Legal Developments in International Civil Aviation

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Legal Developments in International Civil

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Legal Developments in International Civil Aviation

Summary

Much of the law regarding civil aviation has been developed through a combination of domestic

laws and international agreements between the United States and other nations. In 1992, the

United States Department of Transportation (DOT) introduced the “Open Skies” initiative and

began negotiating and entering into modern civil aviation agreements with foreign countries, as

well as individual members of the European Union (EU). As a result of a 2002 European Court of

Justice ruling that several portions of these “Open Skies” Agreements violated EU law, the United

States and the EU have been negotiating a new Open Skies Agreement. A tentative agreement

appears to exist between the parties that if enacted would, among other things, allow every EU

and U.S. airline to fly between every city in the European Union and every city in the United

States and would permit U.S. and EU airlines to determine the number of flights, their routes, and

fares according to market demand.

Despite this development, there appears to remain several areas of international civil aviation law

that the tentative agreement does not address. Among them are the issues of foreign ownership

and control, participation in the Civil Reserve Air Fleet Program, and cabotage. Presently, U.S.

law requires that to operate as an air carrier in the United States, an entity must be a citizen of the

United States. To be considered a citizen for civil aviation purposes, an entity must be owned

either by an individual U.S. citizen, a partnership of persons who are each U.S. citizens, or a

corporation (1) whose president and at least two-thirds of the board of directors and other

managing officers are U.S. citizens, (2) that is under the actual control of U.S. citizens, and (3)

has at least 75 percent of its stock owned or controlled by U.S. citizens. Recently, however, the

DOT released a Notice of Proposed Rulemaking (NPRM) that would change its interpretation of

what constitutes “actual control.” If adopted, this new interpretation could have major

implications for U.S. and international civil aviation. Several issues relating to this NPRM are

currently being debated, including the consistency with the operative statutes and the viability of

the Civil Reserve Air Fleet Program (CRAF), should more extensive foreign ownership be

permitted. In addition, Members of Congress have taken a significant interest in this DOT

rulemaking, both through direct participation in the rulemaking process and by introducing

legislation (H.R. 4542 and S. 2135) that would prohibit the adoption of a final rule for one year

and require the DOT to submit reports and analysis on the impact of the new interpretation on the

domestic industry and national security concerns. Furthermore, both the House and Senate have

adopted amendments to the proposed Transportation, Treasury, Housing and Urban Development,

the Judiciary, the District of Columbia and Independent Agencies Appropriations Act of 2007

(H.R. 5576) that would effectively forestall the DOT from adopting a final rule.

U.S. law also contains a general restriction on cabotage, defined as the transportation of

passengers or cargo by foreign air carriers from one point in the United States to another. This

report provides background on U.S. civil aviation agreements, updates the current status of U.S.

“Open Skies” negotiations with the EU, and addresses the legal debate concerning both the

foreign ownership and control rules and the cabotage laws. It will be updated as events warrant.

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Contents

Background ..........................................................................................................................1

“Open Skies” Agreements .....................................................................................................3

Air Carrier Citizenship ..........................................................................................................5

Current Law and Legal Precedent....................................................................................5

The Department of Transportation’s Proposed “Actual Control” Rule....................................9

Recent Developments.................................................................................................... 13

Legislative Responses ................................................................................................... 15

Cabotage............................................................................................................................. 16

Contacts

Author Contact Information ...................................................................................................... 18

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Background

The legal framework for international civil aviation rights dates back to the 1919 Convention for

the Regulation of Aerial Navigation (Paris Convention), which was a part of the Paris Peace

Conference. 1 The hallmark aviation principle recognized by the Paris Convention is that every

nation has absolute and exclusive sovereignty over the airspace above its defined territory. 2 This

principle was reaffirmed in 1944 at the Chicago International Civil Aviation Conference, which

produced the Chicago Convention. 3 The Chicago Convention resulted in an international

framework based largely on national interests, favoring bilateral air transport agreements over

multilateral accords with respect to issues such as routes, frequency and capacity.4 The Chicago

Convention’s accomplishments included an agreement by the signatories to grant each other two

of the so-called “five freedoms” of air transport,5 specifically, the right to fly across other states

without landing and the right to land for nontraffic purposes. In addition, the Chicago Convention

established the International Civil Aviation Organization (ICAO) to regulate the safety,

communications, and technological aspects of international civil aviation.6

Since the Chicago Convention, international civil aviation rights have developed primarily

through a series of bilateral agreements between the United States and foreign countries. Most of

these agreements have been “executive agreements” rather than treaties, thereby avoiding the

advice and consent requirement of the Constitution,7 and typically have contained language

favorable to the United States. For example, prior agreements permitted the United States to

designate both an unlimited number of gateway cities and an unlimited numbers of carriers.8 In

addition, the agreements provided the air carriers the right to determine capacity with only the

vaguest of guidelines. 9 As the United States began to deregulate its domestic airline industry,

administrations began to seek more liberal, free-market-based international agreements as well.10

Domestically, however, even as the United States began to adopt more liberal regulations for its

aviation industry, several existing laws continue to have a strong impact on international civil

Convention for the Regulation of Aerial Navigation, Oct. 13, 1919, Art. 1, 11 L.N.T.S. 173, 190.

Id.

Convention on International Civil Aviation, Dec. 7, 1944, Art. 44, 61 Stat. 1180, 15 U.N.T.S. 295, 296 [hereinafter

Chicago Convention].

See Andras Vamos-Goldman, The Stagnation of Economic Regulation under Public International Air Law:

Examining its Contribution to the Woeful State of the Airline Industry, 23 TRANSP. L.J. 425, 431 (1996); see also Paul

S. Dempsey, Turbulence in the “Open Skies:” The Deregulation of International Air Transport, 15 TRANSP. L.J. 305,

362 (1987) [hereinafter Dempsey].

The remaining “five freedoms” of air transport consist of the right to put down passengers, mail, and cargo taken on

in the territory of the state whose nationality the aircraft possesses; take on passengers, mail, and cargo destined for the

territory of the state whose nationality the aircraft possesses; and take on passengers, mail, and cargo destined for the

territory of any other state and the privilege to put down passengers, mail, and cargo coming from such territory. See

Daniel C. Hellund, Toward Open Skies: Liberalizing Trade in International Airline Services, 3 MINN. J. GLOBAL TRADE

259, 265 (1994).

See Chicago Convention, supra footnote 3, at Art. 44, 61 Stat. 1192-93, 15 U.N.T.S. 326.

See Dempsey, supra footnote 4, at 316-17; see also LOUIS HENKIN, FOREIGN AFFAIRS AND THE U.S. CONSTITUTION 215

(2nd ed. 1996).

Id. (citing United States Standard Form Bilateral Air Transport Agreement, Art. 3 (1953)).

Id.

See Adam L. Schless, Open Skies: Loosening the Protectionist Grip on International Civil Aviation, 8 EMORY INT’L

L. REV. 435, 441-42 (1994).

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aviation. Currently, air transportation and air commerce are governed by the Federal Aviation Act

of 1958.11 Section 401(a)(1) of the Act states that “an air carrier may provide air transportation

only if the air carrier holds a certificate issued under this chapter authorizing the air

transportation.”12 The statute authorizes the Secretary of Transportation to “issue a certificate of

public convenience and necessity to a citizen of the United States ....”13 Before issuing a

certificate, however, the Secretary “must find that the citizen is fit, willing, and able to provide

the transportation to be authorized by the certificate and to comply with this part and the

regulations of the Secretary.”14 Stated another way, to operate in the United States as an air

carrier, an entity must be a U.S. citizen and must be judged by the Secretary to comply with the

statute and any other applicable regulations.

In addition to the citizenship requirements, U.S. law also contains a general prohibition against

cabotage activity. Generally speaking, the term cabotage is defined as “the right of a foreign

airline to carry passengers and/or cargo between airports of the same country.”15 The prohibition

states that “aircraft may take on for compensation, at a place in the United States, passengers or

cargo destined for another place in the United States only if—(1) specifically authorized under

section 40109(g) of this title; or (2) under regulations the Secretary prescribes authorizing air

carriers to provide otherwise authorized air transportation with foreign registered aircraft under

lease or charter to them without crew.”16 If neither of those situations exists, foreign aircraft are

not permitted to perform cabotage within the United States. In addition, the Secretary of

Transportation has general discretionary authority to waive other economic-related statutory

provisions listed in section 40109(c) “when the Secretary decides that the exemption is consistent

with the public interest.”17 The cabotage prohibition, however, is not among the regulations listed

in section 40109(c).18

Finally, U.S. law has created an incentive program exclusively available to domestic air carriers;

namely, the Civil Reserve Air Fleet Program (CRAF). 19 Under this program, domestic air carriers

supply aircraft on a voluntary basis to increase the military’s airlift capacity. The CRAF allows

the U.S. military, in times of need, to demand access to a selected percentage of the civil aircraft

fleet to deliver troops and equipment to the battlefield.20

Federal Aviation Act of 1958, P.L. 85-726, 72 Stat. 740 (Aug. 23, 1958) (codified as amended at 49 U.S.C. § 40101

et seq.) [hereinafter Federal Aviation Act of 1958].

49 U.S.C. § 41101(a)(3) (2003).

Id. at § 41102(a) (emphasis added).

Id. at § 41102(b)(1).

See BLACK’S LAW DICTIONARY 194 (7th Ed. 1999).

49 U.S.C. § 41703(c)(1)-(2) (2003). Section 40109(g) gives the Secretary of Transportation the authority to grant

limited 30 day exemptions if it is determined that either there is an emergency, or it is necessary to avoid unreasonable

hardship and no unreasonable advantage will be given to any party involved in a labor dispute. 49 U.S.C. § 40109(g)

(2003).

49 U.S.C. § 40109(c) (2003).

Id.

See 10 U.S.C. § 9511 et seq. (2004).

See 10 U.S.C. § 9512 (2004).

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“Open Skies” Agreements

In August of 1992, the Department of Transportation (DOT) announced its “Open Skies”

initiative, which was intended to continue the trend of liberalizing international civil aviation. As

defined by the DOT, “Open Skies” consists of the following 11 principles:

1) Open entry on all routes; 2) Unrestricted capacity and frequency on all routes; 3) The right

to operate between any point in the U.S. and any point in the European Community without

restriction, including service to intermediate and beyond points, and the right to transfer

passengers to an unlimited number of smaller aircraft at the international gateway; 4)

Flexibility in setting fares; 5) Liberal charter arrangements; 6) Liberal cargo arrangements;

7) The ability of carriers to convert earnings into hard currency and return those earnings to

their homelands promptly and without restriction; 8) Open code-sharing opportunities; 9)

The right of a carrier to perform its own ground handling in the other country; 10) The

ability of carriers to freely enter into commercial transactions related to their flight

operations; [and] 11) A commitment for nondiscriminatory operation of and access to

computer reservation systems.21

The “Open Skies” initiative incorporated many elements of the previous bilateral agreements and

was designed to be entered into with any country “willing to permit U.S. carriers essentially free

access to their markets.”22 However, because “Open Skies” is an executive branch initiative,

policies that require legislative changes to U.S. law, such as foreign ownership and control, and

cabotage23 are not included within its principles.24 Currently, the United States is a party to 74

“Open Skies” Agreements worldwide. 25

In Europe, the first “Open Skies” Agreement was reached in October of 1992 with the

Netherlands, and over the next several years, similar agreements were reached with other

European countries, including Austria, Czech Republic, Belgium, Denmark, Finland, Germany,

Luxembourg, Norway, Sweden, Switzerland, and Iceland.26 As a result of these agreements, the

United States enjoys what can be characterized as quasi-cabotage rights within the European

Union (EU). In other words, although U.S. carriers still cannot operate truly domestic routes (e.g.,

Paris to Marseille), they have created so-called “hub and spoke networks” within Europe; for

example, a hub in Frankfurt, Germany, with spokes to Paris and Marseille. On the other hand, it

should be noted that U.S. law currently prevents European carriers from enjoying any type of

cabotage rights within the U.S. domestic market. 27

Defining “Open Skies,” D.O.T. Order No. 92-8-13, at App. 1 [hereinafter DOT Order].

See 57 Fed. Reg. 19,323 (May 5, 1992).

Cabotage is defined as “the right of a foreign airline to carry passengers and/or cargo between airports of the same

country” See BLACK’S LAW DICTIONARY 194 (7th Ed. 1999).

See DOT Order, supra note 21, at 6 (specifically noting the absence of cabotage and foreign ownership and control

policies).

See Open Skies Partners, U.S. Department of State, Bureau of Economic and Business Affairs, available at

http://www.state.gov/e/eb/rls/othr/2005/22281.htm (providing a list of the “Open Skies” Agreements currently in

effect).

See Benoit M.J. Swinnen, An Opportunity for Trans-Atlantic Civil Aviation: From Open Skies to Open Markets, 63 J.

AIR L. & COM. 249, 270 (1997).

Federal Aviation Act of 1958, supra footnote 11.

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The combination of the number of “Open Skies” Agreements between the United States and

individual EU Members, and the growing dominance of U.S. air carriers throughout Europe, led

the European Commission to seek a mandate to negotiate a bilateral aviation agreement between

the United States and the EU. The Commission, however, was unable to obtain such a broad

mandate and, in 2002, decided to bring legal action against those Member states that had

independently negotiated and entered into “Open Skies” Agreements with the United States.

While the European Court of Justice appeared to stop well short of invalidating the existing

“Open Skies” Agreements, it did hold that certain specific provisions were discriminatory and

therefore contrary to EU law. These included provisions relating to the allocation of airport slots

and those governing pricing, fares, and rates of intra-European air services; agreements on

computer reservation systems; and the “nationality clauses,” which permit the United States to

deny access to carriers whose home state has not signed an agreement.28 As a result of this

decision, the legal status of the existing “Open Skies” Agreements has been questioned,29 and the

EU Members have granted the Commission a mandate to negotiate a civil aviation agreement

with the United States.

Since the European Court of Justice ruling, the United States and the EU have committed to

negotiations with respect to a comprehensive air transportation agreement often referred to as an

“Open Aviation Area,” or the “Transatlantic Common Aviation Area” (TCAA). 30 Until recently,

negotiations appeared to stall as the countries’ differences on key issues prevented them from

moving forward.31 In November 2005, however, the parties announced a negotiations

breakthrough and the completion of text for a preliminary agreement. According to U.S.

Transportation Secretary Norman Y. Mineta, the agreement “provides new opportunities for U.S.

and European airlines, healthier competition for a growing travel market and greater connections

between cities and towns on both sides of the Atlantic.”32 Although a draft agreement is not yet

publicly available, according to the State Department, the agreement, if implemented, would,

inter alia, allow every EU and U.S. airline to fly between every city in the European Union and

every city in the United States and would permit U.S. and EU airlines to determine the number of

flights, their routes, and fares according to market demand. 33 In addition, the agreement would

See, e.g., Case C-469/98 Commission of the European Communities v. Republic of Finland, § 118-132. There were,

eight independent cases in all, each with a separate opinion that for the purposes of this discussion can be considered

substantively identical.

The United States has publically asserted that “the current agreements would remain in force as the legal basis for air

services between the United States and individual Member States.” See “U.S. Says “Open Skies” Pact with E.U.

Nations in Force,” Agence France Presse, Nov. 5, 2002 (quoting DOT spokesman Leonardo Alcivar). However, EU

Vice President Loyola de Palacio subsequently reminded EU nations that “they should start procedures to terminate

those agreements in order to ensure that they comply with their obligations under Community law.” See EU Press

Release No. 116/04, “EU Commission Takes Action To Enforce ‘Open Skies’ Court Rulings,” July 20, 2004, available

at http://www.eurunion.org/news/press/2004/200400116.htm.

See Press Release, “European Union and The United States of America Agree on Opening Negotiations on Open

Aviation Area,” June 25, 2003, available at http://www.eurunion.org/partner/summit/Summit0306/OAANeg.htm; see

also The White House, “Aviation Agreement Fact Sheet,” June 25, 2003, available at http://www.whitehouse.gov/

news/releases/2003/06/20030625-3.html.

See Department of State, International Information Programs Press Release, “U.S. Remains Committed to Opening

Transatlantic Aviation Markets,” June 14, 2004, available at http://usinfo.state.gov/xarchives/.

See U.S., EU On Track to Change Air Rules, U.S.A. TODAY, Nov. 21, 2005, available at http://www.usatoday.com/

travel/news/2005-11-21-us-eu-open-skies_x.htm?csp=N009.

See U.S. Department of State, Office of the Spokesman, Fact Sheet: U.S., E.U. Air Transport Agreement, November

18, 2005, available at http://usinfo.state.gov/eur/Archive/2005/Nov/21-680403.html.

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allow carriers to freely enter into cooperative arrangements with other airlines, such as codesharing and leasing.34

According to some commentators who appear to have seen a version of the text, as

comprehensive as the draft agreement appears to be, there cannot be meaningful reform in the

international aviation market until Congress repeals the so-called “citizenship test,” which limits

foreign ownership and control of U.S. air carriers.35 Based on the information currently available

regarding the draft agreement, it does not appear that the proposed agreement addresses foreign

ownership or control, thus it appears to be left to each party to determine its own rules and

regulations independently.

Air Carrier Citizenship

Current Law and Legal Precedent

As previously mentioned, U.S. law requires that all air carriers be “citizens of the United States”

before they are granted certificates to operate between domestic locations. The Federal Aviation

Act specifically defines the phrase “Citizen of the United States” as the following:

(A) an individual who is a citizen of the United States; (B) a partnership each of whose

partners is an individual who is a citizen of the United States; or (C) a corporation or

association organized under the laws of the United States or a State, the District of

Columbia, or a territory or possession of the United States, of which the president and at

least two-thirds of the board of directors and other managing officers are citizens of the

United States, which is under the actual control of citizens of the United States and in which

at least 75 percent of the voting interest is owned or controlled by persons that are citizens of

the United States.36

This statutory language has existed in various forms since the Civil Aeronautics Act of 1938.37 In

2003, Congress amended the statute so as to codify the Department of Transportation’s (DOT’s)

long-standing precedent with respect to requiring actual control of an air carrier for citizenship

purposes.38 Developed primarily through its administrative decisions, the DOT and its

predecessor, the Civil Aeronautics Board (CAB), have long interpreted the air carrier citizenship

definition to include a requirement of “actual control” by U.S. citizens, even though the specific

statutory language has only recently been added. 39

See id.

See Professor Brian F. Havel, Commentary at the Institute of Economic Affairs’ 13th Annual Conference “The Future

of Air Transport,” (Nov. 29, 2005) (transcript available at http://dmses.dot.gov/docimages/pdf95/378128_web.pdf).

See 49 U.S.C. § 40102(a)(15)(A)-(C) (2004).

Civil Aeronautics Act of 1938, P.L. 706 § 1(13)(c), 52 Stat. 973 (1938).

See Vision 100—Century of Aviation Re-authorization Act § 807, P.L. 108-176, 117 Stat. 2490 (2003) (codified as

amended at 49 U.S.C. § 40102(a)(15)(A)-(C) (2005)) (inserting the phrase “which is under the actual control of the

United States”).

See Urbana, Medellin and Central Airways, Inc. - Certificate of Public Convenience and Necessity, 2 C.A.B. 334

(1940); Wille Peter Daetwyler, D.B.A. Interamerican Airfreight Co., Foreign Permit, 58 C.A.B. 118 (1971); In re the

Acquisition of Northwest Airlines by Wings Holdings, Inc., 1989 WL 256026 (D.O.T.) (1989).

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One of the oldest and most frequently cited citizenship determinations occurred in 1940 when the

CAB was asked to review Urbana, Medellin and Central Airways’ application for a certificate of

public convenience and necessity. This review was conducted pursuant to the Civil Aeronautics

Act of 1938, which contained a citizenship requirement that was nearly identical in legislative

language to the current statute.40 After reviewing the corporate structure of the airlines, who the

various stock holders were, and the citizenship of the corporate officers, the CAB turned its

attention to the phrase “two thirds or more of the Board of Directors and other managing officers”

contained in the statutory requirement for citizenship. 41 In its interpretation of this phrase, the

CAB concluded that

[t]he apparent general intent of the statute is to insure that air carriers receiving economic

support from the United States and seeking certificates of public convenience and necessity,

under section 401 of the Act shall be citizens of the United States in fact, in purpose, and in

management. The shadow of substantial foreign influence may not exist.42

The CAB further stated that “... it may be permissible to look behind the form to the substance of

the management to determine whether in fact, as well as in law, it is under the control of citizens

of the United States. ...”43 This interpretation expanded the scope of the CAB’s inquiry beyond an

entity’s apparent compliance with the language of the statute, and the agency announced its

intention to conduct a close examination of the internal structure and operation of an airline

seeking certification of U.S. citizenship to determine where actual control is vested. The CAB’s

holding and reading of the citizenship definition established a framework for future Board

decisions.

With respect to the concept of control by a foreign citizen, in 1971, the CAB was asked to

determine whether Interamerican Airfreight qualified as a citizen of the United States pursuant to

the Federal Aviation Act. Although Interamerican met the formal requirements of the statute,44 at

issue in the proceeding was whether Wille Peter Daetwyler, a Swiss citizen, exercised sufficient

control over the operations of the airline such that it would not qualify for U.S. citizenship.45 The

CAB expanded on the statutory interpretation in Uraba, Medellin and Central Airways and,

despite a close examination of the transaction, remained concerned that future corporations would

attempt to mask foreign control by arranging corporate structures simply to meet the statutory

requirements. 46 In response, the CAB stated that in cases where an

Specifically, §1(13)(c) of the Civil Aeronautics Act of 1938 stated that “a corporation or association created or

organized under the laws of the United States or of any State, Territory, or possession of the United States, of which the

president and two-thirds or more of the board of directors an other managing officers thereof are such individuals and

which at least 75 per centum of the voting interest is owned or controlled by persons who are citizens of the United

States or one of its possessions.” Civil Aeronautics Act of 1938, P.L. 706 § 1(13)(c), 52 Stat. 973 (1938).

Urbana, Medellin and Central Airways, Inc.—Certificate of Public Convenience and Necessity, 2 C.A.B. 334, 33637 (1940).

Id. at 337.

Id.

Wille Peter Daetwyler, D.B.A. Interamerican Airfreight Co., Foreign Permit, 58 C.A.B. 118, 119 (1971) (“There is

no dispute that 75 percent of the stock of Interamerican is nominally owned by U.S. citizens and that two-thirds of the

board of directors and other managing officers of Interamerican are U.S. citizens.”).

Id. While the CAB’s decision does not fully explain Mr. Daetwyler’s relationship with respect to Interamerican, the

decision does conclude that “[t]he Daetwyler control is reflected by the fact that the corporation [Interamerican] is the

direct successor of the Daetwyler forwarding company and [was] created wholly at the instance of Daetwyler.” Id. at

120.

Id. at 121.

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applicant has arranged its affairs so as to meet the bare minimum requirements set forth in

the Act, it is the Board’s view that the transaction must be closely scrutinized and that the

applicant bears the burden of establishing that the substance of the transaction is such as to

be in accordance with the policy, as well as the literal terms of the specific statutory

requirements.47

In this case, the CAB determined that Mr. Daetwyler was in a position to exert a significant

amount of control over the operations of Interamerican.48 The CAB found significant the fact that

the company was created wholly at Mr. Daetwyler’s insistence and that Mr. Daetwyler retained

“25 percent stock ownership and represents one-third of the board of directors,” the maximum

amount of control allowed under the statute.49 In addition, the CAB concluded that foreign

control existed because Interamerican was to continue to do business under the Daetwyler system

of companies and there was evidence of close personal relationships between Mr. Daetwyler and

the Interamerican stock holders.50

In 1989, the DOT was asked to review the merger between Northwest Airlines and Wings

Holdings, Inc. 51 Although both companies were U.S. controlled and operated, a citizenship issue

existed because the merger’s largest equity holder, with approximately $400 million or 56.74

percent, was KLM, Inc., a Dutch company and foreign air carrier.52 In addition, KLM’s interest

provided it with substantial power with respect to numerous stock-related decisions.53

In discussing the citizenship test, the DOT cited the Daetwyler decision favorably, stating that the

control test “has traditionally been a complex matter in past cases.”54 The DOT declined to

enumerate specific factors to determine the existence of control, saying instead that the analysis

with respect to control “has always necessarily been on a case-by-case basis, as there are a myriad

potential avenues to control.”55

The DOT pointed to three specific factors that led it to conclude that this merger resulted in a

company that was not a U.S. citizen. First was the equity interest in the new company held by

KLM. Although a majority of KLM’s interest was held in nonvoting stock, the DOT concluded

that it “represent[ed] a genuine ownership interest” and, therefore, significantly increased KLM’s

incentive to participate in Northwest’s business decisions.56 Second, the corporate structure of the

new company, according to DOT, would have allowed KLM to exert influence even without

voting rights.57 Finally, the DOT pointed to the fact that KLM was an actual competitor with

Northwest in various markets, and had stated an intention to become involved in the decisions of

Id.

Id. at 120.

Id.

In re the Acquisition of Northwest Airlines by Wings Holdings, Inc., 1989 WL 256026, *1 (D.O.T.) (1989).

Id.

Id. For example, KLM’s position as an equity holder gave the corporation the ability to prevent issuance for

liquidation, dissolution or dividends, as well as the ability to block amendments to the certificates of incorporation that

would allow for changes in stock designations or the special rights of preferred stock holders. See id.

Id. at * 3.

Id.

Id. at *4.

Id. at *4-5.

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the new corporation. 58 Taken together, these factors resulted in a finding that, as presented at the

time, Wings Holdings, Inc., was not a U.S. citizen as defined by the Federal Aviation Act.59 Upon

review of this decision, the DOT commented on an additional foreign control factor. With respect

to equity/debt relationships, the DOT held that “absent a default, unless the loan agreement

provides special rights to the debt holder that imply control, we do not anticipate treating debt as

a foreign control issue.”60

In sum, these precedents establish DOT’s methodology of looking behind the corporate structure

or transaction for the purpose of determining whether “actual control” is held by U.S. citizens.

With respect to factors that can be utilized in determining actual control, the DOT has specifically

considered equity ownership, business and personal relationships, control over the voting rights

of stock, veto power, equity/debt agreements, competitive status, and other features of corporate

transactions.61

Most recently, the issue of foreign ownership and control was considered in a case involving

DHL Airways, also known as ASTAR Air Cargo. At issue in this case was whether the level of

control exerted by DHL Worldwide Express, a foreign company owned in part by Deutsche Post,

Germany’s national postal service, was sufficient to consider ASTAR not a U.S. citizen. The

specific mechanism through which it was alleged that DHL Worldwide exercised control was an

agreement between ASTAR and DHL Worldwide Express known as an Aircraft, Crews,

Maintenance, and Insurance Agreement (ACMI). Broadly defined, the ACMI agreement was a

“wet lease,” in which ASTAR agreed to provide DHL Worldwide Express with aircraft, crews,

maintenance, and insurance for the purpose of allowing DHL Worldwide to legally transport air

cargo within the United States.62 According to the challengers of ASTAR’s citizenship status, the

ACMI agreement provided for more than 90% of ASTAR’s revenues, contained payment

provisions that were integral to both ASTAR’s financing and working capital, and shifted all of

ASTAR’s risks to DHL Worldwide. 63 In addition, the ACMI agreement allegedly gave Deutsche

Post/DHL Worldwide the power to veto changes in corporate control, limit third-party business,

and audit ASTAR’s financial records.64

The ASTAR case was decided by an Administrative Law Judge (ALJ) who concluded that

“[f]rom the record taken as a whole ... ASTAR is a citizen of the United States.”65 Specifically,

Id. at *5.

The companies reached an agreement with the DOT for a series of corporate adjustments that if implemented would

bring them into compliance with the citizenship statute. Id. at *7-8. Fifteen months later, the DOT reviewed the

application a second time and granted the petition for citizenship. See In re the Acquisition of Northwest Airlines by

Wings Holdings, Inc., 1991 WL 247884, *4 (D.O.T.) (1991).

See In re the Acquisition of Northwest Airlines by Wings Holdings, Inc., 1991 WL 247884, *6 (D.O.T.) (1991).

See Thomas Lehrich and Jennifer Thibodeau, Citizenship Requirements and Why Branson Can’t Save United, 18

SUM AIR & SPACE LAW 8, 9-10 (2003); see also Constantine G. Alexandrakis, Foreign Investment in U.S. Airlines:

Restrictive Law is Ripe for Change, 4 U. MIAMI BUS.L.J. 71, 76-91 (1994) (providing additional summaries and

analysis of DOT precedent with respect to air carrier citizenship requirements).

See Proposed Findings of Fact and Conclusions of Law of Federal Express Co. and United Parcel Service, Co., No.

OST-2002-13089-580, 40-43 available at http://dmses.dot.gov/docimages/pdf88/259142_web.pdf.

Id. at 82-90.

Id. at 90-94.

See Recommended Decision of Administrative Law Judge, Dec. 19, 2003, No. OST-2002-13089-594, 2 available at

http://dmses.dot.gov/docimages/pdf88/262152_web.pdf. The Vision 100 Bill, see supra note 5, was signed into law on

December 12, 2003, one week prior to the Administrative Law Judge’s recommended decision in this case.

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with respect to the fact that the ACMI agreement produced approximately 90% of ASTAR’s

revenues, the ALJ provided a two-step analysis for determining if, in fact, such control exists.

According to the ALJ, it must first be established that the predominant customer is in a position to

control the carrier by threatening to withdraw their business and then that the carrier would

believe the threat to be creditable. 66 In ASTAR, the ALJ concluded that because the threats were

only available in very limited circumstances and most were controlled by ASTAR, the second

prong of the test, credibility of the threats, could not be satisfied; therefore, control by DHL

Worldwide on the grounds that they are a predominate customer can not be established.67

Regarding whether ASTAR is a “captive supplier” because of the ACMI’s restrictions on pursuing

third-party business, the ALJ held that while the success of ASTAR’s expansion of third-party

business is not relevant to its citizenship, ASTAR’s ability to pursue such business independent of

its agreement with DHL Worldwide is crucial.68 The ALJ concluded that the agreement provided

ASTAR with significant incentives to expand it business.69 For example, the ALJ cited the

guaranteed payment of $15 million from DHL Worldwide to ASTAR,70 which arguably put

ASTAR in a better position than if it were to do business elsewhere.71

Finally, with regard to DHL Worldwide’s alleged veto power over administrative and operational

functions, as well as the ability to perform audits with respect to reimbursable costs, the ALJ

concluded that while there were administrative provisions in the ACMI, ASTAR retained control

over all the carrier’s essential decisions, as well as the day-to-day operations.72

The Department of Transportation’s Proposed “Actual Control”

Rule

On November 7, 2005, the DOT published a Notice of Proposed Rulemaking (NPRM) seeking

comments on a proposal to clarify the policy with respect to when “actual control” rests with a

citizen of the United States.73 The DOT has proposed that the “actual control” requirement be

interpreted in two ways. The first interpretation involves cases where the foreign investor’s home

country provides U.S. citizens reciprocal investment access and U.S. air carriers full and fair

market access, as evidenced by having entered into an “Open Skies” Agreement with the United

States, or where it is necessary for compliance with U.S. international obligations. In these

situations, air carriers seeking to be considered U.S. citizens will have to demonstrate that U.S.

citizens exercise “actual control” only with respect to (1) organizational documentation, including

Id. at 23-24.

Id. at 24.

Id. at 25.

Id.

Id. (stating that the guaranteed payment “encourages the carrier to pursue opportunities and take chances it might not

otherwise take—including exposing itself to a downside risk by way of enlarging the business.”).

Id. at 28 (stating that “ASTAR would be in a better position if DHL [Worldwide] elected to take its business

elsewhere; ASTAR could then charter the formerly dedicated aircraft to other air freight forwarders and still collect on

the DHL [Worldwide’s] guarantee.”).

Id. at 30 (holding that “[t]he structure of ASTAR is consistent with an independent enterprise. It controls all

employment decisions. The carrier hires and fires its own employees—executive, managerial, and otherwise—and sets

their responsibilities and compensation.”).

See 70 Fed. Reg. 67,389 (Nov. 7, 2005)

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such things as incorporation charters, corporate by-laws, stockholder agreements and other

documents of a similar nature; (2) Civil Reserve Air Fleet (CRAF) commitments; (3)

transportation security requirements as implemented by the Transportation Security

Administration; and (4) safety requirements as implemented by the Federal Aviation

Administration. 74 The second scenario involves situations where the foreign investor’s home

county refuses to extend reciprocal investment and/or market access rights to U.S. citizens and

carriers and there are no other relevant international obligations. In these cases, the traditional

case-by-case actual control analysis as determined by DOT precedent would control the

citizenship inquiry. 75

In asserting a justification for its new interpretation of the “actual control” requirements, the DOT

relies primarily on nonlegal or policy grounds. For example, the DOT asserts that the present

interpretation of the actual control requirement “has failed to keep pace with changes in the

global economy and evolving financial and operational realities in the airline industry itself, to

the determent of U.S. carriers.”76 As a result of these changing global economic demands, “U.S.

air carriers seeking to enter the market should similarly be able to obtain the financial capital

necessary to launch their businesses. We tentatively do not believe that ‘actual control’ should be

interpreted in a way that needlessly restricts the commercial opportunities of U.S. air carriers and

their ability to compete.” Legally, it appears that the DOT recognizes that Congress has

established objective statutory requirements that an air carrier must satisfy to be considered a U.S.

citizen; however, they assert that nothing in this NPRM would alter or in any way circumvent

those statutory requirements. 77

Given DOT’s assertion that this new interpretation of the actual control requirement is a

legitimate exercise of its legal authority, it would appear that should a challenge be brought

against this proposal becoming a final rule, a reviewing court would likely address the issue

pursuant to the standards delineated by the Supreme Court in Chevron U.S.A. Inc. v. Natural

Resources Defense Council (Chevron).78 In Chevron, the Supreme Court established a two-part

test for judicial review of agency statutory interpretations. First, a reviewing court must determine

“whether Congress has directly spoken to the precise question at issue.”79 If a court finds that

there has been an express congressional statement, the inquiry is concluded, as the court “must

give effect to the unambiguously expressed intent of Congress.”80 In the event that Congress has

not unequivocally addressed the issue, a reviewing court must respect an agency’s interpretation,

so long as it is permissible.81 The Court further stated that

[i]f Congress has explicitly left a gap for the agency to fill, there is an express delegation of

authority to that agency to elucidate a specific provision of the statute by

regulation....Sometimes the legislative delegation to an agency on a particular question is

implicit rather than explicit. In such a case, a court may not substitute its own construction of

See id. at 67,396.

See id. at 67,395.

Id. at 67,393.

See id. at 67,394.

467 U.S. 837 (1984).

Id. at 842.

Id. at 843.

See INS v. Aguirre-Aguirre, 526 U.S. 415, 424 (1999).

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a statutory provision for a reasonable interpretation made by the administrator of an

agency.82

The Court went on to note that “[j]udges are not experts in the [technical] field, and are not part

of either political branch of the Government,” while agencies, as part of the executive branch,

appropriately make “policy choices—resolving the competing interests which Congress itself

either inadvertently did not resolve, or intentionally left to be resolved by the agency charged

with the administration of the statute in light of everyday realities.”83 Thus, the rationale for this

deference is predicated on the notion that it is not the role of the judiciary to “assess the wisdom”

of policy choices and resolve the “struggle between competing views of the public interest,” as

well as an agency’s greater expertise regarding the subject matter of the regulations.84

The DOT received numerous comments to its NPRM, representing almost every segment of the

aviation industry. Many of the comments have focused specifically on the DOT’s legal authority

to reinterpret the “actual control” requirement. Supporters of the DOT’s action generally assert

that the phrase “actual control,” though it appears in the statute, is vague and undefined. As a

result, the language is arguably ambiguous and, therefore, subject to departmental interpretation.

Thus, pursuant to Chevron, the DOT has wide latitude and is entitled to substantial deference

when rendering an interpretation, provided that it does so reasonably and in a manner that is

consistent with the plain meaning of the statute.85

Conversely, opponents of the NPRM assert that when Congress specifically added the phrase

“actual control” to the statute, they were in effect codifying the DOT’s long-standing precedent

and not granting any additional authority over the interpretation of the phrase than previously

existed.86 In addition, opponents of the NPRM assert that the DOT’s interpretation is contrary to

Chevron, 467 U.S. at 843-44.

Chevron, 467 U.S. at 865. In Cablevision Sys. Dev. v. Motion Picture Ass’n, 836 F.2d 599, 608-609 (D.C. Cir. 1988),

the court noted that, “Chevron’s rationale for deference is based on more than agency expertise.” Elaborating, the court

stated: “Like the Court in Chevron, we are faced with several interpretations of ambiguous language which really

involve competing policies among which Congress did not explicitly choose. We see no reason to deny the Copyright

Office’s legitimacy in selecting, as the EPA did in Chevron, among those choices so long as the interpretation selected

is reasonable.” Id. at 609.

Chevron, 467 U.S. at 866; Rust v. Sullivan, 500 U.S. 173, 187 (1991). It should be mentioned that the Supreme Court

revisited Chevron in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), declaring that the Food &

Drug Administration lacks jurisdictional authority to regulate tobacco products. In reaching this determination, the

Court discussed the first prong of Chevron, declaring that the proper analysis is to focus not only on the statutory

clause, but rather to consider the structure, function, and history of all relevant provisions, interpreting a statute “as a

symmetrical and coherent regulatory scheme.” Id. at 1294. Upon concluding that Congress “squarely rejected proposals

to give the FDA jurisdiction over tobacco,” the Court stated that it was “obliged to defer not to the agency’s expansive

construction of the statute, but to Congress’ consistent judgment to deny the FDA this power.” Id. at 1315. This

reasoning centers on an analysis of the unique regulatory scheme created for tobacco products under the first prong of

the Chevron test, and, as such, does not appear to impact the traditional inquiry as it applies to the issue at hand. The

Supreme Court further clarified the limits of the Chevron standard in United States v. Mead Corp., 533 U.S. 218, 229

(2001), ruling that deference applies only in instances when Congress has delegated authority to an agency to make

rules carrying the force of law, and when the agency interpretation claiming deference was promulgated pursuant to

that authority.

See Comments of United Airlines, Docket OST-2003-15759, 7-9 available at http://dmses.dot.gov/docimages/pdf95/

380696_web.pdf (Jan. 6, 2006); see also Comments of Delta Airlines, Docket OST-2003-15759, 9 available at

http://dmses.dot.gov/docimages/pdf95/380757_web.pdf (Jan. 6, 2006); Comments of Federal Express Corporation,

Docket OST-2003-15759, 9 available at http://dmses.dot.gov/docimages/pdf95/380710_web.pdf (Jan. 6, 2006).

See Comments of Continental Airlines, Docket OST-2003-15759, 5-6 available at http://dmses.dot.gov/docimages/

pdf95/381133_web.pdf (Jan. 6, 2006) (citing 149 Cong. Rec. S7813 (June 12, 2003) (stating that the DOT assured the

(continued...)

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the express language of the statute. Specifically, they argue that unlike the four narrow areas of

control defined by the DOT, actual control of an air carrier rests with the entity that makes the

fundamental economic decisions that determine the nature of the airlines’ operations. 87 These

decisions include, but are not limited to, the types of airplane flown, markets to be served, flight

schedules, fares, and aircraft maintenance and other services. 88 Thus, according to opponents of

the NPRM, relinquishing control over these elements of an air carrier renders any other statutory

requirements “pointless.”89

Finally, opponents of the proposed NPRM cite the military’s continued reliance on the Civil

Reserve Air Fleet Program (CRAF). Under this program, domestic air carriers supply aircraft on a

voluntary basis to increase the military’s airlift capacity. CRAF allows the U.S. military, in times

of need, to demand access to a selected percentage of the civil aircraft fleet to deliver troops and

equipment to the battlefield. 90 Concern with respect to CRAF is not new; prior to the NPRM,

several commentators had noted that changes to the U.S. civil aviation ownership and control

requirements could substantially hinder or even destroy CRAF, as aircraft that move from

domestic to foreign ownership would not be under any legal obligation to remain available to the

program. 91 The NPRM specifically states that for an air carrier to be considered a U.S. citizen,

decisions with respect to CRAF are to remain under the control of U.S. citizens; however, at least

one commentator has questioned how the DOT will ensure that U.S. citizens are not pressured by

their foreign partners to either modify or eliminate their participation in this voluntary program.92

In addition, both Continental Airlines and Delta Airlines noted that new foreign owners might, as

a result of their control over other commercial aspects of an airline, divest the use, upkeep, and

maintenance of “long-haul” aircraft that are useful to the CRAF.93 Divestitures of this type would,

(...continued)

Congress that the amendment “will not in any way affect [DOT’s existing] determination of what constitutes a citizen

of the United States”)).

See Comments of Airline Pilots Association International, Docket OST-2003-15759, 4-5 available at

http://dmses.dot.gov/docimages/pdf95/380514_web.pdf (Jan. 6, 2006).

See id.

Id. at 5.

See 10 U.S.C. § 9512 (2004). CRAF has only been used twice in our nation’s history. The first use occurred during

the 1991 Gulf War, when approximately two-thirds of the available aircraft were deployed. See William G. Palmby,

“Enhancement of the Civil Reserve Air Fleet: An Alternative for Bridging the Airlift Gap,” 53-54, available at

http://www.fas.org/man/eprint/palmby.htm (noting that the CRAF is activated in three stages, and that during the 1991

Gulf War the aircraft in the third stage were not activated). More recently, on February 8, 2003, the Department of

Defense activated 47 civilian aircraft for service in Iraq, representing approximately five percent of CRAF’s total

capability. See “DOD Activates Commercial Airlift Reserves for Troops, Regulatory Intelligence Data,” Feb. 10, 2003;

see also “Defense Dept. Activates First Stage of Civil Aircraft Fleet,” Aviation Daily, Feb. 11, 2003, at 3.

See Stephen D. Reynerson, Everybody Wants to go to Heaven, but Nobody Wants to Die: The Story of the

Transatlantic Common Aviation Area, 30 DENV. J. INT’L L. & POL’Y 421, 456 (2002) (estimating that the cost of

replacing the transport capacity of the CRAF “would be approximately fifty billion dollars and maintenance costs of

one to three billion dollars a year thereafter.”); see also Jacob A. Warden, “Open Skies” at a Crossroads: How the

United States and European Union Should use the EJC Transport Cases to Reconstruct the Transatlantic Aviation

Regime, 24 NW. J. INT’L L. & BUS. 227, 250 (2003).

See Comments of the Transportation Trades Department, AFL-CIO, Docket OST-2003-15759, 3 available at

http://dmses.dot.gov/docimages/pdf95/380680_web.pdf (Jan. 6, 2006).

See Comments of Continental Airlines, Docket OST-2003-15759, 12, available at, http://dmses.dot.gov/docimages/

pdf95/381133_web.pdf (Jan. 6, 2006); see also Comments of Delta Airlines, Docket OST-2003-15759, 10, available

at, http://dmses.dot.gov/docimages/pdf95/380757_web.pdf (Jan. 6, 2006).

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argued the commentators, render those airlines of no effective use to CRAF and, therefore, could

potentially result in a diminished air fleet from which DOD could call upon. 94

Recent Developments

In response to the numerous comments on the NPRM and to the spate of legislative responses

from Members of Congress discussed below, on May 5, 2006, the DOT issued a “Supplemental

Notice of Proposed Rulemaking” (SNPR) that attempts to clarify the Department’s position on

several of the major issues raised by the initial NPRM.95 In light of the fact that several critical

comments revolved around the influence that foreign investors may have, the DOT clarified its

proposed interpretation by stating that it “would be requiring all delegations to foreign interests

ultimately to be revocable by the board of directors or the voting shareholders.”96 According to

the DOT, requiring that any delegations of authority to foreign investors be revokable ensures that

“actual control” is retained by U.S. citizens, as the Federal Aviation Act requires that both the

board of directors and the voting shareholders be controlled by super-majorities of U.S. citizens

(⅔ of the board and/or 75% of the shareholders must be U.S. citizens).97

The DOT also responded at length to the legal arguments presented by the commentators,

especially with respect to the agency’s legal authority to adopt such an interpretation of the

underlying statute. The DOT, in making its arguments, appears to rely on well-established

principles of administrative law, especially with respect to its ability to effectively interpret and

administer the statute.98 DOT argues that they have often interpreted the citizenship statute and, in

fact, developed the “actual control” test prior to its inclusion in the statute by Congress.99 In

addition, DOT asserts that Congress, in adopting the “actual control” language into the statute,

recognized the need for continued agency interpretation and “did not direct us to follow the past

interpretations.”100 DOT’s position appears to be that the amendment to the Federal Aviation Act,

which inserted the phrase “actual control,” did not in any way amend or alter the agency’s

discretionary authority to modify its interpretation as appropriate.101 In support of its position, the

DOT extensively cites the amendment’s legislative sponsor and floor manager, who, at the time

the Vision—100 legislation102 was being considered, stated that the amendment “leaves the

interpretation of effective control up to DOT, but the department can draw upon its decades of

precedents to reach these conclusions.”103 Further, DOT cites to the floor manager’s assertion that

the amendment “was simply a reflection of existing law” and that the inclusion of the actual

See id.

See 71 Fed. Reg. 26,425 (May 7. 2006).

Id. at 26,430.

Id.

Id. at 26, 436 (stating that “[o]ur responsibility for enforcing the statutory citizenship requirement gives us the

authority to interpret that requirement to the extent that it is not specifically defined”(citing Chevron U.S.A. v. Natural

Res. Def. Council, 467 U.S. 837, 843 (1984), (quoting Morton v. Ruiz, 415 U.S. 199, 231 (1974)); see also Continental

Air Lines v. DOT, 843 F.2d 1444, 1449 (D.C. Cir. 1988)).

Id. (citing Wille Peter Daetwyler, D.B.A. Interamerican Airfreight Co., Foreign Permit, 58 C.A.B. 118, 120-21

(1971)).

100

Id. at 26,436-437.

101

Id.; see also supra, notes 36-38 and accompanying text.

102

See supra, note 38 and accompanying text.

103

71 Fed. Reg. 26,425, 26,436-437 (May 7. 2006) (citing Congressional Record, S7813 (June 12, 2003)).

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control language “will not in any way affect [the Department’s] determination of what constitutes

a citizen of the United States.”104

In addition to addressing the numerous other legal and policy arguments made by opposition

comments, the SNPR specifically addressed the concerns raised with respect to CRAF

commitments. First, DOT clarifies and expands its proposal to require that not only CRAF

commitments be actually controlled by U.S. citizens, but also that overall airline participation in

“national defense airlift operations” be in the actual control of only U.S. citizens.105 According to

the DOT, this requirement means that “the carrier could not allow foreign investors to make

decisions that would make participation in CRAF or other national defense airlift operations

impossible as a practical matter.”106 Moreover, if there was suspicion that national defense airlift

operations were precluded or impaired by decisions of the foreign investor(s), the SPNR indicates

that DOT would investigate to determine if the requirements for the actual control test was being

satisfied by the carrier.107 The DOT responds to the concerns about the proposal’s potential

negative impact on CRAF commitments by noting that participation in the CRAF is a voluntary

commercial arraignment in which the airlines commit aircraft in return for access to U.S.

government contracts. According to the DOT, because nothing in the NPRM changes or alters

that dynamic “DOD can adjust the economic incentives of the program in order to better ensure

sufficient military airlift capacity” and, thus, maintaining adequate participation levels.108 Finally,

in direct response to some of the commentators concerns about fleet divestment, DOT argues that

because domestic carriers make their fleet decisions based on what is best to ensure a successful

commercial operation, foreign owners would “be motivated by the same commercial incentives”

and, therefore, in DOT’s opinion, there should be no significant changes to CRAF commitment

levels.109

The DOT and DOD have entered into a Memorandum of Understanding (MOU) that appears to

be intended to provide a procedural framework for DOD’s participation in DOT’s consideration

of air carrier citizenship issues as they relate to CRAF commitments. 110 This MOU will become

effective on the date that the final actual control rule goes into effect.111 The MOU applies in

situations that involve (1) citizenship issues in which the proposed actual control rules may apply

and (2) airlines that have existing CRAF commitments or have aircraft that could be operated as

part of the “Long-Range International Segment of the CRAF program.”112 According to the

MOU, DOT agrees to notify DOD of all air carrier fitness requests and, upon request from DOD,

will share with DOD all documents relating to fitness reviews that implicate CRAF

104

Id. (citing Congressional Record, S7813 (June 12, 2003)).

See id. at 26, 434.

106

Id.

107

Id. (stating that “[DOT] would likely investigate whether the carrier is living up to its obligation under our revised

rule to ensure that decisions relating to military airlift participation are wholly controlled by U.S. citizens. Because a

failure to comply with that obligation would call into question the carrier’s eligibility to retain its operating certificate,

airline management can be expected to take those obligations very seriously”).

108

Id.

109

Id.

110

See Memorandum of Understanding Between the Department of Transportation and the Department of Defense

Concerning United States Air Carrier Citizenship Reviews, 2, (July 17, 2006) (copies on file with author).

111

Id. at 6.

112

Id. at 2.

105

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commitments.113 DOT further agrees to consult with DOD with respect to an ultimate disposition

in those reviews where DOD has expressed an interest.114 In cases where DOT and DOD

disagree, and DOD so requests, meetings can be arranged to discuss and solicit input prior to a

final decision. 115 Moreover, in situations where DOD can demonstrate “good cause,” which,

while not specifically defined, appears to include “a significant reduction or proposed significant

reduction in a carrier’s capability to meet its CRAF commitments,” DOT agrees to “commence a

review to determine the continuing fitness of an identified air carrier within the scope of this

agreement....”116 In cases where DOD requests a continuing fitness review, it agrees to provide all

information and documents, necessary to support its position, in a manner that can be provided to

the air carrier so that it may properly respond.117 Finally, DOD agrees to “expeditiously provide

any input to DOT so as not to delay DOT’s processing of the case....”118

Legislative Responses

Several Members of Congress have taken an interest in this rulemaking and have even filed

written comments with DOT expressing concerns with respect to CRAF commitments, airline

employees, and consumer protection issues.119 In addition, companion House and Senate bills

have been introduced in the 109th Congress to address this issue. H.R. 4542 and S. 2135 both

contain provisions that would prevent the DOT from issuing a decision on the NPRM for a period

of one year after the date of enactment. 120 The House and Senate bills both require that at least

180 days prior to issuing a final decision, the DOT shall submit to Congress a report assessing the

impact of the proposed rule on various aspects of domestic and international aviation law.121 In

addition, both the House and Senate attempted to address this issue by adopting language in their

respective versions of the 2006 Emergency Supplemental Appropriations Bill.122 While the House

of Representatives’ version did not contain any legislative language with respect to the DOT

rulemaking, the committee report made express mention of the issue. 123 According to the

committee’s report, the committee considers airlines to be part of the United States’ critical

infrastructure and, as such, believes that it is “critical that any final rule regarding foreign control

of U.S. airlines not only comply with current laws regarding foreign ownership, but also comply

with statutes recently passed by the Congress which require that all U.S. airlines be under the

‘actual control’ of U.S. citizens.”124 The committee, therefore, inserted language directing the

113

Id. at 2-3.

Id.

115

Id. at 3.

116

Id.

117

Id. at 3-4 (stating that “DOD will also provide unclassified information to DOT that can be released to the carrier, so

that the air carrier can effectively respond”).

118

Id. at 4.

119

See Letter from The Honorable Don Young, Chairman of the House Committee on Transportation and Infrastructure

and The Honorable John L. Mica, Chairman of the Subcommittee on Aviation to The Honorable Norman Y. Mineta,

Secretary of the U.S. Department of Transportation 2-3 (Dec. 8, 2005) available at http://dmses.dot.gov/docimages/

pdf95/378411_web.pdf.

120

See H.R. 4542, 109th Cong. (2005); see also S. 2135, 109th Cong. (2005).

121

See id. at § 2.

122

See H.R. 4939, 109th Cong. (2006).

123

See H.Rept. 109-388, at 68.

124

Id.

114

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Secretary of Transportation “to refrain from issuing a final rule for 120 days.”125 While this

suggestion is a clear expression of the views of the House Appropriations Committee, it would

not have been legally binding on the DOT and, absent some other legislative action, would likely

not have prevented the promulgation of a final rule with respect to foreign ownership. The Senate

version, on the other hand, did contain explicit legislative language that would have effectively

prevented the DOT from promulgating a final rule.126 Ultimately, however, neither version was

included in the final bill.

Subsequently, both the House of Representatives and the Senate have included the following

identical language into the Transportation, Treasury, and Housing and Urban Development, the

Judiciary, District of Columbia Appropriations Bill (H.R. 5576):

None of the funds made available in this Act may be used by the Department of

Transportation to finalize or implement the policy proposed in the notice of proposed

rulemaking published in the Federal Register on November 7, 2005 (70 Fed. Reg. 67389), or

the supplemental notice of proposed rulemaking published in the Federal Register on May 5,

2006 (71 Fed. Reg. 26425), in Docket No. OST-2003-15759.127

This language, if included in the final appropriations measure, would appear to prohibit the DOT

from promulgating the final rule using any funds made available for fiscal year (FY) 2007. In

addition, if DOT were to issue a final rule prior to the enactment of this language, it would appear

to prevent the use of any FY2007 funds from being used to implement the rule’s provisions.

While it is difficult to conceive of any statutory interpretation arguments that DOT could use to

avoid the plain meaning of this language, it is important to note that the language does not contain

any independent enforcement mechanism. As such, to ensure compliance, Congress would likely

have to rely on its oversight functions or other general laws governing the use of appropriated

funds, such as the Anti-Deficiency Act.128

Cabotage

Another major issue facing international civil aviation law is cabotage. As previously mentioned,

cabotage is the right of a foreign airline to carry passengers and/or cargo between airports of the

same country (e.g., from New York to Los Angeles). 129 Currently, the Federal Aviation Act

contains a general prohibition against cabotage activity by foreign air carriers. The prohibition

states that “aircraft may take on for compensation, at a place in the United States, passengers or

cargo destined for another place in the United States only if—(1) specifically authorized under

125

Id.

See John Crawley, US Senate Panel Votes to Block Air Ownership Change, REUTERS, April 5, 2006, available at

http://www.redorbit.com/modules/news/tools.php?tool=print&id=457830; see also Michael Posner, Appropriators

Clear $107 Billion War Supplemental, NATIONAL J OURNAL, April 5, 2006, available at http://nationaljournal.com/

members/markups/2006/04/mr_20060404_1.htm.

127

Transportation, Treasury, and Housing and Urban Development, the Judiciary, District of Columbia and

Independent Agencies Appropriations Act, 2007, H.R. 5576 § 952, 109th Cong. 2d Sess. (2006) (as adopted by the

House); see also Transportation, Treasury, and Housing and Urban Development, the Judiciary, District of Columbia

and Independent Agencies Appropriations Act, 2007, H.R. 5576 § 104, 109th Cong. 2d Sess. (2006) (as passed by the

Senate Appropriations Committee and currently pending before the full Senate).

128

See 31 U.S.C. § 1301(a) (2000) (prohibiting officers of the United States from utilizing funds specifically authorized

by Congress for other than their intended purpose).

129

See supra footnote 15.

126

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section 40109(g) of this title; or (2) under regulations the Secretary prescribes authorizing air

carriers to provide otherwise authorized air transportation with foreign registered aircraft under

lease or charter to them without crew.”130 If neither of those situations exists, foreign aircraft are

not permitted to perform cabotage within the United States. In addition, the Secretary of

Transportation has general discretionary authority to waive other economic-related statutory

provisions listed in section 40109(c) “when the Secretary decides that the exemption is consistent

with the public interest.”131 The cabotage prohibition, however, is not among the regulations

listed in section 40109(c).132

Congress last amended the cabotage laws as part of the Vision—100 Century of Aviation

Authorization Act.133 The enacted changes permit “eligible cargo” to be removed from aircraft,

including foreign aircraft, in Alaska and “not be deemed to have broken its international journey

in, be taken on in, or be destined for Alaska.”134 The statute defines “eligible cargo” as cargo

“transported between Alaska and any other place in the United States on a foreign air carrier

(having been transported from, or thereafter being transported to, a place outside the United

States on a different air carrier or foreign air carrier) that is carried—(A) under the code of a

United States air carrier providing air transportation to Alaska; (B) on an air carrier way bill of an

air carrier providing air transportation to Alaska; (C) under a term arrangement or block space

agreement with an air carrier; or (D) under the code of a United States air carrier for purposes of

transportation within the United States.”135 These provisions provide for a very limited statutory

exception to the general prohibition against cabotage activities.

While it does not appear that the current draft “Open Skies” Agreement with the European Union

requires the granting of more cabotage rights to foreign-owned or controlled carriers, it appears to

remain a major issue in international civil aviation. It appears, however, that statutory changes

would be required before the executive branch can enter into any sort of agreement purporting to

liberalize the cabotage rules. Although foreign aircraft are allowed to navigate within U.S.

airspace, unless specifically authorized either by statute or DOT regulations, they are not

permitted to perform any form of cabotage within the United States.136 While it is unclear what, if

any, economic effect a more liberal cabotage policy would have on the domestic airline industry,

only Congress has the legal authority to amend the Federal Aviation Act and permit foreign

carriers to have cabotage rights.

130

49 U.S.C. § 41703(c)(1)-(2) (2003). Section 40109(g) gives the Secretary of Transportation the authority to grant

limited 30 day exemptions if it is determined that either there is an emergency, or it is necessary to avoid unreasonable

hardship and no unreasonable advantage will be given to any party involved in a labor dispute. 49 U.S.C. § 40109(g)

(2003).

131

49 U.S.C. § 40109(c) (2003).

132

Id.

133

Vision 100—Century of Aviation Re-authorization Act, P.L. 108-176, § 808 117 Stat. 2588 (Dec. 12, 2003).

134

Id. (codified at 49 U.S.C. § 41703(e)(1)).

135

Id. (codified at 49 U.S.C. § 41703(e)(2)).

136

49 U.S.C. § 41703(c)(1)-(2) (2004).

Congressional Research Service

Legal Developments in International Civil Aviation

Author Contact Information

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

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