, Inc. v. County of Kent, Michigan.

738 F.Supp. 1112 (W.D.Mich. 1990), aff'd, 955

F.2d 1054 (6th Cir. 1992) 5

CONSTITUTIONAL PROVISION

il TABLE OF AUTHORITIES CITED.

STATUTES.

‘Airport and Airway Improvement Act of 1982, Pub. L.

97-248, 49 U.S.C. App. §§ 2201 et seq.

49 U.S.C. App. § 2201(a)(2)

49 U.S.C. App. § 2201(a)(11)

49 U.S.C. App. § 2210(a)(9)

49 U.S.C. App. § 2210(a)(12)

49 U.S.C. App. § 2218

Airport and Airway Safety, Capacity, Noise Improve-

ment, and Intermodal Transportation Act of 1992,

Pub. L. 102-581, tit. II

§ 204(c)(1)

§ 204(d)(3)(G)

Anti-Head Tax Act, 49 U.S.C. App. § 1513

2, 4,9, 10n, 13

Aviation Safety and Capacity Expansion Act of 1990,

Pub. L. 101-508, tit. IX, subtit. B, 49 U.S.C. App.

§ 1513(e)

49 U.S.C. App. § 1513(e)(9)

LEGISLATIVE HISTORY.

H. Rep. No. 581, 1lOIst Cong., 2d Sess. (1990)

H. Rep. No. 22, 103rd Cong., Ist Sess. (1993)

MISCELLANEOUS.

Airport Council International—North America, Airport

Costs and the U.S. Airline Industry (1993)

Y

10, Lin

10

6n

TABLE OF AUTHORITIES CITED.

American Association of Airport Executives, Survey of

Airport Rates and Charges 1991-1992 (undated)

Moody's on Airports, A New Look at Airport Debt in a

Changing Environment (1991)

National Commission to Ensure a Strong Competitive

Airline Industry, Change, Challenge and Competi-

tion: A Report to the President and Congress (Aug.

1993)

U.S. Government Accounting Office, Airport Improve-

ment Program, Opportunity to Consider FAA’s Role

in Meeting Airport System Needs, GAO/T-RCED-

93-43 (May 26, 1993)

On

No. 92-97

In the

Supreme Court of the United States

OcTOBER TERM, 1993

NORTHWEST AIRLINES, INC... ET AL..

Petitioners,

V.

COUNTY OF KENT, MICHIGAN, Ef AL.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT.

BRIEF OF AMERICAN ASSOCIATION OF

AIRPORT EXECUTIVES AS AMICUS CURIAE

IN SUPPORT OF RESPONDENTS.

Interest of Amicus Curiae.

The American Association of Airport Executives (“AAAE”)

was founded in 1928 to assist airport managers tn fulfilling their

2

responsibilities to the nation’s airports, the traveling public

and the airport communities. The AAAE has members from

almost every commercial airport in the United States;4ts mem-

bership includes managers at airports that enplane 99 percent

of the nation’s airline passengers. The AAAE represents the

interests of airport managers before Congress and federal agen-

cies, and its staff works closely with federal officials to make

the nation’s airports safe and efficient.

The nation’s airports are an essential link in the air transpor-

tation system. In order to meet the needs of the traveling public

and aircraft operators, including the commercial airlines, the

airports must be adequately funded. The AAAE has filed this

brief as amicus curiae to show, contrary to the arguments of

the petitioning airlines (the “Airlines”) and the Air Transport

Association of America (the “ATA”), that the economics of

the nation’s airports do not provide any basis for the relief the

Airlines seek. Rather, if this Court were to reverse the decision

of the Court of Appeals, the ability of the AAAE’s members

prudently and effectively to manage the nation’s airports could

be greatly impaired. The AAAE respectfully urges the Court

to affirm the Court of Appeals’ decision. '

Summary of Argument.

The Airlines and the ATA claim that airports have generated

“excess” non-aeronautical operating revenues by using the

compensatory ratemaking method, and that these so-called

“surpluses” show that airport charges to commercial aircraft

operators for the use of airport facilities are “unreasonable”

under the Anti-Head Tax Act (the “AHTA”), 49 U.S.C. App.

§$ 1513, and the Commerce Clause, U.S. Const., art. 1, § 8,

Letters of consent for the filing of this brief as amicus curtae have been submitted

to the Clerk mm accordance with Rule 37.3 of the Rules of this Court

3

cl. 3. This claim has no evidentiary basis and reflects distorted

views about how airports finance their facilities.

Airports that use the compensatory method base their charges

to the airlines on the actual costs of the airport facilities the

airlines use. These charges have marginal impact on the airlines

and have not contributed to recent airline financial problems.

The generation of operating income is not evidence of exces-

sive charges, it is evidence of prudent airport management.

Airports have massive capital requirements that can only be

met if they have earnings sufficient to meet their debt service

obligations.

Congress has directed the nation’s airports to be “as self-sus-

taining as possible” and has reco: nized, by funding the Airport

Improvement Program and authorizing the use of passenger

facility charges, that airports cannot be expected to raise all

the capital they require even if they have operating surpluses.

Here, the Airlines seek to deprive an airport of its non-aero-

nautical operating incomc, by forcing it to charge less than

the actual costs of the airport facilities the Airlines use, without

assuming any obligation to ensure that the Airport is able to

meet its own capital requirements.

Airport owners generally use two alternative methods to

determine what they charge airlines for use of the airport: the

“compensatory” method, under which the airlines are charged

only the actual costs of the facilities they use, and the airport

retains non-airline revenues and control of its capital program;

and the “residual cost” method, under which the airlines agree

to pay whatever costs remain unpaid after all non-airline re-

venues are collected, and in return for this commitment, the

airlines share control of the airport's capital decisions. Both

of these methods align control of the revenue stream with

financial responsibility for the airport.

The Airlines seek to impose an unprecedented combination

of these methods which would give them the benefit of non-air-

4

line Operating income without the burden of assuming the risk

of non-airline operating losses. If the Court grants the relief

the Airlines seek, the revenue streams that support the debt

obligations of airports throughout the country will be

threatened.

Neither this Court nor Congress has ever suggested that it

is unreasonable for airport owners to recover their actual costs

of providing airport facilities to the airlines. There is no justifi-

cation for the below-cost charges the Airlines continue to pur-

sue in this appeal. The Court should reject the Airlines’ claims

and declare that the managers of this nation’s airports may

continue to use the compensatory method to set their airline

charges.

Argument.

1. THere Is No Evipence THAT AtRPORT CHARGES ARE EX-

CESSIVE.

The Airlines and the ATA claim that the nation’s airports,

including the Kent County International Airport, have accumu-

lated “excess revenues” and have therefore charged the Airlines

unreasonable rates which should be declared unlawful under

the AHTA and the Commerce Clause. The Airlines suggest

that these charges have led to their recent financial difficulties.

There is no evidence, however, that the nation’s airports in

general, or the Kent County International Airport in particular,

have charged unreasonable rates, accumulated excess reve-

nues, or contributed to the financial problems of the Airlines.

In fact, the economics of the nation’s airports compel the

affirmance, not the reversal, of the Court of Appeals’ decision

sustaining the use of the compensatory ratemaking method by

Kent County.

5

_ A. Airport Charges Have Not Caused Massive Airline Losses.

The ATA argues that airport charges have “risen virtually

unimpeded” and implies that the increase in airport charges

has been a significant cause of the airlines’ loss of $10 billion

over the past three years (ATA Brief, pp. 6-8). The Court

should give no weight to these claims, for two basic reasons.

First, there is no evidence that airport charges have exceeded

the actual costs of providing airport facilities to the Airlines.

The courts below correctly found that the airport in Kent

County only recovered its “break-even” costs from the Airlines

and that the compensatory ratemaking method, which ts used

in Kent County and at many airports throughout the country,

is designed to produce this result. Northwest Airlines, Inc. v.

County of Kent, Michigan, 738 F.Supp. 1112, 1115S, 1119

(W.D.Mich. 1990), aff'd, 955 F.2d 1054, 1057 (6th Cir.

1992).

Second, airport charges remain only a small fraction of the

airlines’ total costs and total revenues. Nationwide, charges

to commercial aircraft operators for the use of airport facilities

average only about 4% of total airline costs. Airport Council

International-North America, Airport Costs and the U.S. Air-

line Industry (1993), p. 14. For the Kent County International

Airport, the previous charges accepted by the Aulines were

only 1.2% of the Airlines’ revenues from their Grand Rapids

operations, and the challenged charges would have been only

1.5% of their revenues. Northwest Airlines, 738 F.Supp. at

1119.

It is, therefore, not surprising that when Congress recently

created the National Commission to Ensure a Strong Competi-

tive Airline Industry to investigate the financial health of the

airline industry, the Airlines did not claim and the Commission

did not find that airport charges have played a significant role in

6

the industry's losses in recent years.’ In fact, the Commission's

final report never mentions airport charges as a factor in the

airlines’ current financial predicament. See Change, Challenge

and Competition: A Report to the President and Congress

(Aug. 1993).

B. Airport Charges Have Not Produced Financial Windfalls.

The ATA also claims in its brief (pp. 8-9) that “many of the

nation’s airports are . . . generating excess revenues” and pro-

ducing “financial windfalls.” The ATA bases this claim upon

what it says are the results of the AAAE’s own Survey of

Airport Rates and Charges 1991-1992 (undated). Unfortu-

nately, the ATA has badly distorted the Survey in an attempt

to mislead the Court.

The AAAE’s Survey compiles the operating revenues and

operating expenses of airports throughout the country. The

Survey does not, however, purport to reflect the costs of capital

at the nation’s airports.’ It is meaningless to say, as the ATA

does, that the existence of operating income shows that airports

have generated “excess revenues” or “financial windfalls.”

The nation’s airports already have enormous capital costs, and

See Airport and Airway Satety, Capacity, Nowe Improvement, and Intermoda!

Transportation Act of 1992, Pub. L. 102-581. tt. TH. § 204¢2)¢1) (directing the

Commission to “make a complete investigation and study of the financial condition

of the airline industry”) and § 204(d) 3G) (specifying “user fees imposed on

United States airlines” as a matter to be addressed); H. Rep. No. 22, 103rd Cong...

Ist Sess. (1993) (not mentioning user fees as a significant factor).

From time to ime, the AAAE surveys its members about the rates each airport

charges air carriers and concessionaires, the type of cost recovery system each

airport uses (compensatory or residual), the amount of revenue raised from each

type of user, and the charges for the use of each type of airport facility. The survey

is intended to p: ovide general information to the AAAE’s members as to how their

charges compare to the rates at similar airports throughout the country. The survey

is not designed to provide a complete financial picture of any specific airport or

of the airport industry as a whole

7

many airports plan huge capital improvement programs. A

brief look at the airports singled out by the ATA demonstrates

this critical point.

As reported in the AAAE Survey, the three major airports

operated by the Port Authority of New York and New Jersey

(John F. Kennedy International Airport, LaGuardia Airport

and Newark International Airport) had a combined operating

surplus of $304 million in 1991. This figure, however, does

not take into account the airports’ share of the Port Authority's

administrative expenses ($48 million), the depreciation of air-

port capital investments ($100 million), or any allowance for

debt service on the obligations of the Authority (which for all

of its facilities was $295 million in 1991). Moreover, the Port

Authority's current capital plan calls for additional investments

at these airports of $2 billion during the five year period 1993-

1997.

Similar patterns can be found at the Boston, Houston and

Las Vegas airports highlighted by the ATA. The Massachusetts

Port Authority produced an operating surplus at Logan Inter-

national Airport of about $58.5 million in 1991, but its debt

service and required reserve payments for the Airport were

approximately $34 million. Meanwhile, the Logan Airport

Capital Plan anticipates capital improvements of $1.3 billion

over the next ten years.

While the AAAE’s 1991-1992 survey showed net revenues

of $52.3 million for the Houston Intercontinental Airport, the

accumulated operating surplus generated by the Houston air-

port system, including Houston Intercontinental Airport, has

been used to pay administrative expenses, to meet debt service

obligations and to refund outstanding indebtedness and thereby

reduce the debt service of the airport system. Over the next

five years, the Houston airport system plans to spend about

$812 million on capital improvements.

While the Las Vegas McCarran International Airport gener-

ated an operating surplus of about $66 million, it had debt

8

service obligations of about $60 million in 1991. By agreement

with the Airlines, the remaining funds have been held for usc

on new airport capital projects, which are slated to cost about

$600 million by the end of this century.

Finally, at the Seattle-Tacoma International Airport. the air-

lines have a residual cost agreement with the Airport which

provides that the operating surplus ($43.5 million) should be

devoted to debt service, coverage requirements and administra-

tive expenses. During the next ten years, this airport expects

to spend $1.3 billion on capital improvements.

In short, after existing debt service and future capital require-

ments are taken into account, there 1s no proof that any airports

have accumulated “excess revenues” or realized “financial

windfalls.” Rather, the evidence ts that the nation’s airports,

including Kent County International Airport, have capital

needs that vastly exceed their retained operating income.

If. THe ACCUMULATION OF NON-AIRLINE OPERATING INCOME

Is CONSISTENT WIttH CONGRESSIONAL EXPECTATIONS.

It is the responsibility of state and local airport operators to

build, operate, maintain and improve the nation’s airports.

Congress has required airport operators to set their charges for

the use of airport facilities so that each airport is “as self-sus-

taining as possible.” 49 U.S.C. App. § 2210(a)(9). To raise

the capital required for airport construction and improvement,

it is essential for an airport to generate operating revenues that

exceed its operating expenses (that is, in the words of the

ATA, to produce “excess revenue”). This so-called “surplus”

is necessary to pay debt service, maintain required debt cover-

age and reserve funds, cover the up-front costs of projects that

are eligible tor federal grants and permit capital expenditures

9

on a pay-as-you-go basis.* A ruling that either the AHTA or

the Commerce Clause prohibits airports from generating such

“excess revenues,” even when they only charge the airlines

the break-even costs of the airport facilities they use, would

cripple the efforts of the nation’s airports to be “self-sustaining”

and cannot be reconciled with the intent of Congress.

For many years Congress has recognized that it is very diffi-

cult for airports to be entirely “self-sustaining” and therefore

has provided massive financial assistance through the federal

Airport Improvement Program (“AIP”). Airport and Airway

improvement Act of 1982, Pub. L. 97-248, 49 U.S.C. App.

$§ 2201 et seq.. Even with the AIP, however, Congress has

recognized that the nation’s airports cannot meet their capital

requirements. As a result, Congress enacted the Aviation

Safety and Capacity Expansion Act of 1990, Pub. L. 101-508,

tit. IX, subtit. B, which amended the AHTA to permit airports

> 99

to levy “passenger facility charges” (“PFC’s”) to augment their

‘The “surplus” challenged by the Airlines is required by federal grant assurances

to be used only for airport capital or operating costs. In order to receive federal

grants under the Airport Improvement Program, an airport must provide assurances

satisfactory to the Secretary of Transportation that “all revenues generated by the

airport . will be expended for the capital or operating costs of the airport, the

local airport system, or other local facilities which are owned or operated by the

owner or operator of the airport and directly and substantially related to the actual

air transportation of passengers or property.” 49 U.S.C. App. § 2210(a)(12). Thus,

as a matter of federal law any “excess” revenue must be reinvested in the airport.

The Secretary has power to enforce this requirement. 49 U.S.C. App. § 2218.

Congress declared that “the continuation of airport and airway improvement

programs” is “required to meet the current and projected growth of aviation and

the requirements of interstate commerce, the Postal Service, and the national de-

fense.” 49 U.S.C. App. § 2201(a)(2). Congress encouraged “airport construction

and improvement projects which increase the capacity of facilities to accommodate

passenger and cargo traffic, thereby increasing safety and efficiency and reducing

delays... .” 49 U.S.C. App. § 2201(aj‘11). From 1982 to 1992, the Federal

Aviation Administration provided AIP grants of about $13 billion “to help airports

sustain or increase their safety and capacity.” U.S. Government Accounting Office,

Airport Improvement Program, Opportunity to Consider FAA's Role in Meeting

Airport System Needs, GAO/T-RCED-93-43 (May 26, 1993), p. 3.

10

ability to finance approved capital improvement projects.° 49

U.S.C. App. § 1513(e). See H. Rep. No. 581, 101st Cong.,

2d Sess. (1990), p. Il (over the years 1990-1995, airport

capital improvement projects are expected to cost $50 billion).

It is implausible that when it mandated that airports become

“as self-sustaining as possible,” funded the Airport Improve-

ment Program and authorized the use of PFC’s, Congress

intended that airports be stripped of the ability to generate the

non-aeronautical operating income they must have to raise

their own capital and pay required debt service.

Il. THe Revcier SouGHT By THE AIRLINES WOULD UNDER-

MINE THE FINANCIAL INTEGRITY OF THE NATION'S AltR-

PORTS.

The Airlines seek to compel the Airport to share its non-

aeronautical operating surplus with the Airlines even though

the Airport has only charged the “break-even” costs of the

facilities the Airlines use and the Airlines have not agreed to

assume any of the financial risks or obligations of the Airport.

This result would be unprecedented and unwise.

Airport operators use two alternative methods to recover the

costs of their airports: the “compensatory” method and the

“residual cost” method. Under a compensatory method, such

as the method used by Kent County, the airport charges com-

mercial aircraft operators only the actual costs of the airport

facilities they use; the airport itself retains any excess revenues

derived from non-aeronautical sources and has sole responsi-

bility for its own financial obligations and capital planning.

‘The ATA makes the perverse argument that the adoption of the PFC legislation

somehow makes “excess airport revenues uniformly unreasonable” (ATA

Bret, p. 12). This broad assertion completely misses the point. Congress reversed

federal policy and loosened the constraints of the AHTA to permit the use of a

specified form of “head tax” not because it found that existing airport revenues

were excessive, but because it found that they were imadequate to meet the needs

of this country’s air transportation system

11

Under a residual cost method, the airport and airlines agree

that the airport will charge the commercial airlines whatever

costs of the airport remain unpaid after all non-aeronautical

revenues have been collected so that the airport is assured that

it will break even overall. In exchange for this financial com-

mitment to make up any revenue shortfalls, the airlines gain

the ability to share the airport’s concession revenues and to

influence its capital planning.

Moody's has summarized the essential differences between

these two methods this way:

The fundamental differences between the residual

and compensatory approaches .. . are reflected in

who assumes the risk for financial operations and

who has control over airport capital decisions. Under

the residual approach, the airlines assume the risks

by guaranteeing annual cash flow sufficient to keep

the airport whole regardless of air traffic levels, con-

cession revenue yields, operating expenses, and

other financial factors. For this guarantee, airlines

share in non-airline revenues in the form of reduced

terminal rental and landing fee requirements, and

exercise certain controls over capital decisions

through MII provisions.’ Conversely, under a com-

pensatory approach the airport assumes the risk for

financial operations by allocating to airlines only

those expenses associated with airline space. Costs

associated with concession, public and vacant airline

rentable space are presumably funded by non-airline

~Mayjority-in-interest or “MII” provisions typically allow the airlines to disapprove

significant capital expenditures. These provisions sometimes allow airlines to veto

capital improvements that would aid competitors. Because of this potential for

anti-competitive behavior, Congress has provided that MII provisions may not be

invoked to restrict the construction of facilities financed with passenger facility

charges. 49 U.S.C. App. § 1513(en9)

12

sic] revenues. By assuming this risk, the airport

retains control over capital decisions and retains any

excess of non-airline revenues over non-airline ex-

penses.

Moody's on Airports, A New Look at Airport Debt In a Chang-

ing Environment (1991), p. 12.

The alignment of financial responsibility with control of the

revenue stream is critical because most airports use revenue

bonds to raise capital for airport improvement projects

(Moody's, p. 7). The authorizing bond ordinances and trust

indentures pledge airport revenue, rather than airport facilities,

as security for the bonds. To reduce the risk of default, these

indentures typically require net airport revenues to be at least

125% of annual debt service and require the funding of reserve

accounts to ensure that the pledged revenue stream continues

to flow to meet debt service obligations.

In this case, the Airlines seek to mandate an illogical and

dangerous combination of the compensatory and residual cost

methods which would force the Kent County International

Airport to reduce its charges below actual costs whenever tt

has “excess” non-airline revenues. If the Airlines succeed in

their appeal, they will have no financial obligation except to

pay below-cost charges for their use of Kent County's airfield

and passenger terminal; but the nation’s airports will lose the

ability to generate the non-aeronautical operating income they

require to meet their capital needs.

This result would undermine the financial integrity of the air-

ports throughout the country which rely upon the compensatory

method to raise the revenues they need to maintain and improve

the air transportation system. If the Airlines are entitled to the

Airport’s “surplus” non-aeronautical revenue, as they claim,

the revenue streams that support the debt obligations of many

13

of the nation’s airports will be threatened.* Such an outcome

is not consistent with the intent of Congress or with the prece-

dents of this Court.

This Court has never before outlawed the use of compensa-

tory ratemaking. There is nothing in the AHTA or the Com-

merce Clause that warrants the relief the Airlines seek. The

Secretary of Transportation, who is responsible for the admin-

istration of the federal aviation laws, has never suggested in

any way that the use of the compensatory method is forbidden.

The Airlines’ misguided attempt to divert non-aeronautical

revenues and destroy the ability of the nation’s airports to meet

the public’s need for a safe and efficient air transportation

system should be squarely rejected by the Court.

Conclusion.

For all of these reasons, the Court should affirm the decision

of the Court of Appeals and permit the nation’s airport managers

to continue to use a variety of financial tools, including the

compensatory method, to meet their obligations to the public to

build, operate, maintain and improve this nation’s airports.

Respectfully submitted,

SCOTT P. LEWIS

PALMER & DODGE

One Beacon Street

Boston, Massachusetts 02108

(617) 573-0162

“The Airlines have never specified how the amount of concession revenues they

claim ts to be determined. Any requirement that airports reduce their cost-based

charges to the airlines whenever they generate income from non-airline sources

would, however, mevitably reduce the revenue streams pledged to secure many

airport bonds and would, therefore, jeopardize the use of revenue bonds to fund the

immense capital improvements required by the nation’s air transportation system