Charter Rules for Foreign Direct Air Carriers, 3158-3168 [05-1107]

Agencies

• Office of the Secretary
• DEPARTMENT OF TRANSPORTATION

[Federal Register Volume 70, Number 13 (Friday, January 21, 2005)]
[Proposed Rules]
[Pages 3158-3168]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-1107]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 212

[Docket No. OST-2002-11741]
RIN 2105-AD38


Charter Rules for Foreign Direct Air Carriers

AGENCY: Office of the Secretary.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department seeks comment on a proposal to revise its rules 
on charter operations. This proposal arises from a petition filed by 
the National Air Carrier Association (NACA). NACA seeks to make changes 
to the definitions and standards the Department uses to determine 
whether to grant or deny foreign air carrier requests to conduct 
certain types of international charter flights.
    The Department grants NACA's petition, and proposes to make some, 
but not all of the changes sought by NACA. The Department proposes to 
make revisions to definitions relating to charter types, and to modify 
the Department's current charter application form so as to require 
updated reciprocity information as well as numbers of U.S.-homeland 
services vs. U.S.-non-homeland services. The Department does not 
anticipate adopting NACA's requests to impose a reciprocity standard 
that ensures substantially equivalent opportunities for U.S. carriers 
in the homeland of the applicant, or to accord U.S. carriers a right of 
``first refusal'' over foreign carrier requests to conduct certain 
U.S.-originating charter operations.
    Specifically, the Department proposes to clarify the definition of 
``fifth freedom charter'' by adding definitions of ``sixth- and 
seventh-freedom charters.'' The Department also proposes modifications 
to OST Form 4540 (Foreign Air Carrier Application for Statement of 
Authorization). Specifically, the Department proposes to require an 
updated reciprocity statement by foreign carriers for a statement of 
authorization to allow us to ensure that our reciprocity standards have 
been satisfied and are properly supported. The Department also proposes 
to require that foreign carrier applicants for a statement of 
authorization include historical data relative to the applicant's U.S.-
home country operations to allow the Department to readily evaluate 
levels of third- and fourth-freedom versus fifth-, sixth-, and seventh-
freedom operations. This data will allow the Department to satisfy any 
concerns we might have as to the applicant's reliance on fifth-, sixth- 
and seventh-freedom operations. These proposed modifications will 
ensure that the Department has the most current information on the 
state of reciprocity for each foreign carrier applicant for fifth-, 
sixth-, or seventh-freedom charter authority.

DATES: Comments should be received by March 22, 2005. Late-filed 
comments will be considered to the extent practicable.

ADDRESSES: To make sure your comments and related material are not 
entered more than once in the docket, please submit them (marked with 
docket number OST-2002-11741) by only one of the following means:
    (1) By mail to the Dockets and Media Management, U.S. Department of 
Transportation, M-30, Room PL-401, 400 7th Street SW., Washington, DC 
20590.
    (2) By hand delivery to room PL-401 on the Plaza level of the 
Nassif Building, 400 7th Street SW., Washington, DC 20590, between 9 
a.m. and 5 p.m., Monday through Friday, except Federal holidays. The 
telephone number is 202-366-9329.
    (3) Electronically through the Web Site for the Docket Management 
System at https://dms.dot.gov. [Comments must be filed in Docket OST-
2002-11741, U.S. Department of Transportation, 400 7th Street SW., 
Washington, DC 20590.]
    Due to security procedures in effect since October 2001 on mail 
deliveries, mail received through the Postal Service may be subject to 
delays. Commenters should consider using an express mail firm to ensure 
the timely filing of any comments not submitted electronically or by 
hand.

FOR FURTHER INFORMATION CONTACT: Gordon H. Bingham, Office of 
International Aviation (X-40), U.S. Department of Transportation, 400 
7th Street, SW., Washington, DC 20590; (202) 366-2404.

SUPPLEMENTARY INFORMATION: Under current Department charter regulations 
in 14 CFR Part 212, foreign air carriers must obtain prior Department 
approval for all ``fifth-freedom'' charters. The standard for grant of 
such authority is a public interest test, with reciprocity on the part 
of the applicant's home country being the primary criterion. Under the 
Department's regulations, ``fifth-freedom'' charters include all 
charters operated between the U.S. and a third-country point, either 
via the foreign carrier's home country or absent any nexus to the 
foreign carrier's home country. Because almost all charter flights 
processed by the Department under Part 212 are conducted as point-to-
point services, in practice the ``no nexus'' case represents the norm.
    On March 4, 2002, NACA, on behalf of its member carriers (Air 
Transport International, American Trans Air, Express.Net Airlines, 
Falcon Air Express, Gemini Air Cargo, Champion Air, Miami Air 
International, North American Airlines, Omni Air International, Ryan 
International Airlines, USA 3000 Airlines, and World Airways, Inc.) 
filed a petition for rulemaking in which it requested that the 
Department change certain provisions of 14 CFR Parts 200 and 212. NACA 
asserted that the current definition of fifth-freedom passenger 
charters in Part 212 is inaccurate, and most of what the Department 
authorizes as fifth-freedom charters are in fact seventh-freedom 
operations because they involve no nexus with the foreign carrier's 
home country. NACA asserted that a true ``fifth-freedom'' charter would 
involve an airline carrying traffic that originates and terminates in a 
country other than its home country, provided the flight originates, 
terminates or changes gauge in the home country of the airline. 
Similarly, true ``sixth-freedom'' charters, according to NACA, involve 
the right of an airline to carry traffic that originates and terminates 
in a country other than its home country, provided the flight operates 
via the home country of the airline. NACA asserts that most foreign 
countries do not provide U.S. carriers reciprocal ``seventh-freedom'' 
passenger charter rights, and thus, the Department should scrutinize 
more closely the ``seventh-freedom'' charters it approves. Finally, 
NACA states that U.S. charter carriers have been adversely affected 
financially by competition from foreign carriers, particularly since 
the events of September 11, 2001, and that foreign carriers have been 
dumping their excess capacity into U.S. charter markets.
    To remedy its concerns, NACA proposes changes to the definitions 
and standards the Department uses in determining whether to grant or 
deny foreign air carrier requests to conduct certain types of 
international charter flights. Specifically, NACA requests that we (1) 
add to and amend the Part 212 definitions concerning charter types so 
as to ensure, inter alia, that what it

[[Page 3159]]

regards as seventh-freedom passenger operations are identified as such; 
(2) amend the existing Part 212 reciprocity standard so that prior 
approval requires a finding of ``substantially equivalent'' reciprocity 
in the charter market of the applicant's home country; (3) alter the 
Department's methodology for measuring fifth-freedom traffic so that it 
more accurately reflects the realities in the marketplace and provides 
the Department with a better basis for resolving ``undue reliance'' 
issues; and (4) accord U.S. carriers a right of ``first refusal'' with 
respect to U.S.-originating fifth-freedom (seventh-freedom) passenger 
charter flights.
    On March 21, 2002, the Department published a Notice in the Federal 
Register (67 FR 55, March 21, 2002) inviting interested parties to 
comment on NACA's petition. Comments to the petition were due May 6, 
2002, and reply comments were due by June 4, 2002.

Comments of Interested Parties

    The Department received a large number of comments in response to 
NACA's petition. A complete summary of those comments follow.

Comments Filed in Support for NACA's Petition

    Comments in support of NACA's petition were filed by eight NACA-
member carriers and approximately 1,600 employees from two NACA-member 
carriers. Other comments in support of NACA's petition were filed by 
the International Brotherhood of Teamsters (IBT), the Air Line Pilots 
Association (ALPA) and the Aviation Suppliers Association, MLT 
Vacations Inc. (a U.S. indirect air carrier), Eagle Aircraft Supply and 
AAR Aircraft Services(aircraft sales and service companies), and P&C 
Engineering Consultants. Sen. Ernest F. Hollings (D-SC), Rep. John L. 
Mica (R-FL), Rep. William O. Lipinski (D-IL), Rep. Jerry Moran (R-KS), 
Rep. Jim Ryun (R-KS), Rep. Todd Tiahart (R-KS), Rep. Brad Carson (D-
OK), and Rep. John Sullivan (R-OK), have written the Department urging 
us to review NACA's recommendations and, if warranted, make changes to 
our charter rules that give foreign airlines an unfair competitive 
advantage over U.S. carriers. Senator Hollings requests that we support 
the changes proposed by NACA.
    NACA's supporters argue, generally, that the Department's current 
charter regulations undermine the ability of U.S. carriers to compete 
commercially; that limited fifth-freedom opportunities exist for U.S. 
carriers abroad; and that adopting a ``first refusal'' policy would 
promote U.S. charter viability. They believe that (1) NACA's proposals, 
if adopted, will remove the anomaly under which seventh-freedom 
passenger charter flights by foreign carriers are defined and regulated 
by the Department as fifth-freedom charter flights; (2) the 
Department's approval of large seventh-freedom charter programs (which 
the supporters believe are often indistinguishable from scheduled 
service) is contrary to the Department's longstanding policy of not 
granting scheduled seventh-freedom scheduled rights to foreign 
carriers; (3) the Department's definition of fifth-freedom charter 
flights is inconsistent with definitions used by our foreign trading 
partners for similar charter services and should be corrected; (4) U.S. 
carriers are placed at a competitive disadvantage when the Department 
provides economic opportunities to foreign carriers that exceed rights 
the U.S. has negotiated for U.S. carriers; and (5) the Department 
should revise filing procedures for its T-100 reporting data to more 
accurately measure levels of foreign carrier third- and fourth-freedom 
operations versus levels of fifth-freedom operations.
    Commenters supporting NACA's petition also share NACA's view that 
the Department should give U.S. charter carriers ``first refusal'' 
rights to assist the ability of U.S. carriers to compete commercially 
and to remain viable supporters of the Civil Reserve Air Fleet (CRAF) 
program. They also believe that current DOT practice favors U.S. 
scheduled carriers by subjecting U.S. charter carriers to competition 
by foreign carrier charter operators while protecting U.S. scheduled 
carriers against competition by not allowing seventh-freedom scheduled 
operations by foreign carriers. They believe that because comparable 
rights for U.S. carriers may not be available in the home country of an 
applicant foreign carrier, ``first refusal'' would place U.S. charter 
carriers on an equal footing with U.S. scheduled carriers. They also 
state that ``first refusal'' would not interfere with foreign carrier 
third and fourth-freedom charter services, and will allow foreign 
carriers to conduct U.S.-originating seventh-freedom charters where no 
U.S. carrier lift is available. The IBT believes that ``first refusal'' 
should be extended to cover U.S.-originating seventh-freedom all-cargo 
charter flights as well.
    Many of the commenters agree with NACA that the Department's 
reciprocity test does not go far enough because it does not take into 
account whether a commercially viable charter market actually exists in 
a foreign carrier's home country. They point out that the Department's 
existing reciprocity test requires nothing more than the apparent 
willingness of a foreign government to grant fifth-freedom charter 
rights to U.S. carriers, regardless of the size of the market or the 
existence of meaningful charter opportunities in the market. They 
believe that NACA's proposal will bring clarity to the standards for 
demonstrating reciprocity which they believe should be based on 
measurable traffic volumes or ``substantial equivalency''.
    Other commenters suggest that foreign carriers enjoy a cost 
advantage over U.S. carriers because foreign carriers enjoy lower 
safety and security requirements and that cost and time burdens 
associated with the disparate safety and security requirements place 
U.S. carriers at a competitive disadvantage.

Comments Filed in Opposition to NACA's Petition

    NACA's petition is opposed by the Air Transport Association (ATA); 
three trade associations (Airports Council International-North America, 
United States Airports for Better International Air Service, and the 
Washington Airports Task Force); seven U.S. indirect air carriers (Cuba 
Travel Services, Marazul Charters, Inc., TNT Vacations, Suntrips, Inc., 
Vacation Express, GWV Travel, and the Apple Companies); Atlas Air, Inc. 
(a U.S. all-cargo carrier); Port of Portland (a U.S. airport operator); 
eleven foreign direct air carriers (Condor Flugdienst, Grupo TACA 
representing six foreign carriers from Latin America; Skyservice 
Airlines, Inc., Lineas Aereas Allegro, S.A. de C.V., Antonov Design 
Bureau, and JMC Airlines Limited); and one individual.
    Those opposing NACA's petition maintain that U.S. charter carriers 
provide the majority of flights in the U.S.-origin charter market in 
spite of the number of U.S-originating charter flights by foreign 
carriers authorized by the Department. They state that based on charter 
approval numbers offered by NACA, Department approvals of U.S.-
originating charter flights by foreign carriers (with no home country 
nexus) since 1999, amount to less than seven flights per day throughout 
the U.S. TNT Vacations states that over the past several years it has 
been increasingly difficult to locate lift at rates enabling it to 
offer charter packages at prices competitive with vacation packages 
available through scheduled service. TNT states that the ``saving 
grace'' has been the competition provided by non-U.S. carriers in both 
home country- and

[[Page 3160]]

non-home country markets. TNT further states that NACA-member carriers 
have received over $90 million in taxpayer support under compensation 
legislation related to the events of September 11, 2001, and now, 
through NACA's petition, seek to impose additional financial burdens on 
the traveling public in the form of higher international charter 
prices.
    ATA, the principal trade association of the U.S. scheduled airline 
industry (representing 21 U.S. carrier members and 4 foreign carrier 
associate members), believes that adoption of NACA's recommendations 
would effectively re-regulate international charter services, a result 
its membership opposes. ATA supports the current U.S. policy of placing 
maximum reliance on competitive forces to determine price, level and 
quality of air transportation services. ATA (as well as other 
commenters), opposes NACA's efforts to add new operating restrictions 
to charter services, whether by redefining definitions or by any other 
means, believing that any restrictions adopted by the United States 
will be applied reciprocally to U.S. carriers around the world. ATA 
contends that NACA's request for commercial equivalency is inconsistent 
with U.S. reliance on competition and should be rejected, arguing that 
U.S. aviation policy is intended to open foreign markets to 
competition, not to guarantee reciprocal access to similarly-sized 
markets for U.S. carriers. It argues that the Department's resources 
should not be used to protect U.S. carriers from foreign competition 
merely because a particular home country market is small, but should be 
used to open restricted markets to both U.S. charter and scheduled 
carriers. It states that NACA's request for ``first refusal'' is 
inconsistent with longstanding Department policy and U.S. efforts to 
liberalize the global aviation market, and, like Atlas Air, believes 
that vigorous enforcement of the public interest factors currently used 
by the Department are sufficient to ensure fair treatment of U.S. 
carriers without having to resort to ``first refusal''.
    GWV states that while U.S. carriers have long been an integral part 
of its charter programs, it has been unable to obtain sufficient and 
competitively priced lift from U.S. carriers ``alone'' to meet its 
operational needs. GWV further stated that charter operators develop 
charter markets to serve a particular leisure market at the most 
economical cost, and adds that careful selection of aircraft, schedules 
and competitive rates are vital to a charter program's success. In that 
regard, foreign carriers play an ``indispensable'' role in supporting 
U.S. public charter programs and that adoption of NACA's petition would 
have a ``chilling'' effect on the willingness of foreign carriers to 
invest time or resources in bidding for U.S. tour operator charter 
contracts. GWV adds that if the Department adopts NACA's 
recommendations, and substitutes its judgment for the business judgment 
of GWV and other tour operators, it should also be prepared to assume 
the financial consequences and costs that could result from such a 
change.
    Many of the commenters believe that the regulatory modifications 
NACA seeks are not necessary and can be better addressed by the 
Department through vigorous enforcement of existing regulations rather 
than by amending the current regulatory structure. They also suggest 
that NACA's concerns can be resolved through, among other things, 
Department efforts to ensure that foreign governments do not impede the 
ability of U.S. carriers to operate charter services, and by monitoring 
foreign carrier services to ensure that they do not place undue 
reliance on non-home country (fifth-freedom) charter operations. Atlas, 
as well as others, suggest that we should reject both NACA's call for 
an ``equivalency test''--which Atlas believes would preclude foreign 
carriers from small countries from operating any third-country 
charters--as well as its request to give U.S. carriers ``first 
refusal,'' which would invite foreign governments to apply a similar 
retaliatory policy against U.S. carrier charter operations. Airports 
Council International-North America (ACI-NA), United States Airports 
for Better International Air Service (USA-BIAS), and the Washington 
Airports Task Force (WATF) strongly oppose NACA's request. ACI-NA, on 
behalf of 53 U.S. participating airports, opposes NACA's petition, 
arguing that it would be detrimental to a wide range of U.S. interests. 
ACI-NA maintains that NACA's request for commercial equivalency focuses 
only on airline benefits and ignores the interests of airports and 
their local economies, and the traveling and shipping public. 
Similarly, ACI-NA, like many of the commenters opposing NACA's 
petition, rejects NACA's call for ``first refusal,'' stating that 
implementation of such a practice would take away a charterer's ability 
to negotiate the service which best meet its needs, and ultimately 
result in the loss of U.S.-originating charter programs because they 
would be priced out of the market. The loss of these programs would, in 
ACI-NA's view, be damaging to the traveling public, tour operators, 
U.S. airports and the local economies they serve. USA-BIAS, on behalf 
of 14 U.S. airports, states that NACA's petition looks only at the 
narrow mercantile needs of its members and ignores the greater good 
that international mobility brings to the U.S. economy, U.S. cities, 
U.S. businesses and the traveling public. USA-BIAS states that it sees 
no need for the ``hyper-regulatory'' approach sought by NACA, 
suggesting that the Department possesses ample tools under its existing 
regulatory framework to assess the public interest. ACI-NA, USA-BIAS 
and WATF all believe that fifth-freedom charter services provide U.S. 
airports with an opportunity to obtain new or competitive international 
air services and oppose any new regulations that would add restrictions 
to the ability of foreign air carriers to provide new services on 
international routes.
    WATF states that history has demonstrated that the people and the 
economy of the United States benefit from a free and open air service 
market, rather than from arrangements which confer commercial benefits 
on a specific class of U.S. carrier. WATF further states that it would 
be ``a gross irony'' for the United States to accept the offending 
aspects of the NACA petition as it strives to negotiate ever more 
liberal air service agreements with foreign governments.
    The Port of Portland expresses its interest in expanding 
international air services at its airport and is opposed to any 
initiative to make the addition of new international services more 
difficult, noting that Portland enjoyed the charter services of a 
foreign carrier passenger charter program to Cancun during the past 
winter season. Portland supports the strong opposition to NACA's 
request set forth in the comments of Atlas and Condor, a foreign 
carrier from Germany.
    As noted above, eleven foreign carriers filed in opposition to 
NACA's petition. Condor Flugdienst (Germany), Grupo TACA (representing 
six foreign carriers from Latin America), Skyservice Airlines, Inc. 
(Canada), Lineas Aereas Allegro (Mexico), Antonov Design Bureau 
(Ukraine), and JMC Airlines Limited (United Kingdom). All believe that 
NACA's proposal is anticompetitive and, if adopted, would deprive the 
Department of its ability to consider the needs of all aviation and 
aviation-related entities.
    Condor Flugdienst (Condor) states that if the Department adopts 
NACA's recommendations, the Department will

[[Page 3161]]

be retreating from its support of liberalization as the cornerstone of 
U.S. aviation policy by urging trading partners to embrace open skies 
and move away from ``balance'' as a guide for trading opportunities. 
Condor states that NACA should be careful of what it asks for, noting 
that if ``economic balance'' is scrutinized, there is large category of 
traffic where non-U.S. carriers are unable to compete because such 
arrangements are prohibited under FAA rules (specifically, the wet 
leasing of aircraft to U.S. carriers). Condor believes that the ability 
to wet lease aircraft is of greater value than the seventh-freedom 
charter flight issue NACA raises, and is particularly unfair given that 
U.S. carriers face no similar restrictions from foreign regulatory 
authorities when they wet lease aircraft to foreign carriers. Condor 
also believes that NACA would be concerned if foreign governments were 
to apply a strict ``reciprocity'' test with respect to such wet-lease 
services against U.S. carriers.
    Grupo TACA argues that changing the name of what the Department 
defines as fifth-freedom charters to seventh-freedom charters would 
neither alter the nature of the subject charter operations nor would it 
impair the underlying justification for the Department's granting them. 
Grupo TACA states that NACA's efforts to create a commercial 
equivalency test would effectively prevent airlines from smaller 
countries from participating in the charter business while at the same 
time facing daily competition in their home countries from large U.S. 
scheduled and charter carriers.
    Skyservice Airlines, Inc. (Skyservice), a foreign air carrier from 
Canada, states that the liberal and pro-competitive environment between 
the United States and Canada has benefited carriers of both sides, 
noting that during calendar years 1999-2001, the Canadian Transport 
Authority (CTA) approved requests by U.S. carriers to operate a total 
of 371 fifth-freedom charter flights (passenger and cargo) to and from 
Canada. Skyservice believes that these services have benefited both the 
traveling and shipping public in both the United States and Canada and 
should not be overlooked in the context of NACA's petition. Skyservice 
also questions NACA's ``equivalency'' test and asks if the Canada 
market would qualify as ``substantially equivalent,'' and if not, which 
nation would. Skyservice disagrees with NACA's contention that foreign 
carriers enjoy cost or regulatory advantages over U.S. carriers.
    Lineas Aereas Allegro S.A. de C.V (Allegro) states that the 
Department's charter policy is well-founded and applied responsibly, 
and therefore, it is not necessary to redefine the various charter 
types as NACA requests. Allegro further states that NACA's 
``equivalency test'' would be burdensome to implement and could 
effectively prevent foreign carriers from operating any fifth-freedom 
charter flights in U.S. markets. Allegro also believes that the relief 
sought by NACA only considers the effect of its request on U.S. charter 
carriers rather than the aviation industry as a whole. Allegro states 
that NACA's suggestion that foreign carrier services to and from the 
United States do not meet U.S. safety standards is unfounded and that 
NACA provides no empirical data to support its claim. Allegro also 
disagrees with NACA's suggestion that the Department should revise the 
requirements for traffic data submitted by foreign carriers, believing 
that instead of relying on T-100 data, the Department would be better 
served by comparing the actual number of third/fourth-freedom flights 
with the number of fifth-freedom charter flights during a specified 
time period.
    Antonov Design Bureau (Antonov) believes that the Department's 
rules require that the Department's actions on foreign carrier charter 
flight requests to and from the U.S. to points other than the 
operator's home country are reviewed and based on reciprocity and 
defined public interest principles, and that NACA's distinction of 
``fifth'' versus ``seventh'' is a distinction without a difference.
    JMC Airlines Limited (JMC) states that NACA's petition is contrary 
to the interests of the traveling public and is designed to eliminate 
competition by disqualifying non-U.S. carriers from conducting fifth-
freedom charter flights. JMC believes that by adopting NACA's petition, 
the Department would effectively lose the ability to consider the 
interests and needs of other beneficiaries of charter services when 
considering fifth-freedom charter requests by non-U.S. carriers.
    The U.S. indirect air carriers mentioned above oppose NACA's 
petition, believing it would have severe repercussions for their 
industry and the traveling public, in the form of higher charter prices 
and reduced service options. They believe that NACA's petition is 
designed to carve out an exclusive market for NACA members and reduce 
competition by barring foreign carriers from U.S. charter markets 
through NACA's ``first refusal'' or ``equivalency test.'' If adopted, 
NACA's proposal would make scarce resources scarcer and cause charter 
prices to escalate, especially in Caribbean markets where some 
countries have no carrier able to provide third/fourth-freedom 
competition against large U.S. scheduled and charter carriers. They 
also argue that NACA's proposal would have a ``chilling'' effect on 
competition because non-U.S. carriers will not expend time or resources 
pursuing U.S.-third country traffic when such opportunities could be 
lost to a less competitive bidder under a ``first refusal'' policy, 
ultimately diminishing the ability of indirect air carriers (tour 
operators) to select the direct air carrier which best meets their 
needs.

Reply Comments

    Reply comments were filed by NACA, the Transportation Trades 
Department of the AFL-CIO (TTD), Amerijet International, Inc. (a U.S. 
all-cargo carrier), three foreign air carriers (Antonov, Air 2000 
Limited, and Allegro), the Apple Companies and 15 ARC-accredited travel 
agencies.

Reply Comments in Support of NACA's Petition

    NACA believes that some of the commenters did not understand that 
the proposed changes are narrow in scope, while other commenters 
``vastly exaggerate'' the impact its proposed changes would have if 
adopted. NACA states that its petition does not seek to re-regulate or 
restrict competition and is intended to create fair and equal 
regulatory treatment of U.S. charter and scheduled passenger carriers 
with regard to seventh-freedom operations by foreign carriers. NACA 
states that the Department has established a ``dichotomy'' of 
regulatory treatment by giving the larger and stronger U.S. scheduled 
carriers preferential regulatory treatment over the smaller and weaker 
U.S. charter carriers by approving virtually all foreign carrier 
seventh-freedom charter requests, while at the same time enforcing a 
strict policy against allowing foreign carriers to operate seventh-
freedom scheduled flights.
    NACA states that it does not believe that foreign governments will 
take retaliatory action against U.S. carriers if its proposals are 
adopted, nor does it believe that all of its concerns can be resolved 
through vigorous enforcement of existing rules, as many of the 
commenters state. NACA maintains that failure to correct existing 
policies could have serious financial consequences on U.S. charter 
carriers and result in possible national security concerns if

[[Page 3162]]

U.S. charter carrier contributions to CRAF are diminished.
    The TTD, on behalf of the 34 transportation unions it represents, 
supports NACA's petition and states that the Department's practice of 
granting foreign carrier seventh-freedom charter requests weakens U.S. 
charter carriers through lost revenues, and, therefore is a threat to 
the viability of U.S. charter carrier industry. TTD supports NACA's 
request that the Department subject foreign carrier charter requests to 
a substantial reciprocity test as well as granting U.S. carriers 
``first refusal'' rights on foreign carrier seventh-freedom charter 
requests. TTD believes that by adopting NACA's recommendations the 
Department will establish a meaningful standard for reforming current 
regulations which TTD believes unfairly penalize U.S. charter carriers 
and their employees.
    Amerijet International, Inc. (Amerijet) also supports NACA's 
proposal and believes that a review of the Department's charter 
regulations should be undertaken to insure that their impact is 
consistent with the goals of the Department and the Congress. Amerijet 
contends that the Department has abandoned its longstanding policy of 
not allowing foreign carriers to place undue reliance on fifth-freedom 
services, and suggests that the NACA's petition serves to strengthen 
that policy. Amerijet further states that following the events of 
September 11, Congress made it clear that the U.S. carrier industry 
requires a level of protection, and argues that that is all NACA and 
its supporters are seeking in this proceeding.

Reply Comments in Opposition to NACA's Petition

    The Apple Companies, ARC-accredited travel agencies, and three 
foreign air carriers are unanimous in their reply comments in 
opposition to NACA's petition.
    The Apple Companies state that the parties supporting NACA's 
petition represent a narrow sector of the industry; that those opposing 
NACA's petition are unanimous in their view that current regulatory 
mechanisms are sufficient to protect the public interest and that the 
overall interests of U.S. aviation would be severely damaged by NACA's 
protectionist and anticompetitive proposal; and, that foreign carrier 
fifth-freedom charter operations represent a small portion of all 
Public Charter flights operated annually in the United States.
    The travel agencies believe that the changes proposed by NACA will 
eliminate competition and either increase prices or reduce the 
availability of charter vacation packages, to the detriment of the U.S. 
travel agent community. The agencies further support the Department's 
longstanding policy of letting the market set the price and quality of 
charter transportation services.
    Antonov notes that while only NACA members and certain labor 
interests filed in support of NACA's request, groups such as tour 
operators, U.S. airports and cities with interests closely aligned with 
the needs of consumers and the traveling public oppose NACA's petition. 
Antonov concurs with the comments filed in opposition to NACA's 
request, and agrees with comments of USA-BIAS, Suntrips Inc., Vacation 
Express, and ATA, which Antonov believes are representative of the 
aviation community which stands to lose the most if NACA's petition is 
adopted.
    Like Antonov, Allegro states that an analysis of the comments filed 
in response to NACA's petition suggests that NACA's petition enjoys 
little support outside its membership and the employees of some of its 
members, while a much broader cross-section of the aviation community 
opposes NACA's petition. Allegro believes that NACA's petition is 
anticompetitive and would ultimately reduce competition between U.S. 
and foreign carriers in the U.S. charter market to the detriment of the 
U.S. traveling public.
    Air 2000 Limited (Air 2000) states that NACA's petition is contrary 
to international aviation policy and the interests of U.S. shippers, 
airports and the traveling public. Air 2000 further states that NACA's 
equivalency test would disadvantage U.S. airlines and U.S. workers, its 
``first refusal'' proposal is anti-consumer and anticompetitive, and 
revision of the definitions of the freedoms of the air would lead to 
protecting only U.S. charter carriers from foreign carrier competition.

Overview

    In its petition, NACA maintained that foreign air carrier charter 
flights generate more benefit to the foreign carrier industry than the 
U.S. carrier industry. It asserted that these flights now threaten the 
survival of some of its members and weaken their ability to serve the 
national defense.
    NACA proposes a number of remedies to address this situation, 
including; revision of the definition of fifth-freedom charters; 
adoption of a new, more restrictive reciprocity standard; and, creation 
of an amendment to our regulations that would provide U.S. carriers 
with a right of ``first refusal'' for certain U.S.-originating 
passenger charter flights. In other words, ``first refusal'' in that 
context would mean the right to prevent a foreign carrier from 
operating any U.S.-originating fifth-freedom passenger charter (under 
our existing definition) that a U.S. carrier wants to operate.
    After carefully examining the comments and information in the 
record, we have tentatively determined that it is in the public 
interest to make modifications to Part 212 that would improve our 
ability to assess the merits of applications filed under that Part.

Background

    Our bilateral aviation agreements do not cover the passenger 
charter services that are at issue in this proceeding; \1\ therefore, 
U.S. and foreign carriers operate these services only at the discretion 
of the U.S and foreign governments. The Department's regulations 
require foreign airlines to apply for permission to operate fifth-
freedom charters (14 CFR 212.9), and establish a ``public interest'' 
standard for considering these foreign carrier requests (Sec.  
212.11(a)).
---------------------------------------------------------------------------

    \1\ A number of our agreements state the parties will give 
favorable consideration to such charters on the basis of comity and 
reciprocity. While this certainly reflects a spirit sympathetic to 
approval, it does not formally bind the parties to such a result.
---------------------------------------------------------------------------

    Reciprocity on the part of the applicant's home country is the 
primary criterion for approval (Sec.  212.11(b)(2)). The Department 
also examines other factors that may be relevant in specific cases (for 
example, the extent of the applicant's reliance on fifth-freedom 
operations in relation to its third- and fourth-freedom services). In 
making its public interest determination, the Department's approach 
consistently has been to look not only to the interests of U.S. charter 
carriers, but also to consider the needs and concerns of other parties 
affected by its decision, notably the tour operator (frequently a U.S. 
company), and members of the traveling public (often U.S. citizens). 
The Department's longstanding policy has been to give charterers the 
maximum flexibility possible to choose the airline services that best 
meet their needs. The Department repeatedly has rejected according U.S. 
carriers a right of ``first refusal''.
    NACA asserts that the Department has permitted foreign airlines to 
operate an excessive number of fifth-freedom passenger charter flights 
under Part 212, and that our actions have harmed its members and 
undermined their ability to serve the national defense. NACA

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also maintains that the effects of the events of September 11, 2001, 
have aggravated that harm and adverse impact on national defense, and 
that foreign governments do not provide NACA members with reciprocal 
charter opportunities. NACA has proposed several changes to Department 
rules to meet its concerns. Specifically, it asks the Department to:
     Add to and amend the Part 212 definitions concerning 
charter types so as to ensure, inter alia, that what it regards as 
seventh-freedom passenger operations are identified as such;
     Amend the existing Part 212 reciprocity standard so that 
prior approval requires a finding of ``substantially equivalent'' 
reciprocity in the charter market of the applicant's home country;
     Alter the Department's methodology for measuring fifth-
freedom traffic so that, in NACA's view, it more accurately reflects 
the realities in the marketplace and provides the Department with a 
better basis for resolving ``undue reliance'' issues; and
     Accord U.S. carriers a right of ``first refusal'' with 
respect to certain U.S.-originating fifth-freedom (seventh-freedom) 
passenger charter flights.

Discussion

Proposed Modifications to OST Form 4540 and Amendments to Part 212

    We are proposing two changes to Part 212 that are intended to 
improve our ability to assess the merits of applications filed under 
that Part. We believe that these changes will enhance the Department's 
decision-making process without imposing an undue burden on applicants 
or affecting the public benefits that our rules now provide.
    First, we propose to amend the application form for charter 
applications (OST Form 4540) as regards the information to be provided 
on reciprocity. Specifically, we will add a note to the reciprocity 
section of OST Form 4540 to establish, as an express requirement for 
approval, that the applicant explicitly provide evidence that it has 
verified that its home country government would accord reciprocal 
treatment to comparable U.S. carrier requests. We will also require 
that the applicant provide the date of such verification and with whom 
the verification was made. This verification must come from an official 
of the government of the homeland of the applicant.
    Because we recognize that some applicants may file multiple 
requests within a limited period, we will not require that each 
successive request entail a new effort to secure the needed 
verification. Under normal circumstances, we would consider 90 days a 
reasonable period to rely on a previously-filed verification of 
reciprocity, and our amendment to OST Form 4540 would so indicate. Of 
course, if intervening events give cause to doubt the continuing 
validity of such verification, we will expect applicants to seek a new 
verification, even if their subsequent request is submitted within 90 
days of a previous verification. Alternatively, we may advise them of 
our inability to complete the processing of their application absent a 
new reciprocity verification.
    Second, we propose to amend OST Form 4540 to require applicants to 
provide additional information regarding the extent to which they are 
relying on fifth-freedom charter services to and from the United States 
in relation to their overall services to and from the U.S. As noted 
earlier, although this relationship is an important public interest 
consideration in our determination of the merits of applications for 
fifth-freedom charter authority, a number of commenters have expressed 
concern that some applications for such authority do not contain facts 
that adequately address this issue. In response to those concerns, we 
propose to amend OST Form 4540 to expressly require that in Box 13 
designated for ``Other information requested by DOT,'' (or, at the 
applicant's preference, in a cover letter or attachment) applicants 
shall specify the number of third- and fourth-freedom flights they have 
provided over the preceding calendar year.\2\ This information should 
be presented with sufficient clarity for any commenting parties and the 
Department to readily evaluate the proposed services against the 
historical data. Failure to provide the necessary information would be 
expected to affect the processing of the application.
---------------------------------------------------------------------------

    \2\ We are not, however, adopting NACA's proposal that we make 
methodological changes regarding our T-100 traffic data. We 
traditionally have based our undue reliance determinations on 
flights rather than traffic, and NACA has presented no persuasive 
reason to alter that approach.
---------------------------------------------------------------------------

    We also propose revisions to our definitions. NACA asserts that 
many of the flights fitting our definition of fifth-freedom charters in 
Sec.  212.2 in fact would be understood throughout the world as 
``seventh-freedom'' charter flights because ``they do not carry paying 
passengers to, from, or via the homeland of the carrier.'' \3\ NACA 
argues that it is misleading, confusing and bad policy for the 
Department to continue to call all passenger charter flights that serve 
countries other than the carrier's home country as ``fifth-freedom'' 
charters.\4\
    While we could point to various commenters who contend that the 
charter community is so familiar with our longstanding regulatory 
nomenclature as to render confusion unlikely, we nevertheless conclude 
that even a limited degree of confusion is best avoided. Accordingly, 
we propose to expand the definitions in Sec.  212.2 to expressly 
differentiate between fifth-, sixth-, and seventh-freedom charters.
---------------------------------------------------------------------------

    \3\ NACA Petition, at 4.
    \4\ Id., at 5.
---------------------------------------------------------------------------

Vision 100--Century of Aviation Reauthorization Act

    Our proposed revisions to Part 212 are consistent with Section 820 
of the recently signed Vision 100-Century of Aviation Reauthorization 
Act (the Act). Specifically, Section 820 of the Act provides the sense 
of Congress that the Department should ``formally define `Fifth 
Freedom' and `Seventh Freedom' consistently for both scheduled and 
charter passenger and cargo traffic.'' As noted above, we are proposing 
to expand the definitions in Part 212 to differentiate between fifth-, 
sixth-, and seventh-freedom charters. The revisions we propose will 
apply to both passenger and cargo services and will standardize the 
definitions used by the Department for both scheduled and charter 
services.

Other Issues

    While we are proposing the changes outlined above in response to 
NACA's petition, we have concluded that the record does not provide 
justification for adopting other changes proposed by NACA, as they 
would in our view significantly reduce other important public benefits 
now provided by our fifth-freedom charter rules. Therefore, we do not 
anticipate adopting NACA's proposal to require a finding of 
``substantially equivalent reciprocity'' in the charter market of the 
applicant's home country, or to accord U.S. carriers ``first refusal'' 
for U.S.-originating fifth-freedom (seventh-freedom) passenger charter 
flights. As more fully discussed below, we believe that the adoption of 
either of these changes would not be in the public interest.
    Part 212 allows U.S. tour operators to hire foreign airlines that 
meet the requirements of that Part to provide foreign air 
transportation for the tour operators. While U.S. tour operators rely 
primarily on U.S. airlines for air service, they also use the option 
provided by our rules to use the services of foreign

[[Page 3164]]

carriers in third-, fourth-, and fifth-freedom markets. The tour 
operators have demonstrated that this option enhances their ability to 
compete with airlines and cruise ship operators in the highly 
competitive discretionary travel markets. We also recognize that tour 
operators have made an important contribution to competition by 
offering attractive price and service alternatives to the marketplace.
    By contrast, it is likely that the changes proposed by NACA would 
inhibit competition in markets served by U.S. tour operators. This is 
especially true to the extent that they would prevent tour operators 
from using foreign airlines by requiring, for example, the latter to 
obtain NACA's permission before they may provide transportation for 
U.S. tour operators in certain fifth-freedom and seventh-freedom 
markets.
    In calendar year 2001, the Department authorized foreign airlines 
to provide 1490 roundtrip fifth-freedom charters on behalf of U.S. tour 
operators, or fewer than five roundtrip fifth-freedom charters per 
day.\5\ Yet, this relatively small number of authorizations is 
important to a number of foreign airlines and their home countries. In 
these circumstances, our rules promote good aviation relations with 
other nations and support a liberal aviation environment that has 
benefited our citizens and airline industry overall. This point is 
illustrated by the fact that in 2001 we authorized airlines from Mexico 
and Central America to provide 512 fifth-freedom roundtrip charters, 
while U.S. airlines were providing nearly 140,000 flights--and carrying 
two-thirds of the cargo and passenger traffic--in the U.S.-Mexico/U.S.-
Central America aviation markets.\6\
---------------------------------------------------------------------------

    \5\ Foreign air carrier applications for statements of 
authorization under 14 CFR Part 212 are on file in the Department's 
Foreign Air Carrier Licensing Division, Room 6412, 400 7th Street, 
SW., Washington, DC 20590.
    \6\ Form T-100 data on file with the Department.
---------------------------------------------------------------------------

    Furthermore, as the Air Transport Association (ATA), airlines, and 
other concerned parties have pointed out, NACA's proposal could invite 
retaliation against U.S. airlines by foreign governments because it 
could remove valuable fifth-freedom charter opportunities now enjoyed 
by their airlines. U.S. airlines providing scheduled service would be 
vulnerable to retaliation because of the huge stake they have in the 
bilateral aviation markets that would be affected. Also, such action 
would expose U.S. airlines providing wet-lease services to foreign 
airlines to a serious risk of harm because they are major providers of 
wet-lease services around the world and because those services are 
operated completely at the discretion of foreign governments.
    The essence of NACA's position is that our rules permit foreign 
airlines to conduct business in markets that should be reserved only 
for U.S. airlines; however, the business which NACA is referring to 
involves the provision of service to tour operators, many of which are 
U.S. companies. Most of the tour operators participating in this 
proceeding commented that there is no need to make major changes to our 
fifth-freedom rules, and that those changes proposed by NACA would be 
harmful to both their interests and competition. We believe that the 
weight of the evidence supports that position.
    NACA maintains that competition from the foreign charter operators 
hired by U.S. tour operators has harmed NACA members and has undermined 
their ability to serve the national defense. Our data shows, however, 
that the number of fifth-freedom charter flights authorized by the 
Department amount to a small percentage of the flights that NACA 
members operate. In calendar year 2001, for example, that number was 
less than 6% of the total number of civilian charters that NACA 
carriers operated and reported to the Department. It is likely that 
those authorizations had a smaller impact on NACA members than 
Department records indicate, considering that: (1) It is likely the 
foreign airlines did not use all of the authorizations for which they 
obtained Department authority; (2) NACA members operated a large number 
of military charters that are not reported to us; and, (3) NACA members 
have benefited from the extensive fifth-freedom opportunities provided 
by other governments.
    NACA maintains that the rules have created a large aviation trade 
deficit with other nations because our fifth-freedom charter markets 
are significantly larger. We disagree. As noted above, our charter 
rules have supported a liberal aviation environment that has allowed 
U.S. airlines to capture traffic and revenues far in excess of the 
traffic and revenues that have been achieved by foreign airlines 
operating fifth-freedom flights, and has permitted our airlines to take 
advantage of the extensive fifth-freedom and wet-lease opportunities 
provided by other governments.
    NACA also contends that the rules discriminate against its members 
because our rules prohibit ``all 7th freedom scheduled passenger 
flights by foreign carriers,'' while permitting what NACA refers to as 
seventh-freedom charter flights by foreign carriers. We disagree with 
this contention. The international aviation industry is still heavily 
regulated. Most governments believe that charter service and scheduled 
service are in separate product markets; therefore, they have created 
different opportunities and have imposed different restrictions on each 
class of service. Thus, while most nations permit U.S. airlines to 
operate charter flights between their home countries and third 
countries, they prohibit U.S. airlines from providing scheduled service 
between their home countries and third countries. Our rules reflect the 
realities of the still-regulated international aviation system. While 
we would prefer to have a situation that imposes no restrictions on 
international aviation services, we note the existing situation has 
provided U.S. charter airlines with advantages that are not afforded to 
U.S. scheduled airlines.

Regulatory Analyses and Notices

    All comments received before the close of business on the comment 
closing date indicated above will be considered and will be available 
for examination in the docket at the above address. Comments received 
after the comment closing date will be considered to the extent 
practicable. In addition to late comments, the Department will also 
continue to file relevant information in the docket as it becomes 
available after the comment period closing date, and interested persons 
should continue to examine the docket for new material.
Executive Order 12866 (Regulatory Planning and Review) and DOT 
Regulatory Policies and Procedures
    This rule is a significant regulation under Executive Order 12866 
and DOT's Regulatory Policies and procedures because of public 
interest. The NPRM was reviewed by the Office of Management and Budget 
under Executive Order 12866. The rule will not impose any new costs on 
applicant carriers. It simply would clarify the types of charters being 
conducted. The change to OST Form 4540 is minor and will require no 
additional burden on the applicant carriers.
Executive Order 13132 (Federalism Assessment)
    The Department has analyzed this rulemaking action in accordance 
with the principles and criteria set forth in Executive Order 13132 and 
has determined that it does not have sufficient federalism implications 
to warrant consultation with State and local officials. The Department 
anticipates that any action taken will

[[Page 3165]]

not preempt a State law or State regulation or affect the States' 
ability to discharge traditional State government functions.
Regulatory Flexibility Act
    The Regulatory Flexibility Act (5 U.S.C. 601, et seq.) requires an 
agency to review regulations to assess their impact on small entities 
unless the agency determines that a rule is not expected to have a 
significant impact on a substantial number of small entities. The 
Department will analyze any action that might be proposed for the 
purpose of the Regulatory Flexibility Act.
    The Department certifies that this rule will not have a significant 
economic impact on a substantial number of U.S. small businesses. 
Because the rule is applicable to foreign air carriers, the proposed 
changes in the NPRM will not have a significant impact on small 
entities within the meaning of 5 U.S.C. 601, et seq.
Regulation Identifier (RIN)
    A regulation identifier (RIN) is assigned to each regulatory action 
listed in the Unified Agenda of Federal Regulations. The Regulatory 
Information Service Center publishes the Unified Agenda in April and 
October of each year. The RIN contained in the heading of this document 
can be used to cross-reference this action with the Unified Agenda.
Unfunded Mandates Reform Act
    The changes proposed would not impose any unfunded mandates for the 
purpose of the Unfunded Mandates Reform Act of 1995.
Paperwork Reduction Act
    Under the Paperwork Reduction Act of 1995, 44 U.S.C. 3501-3520, 
Federal agencies must obtain approval from the Office of Management and 
Budget (OMB) for each collection of information they conduct, sponsor, 
or require through regulations. This rule contains information 
collection requirements. As required by the Paperwork Reduction Act, 
the Department will submit this requirement to the Office of 
Information and Regulatory Affairs of the OMB for review, and 
reinstatement, with change of a previously approved collection for 
which approval has expired.
    OST Form 4540 is a required Application for Statement of 
Authorization for foreign air carriers to file with the Department 
prior to engaging in certain charter operations to and from the United 
States. The Department grants the authorization to the foreign air 
carrier. Foreign air carriers file this form as often as necessary 
whenever they have charter flights required by Part 212. This form is 
required for all foreign air carriers seeking Department authority to 
conduct certain types of charter flights, and does not require a 
significant amount of time and is not burdensome to complete.
    OMB Number: 2106-0035.
    Title: 14 CFR Part 212--Charter Rules for U.S. and Foreign Direct 
Air Carriers.
    Burden hours: 1000.
    Affected public: Business or other for-profit.
    Cost: $400,000.00.
    Description of Paperwork: The proposed changes to the rulemaking 
and the form are intended to improve the Department's ability to assess 
the merits of applications filed under Part 212, and will ensure that 
the Department has the most current information on the state of 
reciprocity for each foreign carrier applicant for charter authority 
filed under Part 212. These proposed changes will also enhance the 
Department's decision-making process without imposing an undue burden 
on applicants or affecting the public benefits that the Department's 
rules now provide. The collection of historical data relative to the 
applicant's U.S.-home country operations will allow the Department to 
satisfy any concerns it might have as to the applicant's reliance on 
fifth-, sixth- and seventh-freedom operations.

List of Subjects in 14 CFR Part 212

    Air carriers, Air transportation, Charter flights, Reporting and 
recordkeeping requirements.

    For the reasons set forth in the preamble, the Department proposes 
to amend Part 212 as follows:

PART 212--CHARTER RULES FOR U.S. AND FOREIGN DIRECT AIR CARRIERS

    1. The authority citation for 14 CFR Part 212 continues to read as 
follows:

    Authority: 49 U.S.C. 40101, 40102, 40109, 40113, 41101, 41103, 
41504, 41702, 41708, 41712, 46101.

    2. Amend Sec.  212.2 by adding, in alphabetical order among the 
existing definitions, a definition of ``Sixth freedom charter'' after 
``Single entity charter,'' and a definition of ``Seventh freedom 
charter'' after ``Part charter.''


Sec.  212.2  Definitions.

* * * * *
    Sixth-freedom charter means a charter flight carrying traffic that 
originates and terminates in a country other than the country of the 
foreign air carrier's home country, provided the flight operates via 
the home country of the foreign air carrier.
* * * * *
    Seventh-freedom charter means a charter flight carrying traffic 
that originates and terminates in a country other than the foreign air 
carrier's home country, where the flight does not have a prior, 
intermediate, or subsequent stop in the foreign air carrier's home 
country.
* * * * *
    3. In Sec.  212.9, revise paragraph (b)(1) to read as follows:


Sec.  212  Prior authorization requirements.

* * * * *
    (b) * * *
    (1) Fifth-, sixth-and/or seventh-freedom charter flights to or from 
the United States;
* * * * *

    Issued this 10th day of January, 2005, in Washington, DC.
Karan K. Bhatia,
Assistant Secretary for Aviation and International Affairs.
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