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Notice

Notice on the Essential Air Service Code-Sharing Pilot Program

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AGENCY:

Office of the Secretary, DOT.

ACTION:

Notice.

SUMMARY:

Vision 100—Century of Aviation Reauthorization Act, Public Law 108-176, Title IV, subtitle A, section 406 requires the Secretary of Transportation to establish a pilot program, under which the Secretary would have discretion to require air carriers receiving Essential Air Service (EAS) subsidy and major carriers serving large hub airports to participate in code-sharing arrangements for up to 10 EAS communities. Public comments were invited about such a prospective program; all of the comments raised objections, particularly concerns that the Department would use the authority to force carriers to participate involuntarily in the program. This Notice discusses the comments, advises of the establishment of the pilot program, solicits applications for participation in the program, and specifies issues that should be addressed in such applications.

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FOR FURTHER INFORMATION CONTACT:

Kevin Schlemmer, U.S. Department of Transportation, Office of Aviation Analysis, 400 7th Street, SW., Washington, DC 20590. Telephone (202) 366-3176. E-mail: kevin.schlemmer@dot.gov.

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SUPPLEMENTARY INFORMATION:

The Essential Air Service program, established in 1978 by the Airline Deregulation Act, Public Law 95-504, enables small communities that were served by certificated air carriers before deregulation to maintain at least a minimal level of scheduled air service. Under this program, the Department currently provides subsidies to air carriers so that approximately 150 rural communities, including 37 in Alaska, can receive such service. DOT's program determines the minimum level of service at each community by specifying a hub through which the community is linked to the national transportation system, a minimum number of round trips and available seats that must be provided to that hub, certain characteristics of the aircraft to be used, and the maximum number of permissible intermediate stops to the hub.

A code-sharing agreement is a marketing arrangement between two carriers that allows one to publish schedules and sell tickets on flights operated by another. Typically, code-sharing allows carriers to broaden their network of destinations, to feed additional passengers to their hub airports, and to serve destinations that they could not otherwise serve on a profitable basis. Major airlines now commonly enter into voluntary code-share contracts with others, including smaller, regional carriers. Most airports covered under the EAS program have service provided by a carrier that has at least one major airline's code attached to its flights out of the airport. However, some carriers that provide subsidized service under the EAS program do not have any code-share arrangements in some of the markets that they serve.

On December 12, 2003, President Bush signed the Vision 100—Century of Aviation Reauthorization Act, Public Law 108-176. Title IV, subtitle A, section 406 of that statute required the Secretary of Transportation to establish a pilot program, under which the Secretary would have discretion to require air carriers receiving EAS subsidy and major carriers serving large hub airports to participate in code-sharing arrangements for up to 10 EAS communities. Section 406 provides as follows:

Code-Sharing Program

(a) In General.—The Secretary of Transportation shall establish a pilot program under which the Secretary may require air carriers providing air service with compensation under subchapter II of chapter 417 of title 49, United States code, and major carriers (as defined in section 41716(a)(2) of such title) serving large hub airports (as defined in section 40102 of such title) to participate in multiple code-sharing arrangements consistent with normal industry practice whenever and wherever the Secretary determines that such multiple Start Printed Page 5405code-sharing arrangements would improve air transportation services.

Limitation.—The Secretary may not require air carriers to participate in the pilot program under this section for more than 10 communities receiving service under subchapter II of chapter 417 of title 49, United States Code.

On July 12, 2005, the Department solicited expressions of interest by air carriers regarding participation in the pilot program, suggestions as to how such a pilot program might be structured, and other comments concerning the practical aspects of mandating code-share arrangements. 70 FR 40098 (July 12, 2005).

Comments: We received comments from the Air Transport Association of America, Inc. (ATA), American Airlines, Inc. (American), The Boyd Group, Inc., Pacific Wings Airlines Limited (Pacific Wings), the Regional Airline Association (RAA), Southwest Airlines Co. (Southwest), and United Air Lines, Inc. (United).

All commenters objected in some manner to a mandated code-sharing program. Commenters also typically questioned the legal authority of DOT to enforce such a regulation, cited the apparent conflict of a mandated program with the laws and policies promoting deregulation of the airline industry, and asserted that carriers would experience substantial difficulties and costs in implementing such a program.

ATA, American, The Boyd Group, RAA, and Southwest all strongly opposed the mandatory aspect of participation in the program. ATA believed intrusive government involvement would seriously harm the dynamics of commercially viable code-share relationships. American, Southwest and The Boyd Group noted the considerable expense and close coordination required for code-share relationships even among willing participants. United stated that it desires to make its route decisions voluntarily and coordinate with EAS providers based on code-share relationships that strengthen its product and route network. Pacific Wings generally objected, but stated that it could support mandatory code-sharing in limited cases with certain restrictions in Hawaii, an area that the carrier serves. RAA noted that, while it is a strong supporter of the EAS program in general, it would prefer to see carriers enter into any program voluntarily.

A number of commenters questioned DOT's legal authority to mediate or intervene when code-share parties under any such program disagreed over the terms of the commitment. ATA asserted that such involvement would constitute a “serious intrusion into the commercial processes through which code-share arrangements are established in the free market.” Moreover, RAA contended that DOT does not have the operational or financial expertise to structure and administer such a program. American echoes this, arguing that such interference is antithetical to free enterprise. In a similar vein, Southwest maintained that compulsory code-sharing would be inconsistent with a deregulated industry and would require an unequivocal expression by Congress to re-regulate the industry before the Department should consider implementation. And United stated that DOT cannot force two independent carriers into a code-share agreement any more that it can force a carrier to enter an EAS market.

Difficulty and oversight of implementation are other concerns cited. In RAA's view, highly complicated issues are involved, among them the terms and conditions of contracts including liability for such matters as lost baggage and bumped passengers, coordination of schedules, passenger and freight pricing, allocation of airport facilities and staff, family assistance assignments, frequent flier programs, and revenue sharing. The Boyd Group and Southwest echo RAA in raising concerns as to the complexity of these issues. While Pacific Wings believed that DOT could help facilitate code-sharing by dealing with technological issues of real-time connections to the host's computer reservations system (CRS) to manage inventory, confirm reservations, and reaccommodate passengers, United points to a more practical matter: it has a shortage of 4 digit flight numbers and the company already has to sacrifice certain code-share markets due to the technological problem of flight number shortages.

Several commenters questioned the potential effectiveness of any such program. The Boyd Group says that, before this program is implemented, the entire EAS program should first be reevaluated and updated to adjust to the air transportation system that has changed considerably since the industry was deregulated in 1978. It stated that while code-sharing would appear to boost traffic at EAS communities, it does not in fact necessarily do this. RAA further expressed doubt whether a mandatory code-share program would increase enplanements, especially where there is a major airport within reasonable driving distance.

American, Southwest, and RAA further noted that the plain language used in the statute specifies only that the Secretary “may” require air carriers to participate. Southwest argued that this plain language does not mandate that DOT require major carrier participation. American urged that, during a time of unprecedented distress in the industry, the DOT should not harm major carriers by imposing “substantial non-recoverable costs” that this program would entail. It stated that, should DOT err and implement this program, several limitations should be imposed, including limiting the display of the major carrier's code on flights operated by the EAS carrier between the EAS point and the large hub airport, limiting the mandated code sharing to one EAS route per major carrier, and not entering into agreement with any EAS carrier unless it has been in operation for at least five years. It also would have the Department require that any EAS partner have compatible systems interfaces with the major carrier (including electronic ticketing capability), and be a full participant in the Airline Reporting Corporation (ARC) before the EAS carrier could apply for a mandatory code-share agreement. American further proposed that all implementation and recurring expenses be borne by the EAS carrier.

Decision: We generally agree with the commenters that requiring code-sharing between unwilling partners would raise serious policy and practical issues. From a policy standpoint, we acknowledge that requiring and enforcing involuntary code-sharing would intrude on carrier management of rates, routes, and services in a manner that is, at a minimum, inconsistent with the basic thrust of the Airline Deregulation Act of 1978 and its implementing Federal policies. From a practical standpoint, even if we were inclined to require code-sharing, the implementation problems would be difficult, if not impossible, to overcome. Under a voluntary arrangement, the major carrier could work with the EAS carrier to delineate the specific details of revenue sharing arrangements and technical considerations within the scope of their business plans and methods. However, because major airlines are under considerable pressure to control costs, when they devote valuable and sometimes scarce resources (such as planning staff, gate agents, and ramp space) they should be confident that there would be a positive revenue outcome for each carrier. Compelling a carrier to enter into an arrangement may cause financial losses. Gate space at hub airports for small aircraft is a concern, as some airlines Start Printed Page 5406have no room for additional aircraft at their existing gates. Some airports now require aircraft parked on certain gates to have a minimum amount of seats and, generally, the EAS carriers would not meet that requirement.

Nonetheless, under some circumstances, code-sharing can make EAS more attractive to customers, increasing traffic and reducing subsidy costs. We agree that carriers should be encouraged to expand code-sharing to small and underserved communities, and look to whether the obstacles some perceive can be overcome. While we find the comments highly persuasive, we are unwilling to state categorically that there are no circumstances where mandatory code-sharing might work. Therefore, we will fulfill our statutory obligation to establish a program, and in doing so encourage any carrier interested in participating in it to submit an application in the context of particular communities or goals. In doing so, however, an applicant should address why its proposal should be implemented in a manner in which the various objections discussed above can be resolved or minimized. If it has a particular code-share partner in mind, it should address any specific objections that carrier has to participating with it in a code-share relationship. This program is limited to subsidized EAS communities. Proposals should be thorough, with a well-laid out plan why the proposed arrangement would be beneficial to the community and the carriers involved. Applicants that do not satisfactorily address the concerns that we have outlined in this Notice, and the concerns of the partner(s) with which it wishes to establish a code-share relationship, should expect to have their applications rejected. Applicants should file any such applications in Docket No. OST-2005-21790.

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Issued in Washington, DC on January 26, 2006.

Michael W. Reynolds,

Acting Assistant Secretary for Aviation and International Affairs.

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[FR Doc. E6-1322 Filed 1-31-06; 8:45 am]

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