May 2008

U.S. Government Relaxes Longstanding Limits on Foreign Charter Operations

Holland & Knight Newsletter

In a break with longstanding policy, the U.S. Department of Transportation (DOT) has announced that non-U.S. airlines as of March 24, 2008, will be able to provide U.S. carriers with aircraft and crew for international flights. (See, “Provision of Entire Aircraft With Crew to a U.S. Certificated Air Carrier By A Foreign Air Carrier,” 73 Fed. Reg. 10986, Docket OST-2008-00063 (February 29, 2008)). While the change applies to all foreign carriers, DOT took this step to honor its obligations under the new EU-US Open Skies Agreement, which entered into force at the end of March 2008. This policy change will create significant market opportunities for foreign air carriers, which previously were unable to lease their aircraft and crews to U.S. carriers. Under this new rule, foreign air carriers may charter their aircraft to U.S. carriers for international services. This change also may give multinational alliance groupings additional operational flexibility, by enabling parties to more freely shift flight operations among themselves. This new policy would permit the operation only of international air services (the new policy does not authorize foreign carriers to fly cabotage sectors, i.e., flights between U.S. points).

Interestingly, the new policy leaves unchanged the Federal Aviation Administration (FAA) regulations (14 CFR 119.53(b)), which prohibits foreign carriers from “wet leasing” aircraft and crew to U.S. carriers. DOT and FAA were able to avoid having to overhaul their regulations by drawing a distinction between contracts to provide aircraft and crew and true “wet leases.” According to the FAA, the new arrangements that are now permissible are not, strictly speaking, wet leases because such arrangements are not true leases, i.e., they do not involve a transfer of legal possession of any aircraft.
Non-U.S. carriers must obtain approval from DOT before implementing these arrangements with their U.S. customers. Among other things, applicants for this authority will have to demonstrate to DOT that their arrangements meet the applicable criteria, which include:

  • demonstrating that the lessor will retain operational control of the flight
  • demonstrating that legal and actual possession of the aircraft will remain with the lessor
  • demonstrating that the operations would otherwise be in the public interest

The notice issued by DOT describes the materials that parties might supply to support each of DOT’s required findings. For example, to establish “operational control” a carrier might submit a copy of its lease agreement with the other party to demonstrate that the foreign carrier will have “authority over initiating, conducting or terminating a flight.” The FAA will consider a number of factors when determining whether the foreign air carrier will maintain legal possession of the aircraft, looking at, among other things, whether the foreign carrier can “substitute other aircraft for the aircraft identified in the agreement, or its right to use the aircraft identified in the agreement for its own purposes when the aircraft is not needed by the U.S. air carrier.” 73 Fed. Reg. at 10987.

The “public interest” test is not fully defined in the new policy statement. However, if DOT practice is any guide, U.S. authorities will take into account the nature of the bilateral air service relationship that the United States has with the homeland of the foreign carrier (the U.S. will take a positive view of carriers from countries which have entered into open skies agreements with the U.S.), and the presence of any “doing business” problems U.S. carriers may be facing in the other country. In addition, the U.S. will consider whether U.S. carriers enjoy similar opportunities in the relevant country. Foreign carriers performing such services must hold AOCs from nations which have been rated as Category 1 under the FAA’s International Air Safety Assessment Program. In addition, such carriers must hold DOT economic authority to perform charter services and undergo safety audits by their U.S. partners.

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