Even with recurring congestion at many major airports in the United States, airport operators have not used airport rates and charges to create economic incentives

for airlines to make more efficient use of limited airport capacity during congested periods – even though experience overseas shows that congestion pricing can be useful in reducing aircraft delays. In 2008, the U.S. Department of Transportation (DOT) revised its Rates and Charges Policy to encourage limited forms of congestion pricing. The recent U.S. Court of Appeals decision affirming DOT’s policy amendments articulates why innovative forms of congestion pricing should be encouraged rather than criticized.

A Brief History of U.S. Airport Rate-setting PolicyFederal policy guides U.S. rate-making in the absence of airline agreements.

As a matter of federal law, U.S. airport operators are required to make their airports available for public use on reasonable and nondiscriminatory terms. These core principles govern the rate-setting authority of airport operators.

The U.S. Congress has never defined what makes a landing fee or terminal rent “reasonable.” In 1994, following the Supreme Court’s Kent County decision upholding the right of airport operators to impose compensatory rates by ordinance, Congress instructed the DOT to promulgate rules provid-ing guidance on what it means for an airport operator to set “reasonable” rates and charges. The DOT originally issued its Rates and Charges Policy in 1996. The Policy prescribes the

rate-setting methods an airport operator can use when estab-lishing airport rates and charges by ordinance or tariff rather than by agreement.* Although the Policy does not apply to rates established by airport-airline agreements, it does define the bargaining power of airport operators and airlines by estab-lishing what an airport operator can do if it fails to obtain – or chooses not to seek – an agreement with the airlines. For this reason, the Policy is important for any airport operator that establishes rates by ordinance or contemplates negotia-tions with airline tenants.

In July 2008, the DOT amended its Rates and Charges Policy. The 2008 amendments were designed to give the operators of “congested” airports enhanced ability to structure their rates and charges to provide economic incentives for the airlines to reduce the number of “peak-hour” flights, up-gauge aircraft size, or use alternative regional airports. The airline industry,

acting through the Air Transport Association of America (ATA), challenged DOT’s 2008 policy amendments in the U.S. Court of Appeals for the District of Columbia Circuit, claiming that they are unlawful.

September 2010

New Congestion Pricing RulingWhat it means and ways it can be applied

A recent U.S. Court of Appeals decision allowing airport operators to use

congestion pricing encourages innovation in airline rate-setting.

* The DOT’s original 1996 Rates and Charges Policy was challenged successfully by both the airline industry (represented by ATA) and the City of Los Angeles. In 1997, the U.S. Court of Appeals for the D.C. Circuit vacated certain important provisions of the Policy dealing with the valuation of airfi eld assets and the rules governing terminal rate-setting. The DOT has never cured the defects the Court found in the 1996 Policy.

LeighFisher prepared this focus piece in collaboration with Scott P. Lewis of Anderson & Kreiger LLP, the lawyer who argued the case for ACI-NA. We hope that it will help our clients understand the signifi cance of the recent Court decision that the operators of congested airports can implement reasonable and not unjustly discriminatory rate restructures designed to provide economic incentives for airlines to change their schedules or fl eet mix.

The core issue raised by ATA was whether an airport opera-tor can restructure its rates and charges with the expectation and intent that the new rates will provide economic incentives for the airlines to alter their schedules or fleet mix. Airports Council International-North America (ACI-NA), representing the airport industry, intervened in the case, siding with DOT.

In July 2010, the Court of Appeals rejected all of ATA’s claims and upheld DOT’s 2008 amendments. Air Transport Association of America, Inc. v. DOT 2010 WL 2735695 (D.C. Cir., Jul. 13, 2010). The Court found that, as long as an airport’s rates and charges are reasonable and not unjustly discriminatory, they are lawful even if they are intended to pro-vide economic incentives for airlines to change their behavior.

Congestion: A Quick OverviewRecent airline profitability and potential growth plans may trigger a resurgence of congestion.

The DOT’s 2008 amendments were precipitated by DOT’s observation that, at major U.S. airports, “…congestion is a problem today…” that is “…projected to get worse in the future.” 73 Fed. Reg. 3312. When DOT promulgated its amended Policy in early 2008, flight delays had returned to pre-9/11 levels; levels that were then and are now seen as unac-ceptable. Although flight delays have eased somewhat over the past 2 years, if forecast growth in num-bers of passengers and operations is realized, intensifying congestion and delay appear to be inevitable.

In upholding the DOT’s policy amendments, the Court recognized that, in theory, the level and struc-ture of landing fees can affect air-line behavior and create appropriate economic incentives to reduce congestion and delay at the nation’s airports. The Court applauded DOT for its innovative initiative, saying that DOT’s “…creativity should be welcomed on its merits, not spurned for its novelty.”

The Court’s Ruling is Important for a Congested AirportThe ruling gives operators of congested airports greater rate-setting flexibility.

Important elements of the ruling include:

• Allowing operators of congested airports to restructure and increase their landing fees during congested hours so long as the overall amount of landing fees does not increase. A congested hour occurs when the demand for the use of an airport’s runways is anticipated to exceed av-erage runway capacity and result in volume-related delays.

• Allowing operators of congested airports to raise their landing fees during “congested hours” to provide an incentive for airlines to reduce the number of flights they schedule during peak hours.

• Clarifying that airport operators may impose two-part landing fees that combine a traditional weight-based charge with a per-operation charge. A two-part landing fee provides an incentive for airlines to up-gauge the size of aircraft in their fleets because such a landing fee raises the relative per-passenger cost to operate smaller aircraft.

• Including in the airfield rate base at a congested airport the amortized costs of airfield capital projects under construction – and not yet used by the airlines – if the operator has obtained required permits and financing for the project, construction has begun, and the opera-tor expects that the added costs would result in reduced congestion or delays at the airport.

• Allowing operators of congested airports to increase their landing fees during congested hours by including in the rate base airfield costs associated with a “secondary” airport owned or operated by the same entity and actually in use, if the airport operator expects that the added costs would result in reduced congestion or delays at the primary airport.

New Congestion Pricing Ruling2

U.S. “CONGESTED” AIRPORTSAs defined by DOT, a currently congested airport is an airport

that either experiences 1% or more of the total operating

delays at the 55 airports with the highest number of operating

delays or an airport found to be congested in the FAA’s 2004

Capacity Benchmark Report or identified in FAA’s FACT 2

Report. CY2009 delays and the most recent FAA reports are

used to identify the congested airports on this map.

PDX

CLECVGDEN

MCO

MEM

SEA

SLC

STL

TPA

MSP

PIT

SAT

SFO,OAK

LAS

PHX

LAX, SNA, LGB

SAN DFW

IAH, HOU

PBI, FLL, MIA

ATL

CLT

IAD, BWI, DCA

EWR, JFK,LGA

PHLPVD

ORD, MDW

BOS

HNL

DTW

The Court found that, as long as an airport’s rates and charges are reasonable and not unjustly discriminatory, they are lawful

even if they are intended to provide economic incentives for airlines to

change their behavior.

The Challenges of Applying the Policy AmendmentsExisting agreements and policy thresholds may limit how these amendments are applied in the future.

Existing airport-airline agreements that prescribe how landing fees will be calculated may prevent an airport operator from implementing any form of congestion pricing for the term of the agreements. As of today, the DOT has not approved true congestion pricing that would allow landing fees to be set at a market-clearing price that would align airline demand with airfield capacity. Unless the affected airlines otherwise agree, all new landing fees must be revenue neutral, meaning that total revenue cannot exceed the total costs allocable to the airfield rate base. As a result, it may be difficult for airport operators to show that landing fees structured on the basis of the DOT’s policy amendments will have an appreciable effect on congestion or delay.

The policy amendments could also affect how airport operators overseeing multiple airports (discussed previously) set rates and charges to address congestion at the primary airport. However, very few primary and secondary airport systems exist in the United States, so the effect of the policy amendments may be small and focused.

No airport operator in the United States has implemented landing fees under the new DOT policy amendments. Effectively, the Court’s decision bars any claim that a two-part landing fee or peak-hour pricing structure is unlawful if the DOT has determined that the airport operator’s adopted structure is reasonable and not unjustly discriminatory. How DOT would resolve such claims remains to be seen.

The Ruling Has Broad ImplicationsThe Court’s decision reaffirms and strengthens airport operators’ rights in setting rates.

The airlines argued to DOT and the Court of Appeals that airport operators cannot use their rate-setting rights to create economic incentives for airlines to alter their operations because that would constitute a form of local regulation outlawed by the Airline Deregulation Act of 1978. The Court recognized, however, that every airport rate, fee, or charge creates some kind of economic incentive that could affect airline decision-making and, therefore, rejected the airlines’ argument. So long as an airport’s rates and charges are reasonable and nondiscriminatory, they are lawful even if they are designed to provide an incentive for airlines to act differently. The Airline Deregulation Act does not limit an airport operator’s rate-setting options. If the Court had affirmed ATA’s position on the DOT’s policy amendments, any airport operator that sought to change its rate-setting meth-odology in ways that the airlines did not like could have faced formidable legal challenges.

Airport operators who are considering the types of rates and charges they might impose by ordinance if no airline agreement is in place are not bound to replicate the past. While most air-port operators are content to charge traditional aircraft weight-based landing fees, many airport operators are considering new types of terminal rent structures that may facilitate market entry or reward efficient use of limited terminal space and capacity.

New Congestion Pricing Ruling

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Congestion Pricing Outside the United StatesCongestion pricing, or peak pricing, has been a common practice at airports in Europe and parts of Asia for many years with:

• Peak pricing for specified times of day, or

• Peak pricing for seasonal demand, or

• A combination of the two.

Peak pricing has been applied to all or certain land-ing fees, parking charges, and passenger charges. In some cases, different peak periods by time of day have been applied to two different charge categories.

At Manchester Airport (United Kingdom), peak pricing is particularly complex, with peaks defined in terms of both time of day and season, and peak times of day varying according to aircraft noise.

Congestion Pricing ExamplesExtent of the difference between peak and off-peak charges at various airports:

• London Gatwick—fixed time-of-day and seasonal landing fees +204.8%

• Mexico City—time-of-day landing and aircraft parking fees +27.5%

• Prague—time-of-day aircraft parking fee +100%

Minimum Landing Fees and the Ruling New support for an old concept.

Many airport operators have implemented minimum landing fee rates. The use of minimum landing fees has often been justi-fied by the need to reflect the costs of establishing and collecting the fees. Minimum landing fees potentially provide incentives for airlines to up-gauge the size of their aircraft and consolidate flights. While minimum landing fees set by ordinance are sub-ject to DOT review, the Court’s decision affirms that they are not subject to attack simply because they may provide different economic incentives than a weight-based landing fee.

The Bottom Line Rates and charges can be useful tools to better align airline demand with airport capacity.

The Court made the common-sense observation that nobody should expect airport rates and charges to be uniform. Local circumstances vary from airport to airport. The costs and operating conditions at different airports are unlikely to be the same. Why must their rates and charges take similar form? The Court’s decision should encourage airport operators to consider innovative forms of rate-setting tailored to their own circumstances, whether their airports are congested or underutilized.

Copyright © 2010 LeighFisher—All Rights Reserved.

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New Congestion Pricing Ruling

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Prepared by Scott P. Lewis and

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For further information, please contact:

www.leighfi sher.com

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Spencer Ballard spencer.ballard@leighfi sher.com Scott P. Lewis slewis@andersonkreiger.com

Landing Charges at London’s Heathrow Airport –Incentives to Increase Aircraft Size and Reduce NoiseLanding fees at Heathrow are revised annually, in line with increases permitted by the UK Civil Aviation Authority (the regulator). Since early in the last decade, increases in excess of inflation have been allowed in recognition of the significant ongoing capital expenditures at the airport. For many years, landing fees at Heathrow have been set on a basis that does not vary according to aircraft weight, but varies only with respect to an aircraft’s noise output. Four noise categories are currently in effect, with the quietest aircraft (Chapter 4 or equivalent) incurring a charge that is 43% lower than that applied to the noisiest Chapter 3 aircraft.

This system was adopted because of an extreme shortage of runway capacity at Heathrow, and is designed to provide a price incentive for airlines to maximize their use of the largest and quietest aircraft, thereby optimizing runway use in a particularly environmentally sensitive manner. The strategy has largely been successful, leaving a minimal number of operations by aircraft with fewer than 100 seats. A grey market in runway slot trading has existed for many years, and airlines holding slots that had been operated only with small aircraft have achieved significant financial gains through slot sales to operators of larger aircraft.