UK: Aerospace News - February 2011

WHEN MANY BECOME ONE – THE POLYGAMOUS ROAD AHEAD FOR PRC CARRIERS

By Cheryl Guan

Over the last decade, PRC carriers have consolidated around three main carriers. This trend looks likely to continue. This article tracks the historical backdrop, and sets the stage for a subsequent discussion on anti competition issues.

In July 2000, the all-powerful General Administration of Civil Aviation of China (CAAC) ordered the top ten airlines in its fold to consolidate into three airline groups around Air China, China Southern Airlines and China Eastern Airlines.

Other than to prepare for full entry into the World Trade Organisation, the consolidation of PRC carriers was chiefly to streamline airline operations and to improve the overall competitiveness of the PRC aviation industry.

The flurry of consolidation activities that followed thereafter included:

• the acquisition of Air China Southwest and Zhejiang Airlines by Air China in 2001;
• the absorption of Zhongyuan Airlines into China Southern Airlines in 2000 and the latter's acquisition of China Northern Airlines and China Xinjiang Airlines a year later; and
• the takeover of China Yunnan Airlines and China Southwest Airlines by China Eastern Airlines in 2001 and 2003 respectively.

In the same year, military chief Li Jiaxiang was dispatched into civilian service as the head of Air China, a position that he held up to 2008. During this time, Li Jiaxiang reportedly wiped clean (in seven years) the carrier's deficit of US$276 million accumulated since 1998. In late 2007, Li Jiaxiang published an influential book titled "Route to Fly" where he mooted the dream of transforming Air China into an "international super-carrier" through (among other things) a consolidation of PRC carriers. Shortly after the publication of the book, Li Jiaxiang was catapulted to the chief de corps of the CAAC, a position that he continues to hold.

It has been more than three years since the publication of Li Jiaxiang's book and the consolidation activities of PRC carriers show no sign of easing:

• In July 2009, Air China injected a further US$19.3 million into Air Macau to increase its shareholding stake to 80.90 per cent before spending HK$6.3 billion (c.US$813 million) to raise its stake in Cathay Pacific Airways from 17.5 per cent to 29.99 per cent a month later.
• In 2010, Air China mounted a takeover of Shenzhen Airlines by injecting c.US$100 million to increase its stake in the beleaguered airline to 51 per cent.
• China Southern Airlines has now obtained significant stakes in Sichuan Airlines (approx. 39 per cent), Xiamen Airlines (approx. 51 per cent), and Chongqing Airlines (approx. 60 per cent).
• In 2010, China Eastern Airlines completed a merger with Shanghai Airlines.

As more and more airline unions are forged, the consideration on everyone's mind will be how such consolidation interacts with regulatory concerns and, in particular, the Anti-Monopoly Law of the PRC (the AML) which came into being in August 2008. To date, the long arm of the Anti-Monopoly Commission has seemingly not reached any PRC carriers, although the same cannot be said of telecommunications and technology entities such as China Mobile, China Netcom and Baidu. Having set the historical backdrop, we will review in the next edition of Aerospace News the potential impact of the AML on the consolidation of PRC carriers as well as lessons gleaned from some notable civil cases brought under the auspices of the AML.

INJUNCTIONS: MAINTAINING THE DYNAMIC STATUS QUO

By James Jordan

On 3 December 2010 Mr Justice Beatson, sitting in the Commercial Court heard application to continue until trial a mandatory injunction obliging an airport operator to accept a carrier's scheduled flights outside airport promulgated operating hours.

Jet2.com Limited v Blackpool Airport Ltd (3 December 2010), Queen's Bench Division, Commercial Court

In September 2005 low cost airline Jet2.com Limited (the claimant) entered into a letter of agreement (the Agreement) with Blackpool Airport Limited (BAL) (the defendant). regarding use of the airport. The material provisions of the Agreement provided that the parties would "co-operate and use their best endeavours to promote Jet2's low cost services ... and to provide a cost base that will facilitate Jet2's low cost pricing". As part of the Agreement, both parties agreed a number of charges that would be levied by BAL for services provided to Jet2. Amongst these was a surcharge for aircraft movements outside the promulgated airport operating hours.

Pursuant to the Agreement Jet2 proceeded to operate flights out of Blackpool airport. By 2010 Jet2 had two aircraft based at the airport and expected to carry 180,000 passengers annually. Since the summer of 2006 the carrier regularly scheduled flights outside of the airport's promulgated operating hours. Between 1 November 2009 and 3 November 2010 Jet2 operated 759 flights from or to Blackpool airport of which 20.3 per cent arrived outside the promulgated operating hours.

In May 2008 a subsidiary of Balfour Beatty PLC purchased the majority shareholding in the defendant's parent company. At the time of purchase BAL was operating at a loss, forecast to be £4.5 million per annum. The new owners sought to address this by levying a £10.00 "Air Development Fee" on each departing passenger. This went some way to reducing operating losses. However, in 2009 Ryanair, the other major airline operating out of Blackpool ceased operations from the airport. Ryanair's departure resulted in a significant fall in passenger numbers. Keen to reverse this position BAL encouraged Jet2 (who had consistently said it intended to increase its capacity), to increase the size of its operation at the airport. BAL in turn continued to accept Jet2's aircraft movements outside of the promulgated hours, although not contractually obliged to do so.

On 19 July 2010 BAL wrote to Jet2 stating that the airport could not continue to incur the then current levels of loss and asked whether the carrier would have the capacity to attract an additional 120,000 departing passengers in 2011. In the same letter, BAL stated that unless profitability improved significantly it would be "... forced to re-gauge the airport's operations". Further, that re-gauging would result in downgrading of radar and traffic control facilities at the airport, "... to a position where [the airport] will no longer be able to maintain any of [Jet2's] operations".

Further letters between the parties and their legal representatives followed. On 22 October 2010 BAL wrote to Jet2 stating that due to "current financial circumstances" BAL would only operate within its published hours of 0700 and 2100. A number of flights in Jet2's winter 2010 schedule had arrival and/or departure times outside of these published operating hours.

No agreement was reached and in a letter dated 29 October 2010 BAL stated that with effect from midnight on that day, it would not accept departures or arrivals scheduled outside its publicised operating hours. BAL also notified Jet2 that the approach radar facilities would be open only between 0900 and 1900. As a result of this, two of Jet2's flights which were due to arrive outside of the promulgated operating hours on the 30 and 31 October 2010 had to divert to Manchester airport.

The injunction

On 4 November 2010 Jet2 applied successfully to Hamblen J sitting in the Commercial Court for an injunction against BAL. By its terms BAL was ordered not to refuse to provide any of the services set out in the Agreement, nor to refuse to provide radar services in a manner equivalent to that provided to Jet2 in the preceding six months.

Jet2 then applied to continue the injunction to trial. At a hearing on 3 December 2010 Mr Justice Beatson concluded that BAL should continue to be subjected to an injunction pending an expedited trial. In coming to this decision Beatson J found that:

• In light of the dealings between the parties from 2006 the "dynamic status quo" would be maintained by allowing the injunction to continue.
• This was a case in which not granting the relief sought would cause more harm to the claimant than to the defendant. Jet2 would need to reschedule flights to fit BAL's proposed new operating hours which in turn could lead to flight cancellations or diversions to other airports, whereas, the defendant would only have to maintain the service that it had provided hitherto.
• Damages would not be an appropriate substitute for the injunction due to the unquantifiable reputational damage that might be occasioned to Jet2 and mindful also of the hardship suffered by passengers if Jet2 had to cancel and/or divert flights from Blackpool airport over the busy Christmas period.
• Jet2 had a strong arguable case that BAL's change of position involved a breach of contract. Beatson J suggested that ceasing to operate outside of the promulgated hours would go against the terms of the Agreement, "... to provide a cost base that will facilitate Jet2's low cost pricing".

The decision of the Commercial Court to allow the injunction to continue to trial gives some indication as to how the court may treat this case; however, observers will have to wait until the final outcome before any firm legal principles can be established. In the meantime, both airport operators and carriers should be mindful of the possible effect that loosely worded contractual agreements regarding the provision of airport services may have on obligation on their part to provide services outside of promulgated operating hours.

GENERAL RISKS CONVENTION (GRC) AND THE UNLAWFUL INTERFERENCE COMPENSATION CONVENTION (UICC)

The GRC and UICC were adopted by the International Conference on Air Law held at Montreal in April and May 2009. Under the UICC strict liability is imposed on aircraft operators for third party damage caused by an aircraft as a result of an act of unlawful interference. The GRC covers third party damage caused by an aircraft other than by an act of unlawful interference with an aircraft.  

Both conventions require 35 state ratifications in order to come into force. The UICC has the additional obstacle that ratifying states must have annual passenger numbers of 750 million before it becomes effective. South Africa became state party to both conventions on 30 September 2010. Nigeria became state party to the GRC on 8 October 2009. As of January 2011 ten states have signed the GRC. Eight have signed the UICC.  

The slow take-up rate of these conventions confirms reluctance on the part of many states to move away from reliance on existing domestic laws. US airlines in particular have made it known that they are not keen to trade in domestic laws that provide government-backed compensation for an international regime that exposes airlines to potentially uncapped (and potentially uninsurable) liability. The Conventions appear to be achieving greater support in less developed states, where existing domestic law protection for third party damage is limited.

VOLCANIC ASH AND COMPENSATION UNDER REGULATION 261

By Maria Galán

There could scarcely be a better example of meteorological conditions incompatible with the operation of flight than the effects of volcanic explosions resulting in blanket international flight bans affecting every airline. So found District Judge Trent in a recent case concerning flight cancellation due to the April 2010 eruption of Iceland's Eyjafjallajokull volcano.

Marshall v Iberia Líneas Aéreas de España S.A. (Mayor's and City of London County Court, 13 December 2010)

On 14 April Iceland's Eyjafjallajokull volcano erupted. There followed a progressive closure of European airspace and the grounding of most scheduled passenger air traffic within Northern Europe between 15 and 23 April 2010. The Marshalls argued that resulting cancellation of their scheduled flight from Madrid to London did not constitute "extraordinary circumstances" under Regulation 261...

The Marshall family purchased tickets with Iberia for flights from Guayaquil, Ecuador to London Heathrow via Madrid, departing on 17 April 2010. No claim was made in relation to the first leg of the journey from Ecuador to Madrid. However, their Madrid to London flight, scheduled to depart on 18 April, was cancelled. The family elected to make their own travel arrangements to London. Once home, they requested a refund from Iberia for their unused Madrid to London tickets. A refund was duly paid by the carrier. Request on the part of the family for compensation was rejected.

Separate proceedings were issued by Mr Marshall on the one hand and by his wife and children on the other. The legal basis of claim was alleged breach of contract and of Regulation (EC) No 261/2004. The Marshall family sought recovery of their costs of alternative travel arrangements to London, compensation of Euro 250 each (under Article 7 of Regulation 261) and unspecified damages in respect of alleged inconvenience. Following application by the defendant, the claims were consolidated and on reduction of the damages claimed, allocated to the small claims track.

Consideration of the evidence

The heart of the claimants' case rested on Mr Marshall's account of a conversation with an Iberia employee on duty at the customer service desk in Madrid airport on 18 April 2010. Having considered the witness evidence from both parties the judge held that Iberia, by its representative, did not refuse to fly the claimants or fail to offer an alternative flight as soon as one became available. Further, Iberia did not represent to the claimants that they were entitled to reimbursement in respect of their alternative travel arrangements, Iberia's representative did her best to assist the first claimant given his particular circumstances and the total uncertainty surrounding the timing of any opening of European airspace and the carrier's ability to recommence flights.

The legal findings

District Judge Trent found that there had been no breach of contract by reason of flight cancellation alone. Under the Regulation the family had the choice of being re-routed or making their own way home, accepting reimbursement of the unused tickets. They elected the latter. They were not entitled to the costs of their own transport arrangements: nowhere in the Regulation is it stipulated that carriers are obliged to fund passengers' alternative means of transport.

The core remaining issue was whether the claimants were entitled to compensation under the Regulation or breach of other contractual rights arising from the carrier's alleged failure subsequent to cancellation of the scheduled 18 April flight to transport them to London. Compensation under the Regulation is payable unless the carrier can prove that the flight cancellation is due to "extraordinary circumstances".

Mr Marshall argued that notwithstanding submission by Iberia supported by a considerable amount of press and regulatory material concerning the impact of the volcanic ash on European airspace, the defendant had failed to produce any official statement that this amounted to "extraordinary circumstances" under the Regulation. Mr Marshall advanced argument, inter alia, that European airspace had in fact remained open – to propeller aircraft. (Iberia took delivery of its first jet aircraft in 1961 and did not at the material time operate propeller aircraft. Whilst it did historically operate propeller aircraft, those that remain are now museum exhibits.) The judge held: "I have no hesitation in finding, on the balance of probabilities, that the defendant has proved that these circumstances represented known and unavoidable extraordinary circumstances which, by virtue of Art 5 (3) [of Regulation 261] exclude the Defendant from having to pay compensation under Article 7 (1) (a)." The claim was dismissed.

Maria Galan, Associate and Fellow of the Institute of Legal Executives acted for the defendant, Iberia Lineas Aereas de España S.A.

MACAU: MINIMUM AIR TRANSPORT PASSENGER RIGHTS

by Lee Tam

To provide increased protection of air passenger rights and to enhance Macau's aviation service industry Macau Special Administrative Region (SAR) is set to implement a new administrative regulation covering air passenger rights.

The Civil Aviation Authority of Macau (AACM) began drafting a new administrative regulation in 2008, stipulating minimum rights afforded to air passengers in cases of denied boarding, flight cancellation or delay. The provisions look set to be implemented this year.  

Macau is a Special Administrative Region (SAR) of China and is therefore permitted to introduce its own laws to include those concerning the rights of air passengers. In drafting the new administrative regulation reference has been made to air passenger rights laws and regulations applicable in Europe, USA, Canada and Brazil.  

The new regulation affords rights to (i) passengers departing from Macau International Airport, and (ii) passengers departing from an airport located outside Macau and flying into Macau International Airport, if the operating air carrier holds an air operator certificate issued by the AACM, unless passengers are afforded rights and assistance under available provisions in the place of departure.  

The following is a summary of relevant provisions under the current draft of the new administrative regulation.  

The new regulation also provides for financial penalties should air carriers fail to comply with their obligations.  

The initial drafting has been completed, followed by a one-month consultation period during which the AACM solicited views from local aviation and tourism sectors. The AACM is now reviewing the results and considering appropriate amendments. A final draft will then be produced. The new regulation is expected to be implemented during 2011 once the necessary legal procedures are completed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.