AviationRegister                      E-Xpert Witness Journal

October 5th, 2008

  Deregulation

turns 180 degrees

as politicians acknowledge

it has limitations

Relief, reform and reconstruction Vs smaller government, free markets, lower taxes  and deregulation.

Regan's Faith in markets Vs Roosevelt's trust in government 

"Voluntary regulation does not work.... because investment banks could opt in or out of supervision voluntarily." Chris Cox, Chairman of the SEC

"The idea that the markets are always right is a crazy idea.  A certain idea of globalization is drawing to a close with the end of financial capitalism that imposed its logic on the whole economy." President Sarkozy of France.

Depression leads to regulation

The regulation of the banking industry began ever long before the air transport business took shape.  Seventy five years ago banks failed in large numbers, U.S. unemployment was at 25% and bread lines were a common sight.  The New Deal was introduced to overcome the economic impact of the Depression. That deal was based on the principles of relief, reform and reconstruction. The Emergency Banking Act was the first piece of legislation introduced in 1933 and was intended to address the worst banking crisis ever.  The government of the day created the FDIC to provide government backed insurance to protect bank depositors.  Unemployment insurance was introduced to help the unemployed. The New Deal resulted in the creation of most regulatory agencies as they exist today.  The reconstruction program cost $500 billion in total. It included $250 billion expenditures on public works such as the construction of 80,000 bridges, 72,000 schools, 40,000 other buildings and 8,000 parks. 

Deep recession leads to deregulation

The global economy suffered prolonged recession throughout the 1970's caused by the oil crisis, high inflation and high interest rates. By the mid-1970s the demands for deregulation increased.  As far as the airline industry is concerned that process began when the powers of the Civil Aviation Board were transferred to the FAA.  Airline deregulation was implemented beginning in 1979.  President Regan came to power in 1980 with a mandate to reduce the size of the government, free up markets, reduce taxation and expand deregulation across a broad range of industries.  The Regan administration policy  was based on accelerating the process of unwinding the regulatory structure in favor of smaller government, free markets and deregulation. In 1999 the Gramm-Leach-Bliley Act was introduced by the U.S. congress to allow commercial banks to acquire investment banks. 

Sarbanes-Oxley Act of 2002 marks a turning point

The Sarbanes-Oxley Act enacted into U.S federal law July 30, 2002 and also known as the Public Company Accounting Reform and Investor Protection Act of 2002 (SOX or Sarbox); was implemented in  response to a number of major corporate and accounting scandals including Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals cost investors billions of dollars when the share prices of the affected companies collapsed. Public confidence in the securities markets was shaken to its foundation. President George W. Bush claimed that SOX is: "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."

The passage of the Medicare drug benefit plan in 2003 was the high point but not the end of the deregulation process. In 2004 the U.S. Securities and Exchange Commission (SEC) introduced a program called the consolidated supervised entities program that allowed investment bank to opt in or out of SEC supervision.

Retreat from deregulation

The effort by the Bush Administration to privatize Social Security based on the ideal of the "ownership society" failed in congress in 2005. The Democrats took control of Congress in 2006 with a limited mandate to strengthen business regulation and the agencies that impose them.  

By 2006 SEC regulators were aware that a crisis was developing in the sub-prime mortgage market and that Bear Stearns was at the center of that storm. By September 2008 the SEC had conceded through its Chairman, Chris Cox: "The last six months have made it abundantly clear that voluntary regulation does not work.... because investment banks could opt in or out of supervision voluntarily."  The acceptance that self-regulation of investment banks such as Bear Stearns, stock exchanges, mutual funds, brokerage firms and public corporations does not work is echoed by both the Federal Reserve and the U.S. Treasury.  Since the credit crisis began the SEC has imposed regulatory restrains on short-selling, a practice which allows traders to sell stock they do not have in the belief that its value will decline before  they have to deliver. The Federal Reserve now takes on the task of effectively reintroducing regulation, a move that is likely to trickle over to the airline industry. The era of deregulation effectively came to an end on Wednesday the 24th of September, 2008 when President Bush proposed the $700 billion bail out for financial companies.

Credit crisis, stock market volatility, bank failures, rising unemployment & recession

return of sentiment to re-regulation

What began in 2006 as a problem specific to the sub-prime mortgage market turned into a rout of the financial system by September 2008.  Whether the economy was officially in recession mattered little because the economic conditions on the ground spoke for themselves.  Credit crisis, stock market volatility and rising unemployment aside, some economists hoped for a mild recession.  At the very least the political consensus is for moderate re-regulation at the very least and if the recession is prolonged then the calls for increased re-regulation will increase.

Air transport deregulation prospects linked to the consolidation issue

At the same time in 2008 that the US government has come to accept that deregulation has its limitation, open skies/deregulation treaty talks were taking place between the USA and the European Union in Washington.  The EU negotiators were optimistic but their US counterparts were focused on a general election one month away.  The existing open skies treaty between the USA and the EU permits carriers to fly between any U.S. and European city.  The EU is calling for increased deregulation as a way to regenerate the air transport industry but their is less and less support for that tin the USA.  The EU is also pushing for the airline industry to be restructured through consolidation. The EU believes that by the USA removing the 25% limit on the foreign ownership of U.S. airlines it will assist the consolidation process.  Any proposed change is unlikely to receive a positive response from the current US congress or the new one that will take over in 2009.

How will re-regulation proceed?

The speed of implementation and the breadth of it will very much depend on who becomes President of the United States in January 2009 and who that President appoints to run the Department of Transport and the FAA.  If the party in power has a clear majority in both the Senate and the House of Representatives and if strong regulator are appointed  to key agencies then the pace of regulation could be accelerated.  Any other outcome will likely drag the process out and dilute the level of regulation.

Funding increased regulatory cooperation & oversight

Any move towards re-regulation will required the increased funding of those government agencies tasked with the responsibility of implementing new trading rules and greater cooperation between those agencies. That's where the Achilles heel is likely to be because the size of the US budget deficit is unlikely to leave much room for more spending on government programs.  Overshadowing the funding issue is the political calculation that excessive government intervention could result in a political backlash in 2010 against the government in power funded in part by political donors and powerful industry lobbyist in Washington.     

Regulatory structure

RegulatoryReportingOversees   Area

InstitutionRelationshipInstitutionregulated

Treasury Department PresidentOffice of Thet Comptroller

     of the Currency

     Office of Thrift Supervision

Department of      President  Insurance Co'sSets standards for

Labor             employer-sponsored benefits

Individual States  Governor  Chartered banks     Oversees State chartered banks

      Industrial Loan Co'sCharter Industrial Loan Co's

      Securities registration

      Fraud prevention

      ThriftsOversees State chartered Thrifts.

     Insurance Co's      Monitor insurer insolvencies

  Protects consumers

      Stock Exchanges   Registers securities &

  prohibits fraud

Federal Independent       Bank Holding Co's Own one or more

Reserve Bank    Federal   Commercial Banks

Agency

  Limits activities to  banking or

  Managing banks

National Banks      Requires National       State Banks     & some State Banks

         to join

   

Industrial Loan Co'sLimits certain

         Industrial Loan

         Co. transactions

Limits activities to

banking or managing

banks

Securities &      Independent   Stock Exchanges  Securities

Exchange Federal      Standardizes

Commission     Agency      Interstate regulation

    of securities 

    Registers securities

    Fights fraud

  Clearing Houses  Registers some

   under securities law

Office of the

Comptroller 

of the Currency   Treasury National Banks     Oversees National Banks

Federal Deposits Independent

Insurance       Federal        Commercial Banks       Deposits <$250K

Corporation (FDIC)     Agencies     ThriftsProvises Thrift Insurance

  Industrial Loan Co's      Federal insurance is required

Office of Thrift

Supervision    Treasury Dept  Thrifts/S&LsProvide home mortgages

Encourages competition

Protects consumers

Commoditity Futures      IndependentCommodity ExhangesRegulation is 

Trading Commission      Federal        based on the risk      

       Agency  levels of the asset

Futures   Futures

regulation is

based on the risk

levels of the asset

National

Credit UnionIndependentCredit UnionsInvestments & lending

Administration    Federal restricted to highly

Agency  secure assets

     

Financial SystemRegulated by:

Bank Holding

Companies     Federal Reserve

Commercial Banks      Office of the Comptroller of the Currency

    Federal Reserve Bank

    Federal Deposits Insurance Corporation    

    Individual States

National Banks     Office of the Comptroller of the Currency

Commodity/Futures   Commodities Futures Trading Commission

Exchanges     Securities & Exchange Commission

      

Stock ExchangesSecurities & Exchange Commission

& Securities    Individual States

Industrial Loan    Federal Reserve Bank

Companies     Federal Deposits Insurance Corporation     

    Individual States

InsuranceInvididual States

   Department of Labor

ThriftsOffice of Thrift Supervision

    Federal Deposits Insurance Corporation

   Individual States

Hedge Funds None

Complex Derivatives  None

Credit UnionsNational Credit Union Administration

December 2009

Bill of Passenger Rights:  For the first time, the U.S. government is regulating delays on domestic airline flights.

Bill of Passenger Rights:  Limits passenger wait time on domestic flights to three hours due to aircraft delays. 

Bill of Passenger Rights: The new rules as issued by the Department of Transportation on Dec. 21 take effect in mid-April 2010.

Bill of Rights limits: The new rule can be overturned by a future administration and does not it give passengers permanent protection.

Rules flexible: The new rules leave plenty of discretion with flight crews and air traffic controllers to call a qualifying flight delay.

Rules do not apply to international flights.

Rule timing: The rule comes after the DOT fined Continental, ExpressJet, and Mesaba $175,000 in November for flight delays.

Rule timing: The fine was for an August flight delay in Minnesota that kept 47 passengers trapped overnight on a regional jet. 

Flight delays measured: An estimated 0.02% of all flights are delayed more than three hours.

Traffic impact: Of the 557,000 U.S. domestic flights each month an average of 88 are delayed more than three hours.

Delays on record: In the year through Sept. 2009, 1,096 flights were delayed three hours or longer, according to DOT data.

Airline cost: The fine per transgression is up to a negotiable $27,500 for each passenger. DOT airline fines have historically settled at 10 cents in the dollar.

Flight delay cost: Assuming a flight with 150 passengers, the fine could range from $412,500 to $4,125,000 per transgression.

Flight delay annual cost: U.S. airlines could face fines for flight delays ranging from $436M to $4.4B annually.

Airline/Passenger cost benefit: Flight delays at US airports cost passengers an estimated $14B annually.

November 2009

Regulation: Senator Charles Schumer wants the U.S. Department of Transportation to regulate frequent flier programs at commercial airlines.

Regulators: FAA issued a final airworthiness directive (AD) requiring the spinners on ERJ135/145 Rolls-Royce engines be replaced.

ERJ135/145 Rolls-Royce engines: The spinners must be replaced during the next engine maintenance visit or within 4,000 cycles.

NTSB concluded that the spinner was the "probable cause" for an engine failure on American Connection flight 5699.

AD cost: FAA says it will take one hour of labor to replace each spinner, bringing the total fleet-wide cost to $20.8M.

Regulators: FAA mandated that electronic engine-control software on the Embraer 170 be replaced, effective December 2009.

Embraer 170 AD: The FAA has recorded 20 incidents over the past eight months where operators suffered loss of engine control.

European Court of Justice (ECJ) rules airlines must pay compensation to passengers for flights delayed for more than 3 hours.

EU regulations entitle passengers on cancelled flights from $375 to $900 in compensation.

Airline can avoid paying compensation if delay was caused by extraordinary circumstances, which are beyond its control.

DOT creates a new federal advisory committee (Federal Advisory Committee on the Future of Aviation) to "restore the health" of the aviation industry.

DOTs new federal advisory committee will report its findings within one year.

DOT: Consumer complaints about cost cutting, deteriorating service, flight delays, and a series of high profile maintenance lapses have prompted scrutiny.

DOT decision came after a "closed-door" forum about the state of the industry "at the behest of airline unions who say the industry has become dysfunctional.

DOT: That conference covered financial, safety, labor, and operational issues, participants said afterward

DOT says the airline industry is losing billions of dollars, shedding jobs and is blamed for using a business model that critics say undermines safety.

DOT special panel is to come up with a plan to restore health to the ailing airline industry.

DOT was asked by airlines to "pick up the entire tab" for the NextGen air traffic control system instead of splitting the cost.

DOT panel:  AFL-CIO's transportation trades department, called for the U.S. government to "tighten regulations" on how "new, low-cost airlines" enter the market.

Deregulation:  Reuter’s reports that airlines are asking the Obama administration not to re-regulate the industry.

DOT’s LaHood reportedly is not enthusiastic about the union's request to regulate low fare airlines.

      

DOT’s new federal advisory committee "will study every facet of the aviation industry.

DOT forum participants are being asked for their recommendations on the composition and the issues the panel should focus on.

.

DOT panel: Unions, which have the ear of the current administration, want to raise the bar for entry into the airline business.

October 2009

EU airline antitrust investigation.

The European Commission (EC) of the European Union (EU) sets out its antitrust objections to the proposed OneWorld alliance whose members have a global network of more than 500 destinations. The commission originally informed the members of the OneWorld alliance in April that it was looking into global airline alliances and competition issues over the North Atlantic. The Commission parallel ongoing investigations into the proposed cooperation between four Star Alliance members; Air Canada, Continental, Lufthansa and United, and that between Skyteam members. The U.S. Department of Transportation will complete its review of the Oneworld application by the end of October.

In September 2009, the EC confirmed that it has sent a Statement of Objections to OneWorld airline alliance members American Airlines, British Airways, and Iberia. A Statement of Objections is a formal step in EC antitrust investigations whereby the EC informs the parties concerned in writing of the objections raised against them. The targets of the statement can offer an oral and written defense addressing the EC objections.

The Statement of Objections sent to the OneWorld alliance member’s addresses coordination of commercial, operational, and marketing activities. The EC is concerned that international scheduled airlines plan to jointly manage schedules, capacity, pricing, and share revenues on transatlantic routes between Canada, Mexico, US and Puerto Rico and the EU, Norway and Switzerland.

The EC position is that any transatlantic cooperation on passenger routes may be in breach of Article 81 of the EC Treaty and Article 53 of the EEA Agreement that governs restrictive business practices.

Procedural background

The commission has now informed American Airlines, British Airways, and Iberia that it has antitrust objections to their proposed alliance. American Airlines has responded by saying the process is similar to the EU’s continuing review of the Star and SkyTeam alliances, which already have anti-trust immunity from the U.S. Department of Transportation (DOT). BA claims that the Star Alliance and SkyTeam carry more traffic out of the UK regions to the US than Oneworld does. American and BA argue that the alliance is necessary to allow OneWorld to compete on a level playing field with the Star and SkyTeam alliances, which have been granted DOT anti-trust immunity and have larger and increasing shares of transatlantic traffic.

September 2009

Passenger rights: A three-hour time limit on tarmac waits for airline passengers will soon become law says Sen. Barbara Boxer (D-Calif.).

Regulation: Federal Reserve to add rules to regulate pay at major US banks. The Fed is preparing what many say will be the most sweeping rules yet to regulate the banking sector.

The WTO on Friday the 5th of September 2009 issued a 1,000-plus page ruling on whether subsidies the EU gave to Airbus were illegal.

Hard copies of the confidential report were distributed to US and European diplomats in Geneva.

The three-member WTO panel was widely expected to agree with complainant Washington that billions of euros of "launch aid" Airbus received to build the A380 and other top-selling planes was anti-competitive and broke trade laws.

The Airbus case, and the European Union counter-claim about US support to Boeing, represent the most commercially significant dispute in WTO history.

EU officials in Brussels stressed a full picture of the aircraft subsidy dispute would only become clear after the initial ruling is released from the case against Boeing, expected in six months.

This report is only half the story and must be read together with an interim report on the EU case against the US over aid to Boeing.

The Office of the US Trade Representative has always maintained that the European governments have provided unfair subsidies to Airbus that harm US interests.

It could take years for the WTO dispute settlement mechanism to run its course, and most industry analysts expect Boeing and Airbus to negotiate a settlement in their long-running dispute before it reaches the WTO's top court.

The extent to which Airbus or Boeing comes out cleaner than the other in the twin preliminary rulings will affect the dynamics of those settlement talks, which both sides have said they eventually want to hold.

Before the WTO ruling was circulated Airbus said  that the window is closed for talks until the trade arbiter reaches an initial verdict in the Boeing case, which Washington is expected to lose.

$205 BILLION BOOST?

Boeing says Airbus got a cumulative boost of USD$205Bn from advantageous loans and other perks from France, Germany, Spain and Britain over two decades, giving it an unfair edge.

Airbus says the loans were fair and claims in turn that Boeing got illegal subsidies from US agencies including NASA plus big tax breaks from several states, worth some USD$24 billion.

If the panel strikes down launch aid, Airbus may have fewer options to finance new airliners such as the wide-body A350 due in the next decade. Such a decision would also affect how rivals in Brazil, Canada, China, Russia and Japan fuel their expansion.

Brazil's Embraer and Canada's rival Bombardier spent years embroiled WTO litigation over aircraft subsidies.

WTO decision on A380/A320 subsidies could push the $35Bn US Air Force aerial refueling tanker contract towards Boeing.

Airbus and Boeing are also disputing A350 subsidies. So far, $4Bn in subsidized funding has been provided to enable the aircraft to compete with the B787. 

Airbus will have to refinance the subsidized loans at commercial rates. Repayments are currently made as A380s are delivered to customers. 

A380 reimbursable investment loans were not found to be prohibited in their totality.

Airbus through the European Union has a counter claim that is being reviewed by a separate WTO panel and a decision is due by mid-2010. 

A380 ($13Bn), A320 ($8Bn) launch aid subsidies abused global trade rules according to the World Trade Organization (WTO).

August 2009

A350: EU governments will subsidize the A350 even if a WTO decision finds previous aid to Airbus was illegal.

A350: European Commission says that any support for the A350 has no relation to current WTO litigation dealing with previous Airbus models.

FAA issued a Notice of Proposed Rulemaking (NPRM) that would amend FAR Part 23 certification standards for light jet aircraft.

EU standard body recognizes IS-BAO as an industry standard for business aircraft operations in Europe.

FAA Part 23 certification process review is examining the entire lifecycle of aircraft. The average age of the US small aircraft fleet is now about 40 years.

FAA Part 23 certification process is being reviewed for the first time since 1984 by the FAA’s small airplane directorate. 

India is the ninth biggest aviation market in the world and is still the least penetrated. The country accounted for 0.02 air trips per capita, compared with 0.1 in China and 2.2 in the US.

Consumer rights: The Consumer Bill f Rights has been included in the FAA re-authorization bill approved by the U.S. Senate (8/09).