Thank you for taking time to speak with me by telephone yesterday afternoon. I know the demands on your time are tremendous, and I sincerely appreciate your personal attention to our concerns regarding Hawaii’s airports.
The Part 135 Regulated Operator’s Partnership (PROP) of Hawaii is a coalition of locally owned and operated Part 135 air carriers. As discussed, we are extremely concerned about apparent fraud, waste, abuse and mismanagement of Hawaii’s federal airport grants. We have made patient and repeated efforts to address these concerns with cognizant state transportation officials directly, without success.
There are four general areas where the state appears to be in substantial non-compliance with key federal grant assurance requirements:
- Ratemaking methodology
- Signatory designation
- Ground leases and terms
- Facilities access and use
As discussed, there are a number of interdependent issues involved. In the interests of simplicity and brevity, this correspondence will attempt to address only our concerns with ratemaking methodology and signatory designation. We will provide details concerning ground leases and facilities under separate cover.
To receive federal airport improvement funds, an airport operator must agree that it will operate the airport in an economically nondiscriminatory manner. The “economic non-discrimination” grant assurance implements the provisions of 49 U.S.C. 47107(a)(1) through (6). In pertinent part, these provisions require the airport sponsor to make the airport available for public use on reasonable terms and without unjust discrimination to any aeronautical user.
Airports and air carriers have developed two common types of contractual arrangements to govern their ongoing business relationships. These contracts specify the terms and conditions of the airlines’ use of and payment for airfield and terminal facilities.
- Under a compensatory agreement, an airport operator charges its airline tenants fees and rental charges in an amount necessary to recover the actual cost of operating the airport for each group’s respective benefit; accordingly, the airport assumes the financial risk of any overall revenue shortfall.
- Under a residual agreement, signatory airlines generally agree to pay any costs of operating the airport that are not allocated to other users or covered by non-airline revenues. Signatory carriers thus assume the risk of overall revenue shortfall and receive the benefit of any revenue surpluses.
The nature of the agreement can influence an airport’s rate setting and investment practices. Residual agreements like the one used by the Hawaii Department of Transportation grant signatory airlines certain privileges, including the right to review and defer airport capital development projects. These rights have the potential to place signatory air carriers at a significant competitive advantage over other, non-signatory carriers. Consequently, airport sponsors are prohibited from:
- adopting unjustified standards for designation of signatory status, containing criteria not relevant to operations, not uniformly applied, or intended to protect incumbents;
and,
- unreasonably delaying or denying signatory status to an authorized carrier that is willing to assume the obligations established for signatory status
These actions may be considered failing to grant reasonable access, unjustly discriminating against a class or between classes of carriers, or granting a prohibited exclusive right in violation of 49 U.S.C. 40103(e) and 47107(a)(4). Furthermore, classification or status as signatory may not be unreasonably withheld by the airport, provided an air carrier assumes obligations substantially similar to those already imposed on air carriers in such classification or status. 49 U.S.C. 47107(a) (2), (3). Grant assurance 22.e, Order 5190.6A, ¶4-14a(1). Air carriers that are willing to sign a contract, assume appropriate financial obligations, and become a signatory with the airport must not be subject to unreasonable delays or conditions for classification as a signatory carrier. Despite these clear and legally binding federal requirements, Hawaii transportation officials have knowingly engaged in a discriminatory course of conduct characterized by unreasonable, arbitrary and unjustified actions and inactions that serve to delay, hinder and frustrate the ability of certain air carriers (and classes of air carriers) to attain signatory status, including:
- failure to clearly define and document signatory carrier application procedures, processes and service levels, and to make this information readily available to prospective applicants
- failure to identify all entities and participants in the airport sponsor’s deliberations and decisions regarding signatory carrier applications
- refusal to quantify, document or disseminate any specific criteria, standards or factors used by state transportation officials or others to evaluate application materials, approve or decline requests for signatory status
- failure to act on signatory carrier applications in a timely manner
- delaying signatory carrier applications for months at a time without explanation or action
- allowing other state government agencies to hold signatory carrier applications under review for extended periods of time without explanation or action
- refusal to provide specific details to air carriers and FAA representatives seeking status information regarding pending applications for signatory status
- allowing consultants representing dominant signatory airlines to review and advise high ranking state officials regarding applications for signatory carrier status
- refusal to return numerous telephone calls or respond to meeting requests from air carriers concerning pending applications for signatory status
- ignoring official requests for public documents made by air carriers pursuant to Hawaii’s Uniform Information Practices Act.
These behaviors are detrimental to airline competition and contrary to the federal preemption authority over rates, routes, and services. Furthermore, the actions of Hawaii transportation officials undermine the goals of the Airline Deregulation Act to foster competition and encourage air transportation market entry and expansion.
These actions also have the distinct appearance of blatant economic discrimination because Hawaii’s signatory airlines enjoy privileges and rights not available to non-signatory airlines. These rights and privileges are extended by the state because of the assumed financial risk inherent to the airport residual agreement and rate setting methodology.
In reality, every major airline serving Hawaii has suffered staggering losses as a result of 9/11. Some of the largest US carriers are operating in bankruptcy, while others have received federal stabilization loans as part of an industry wide bailout program. Most of the airlines serving the state have publicly acknowledged their inability to continue operating without significant and long-term cost reductions and concessions.
The state is clearly aware that the signatory airlines are no longer in any financial position to underwrite airport revenue shortfalls, yet these carriers continue to enjoy the privileges, benefits and status associated with this presumed risk.
The fact that the airport sponsor currently requires qualifying financial information from new air carriers seeking signatory status, while simultaneously allowing a handful of bankrupt and struggling major airlines to retain that status (and control public expenditures) is clearly unreasonable, arbitrary, discriminatory, and unjustified.
Each air carrier using the airport (whether as a tenant, non-tenant or subtenant of an air carrier tenant) must be subject to substantially similar rules, conditions, and charges as are applicable to similarly situated users. Federal grant program requirements contemplate that airport sponsors will exercise due diligence and fiduciary responsibility. Signatory financial disclosure requirements are clearly intended to represent that air carriers can meet financial obligations inherent to airport rate setting agreements, and that the airport sponsor’s rate setting methodology is viable.
In actuality, Hawaii’s residual airport guarantees are worthless, because signatories lack adequate financial solvency to assume associated risks. Moreover, state transportation officials have failed to act diligently or responsibly to address these changing economic conditions in more than three years since the major airlines began failing.
The State is therefore at risk of failing to comply with the assurance it provided the Secretary that it would maintain a schedule of charges that will make the airport as self-sustaining as possible under the circumstances. 49 U.S.C. 47107(a)(13).
These behaviors on the part of state transportation officials are having an immediate and adverse impact on the operations and competitiveness of Hawaii’s Part 135 air carriers. Actions that thwart an air carrier’s access or operations can be contrary to the procompetitive purposes of the exclusive rights prohibition, and have anti-competitive implications inconsistent with the anti-discrimination assurance.
Airport sponsors engaging in these behaviors may be subject to enforcement actions including withholding of payments under project grant agreements, under 49 U.S.C. 47111(d). The Federal Aviation Administration may investigate a violation of the grant assurances, upon complaint of an air carrier or on its own initiative, and may after investigation and hearing order an airport to comply with the grant assurances or face a suspension of payments and a withholding of approval of future grants.
Under 49 U.S.C. 47111(f), the Secretary may also apply to a court for a cease and desist order or other declaratory and injunctive relief to remedy a violation of the grant assurances.
Bob, I hope that by working together, we can resolve these persistent non-compliance issues and avoid the kind of federal sanctions that have characterized Hawaii’s airports for more than a decade. You have our commitment to work proactively with the administration in a spirit of cooperation and trust so long as the lines of communication remain open and we receive equitable treatment consistent with other similarly situated airport users.
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