FAA Issues Guidance Concerning Air Carrier Incentive Programs

30 September 2010 Publication

Legal News Alert: Airport Services

Responding to a reduction in airline capacity and increased competition for air service, many airports have instituted air carrier incentive programs. Although federal law and the FAA’s Policy and Procedures Concerning the Use of Airport Revenue (Revenue Use Policy) and its Policy Concerning Rates and Charges (Rates and Charges Policy) provide some guidance concerning the permissible provisions and scope of such programs, many issues relating to such programs have been left unresolved. To help clarify the requirements applicable to air carrier incentive programs, the FAA issued its Air Carrier Incentive Program Guidebook (Guidebook), available at http://www.faa.gov, on September 15, 2010.

The Guidebook provides a concise list of permissible and impermissible incentives in a question-and-answer format. The Guidebook provides many bright-line responses, which will bring clarity to some previously unresolved issues, but may preclude some of the innovative approaches taken before the Guidebook was issued. Further, like the recently issued FAA Order 5200.11 concerning Safety Management Systems, the Guidebook was issued without any prior notice or opportunity for public comment.

Applicable Law and Policy

Applicable federal law requires (with certain very limited exceptions) that airport revenue be used only for the capital or operating costs of (A) the airport; (B) the local airport system; or (C) other local facilities owned or operated by the airport owner or operator and directly and substantially related to the air transportation of passengers or property. This law prohibits the use of airport revenue for direct payments or indirect payments, other than payments reflecting the value of services and facilities provided to the airport, or for general economic development, marketing, and promotional activities unrelated to airports or airport systems. Further, federal law requires that an airport receiving federal grant funding must be available for public use on reasonable conditions and without unjust discrimination, and that air carriers making similar use of the airport will be subject to substantially comparable charges. These requirements also are part of contractual provisions in the grant assurances included in each grant agreement entered into between an airport and the FAA. The Revenue Use Policy provides that “the full costs of activities directed toward promoting … new air service and competition at the airport (other than direct subsidy of air carrier operations … )” are a permissible use of airport revenue, but that direct subsidies of air carrier operations are a prohibited use of airport revenue. The Revenue Use Policy also provides that “waivers of fees or discounted landing or other fees during a promotional period” are not prohibited direct subsidies. Any fee waiver or discount must be offered to all users of the airport and provided to all users that are willing to provide the same type and level of new services consistent with the promotional offering.

Guidebook Format

The Guidebook sets out four steps to creating an air carrier incentive program. First, the airport sponsor should review and understand the grant assurances and applicable law and policies. Second, the sponsor should identify the goals of the program and the types of service that may be covered under the incentive program. Third, the sponsor should define the incentive program timelines. Finally, the sponsor should design a properly structured incentive program. The Guidebook is organized to address each of these four topics, and includes helpful contact information for FAA Airport Compliance and Field Operations staff at the FAA headquarters, as well as in its Airport District Offices.

Guidebook Highlights

The Guidebook’s question-and-answer format provides generally unambiguous guidance to a number of issues not previously addressed by applicable law or FAA policy. A clear resolution of these issues is helpful and provides airport sponsors with greater certainty concerning the permissible and impermissible provisions of an air service incentive program. However, some of the FAA’s responses are not necessarily required by applicable law and may have benefited from the thoughtful dialog resulting from a public notice and comment period. In any event, although the Guidebook resolves some issues, others were not addressed. A few of the more helpful bright-line tests are set forth below.

  • Incentives may be limited to new entrant carriers only.
  • Consultation with the carriers operating at the airport is not required before instituting an incentive program.
  • Incentives may not be limited to a type of carrier (such as a low-cost carrier), to a specific carrier, or to a specific type or characteristic of service, such as size of aircraft or multi-class service.
  • Incentives may not be limited to signatory carriers.
  • Incentives may only be offered for one year for new entrants and for two years for all carriers. However, the air service incentive program itself may run for a longer period of time. Note that when air service incentive programs were first being developed, the FAA’s initial informal guidance was that a permissible “promotional period” under the Revenue Use Policy was no longer than one year. As time went on and the FAA developed more experience with the issues raised by these programs, it gradually permitted longer incentive periods.
  • Eligibility for participation must be reasonable and not unjustly discriminatory. For example, if an airport sponsor requires an air carrier to respond within a very limited period of time, such as 30 days, in order to qualify for an incentive, and a carrier has had advance notice and the ability to plan to meet such a short response time, then such a provision may be unjustly discriminatory.
  • Landing fees or terminal rents may be rebated, and this will not constitute a direct subsidy. However, airport sponsors should be careful to clearly trace such funds to avoid any potential claim of direct subsidy.
  • The cost of providing incentives to one or more carriers cannot affect the rate base for air carriers not participating in the incentive program without their express permission.
  • Airport revenue may be used for a proportionate share of marketing and advertising for new service, but only when the airport is included in the advertising with the carrier, in accordance with the Revenue Use Policy. The FAA recommends that the airport sponsor pay marketing and advertising costs directly to the entity providing the service to avoid any potential claim of direct subsidy.

We have assisted several airports in the development of their air service incentive programs, and have found the FAA quite helpful to airports seeking creative ways to attract new service. We hope that the issuance of the Guidebook does not mark a hardening of the FAA’s willingness to continue to assist airports in considering new approaches to air service development.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or:

David Y. Bannard
Boston, Massachusetts

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