Amicus Curiae Brief — American Airlines, Inc. v. Wolens

No. 93-1286 |

——ee eee CLERK |

IN THE

Supreme Court of the United States

OCTOBER TERM. 1993

AMERICAN AIRLINES, INC.,

. Petitioner,

MyYRON WOLENS, ALBERT J. GALE, R. CRAIG ZAFIS,

BRET MAXWELL, ROBERT NELSON and P.S. TUCKER,

Respondents.

On Writ of Certiorari to the

Supreme Court of Illinois

BRIEF AMICUS CURIAE OF

AIR TRANSPORT ASSOCIATION OF AMERICA

IN SUPPORT OF PETITIONER

WALTER A. SMITH, JR. JOHN R. Keys, JR.

JOHN G. ROBERTS, JR.* WINSTON & STRAWN

HOGAN & HARTSON L.L.P. 1400 L Street, N.W.

555 Thirteenth Street, N.W. Washington, D.C. 20005

Washington, D.C. 20004 (202) 371-5700

(202) 637-5810 CALVIN P. SAWYIER

Mary EF. DOWNS WINSTON & STRAWN

DAVID A. BERG 35 West Wacker Drive

AIR TRANSPORT ASSOCIATION Chicago, IL 60601

OF AMERICA (312) 558-5600

1301 Pennsylvania Avenue, N.W. Counsel for Amicus Curiae

Suite 1100 Air Transport

Washington, D.C. 20004 Association of America

(202) 626-4234

* Counsel of Record

WILSON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

QUESTION PRESENTED

Is a class action suit under state common law seeking

damages for an alleged failure to make airline seats avail-

able to frequent flyers at a particular rate (free with

frequent flyer credits) an effort by the State to enforce a

law relating to the rates and services of an airline, and

therefore pre-empted under 49 U.S.C. App. § 1305(a)(1)

and this Court’s decision in Morales v. Trans World Air-

lines, Inc., 112 S. Ct. 2031 (1992)?

TABLE OF CONTENTS

Page

QUESTION PRESENTED ic i

TABLE OF AUTHORITIES ...................... Sica iil

STATEMENT OF INTEREST OF AMICUS CURIAEL. l

STATEMENT OF THE CASE ..W000000000000000000000000... 3

SUMMARY OF ARGUMENT ...00 0... A

ARGUMENT. ‘ 6

I. THE AIRLINE DEREGULATION ACT PRE-

EMPTS STATE REGULATION OF FRE-

QUENT FLYER PROGRAMS 6;

I. STATE REGULATION OF FREQUENT

FLYER PROGRAMS RELATES TO AIRLINE

RATES AND SERVICES ‘ “

A. Airlines Market Their Services And Compete

Through Frequent Flyer Programs 5

B. The Airlines’ Yield Management System For

Setting Rates Under Deregulation Requires

Flexibility In Frequent Flyer Programs 13

Ill. THE DECISION BELOW, IF ALLOWED TO

STAND, WOULD HAVE A DRAMATIC AD-

VERSE FINANCIAL IMPACT ON THE AIR

TRANSPORT INDUSTRY pune 15

EELS SSS 17

(iii)

iv

TABLE OF AUTHORITIES

Cases Page

Alaska Airlines, Inc. Vv. Johnson, 8 F.3d 791 (Fed.

EES estar ee Rae Ae ats ee 14

Hines V. Davidowitz, 312 U.S. 52 (1941) 0... 7

Morales V. Tranz World Airlines, Ine., 112 S. Ct.

2031 (1992) . passim

Shaw Vv. Delta Air Lines, hue. 463 U. Ss. 85 (1983) . 7-8

Statutory Provisions

49 U.S.C. App. § 1305(a) (1) _......... stinonaia jt a claeiihicall passim

ie a) Ce eee «16

Airport and Airway Safety, Capacity, Noise Im-

provement, and Intermodal Transportation Act

of 1992, Pub. L. No. 102-581, § 204(a) (2)

i GERD ceustndnanenbdinetuansnsctacdianalbiapadsiaartinenicdacdaiiaiiintes. 16

Other

a ena ne! Wee Lanier 10

ESSE edie Fee ee Save an RS le Ne: 10-11

i in 10

Ian Brown, The Loyal Family, Airline Business:

The Skies in 1994 (1994) ............................. 9

National Commission to Ensure a Strong Competi-

tive Airline Industry, Change, Challenge, and

Competition: A Report to the President and

ee ee ev occa eee 15

Secretary’s Task Force on Competition i in the U.S.

Domestic Airline Industry (Feb. 1990) 9,14

IN THE

Supreme Court of the United States

OcToBeR TERM, 1993

No. 93-1286

AMERICAN AIRLINES, INC.,

7 Petitioner,

Myron Wortens, ALBERT J. GALE, R. CRAIG ZAFIS,

Bret MAXWELL, Ropert NELSON and P.S. TUCKER,

Respondents.

On Writ of Certiorari to the

Supreme Court of Illinois

BRIEF AMICUS CURIAE OF

AIR TRANSPORT ASSOCIATION OF AMERICA

IN SUPPORT OF PETITIONER

STATEMENT OF INTEREST OF AMICUS CURIAE

The Air Transport Association of America (“ATA”)

is a non-profit tnineorporated trade association of fed-

erally certificated air carriers providing scheduled passen-

ger and cargo service. ATA’s members account for more

than 95 percent of the domestic passenger and cargo

traffic flown annually by United States carriers.’

' ATA’s members are: Alaska Airlines, Aloha Airlines, American

Airlines, American Trans Air, Continental Airlines, Delta Air

Lines, DHL Airways, Evergreen International, Federal Express,

Hawaiian Airlines, Northwest Airlines, Reeve Aleutian Airways,

Southwest Airlines, Trans World Airlines, United Air Lines, United

Parcel Services, and USAir. Associate members are Air Canada,

Canadian Airlines International, and KLM Royal Dutch Airlines.

This brief is filed with the « rent of the parties. The consent

letters have been filed with the Clerk.

2

ATA’s principal functions are to represent the interests

of the commercial airline industry before Congress, state

legislatures, and federal and state courts. ATA also

works closely with the various federal agencies which reg-

ulate the airline industry, such as the Federal Aviation

Administration and the Department of Transportation.

ATA has filed numerous amicus briefs in federal and state

court proceedings concerning a wide variety of issues of

interest to its members.

ATA’s members have a vital interest in the outcome of

this case, which has far-reaching consequences to the air-

line industry. Almost all of ATA’s passenger airline

members have a trequent flyer award program similar to

the award program offered by American Airlines. In-

deed, this suit against American Airlines is only one of

more than five such suits which have been brought against

airlines in the Circuit Court of Cook County, Illinois,

challenging changes in frequent flyer programs.

Each airline’s frequent flyer program may differ in cer-

tain respects from the programs of other airlines, and

changes in one airline’s program may be made at different

times, in a different manner, and for different reasons than

changes in the programs of other airlines. ATA, in light

of its experience and perspective, is particularly qualified

to bring to the attention of the Court the industry-wide

significance of frequent flyer programs, to explain the role

these highly successful programs play in airline market-

ing, and to detail the manner in which these programs

relate to “the dynamics of the air transportation indus-

try,” which this Court found significant in Morales v.

Trans World Airlines, Inc., 112 §. Ct. 2031, 2040

(1992).

The decision below—if allowed to stand—would pre-

clude airlines from administering frequent flyer programs

with the flexibility necessary in a competitive market with

3

the characteristics of the air transportation industry, in

direct conflict with Congress’ pre-emption of state laws

“relating to rates, routes, or services.” 49 U.S.C. App.

§ 1305(a)(1). Frequent flyer programs—progeny of

Congress’ decision to infuse free market competition into

the United States airline industry—would be radically

modified or terminated, to the detriment of the industry

and the public. ATA and its members—as well as the

passengers they serve—have a strong interest in avoiding

any such result, and ensuring that courts correctly inter-

pret and apply Section 1305(a)(1).

ATA and its members also have a strong interest in

preserving the certainty and clarity of the regulatory

regime under which air carriers operaie. This Court

in Morales contributed to that certainty and clarity by

reading the pre-emption clause of Section 1305(a)(1)

as written. The decision below threatens to unsettle that

clarity, on which the airlines have relied.

STATEMENT OF THE CASE

The facts are set forth fully in petitioner’s statement

of the case, and ATA will not repeat them here. We

note, however—and we file this brief to demonstrate—

that the significance of this case extends far beyond the

particular parties. Although the Illinois Supreme Court

concluded that a “frequent flyer program is not an essen-

tial element to the operation of an airline,” Pet. App. 6a,

the fact is that all major domestic carriers have frequent

flyer programs, and these programs are a significant part

of the rate and service structure of today’s air transport

industry. Indeed, as explained below, they are a prime

device for marketing the rates and services of one airline

aS against its competitors and constitute one of the most

creative competitive innovations of the post-deregulation

era.

The programs differ in various respects, and are con-

stantly changing as particu’. airlines respond to a com-

4

petitive environment and seek to gain an advantage over

their domestic and international rivals. As_ petitioner

American Airlines did in this case, other carriers have

modified the benefits and resirictions in their frequent

flyer programs from time to time, to ensure continued

viability of the programs consistent with the yield man-

agement approach that forms the core of effective com-

petition in the modern air transport industry.

This case is of broad significance beyond the parties

not only because of the importance and prevalence of

frequent flyer programs, but also because it is a nation-

wide class action brought under state law to challenge

the practices of an air carrier engaged in air transport

services throughout the country. The effect of such a suit

is tantamount to broad regulation of the relations between

an airline and its customers under state law—precisely

the result forbidden by the Airline Deregulation Act’s

express pre-emption of all state laws “relating to rates,

routes. or services.” 49 U.S.C. App. § 1305(a)(1).

This case is of particular interest to ATA because the

Cecision below—if allowed to stand—will interfere with

competition among ATA members over frequent flyer

programs, and deprive ATA members of the flexibility

they need to administer vield management programs in a

cost-effective manner. Both of these consequences will

seriously inhibit the competitive market Congress sought

to foster when it enacted the Airline Deregulation Act.

SUMMARY OF ARGUMENT

The express pre-emption clause of the Airline Deregula-

tion Act of 1978, 49 U.S.C. App. § 1305(a)(1), is ex-

pansive in scope and unambiguous in meaning: “{N]o

State * * * shall enact or enforce any law, rule, regula-

tion, standard, or other provision having the force aad

effect of law relating to rates, routes, or services” of any

interstate air carrier. Just two years ago in Morales v.

Trans World Airlines, Inc., 112 §. Ct. 2031, 2037

(1992), this Court concluded that this provision shouid

5

be read as written, holding that state enforcement actions

“having a connection with or reference to airline ‘rates,

routes, or services’ are pre-empted.” Respondents seek to

enforce in state court an aileged right to certain airline

services (air travel) at a particular rate (free, with fre-

quent flyer credits). This attempt clearly relates to rates

and services, and is accordingly pre-empted.

The conclusion of the majority below that frequent

flyer programs are “peripheral to the operation of an

airline” and “only tenuously connected to the airlines’

rates, routes, and services” (Pet. App. 7a) is palpably

untrue. Frequent flyer programs—one of the leading crea-

tive innovations of the deregulation era—are an integral

part of the way airlines market their services. As might

be expected given the important role such programs play,

airlines compete intensely with each other over ‘the terms

of their frequent flyer programs, and the marketplace

imposes serious restrictions on any airline’s ability to alter

frequent flyer benefits. In fact, the competitive market-

place has generally driven air carriers greatly to expand

the benefits they offer frequent flyers.

Respondents’ assertion that they have a right enforce-

able under state law to use their frequent flyer credits for

any seat on any flight would—if upheld——directly affect

rates and services by undermining the yicld management

process through which airlines achieve the most economi-

cally efficient mix of full fare, discount fare, and frequeni

flyer seats on any particular flight. This Court explained

the importance of this process in Morales, noting that

the economics of the air transport industry required re-

strictions on the availability of lower fare seats to in-

crease the prospects of a profitable flight. See 112 S. Ct.

at 2040. Frequent flyer seats are the lowest of the lower

fare seats, and restrictions on their availability—evolving

over time in response to changing competitive conditions

—are critical to the manner in which air carriers set the

rates for their services. State law actions that seek to

6

limit this flexibility are plainly related to the carriers’

rates and services, and are therefore pre-empted.

The air transport industry plays a critical role in ou.

Nation’s economy, not only because of its own contribu-

tion but because of its ties to the aerospace manufactur-

ing and tourism industries and its role in linking other

segments of the domestic and international marketplace.

The industry is currently facing an unprecedented eco-

nomic crisis, having lost some $12.8 billion over the past

four years. Opening the industry to massive new and

unforeseen liabilities under state law through actions of

the sort at issue here would be devastating not only to the

air transport industry but to all the other segments of the

economy inextricably linked to it. In expressly providing

that all state laws relating to rates, routes, or services are

pre-empted, Congress ensured that the industry would not

be subjected to such liability. This Court confirmed that

understanding in Morales, and should reaflirm it here.

ARGUMENT

I. THE AIRLINE DEREGULATION ACT PRE-EMPTS

STATE REGULATION OF FREQUENT FLYER

PROGRAMS

The Airline Deregulation Act contains an express pre-

emption provision specifying that “no State * * * shall

enact or enforce any law, rule, regulation, standard, or

other provision having the force and effect of law relating

to rates, routes, or services of” any interstate air carrier.

49 U.S.C. App. § 1305(a)(1). In Morales v. Trans

World Airlines, Inc., 112 §. Ct. 2031 (1992), this Court

held that this provision means what it says, concluding

that state enforcement actions “having a connection with

or reference to airline ‘rates, routes, or services’ are pre-

empted.” /d. at 2037.

Here respondents’ state court action secks to enforce

an alleged contractual right under Illinois common law to

use frequent flyer credits in a particular manner for free

7

flights. The respondents claim an entitlement to a partic-

ular airline “service”’—air transportation—at a particular

“rate”—free with frequent flyer credits. Their suit plainly

has “a connection with or reference to airline ‘rates [and]

services,’ ” and accordingly is pre-empted.

Under Morales and the Act, that is the end of the

matter. There is no avoiding the pre-emptive effect of

Section 1305(a)(1) by arguing—as the State attempted

to do in Morales—that the state court action is not incon-

sistent with federal law. Such an approach would be per-

tinent if the issue presented concerned conflict pre-

emption, i.e., the displacement of state law because it con-

flicts with federal law or “stands as an obstacle to the

accomplishment and execution of the full purposes and

objectives of Congress.” Hines v. Davidowitz, 312 U.S.

52. 67 (1941). But that is not what is at issue here.

This is a case of express pre-emption, and all that need

be shown is that the state law has “a connection with or

reference to” rates and services.

Certainly many if not most cases of express pre-

emption involve situations in which state regulation con.

flicts with federal law, which presumably was the reason

Congress enacted the express pre-emption provision in

the first place. But it is not necessary to show such a

conflict when the express pre-emption provision applies,

and the absence of a conflict can hardly override the

plain import of the statutory pre-emptive language enacted

by Congress. As the Morales Court explained in reject-

ing the State’s argument that its contemplated action was

consistent with federal law, that issue “is beside the point.

Nothing in the language of § 1305(a)(1) suggests that

its ‘relating to’ pre-emption is limited to inconsistent state

regulation.” 112 S. Ct. at 2038 (emphasis in original).

This Court in Morales did note, in dicta, that “ ‘[s]ome

state actions may affect [airline fares] in too tenuous, re-

mote. or reripheral a manner’ to have pre-emptive effect.”

Id. at 2040 (quoting Shaw vy. Delta Air Lines, Inc., 463

8

U.S. 85, 100 n.21 (1983) (bracketed language in orig-

inal)). That possible limitation on the scope of Section

1305(a)(1) is plainly not applicable in this case, since

respondents’ action seeks to enforce alleged rights to par-

ticular services at particular rates. The connection to ser-

vices and rates is direct, not tenuous and remote.

That point is confirmed by the following analysis ct

the role frequent flyer programs play in the air transport

industry. It is important to note, however, that this anal-

ysis of the actual impact of the state regulation at issue

is pertinent only in considering the possible remoteness

limitation adverted to in dicta in Morales. The question

is not whether state law is consistent with federal law,

but rather whether the state regulation affects airline rates

and services in so “tenuous, remote, or peripheral a man-

ner” that the regulation cannot even be said to have “a

connection with or reference to” the rates and services.

Morales, 112 S. Ct. at 2037.

Il. STATE REGULATION OF FREQUENT FLYER

PROGRAMS RELATES TO AIRLINE RATES AND

SERVICES

A. Airlines Market Their Services And Compete

Through Frequent Flyer Programs

This Court in Morales explained that pre-emption un-

der Section 1305(a)(1) applies to state laws which

“have a significant impact vpon the airlines’ ability to

market their product.” 112 S. Ct. at 2040. The contrast

with the analysis of the Illinois Supreme Court could not

be clearer. That court declined to find pre-emption be-

cause a “frequent flyer program is not an essential ele-

ment to the operation of an airline.” Pet. App. 6a. This

“essential element” test has no logical bearing on whether

a state law “relat[es] to rates, routes, or services”’—the

statutory language. A ten percent discount offered by an

airline for weekend travel mav not be “essential” to the

operation of the airline, but it is clear that a state law

purporting to regulate such a discount program would

9

nonetheless be pre-empted as “relating” to the airline’s

rates and services.

In any event, the Illinois Supreme Court’s view that

frequent flyer programs are “peripheral to the operation

of an airline” and “only tenuously connected to the air-

lines’ rates, routes, and services” (Pet. App. 7a) is dem-

onstrably false and not shared by the federal agency re-

sponsible for administering the Deregulation Act. The

Department of Transportation has concluded:

To be a successful competitor in today’s airline in-

dustry, an air carrier must differentiate its service

and develop incentives that reduce the need to rely

on price competition. Frequent flyer programs are

one of the most effective marketing practices yet de-

vised for differentiating airline services and appeal-

ing directly to the traveler, who, in many instances,

is different from the purchaser of the ticket. [Secre-

tary’s Task Force on Competition in the U.S. Domes-

tic Airline Industry, Airline Marketing Practices

(Feb. 1990), at 31.]

This conclusion—that “[f]requent flyer programs are one

of the most effective marketing practices yet devised”—

direct! answers this Court’s test in Morales that state

laws ue pre-empted if they “have a significant impact on

the airlines’ ability to market their product.” 112 S. Ct.

at 2040.

The Secretary’s Task Force further explained that

“{i]n interviews with airline executives, travel agents, and

corporate travel managers, it has been acknowledged that

frequent flyer membership has a powerful effect on air

carrier selection.” Airline Marketing Practices, supra, a*

41. See also lan Brown, The Loyal Family. Airline Busi-

ness: The Skies in 1994 20, 21 (1994) (“Surveys have

repeatedly shown that passengers take FFP [frequent

fiver program] considerations into account when choosing

flights and airlines”). Thus-—although “essentiality” is

plainly not the appropriate test—a frequent flyer program

10

may well be essential for many carriers to compete effec-

tively in today’s market for air travel consumers. See id.

at 23 (managing director of Cathay Pacific quoted as

saying “A mileage programme is essential if we are to

have a competitive product” ).

In fact, airlines compete intensely over the terms of

their respective frequent flyer programs. This competi-

tion dates from the first introduction of a frequent flyer

program by American Airlines in May 1981. By July

1981, all of the other major domestic airlines had te-

sponded by offering competing programs of their own.

This pattern was replicated internationally. European

carriers generally did not offer free flights to frequent

flyers until shortly after United States carriers gained ac-

cess to London Heathrow slots in 1990. British Airways

then promptly responded to this competition by offering

a program with free flights, and other European carriers

responded to the British Airways’ initiative. /d. at 20.

Indeed, frequent flyer programs are such a major com-

ponent of how airlines compete that there are even regu-

larly published newsletters and journals such as Business

Flyer and Frequent (now known as Inside Flyer) de-

voted to keeping consumers apprised of changes in fre-

quent flyer programs and the comparative strengths and

weaknesses of programs offered by different airlines. The

monthly magazine Frequent Flyer also contains a regular

department devoted to frequent flyer programs, and car-

ries advertisements from airlines publicizing their pro-

grams. See, e.g., Frequent Flyer (June 1994), at 21, 64.

Recent articles in Frequent include “The Battle for

California” (June 1990, p. 9), detailing the competing

bonus. mile programs offered by American, Delta, United,

and USAir to attract customers on the Los Angeles—San

Francisco route; “Air Wars 2 (Battle Review)” (March

1990, p. 3), describing one airline’s offer of double or

trinle miles usable for a more extended period of time

than allowed under competitors’ programs; and “Con-

11

tinued Evolution of Elite Level Programs” (Jan. 1990,

p. 2), noting that “elite level programs became a battle-

ground” and that new programs by certain airlines “will

force others * * * to go back and review their benefit

program.”

. Regular features in the magazine include “Partners,”

listing which airlines have linked with others in frequent

flyer programs, and “Bonus Bulletin,” listing special pro-

motions offered by the airlines to their frequent flyers for

limited times. The magazine even conducts an annual

awards program, bestowing “Freddies” in categories for

best customer service, best overall award, best overall pro-

motion, best affinity credit card, best program newsletter,

best elite level program, and best frequent flyer program.

See Frequent (Jan. 1990, at 1, 20). Frequent also pub-

lishes the Official Frequent Flyer Guidebook, with com-

prehensive information about the competing programs.

Significantly, among the issues discussed in Frequent—

by both reporters and readers writing letters to the editor

—are limits imposed by the airlines on redemption of fre-

quent flyer miles. Letters tout one program’s mileage

awards “free of capacity control for ‘Gold’ members with

no extra mileage” (April 1990, p. 2); an article on ca-

pacity controls reviews different programs and advises fre-

quent flyers that “[i]f you continue to have problems with

your award destination, consider flying another airline

* * *- Remember, you do have choices” (March 1990,

pp. 1, 20).

This intense competition has resulted in an overall ex-

pansion of benefits under frequent flyer programs, with

airlines extending originally limited periods for the re-

demption of awards; offering enhanced opportunities to

earn mileage credits through hotel, auto rental, telephone,

and general credit card purchases; and broadening not only

opportunities to earn miles but also redemption possibili-

ties through affiliation with other, especially international,

air carriers. The Department of Transportation recog-

12

nized this in 1992, when it rejected a petition seeking a

rulemaking addressed to frequent flyer programs. As the

Department noted, “[s]ince the programs began, each

carrier has greatly expanded the kinds of awards that

members can obtain and the ways in which members can

accumulate award miles in order to make its program

more attractive.” Pet. App. 99a.

The airlines thus face significant competitive pressures

in the marketplace which restrict their ability to modify

frequent flyer programs. Carriers recognize that excessive

restrictions will be noted by their most frequent flyers,

may well be widely publicized, and could result in loss of

customer loyalty to rival airlines.

The foregoing makes clear that the terms of an air-

line’s frequent flyer program are an integral part of that

airline’s “rates” and “services”. State court actions seek-

ing to regulate airline practices with respect to frequent

flyer programs therefore plainly “relatle] to rates, routes,

or services” and are pre-empted by the plain language of

Section 1305(a)(1). As Congress intended, the compe-

titive market established by the Deregulation Act—not

the States—regulates this aspect of airline rates and serv-

ices.

It is also clear that state regulation is inconsistent with

the purposes of the Deregulation Act, because the state

action directly implicates competition among the airlines

and the pro-competitive policies of the Act. A state effort

to raise or lower airline rates would indisputably be barred

by the express pre-emption clause, and would hinder com-

petition among various carriers on the basis of fares. Brt

airlines compete just as vigorously through their frequent

flyer programs, and any state effort to regulate those pro-

grams similarly hinders competition. Indeed, competition

through frequent flver programs mav often be more effec-

tive for airlines. because it entails less risk than an across-

the-board reduction in fares and carries with it the added

advantage of rewarding and solidifying customer loyalty.

13

B. The Airlines’ Yield Management System For Set-

ting Rates Under Deregulation Requires Flexibility

In Frequent Flyer Programs

_ Respondents’ State law claims have another effect on

airline rates and services, quite apart from affecting com-

petition over frequent flyer programs themselves. In fact,

the attempted state regulation in this case goes to the core

of how the airlines compete in the deregulated market-

place established by the Act.

To appreciate fully the impact the decision below will

have on airline rates and services, it is necessary to un-

derstand “the dynamics of the air transportation indus-

try.” Morales, 112 S. Ct. at 2040. As this Court ex-

plained:

The expenses involved in operating an airline flight

are almost entirely fixed costs; they increase very

little with each additional passenger. The market for

these flights is divided between consumers whose vol-

ume of purchases is relatively insensitive to price

( primarily business travelers) and consumers whose

demand is very price sensitive indeed ( primarily

pleasure travelers). Accordingly, airlines try to seil

as many seats per flight as possible at higher prices

to the first group, and then to fill up the flight by sell-

ing seats at much lower prices to the second group

(since almost all the costs are fixed, even a passenger

paying far below average cost is preferable to an

empty seat). [/d.]

The Court went on to recognize that “substantial restric-

trons on the availability of the lower priced seats (so as

to sell as many seats as possible at the higher rate)” were

necessary in order for this pricing system to function. Id.

Frequent flyer tickets are, of course. the lowest of the

lower priced seats. Without the ability to impose restric-

trons on the availability of seats for frequent flyers, the

complex and sophisticated revenue management systems

employed by every air carricr—systems the Department

of Transportation has recognized as “pro-competitive,” see

14

Secretary's Task Force on Competition in the USS.

Domestic Airline Industry, Pricing 188-189 (Feb. 1990)

—could not function.

This requisite flexibility is completely incompatible with

the regulatory regime respondents seek to impose under

Illinois common law. American Airlines’ frequent flyer

brochure expressly stated that “program rules, regulations,

travel awards and special offers are subject to change with-

out notice.” See Pet. Br. 8 & n.13. Respondents never-

theless insist on more detailed disclosure—precisely the

sort of disclosure that cannot be made because of the

fluidity of the yicld management process in today’s com-

petitive environment. An air carrier simply cannot know

in advance how developing competition will change the

mix of full fare, discount fare, and frequent flyer seats

that will maximize revenue on a particular flight; how

long seats should be set aside for business travelers on a

particular route before being opened up for additional

frequent flyer travelers; or what the availability of frequent

flyer seats will be on new routes it may offer in the future.

As the Federal Circuit recently explained:

[TJo respond to a changing market the airlines may

limit the number of tickets available at a particular

applicable fare. The airline designates a number of

“available seats” to be sold at each applicable fare

for a given service and this number fluctuates on an

hour-by-hour, or sometimes a minute-by-minute, basis.

| Alaska Airlines, Inc. v. Johnson, 8 F.3d 791, 793

(Fed. Cir. 1993).]

In addition, if Illinois may regulate rates and services

through common law actions of the sort at issue here,

then so may any and every other State. Airlines would

face a chaotic patchwork of different and even conflicting

regulation. Requiring compliance with 50 different com-

mon law advance disclosure rules, which themselves

evolve over time, would seriously distort the yield man-

agement process and directly inhibit the ability of air

carriers to compete in a cost-effective manner.

. ~

15

Respondents’ assertion that they have a legally enforce-

able “right” to use frequent flyer credits to purchase “any

seat” on “any flight” would confer a special status on

frequent flyer fares not accorded any other fare. Thus,

an airline may advertise a discount fare for a_par-

ticular flight, but that does not confer a “right” on any

consumer to “any seat” on that flight at that price.

Rather, as shown, the extent of the availability of the dis-

count fare seats depends upon the yield management

process for that flight. This Court has already held in

Morales that state efforts to regulate the disclosure of

limitations required in connection with the marketing of

such discount fares are pre-empted by Section 1305(a)

(1); a different result should not obtain with respect to

the marketing of a specific type of fare—a frequent

flyer fare—through the promotional materials of the fre-

quent flyer program.

Ill. THE DECISION BELOW, IF ALLOWED TO STAND,

WOULD HAVE A DRAMATIC ADVERSE FINAN-

CIAL IMPACT ON THE AIR TRANSPORT

INDUSTRY

In its Report to the President and Congress (“Report”)

issued in August 1993, the National Commission to En-

sure a Strong Competitive Airline Industry concluded:

This nation’s civil aviation system is a vital national

resource. * * * The air transportation system has

become essential to economic progress for the citi-

zens and businesses of this nation. Without it, our

country will be hamstrung in its ability to participate

in an increasingly global community and market-

place. [Report, Change, Challenge, and Competi-

tion: A Report to the President and Congress, at

1.]

In establishing the Commission, Congress itself found

that “[t]he Nation’s airlines provide our connections with

the global economy. A stron airline industry is essential

to our Nation's ability to compete in the international

16

marketplace.” Airport and Airway Safety, Capacity,

Noise Improvement, and Intermodal Transportation Act of

1992, Pub. L. No. 102-581, § 204(a)(2), 49 U.S.C. App.

$ 1371 note. The importance of the air transport industry

derives not only from the 550,000 people it employs di-

rectly, but also from its critical ties to the aerospace man-

ufacturing and tourism industries, and its role linking

other sectors of the economy, both domestically and in-

ternationally. See Report, at 5 (“The Economic Impact

of Aviation” ).

Congress in establishing the Commission, and the Com-

mission in its Report, recognized that the airline industry

is currently confronting a serious economic crisis, one

with profound implications for the Nation’s economy as

a whole. In the past four years, the industry has lost

some $12.8 billion—.more than twice what it earned since

the beginning of scheduled airline service in 1925. As

Congress found, “[t}he Nation's airlines are in a state of

financial distress.” endangering their ability “to accom-

modate the growing aviation traflic demands of the 1990's

which threaten to undermine our Nation’s ability to com-

pete in the global economy.” Pub. L. No. 102-581, supra,

$ 204(a)(3). See Report, at 12.

Against this background, the decision below threatens

to saddle the industry with enormous new unforeseen lia-

bilities. In addition, if the airlines are forced to abandon

yield management restrictions for frequent flyer seats, or

lose the flexibility to revise frequent flyer benefits in re-

sponse to competitive pressures, the ability to earn an

adequate return on flights may well be lost.

Our point is not, of course, that the airlines should be

free from this liability simply because it would be costly

for them and in turn for the economy as a whole. It is

instead that Congress—sensitive to the vital role a healthy

airline industry plays in our economy—has already ex-

pressly provided that the airlines not be subject to the

prospect of this sort of liability when it passed Section

17

1305(a)(1). By pre-empting any state law “relating to

rates, routes, or services,” Congress ensured that an air

carrier's liability for these aspects of its business would

be set by the competitive marketplace—-which makes th:

carrier pay through business and revenue lost to its rivals

or by the Federal Government—-which can appropri-

ately weigh the vital role of the industry and its economic

health in proceeding with any appropriate remedial action.

CONCLUSION

For the foregoing reasons, and those in petitioner's

bricf, the judgment below should be reversed.

WALTER A. SMITH, JR.

JOHN G. Rorerts, Jr.*

HOGAN & HARTSON L.L.P.

555 Thirteenth Street, N.W.

Washington, D.C. 20004

(202) 637-5810

Mary E. Downs

DAvip A. BERG

AIR TRANSPORT ASSOCIATION

OF AMERICA

1301 Pennsylvania Avenue, N.W.

Suite 1100

Washington, D.C. 20004

(202) 626-4234

* Counsel of Record

Respectfully submitted,

JOHN R. Keys, Jr.

WINSTON & STRAWN

1400 L, Street, N.W.

Washington, D.C. 20005

(202) 371-5700

CALVIN P. SAWYIER

WINSTON & STRAWN

35 West Wacker Drive

Chicago, IL 60601

(312) 558-5600

Counsel for Amicus Curiae

Air Tranaport

Association of America