Commercial trend with possible safety regulatory considerations- estote parati

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Multi-Country Commercial Airline Deals

Economic & Safety Concerns

As the airline industry has grown to be more global in scope, to network their passengers around the world, the competitors have formed alliances.

multi country airline deals

The underlying agreements involved cooperation primarily in marketing, scheduling, passenger handling and interline fares. To varying degrees the alliance members engaged in operational coordination—ground support, part sharing and even maintenance.

There have been limited purchases of the other partners’ stock, but outside of the EU, ownership above certain levels may be construed as control and control may affect the “nationality” of the carrier(s). The legal term “flag of convenience” alarms the economic regulators. As the percentage of  equity holdings increase to defined thresholds, governments, domestic carriers and unions tend to oppose.

A slight variation on this theme is the case of Norwegian Air, which has strategically located its headquarters, operational center, its “office”, its employee hiring/domicile bases and route structures in order to maximize its advantages in these diverse points of contact. Its request for a foreign air carrier permit from the US Department of Transportation has created a firestorm with unions and politicians opposing vehemently.

norwegian air international

With a organizational map touching Norway, Ireland, Thailand and Singapore, Norwegian Air has posed a challenge for the Irish Aviation Authority to surveil this globally flung carrier. The IAA must be able to assure all of the countries that Norwegian Air’s operations are safe! The record of the DoT grant of authority to the airline makes short shrift of the issue of IAA’s ability to meet this 5 country surveillance.

The two articles cited in the headline raise the possibility of cross-ownership among the three airlines mentioned. The author of one traces the history of airlines investing in their foreign competitors. He is bullish on the future of this team and the cross-border transactions:

Even so, the positives mean this latest cross-equity airline partnership should prove more beneficial, and long lasting, than previous attempts to pursue the minority investment model.

That should serve as a harbinger to the FAA, the DoT and Congress that more of these multi-country deals will be coming. Iteration by iteration, these documents will test what constitutes control. Coordinated aircraft spare parts purchasing, then allocation of the inventories of these replacements for operational needs, sharing of MX practices and procedures, joint review of aircraft sale proposals and… and… on.

On another spectrum, cockpit and cabin crews—the list includes interviews, hiring decisions, training, inflight reviews, discipline, trip assignments, flight releases, etc. It is important to note that these personnel decisions were front and center with the Norwegian Air case.

Each of these incremental mutuality contracts between airlines of different flag will create economic (DoT & Congress) and safety concerns (FAA and Congress).

The rungs of this ladder will progressively and collectively test the interstices between what does and does not constitute control. The economic legal analysis will mandate granular examinations of documents, long in pages, heavy in compound/complex sentences and replete with dependent clauses.

Typical constructs for this type of transaction, like “power-by-the-hour”, are not familiar to most economic regulators; discerning whether placing the QC decision in Carrier A’s organization, is that an indicium of control of Carrier B? Continuing up that continuum, there are a myriad of points and combination of such factors, which will likely be posed by the airline counsels.

It may be wise to prepare for the eventuality, not just a possibility, by the assignments by the DoT General Counsel of lawyers to be educated on the intricacies of these terms. Once the “test case” passes review, it is easy to forecast that contract will be soon followed by contract, etc. Any misstep in this process will lead to a loss of regulatory boundaries.

Onto to safety considerations–

The FAA field personnel may be more familiar with the minutiae of these agreements, but their understanding of these terms is not in the context of a dynamic agreements. For example, what step along the way up this commercial relationship mandates greater scrutiny by the FAA? Does it matter that Carrier B is located in a country which has a CAA with staff not expected to be able to carry the load? Assume that Carrier A has an established and high order functioning SMS program, but neither Carrier B nor its CAA has developed much SMS competence?

Again, the variations and circumstances will pose big challenges for regulatory review. The sensitivity is magnified by the fact that the FAA’s relationship with other CAAs involve a number of substantive and diplomatic considerations. If a proposed agreement is submitted for review to the CHDO of carrier A, identifying certain CAA as not being fully competent to deal with authority proposed to be assigned under the contract could create an international faux pas.

The FAA has a set of tests of what constitutes control under fractional ownership, but those criteria may be too simplistic for these commercial/operational issues. The interconnections between and among these individual elements of these commercial transactions are exceedingly complex and resolution of the questions will be difficult in the real time demands of these requests. Again, it may behoove the FAA to dedicate staff to assessing these variables.

  • The sky is not falling, but there is a clear cloud coming. Behind that visible storm may be turbulence for which the DoT and FAA would be well advised to prepare. As Robert Baden-Powell instructed his Boy Scouts estote parati or “Be Prepared”.

faa dot airline industry

 


Series of Transactions to Consolidate Power in Airline Business
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