The International Who’s Who of Aviation Lawyers has brought together four of the leading practitioners in the world to discuss key issues facing lawyers today.
Benjamin G Martin
GROWTH AREAS IN THE INDUSTRY
Who’s Who Legal: With the profit margin in the aviation industry decreasing and profits expected to be 0.7 per cent in 2011 according to the International Air Transport Association in addition to rising fuel prices, increased regulation and environmental targets, are you optimistic about the future of the aviation industry? Is there room for growth? And which areas and regions hold the most potential?
Peter Urwantschky: In some areas, the aviation industry has experienced considerable growth in recent years. This applies, for example, to the Middle East. It also applies to a number of emerging countries, in particular in Asia, as a result of the geo-economic shift of focus towards Asia. In my view, there is still room for further growth in these areas.
Kenneth Quinn: At present, it is impossible to be optimistic about the financial performance of the airline industry because airlines have proven themselves to be historically incapable of recouping their costs of capital and of being consistently profitable. When airlines have pared costs in one area, such as labour, other key outside costs get out of control, such as fuel. When both cost factors are in control, it seems like airlines get hit with shock events like SARS, 9/11, volcanic eruptions or debt crises. When things are going well, you almost brace yourself for the locusts to arrive. When exogenous factors and costs get out of control, it sends a shock through the industry that leads to decreased demand and decreased profits for airlines.
I am, however, optimistic about the growth of aviation as the world’s population increases and more countries create emerging middle classes with discretionary income. Air transport moves goods and people across the globe and allows people to communicate with each other in ways that cannot be replaced with technology. People will continue to travel because human interaction is preferable to electronic communication.
Whereas the markets in Europe and the US are relatively mature, with little room for growth, I see the most potential for growth in the international markets, such as Asia, Latin America and the Middle East. In the future, these markets must grow both profitably and safely. The reduction of accident rates is critical for the long-term success of such markets, particularly in Africa where the accident rate is 12 times that of developed countries. Key factors in reducing above-average accident rates are increased staffing and training of inspectors with national civil aviation authorities, and more robust safety management systems to encourage and learn more from blameless-incident reporting.
Dan Soffin: I am very optimistic about the future of the aviation industry. There is currently no mode of long-haul passenger transport on a broad international scale that competes effectively with air transport as long as travel time remains an essential priority. The same holds true for long-haul carriage of cargo.
At the same time, the past 20 years have taught our industry, often brutally, that the best forecasts are of little value when fortuitous events and even cyclical economic changes occur. Indeed, the aviation industry has suffered disproportionately from events including influenza, 9/11, SARS, recession, oil-price volatility and more. Emissions trading requirements and detriment is certain to unyoke another arduous burden on the aviation industry, and political instability in various regions adds further to ongoing economic instability and uncertainty.
But in the face of the most challenging times, the industry has responded bravely and with grit and continues to do so. The pace of development of greener aircraft and technologies is brisk. Ground services including air navigation are continually developing or being refined. Competition among geographic regions for passenger traffic is strong. Competition among carriers and models of air carriage is lively and creative. Where air transport touches, economies generally grow and develop at a faster pace. Business aviation continues to develop and mature. In short, the aviation industry demonstrates flexibility, adaptability and the ability to grow even in the face of tough economic times.
Clearly challenges such as cost-efficiency, ageing fleets, and access to and return on capital will continue to pose complex challenges; industry participants will come, go, strengthen and weaken, but this is to be expected. We have seen strong and rapid growth, for example in the Middle East and China where markets have not traditionally been as saturated as, for example, in Europe and the US. We will continue to see growth in economies that are growing or where economic and geographical access to air travel is increasing, such as India.
Who’s Who Legal: The global economic crisis has put a strain on the finances of airlines and leasing companies, creating tension in the industry and a litigious environment. Is this the case in your jurisdiction? Have you seen an increase in the number of disputes and what themes have the disputes been centred around?
Dan Soffin: It is indisputable that recent economic times have placed great stress on the aviation industry. What is less clear is whether that has sparked a more litigious environment or whether it has merely added to the build-up of an already vibrant litigation-based ecosystem.
Catastrophe-based litigation has continued fairly predictably throughout the period of crisis largely driven by the event, rather than the economy, although it may well be that the economy has influenced what may be considered to be acceptable financial outcomes of such litigation.
Non-catastrophe-based passenger litigation seems also to have been fairly consistent throughout the crisis. It may well be that difficult economic times have increased the likelihood that passengers would resort to litigation to recover compensation, but we must remember that consumer regulation has been consistently on the increase and increased litigiousness may well be more attributable to exercise of newly accorded rights.
In my view, the biggest increase in disputes attributable to the (continuing) economic crises around the world has been in the area of commercial deal-making in which net worths, portfolio values and aircraft values have suffered considerably, and affected the fundamental viability of purchases and sales. Disputes arising from failed deals or breaches of purchase or lease agreements have provided for some difficult litigation ranging from return of deposits and pre-delivery payments to repossession of aircraft.
Kenneth Quinn: In most circumstances, I do not find the airline industry to be particularly litigious. Many clients have arbitration provisions in their contracts to prevent litigation. Airlines have long-term needs to cooperate with other parties as partners, rather than as enemies, particularly in such a volatile economy. For example, if a manufacturer cannot meet a delivery deadline, both the airline and the manufacturer have the incentive to work out disputes amicably and maintain their relationship, rather than to pursue costly litigation. If the airline is in financial distress, manufacturers and lessors are often understanding and will work with them.
The major exceptions to this trend are with international trade disputes, such as the ongoing WTO disputes with Boeing and Airbus, and distribution systems, where airlines are suing GDSs and travel agencies are challenging certain GDS and airline practices. While such disputes are generally good for lawyers, they do not necessarily benefit either side of the dispute, nor customers.
Further increases in disputes can be seen when governments attempt to interfere in what should be private transactions, such as corporate restructurings, bankruptcies and returns of aircraft. Unfortunately, some governments try to manipulate these situations for their own gain, when instead they should respect the rule of law. I believe the Cape Town Treaty will go a long way in helping to reduce such disputes, even though not all countries are a party to the treaty or are not fully implementing the treaty.
Who’s Who Legal: An increasing number of aviation accident cases are being heard in the US – regardless of the site of disaster – to access the higher level of damages awarded. Our sources noted that defendants are finding themselves fighting costly jurisdictional battles before even getting to the merits of the case. How do you see this trend developing and what ramifications do you envisage this trend having for the defendants?
Kenneth Quinn: In the near future, I see no significant shift away from plaintiffs’ lawyers trying to bring accident cases into US courts, even when the accident did not occur in the US. Often, plaintiffs’ lawyers will bring cases to the US when the only significant nexus to the US is that the underlying product was made here, but the accident, its victims and the evidence are all outside the US.
US courts appear to be more hostile to this forum shopping in the hope of hitting the jackpot in Cook County, South Florida or North Texas. They are granting more motions to dismiss under the doctrine of forum non conveniens, demonstrating that they will not accept such cases and will not buy into the “justice can only be done in the US” mentality. Today, other courts and jurisdictions are fully capable of efficient and just adjudication of aircraft accident cases, and litigation should be brought in such jurisdictions.
A recent ruling in the long-running saga of the West Caribbean Airways crash throws up some interesting uncertainty for this trend. There, the Colombian airline was chartered by a Florida company on a flight from Panama City to Martinique that crashed in Venezuela, killing all passengers on board (all from Martinique) and its entire Colombian crew. The defendant had successfully filed a motion for dismissal under the doctrine of forum non conveniens, and the Florida court applied article 33 of the Montreal Convention to rule that a French court had jurisdiction to hear the case and would be better suited and more proximate. After an initial appeal in the French court accepting the claim, the French Supreme Court, the Cour de Cassation, on 7 December 2011, ruled that France is “not currently available” as an appropriate forum. Presumably, the ruling stands for the provision that under article 33(1) of the Montreal Convention, the court must uphold the plaintiffs’ choice of court, which runs afoul of basic FNC principles. No doubt the plaintiffs will refile in South Florida, citing the unavailability of France as a forum, in the hope of having the case tried in the US.
Ben Martin: Attempts by non-US plaintiffs to bring proceedings for damages in the US as a result of accidents outside the US is occurring more and more often in Australia and the Asian region. Often the US claims are based on causes of action that have no substance or merit in the jurisdiction in which the accident occurred and the quantum of damages claimed also bears no connection to the reality of damages awarded in the claimant’s home jurisdiction.
The use of other causes of action against entities that are insured on an airline’s policy of insurance also has the potential effect of making the international liability conventions such as the Montreal Convention redundant. Claims are made on the airline’s insurers that have no connection with the liability conventions and those claims are free of the limitations, checks and balances that are part of those conventions.
In our experience aircraft operators and their insurers are now resisting attempts for the long arm of US litigation to reach into the Australian and Asian region. The unfortunate consequence for claimants is that the attempt to recover more in the US inevitably leads to longer delays in the resolution of claims due to the time needed for courts to decide the appropriate jurisdiction to determine the claim.
Dan Soffin: There is no question that it has become an accepted practice, if not plaintiff core litigation strategy, to attempt to bring cases into the US. American courts appear somewhat split on the granting of defendant forum non conveniens motions with federal courts demonstrating more comfort with declining jurisdiction in appropriate cases and state courts generally more willing to allow the cases. Over the long-term, it is difficult to predict a trend when the outcome of an FNC motion depends heavily, among other things, on the availability and sophistication of a third state’s legal system and the location of key evidence.
Peter Urwantschky: From our experience at least, plaintiffs’ lawyers in Germany are more aware of the risk of forum non conveniens decisions in the US than they used to be. As a result of this awareness, it has become easier for defendants to settle cases in Germany. Plaintiffs’ lawyers are more inclined to achieve a reasonable settlement here instead of going through costly litigation in the US where they may have to face a forum non conveniens decision later on.
Who’s Who Legal:Our research shows that ECA financing is still playing a large role in the industry. Have you seen any return to commercial financing in your respective jurisdiction? Have there been any alternative sources of funding, for example, from investment funds or through the capital markets? When do you expect to see the level of ECA-backed financings decrease?
Kenneth Quinn: Our aircraft finance practice in New York, now led by Mark Lessard, has not perceived any fundamental shift in 2011 away from the major role of export credit agencies in recent years. The OECD Aircraft Sector Understanding was revised in 2011 at the behest of stakeholders, including commercial banks and “home country” airlines. The result is that ECA financing will become significantly more expensive starting in 2013. At this time, however, ECA financing continues to be an attractive option, especially with the recent turbulence experienced by a number of European banks that are leaders in the commercial financing market. We expect that ECA-backed financings will remain attractive until the ongoing balance sheet recession experienced by governments, banks and consumers has run its course (notwithstanding the increase in pricing starting in 2013).
Commercial lending activity did increase in the US in early 2011 and some leading commercial banks even expanded their US aviation desks in anticipation of large orders from US carriers (which in fact materialised to a large extent). As these US-based orders will not be eligible for export credit financing, we can expect the carriers to seek alternative sources of financing. We anticipate that the capital markets will continue to play a significant role in financing the US order book. The recent chapter 11 filing by American Airlines will place some strain on the overall credit picture of US airlines, but the successful restructuring of almost every other major US airline in the past decade and continued high demand for next generation aircraft should not impede the overall flow of institutional capital into aviation assets.
For the last few years, private equity has flowed into the leasing space, as operating leases have continued to gain overall market share in comparison with commercial lending. Airlines enjoy the financial flexibility that comes with lower financial commitments and the operational flexibility that comes with shorter terms. However, operating lessors are increasingly also consumers of aviation capital, competing with airlines in their quest to diversify their own funding sources. As the leasing industry continues to mature, we can expect to see increased access by lessors to public debt and equity markets.
Dan Soffin: It has been said that, with a virtual shutdown of traditional lending markets following the 2008 crash, the availability of export credit agency financing kept (at least some of) the industry afloat during the worst of the financial crisis.
Throughout the crisis and continuing today, ECAs have modified their mandates and expanded their traditional roles to ensure that financing remained and remains more widely available. From this perspective, ECA finance plays a deservedly more mainstream role in the industry it helped to rescue and it is therefore difficult to accept that ECA-backed financing should decrease, especially if its various products increase in price and competitiveness with other sources of finance as they will under the 2011 revisions to the Aircraft Sector Understanding.
The current (January 2012) debate in the US over Ex-Im Bank reauthorisation and its associated proposed increased lending cap highlights the importance of continued availability of ECA lending whether viewed from an airline and manufacturer perspective or from an executive and legislative branch perspective. Protecting current jobs and creating new jobs in the US remain key issues for manufacturers, the president, and Congress alike. From a borrower’s perspective, ensuring a more level playing field against foreign airlines remains a key issue for US airlines but, again, the revised 2011 ASU should go some way to addressing this concern..
There is no question that, following some very difficult years, traditional bank lending is slowly re-emerging as a renewed and accessible source of aircraft finance. Due diligence may be stricter, terms may be more stringent and banks are, without doubt, more cautious, but the availability of banking capital is certainly on the increase. The same holds true for alternative sources of finance as markets settle and restructure, and as more conservative borrowing and lending criteria are established as the norm. New rules and practices for a new economic reality.
Who’s Who Legal: With regulation on the rise, what changes have you seen in your respective jurisdiction and what impact is this having on your clients and the services that they require?
Dan Soffin: The past few years have been dominated by consumer-oriented legislation and regulation in both the EU and the US. Whereas, previously, our airline clients may have been occupied principally with claims directly from passengers, increasingly those airlines face active intervention of regulatory agencies in addition to passenger claims. This is particularly the case with the European consumer watchdog agencies, whether in the realm of disability rights under the Passengers with Reduced Mobility regulations, flight delays and cancellations under the associated EU regulations, or advertising and reservations displays under related regulations.
We have, accordingly, seen the regulatory component of our practice increase tremendously over the past few years. With the expansion of the European Union, some of the most challenging work for both us and our clients has been dealing with the effect of EU regulations in 27 member states, some of which have more developed regulatory infrastructures than others.
The EU Emissions Trading Scheme has also resulted in numerous issues to address on behalf of clients located within and outside the EU.
Since most airlines are already fairly streamlined in their legal and other departments, the increased regulations and associated requirements can often strain the internal operation resulting in the need to look to outside counsel for advice and assistance.
Peter Urwantschky: Passenger rights are a topic of increasing importance in the airline industry. Over the past years, in various jurisdictions, regulatory authorities have shown an increasing tendency towards developing local regulations aimed at further protecting passenger rights, Regulation (EC) 261/2004 having the biggest impact.
Our clients are involved as defendants in a large and increasing number of court cases. Our clients also need periodical advice in respect of discussions with the German enforcement body on passenger rights and the interpretation and enforcement of the provisions of Regulation (EC) 261/2004.
Kenneth Quinn: The regulatory burden on airlines has increased significantly over the past few years as dissatisfaction with airline customer service has grown. In some respects, airlines have brought this upon themselves by not treating their customers as well as they should, particularly during extended tarmac delays. At the same time, many forces have led to such “mistreatment”. For example, when customers are forced to sit for extended tarmac delays, the delay is often caused by weather, air traffic control restrictions, delays with customs and border protection, airport gate availability or ground crew limitations. Yet there is sensationalised media coverage that then becomes the basis for all-encompassing regulation. In this case, the adage “bad facts make bad laws” is true.
The US Department of Transportation has unleashed a series of three complementary rulemakings that, if upheld after challenges in court, promise to revamp customer service regulations and protections. Fatigue-management rules, also now final in December 2011, rewrite flight duty time in ways that will have a profound impact on costs and scheduling for airlines. As airlines come to grips with providing better customer service, the need for such overarching regulations will subside.
Who’s Who Legal: Government regulation in response to the airlines’ increased attempts at imposing ancillary fees for services is on the rise. How should governments attempt to regulate these services so that the customer experience improves, but the airlines’ financial health is not overly damaged?
Peter Urwantschky: The German legislator does not have much leeway to regulate these services and the ancillary fees, as EU provisions (especially Regulation (EC) 1008/2008 and Directive 2005/29/EC) already prescribe how such ancillary fees are to be dealt with from a legal point of view.
The challenge is rather how these EU provisions or EU-law-based German provisions are to be interpreted.
German consumer protection organisations appear to scrutinise airlines’ websites and booking forms quite regularly and send warning letters to the carriers in which the signing of a cease and desist declaration is requested. If the airline refuses to sign such cease and desist declaration, the consumer protection organisations file a lawsuit against the carrier in which they request the court to order the airline to refrain from engaging in such practice.
Whereas one decision of the German Federal Court of Justice (the highest civil law court in Germany) has already been rendered on credit card fees in May 2010, other proceedings on ancillary fees are still pending.
Kenneth Quinn: A fine line exists between mandating that ancillary fees are easily available and transparent to customers so as to facilitate quick airfare comparisons on the one hand, and over-regulating and harming the financial health of airlines, on the other. Over the years, customers have demonstrated strong elasticity of demand in the airline industry. They want low fares, on-time performance and no lost bags. Not everyone wants full amenities, or at least not if they have to pay for them, but some do. Airlines have responded to that demand by keeping fares low, but charging for ancillary services. In doing so, they are offering consumers a choice and generating significant sources of needed revenue. By breaking out costs and charging for ancillary services, the top 47 airlines earned approximately US$20 billion in revenue from ancillary fees in 2010, and ancillary fees now account for upward of 20 per cent of an airline’s revenue.
I firmly believe that customers should be given the opportunity to pick and choose which amenities they receive and pay for. However, it is difficult to mandate the display of all precise ancillary fees on a website before a customer has chosen an itinerary. This can force the carrier to display a worst-case scenario fare, which can depress demand with much higher fares or highly variable fares, therefore decreasing airlines’ revenue from airfares and ancillary fees. Fewer people travelling means fewer jobs and less economic activity, which is bad for all.
Further, governmental regulation needs to be more consistent. The government wants to mandate the transparent disclosure of all ancillary fees, but also appears to want to hide government taxes and fees in base fares and prohibit the prominent disclosure of such taxes. In an industry that is already taxed significantly more than others, the government must be even-handed in its treatment of charges added on to the base airfare.
Dan Soffin: Ancillary fees are now essential and ingrained components of airline revenues and income. Those fees, as a proportion of overall revenue, have increased dramatically over the past few years and will likely continue to be an increasing proportion of airline revenue. On the one hand, it is clear that ancillary fees have a level of generally accepted appeal to passengers who may pick and choose desirable service or product components that have historically been bundled together in airfares. On the other hand, reductions in taxable airfare and increases in often non-taxable fees pose a dilemma for governments which may see taxes generated from air travel on the decrease.
There are strong arguments that consumers are intuitive enough to be able to ascertain to their own satisfaction acceptable prices for their planned air travel without Big Brother’s intervention. After all, consumers find acceptable prices and choose things like rental cars and restaurants without the need for government regulation. Moreover, we should not forget that airlines operate in an essentially deregulated environment. But, like it or not, government has already chosen to establish itself as a regulator of ancillary fee information published by airlines and whether such intervention is fundamentally in the public interest or in the government’s interest will remain the subject of intense debate.
If we accept for purposes of this debate that increased regulation is in the consumers’ interest, the best way to advance that interest is for regulators to ensure that consumers receive consistently presented and relevant, easy-to-compare information on ancillary fees across airlines and routes so that airline offerings can be easily compared on an “apples to apples” basis and differences easily distinguished on that same basis. Care must be taken to ensure that, in requiring increased disclosure and presentation of ancillary fee components, airline presentation and reporting requirements are not out of proportion to the cost of compliance. Ultimately the passenger will pay that bill.