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					                                         BEFORE THE
                                DEPARTMENT OF TRANSPORTATION
                               FEDERAL AVIATION ADMINISTRATION
                                       WASHINGTON, D.C.

In the Matter of                                              )
            POLICY REGARDING AIRPORT                          )     Docket 29303
              RATES AND CHARGES                               )

                                       COMMENTS OF THE
                             AIR TRANSPORT ASSOCIATION OF AMERICA
                               AND REGIONAL AIRLINE ASSOCIATION

                               Communications with respect to this document
                                           should be sent to:

Allen R. Snyder                                         Robert P. Warren
Jean S. Moore                                           Senior Vice President
Hogan & Hartson L.L.P.                                   and General Counsel
555 Thirteenth Street, NW                               David A. Berg
Washington, DC 20009-1104                               Assistant General Counsel
(202) 637-5741                                          AIR TRANSPORT ASSOCIATION
                                                         OF AMERICA
                                                        1301 Pennsylvania Avenue, NW
                                                        Washington, DC 20004
                                                        (202) 626-4274

                                                        Walter S. Coleman
                                                        REGIONAL AIRLINE ASSOCIATION
                                                        1200 19th Street, NW
                                                        Suite 300
                                                        Washington, DC 20036
                                                        (202) 857-1170

   Attorneys for the Air Transport Association of America and the Regional Airline

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                                         BEFORE THE
                                DEPARTMENT OF TRANSPORTATION
                               FEDERAL AVIATION ADMINISTRATION
                                       WASHINGTON, D.C.

In the Matter of                                            )
            POLICY REGARDING AIRPORT                        )     Docket 29303
              RATES AND CHARGES                             )

                                       COMMENTS OF THE
                             AIR TRANSPORT ASSOCIATION OF AMERICA
                               AND REGIONAL AIRLINE ASSOCIATION

                        The Department of Transportation (“DOT” or “Department”) issued a

notice of proposed rulemaking soliciting suggestions for “replacement provisions” for

those portions of the Department‟s Policy Regarding Airport Rates and Charges

vacated by the United States Court of Appeals for the District of Columbia Circuit

in Air Transp. Ass‟n of America v. DOT, 119 F.3d 38, as amended by 129 F.3d 625

(D.C. Cir. 1997); 63 Fed. Reg. 43228 et seq. (Aug. 12, 1998). In that decision, the

Court of Appeals upheld the Department‟s authority to issue substantive guidelines

governing airport rates and charges but disagreed with the Department‟s existing

Policy in several respects. First, the Court concluded that the existing Policy

created untenable distinctions between airfield and nonairfield fees, failed to

provide adequate guidelines as to the reasonableness of airport charges, and failed

to ensure adequate oversight over airport charging practices. 119 F.3d at 41-43.

Second, the Court held that DOT had not adequately explained its requirement that
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airports must value their land at historical cost. Id. at 43-44. Third, the Court

vacated those portions of the Policy dealing with imputed interest, on the ground

that DOT had not adequately explained why imputed interest should be allowed on

funds received from nonairfield fees, but not on funds received from airfield fees.

Id. at 44-45. Accordingly, the Court vacated the affected provisions of the Policy

and remanded the proceeding to DOT for further consideration.

                        The Department‟s present advance notice of proposed policy followed.

In response to that notice, the Air Transport Association of America (“ATA”) and the

Regional Airline Association (“RAA”), on behalf of their respective members, 1/

submit these comments and request that the Department revise its prior policy to

implement the principles outlined below. As the Court of Appeals‟ opinion makes

1/     The members of the ATA are: Airborne Express, Alaska Airlines, Aloha
Airlines, American Airlines, American Trans Air, America West Airlines, Atlas Air,
Continental Airlines, Delta Air Lines, DHL Airways, Emery Worldwide, Evergreen
International Airlines, Federal Express, Hawaiian Airlines, Midwest Express
Airlines, Northwest Airlines, Polar Air Cargo, Reeve Aleutian Airways, Southwest
Airlines, Trans World Airlines, United Airlines, United Parcel Service and US
Airways. Associate members are: Air Mexico, Air Canada, Canadian Airlines
International, and KLM-Royal Dutch Airlines.

       The members of the RAA are: Aerolittoral (Mexico), Aeromar (Mexico), Air
Midwest, Air Nova (Canada), Air Ontario (Canada), Air Serv, Airnet Systems, Air
Wisconsin, Allegheny Airlines, American Eagle, Astral Aviation, Atlantic Coast
Airlines, Atlantic Southeast Airlines, Austin Express, Big Sky Airlines, Business
Express, Cape Air, CCAir, Champlain Airlines, Chautauqua Airlines, Colgan Air,
Comair, Commutair, Community Air, Continental Express, Corporate Air,
Corporate Airlines, Eagle Aviation Group, Empire Airlines, ERA Aviation,
Executive Airlines, Express Airlines I, Falcon Express, Federal Express, First Air,
Grand Canyon Airlines, Great Lakes Aviation, Gulfstream International Airlines,
Horizon Air, Island Air, Kitty Hawk Air Cargo, Mesa Airlines, Mesaba Aviation,
Midway Airlines, Piedmont Airlines, PSA Airlines, Seaborne Aviation, Shuttle
America, Sierra Pacific Airlines, Skywest Airlines, Specialized Transport Int‟l,
Sunshine Airlines, Sunworld Airlines, Tie Air, Trans States Airlines, Universal
Airlines, Walkers Int‟l Airlines, Wiggins Airways, Wings Airways.
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clear, the central concerns underlying the Court‟s ruling were that DOT‟s revised

Policy did not adequately prevent airports from using their monopoly power to

generate excessive revenues from nonairfield aeronautical fees and was internally

inconsistent in its treatment of airfield and nonairfield aeronautical fees. Equally

important, the Court recognized that the Policy created no incentive to encourage

airports to engage in cost-effective expansion and development and avoid the “Taj

Mahal” syndrome.

                        ATA and RAA strongly believe that the first two concerns can be

addressed by (1) prohibiting airports, absent a negotiated fee agreement with

airport users, from assessing overall aeronautical fees (both airfield and other

“essential” airport facilities 2/) that exceed the actual operating and capital costs of

the airport, including reasonable reserves; (2) requiring that all airports value all

essential aeronautical assets at historical costs; and (3) prohibiting imputed interest

charges or, at most, allowing imputed interest only on those funds derived from

nonaeronautical sources. In short, ATA and RAA urge the Department to reinstate

substantially the policy initially promulgated on February 3, 1995, but with

additional elaboration to address the Court‟s concerns. Otherwise, the critical

policy goals of curbing airport authorities from using their significant market, and

in some cases monopoly, power to generate excessive revenues, while maintaining a

2/      The term “essential” is used herein as a shorthand reference to facilities and
services that airlines require for their operations at an airport. These include, but
may not be limited to, terminal facilities for passenger and baggage check-in,
security screening facilities, boarding gates, baggage transfer and handling
facilities, cargo facilities, line maintenance and ground service equipment facilities,
and operations offices.

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consistent approach toward airfield and nonairfield fees, will not be achieved.

Concerns regarding unnecessary or unjustified development and expansion of

airport facilities should be addressed by the Department through a requirement

that major airport expansion or improvements be mutually agreed upon by the

airport and airlines or justified by the airport through a cost-benefit analysis

approved by DOT. Such a mechanism is the only way to ensure that the traveling

public is not saddled with the cost of unnecessary airport development.


            A.          Background

                        This proceeding results from the continuing disagreement between

airports and airport users over the regulatory structure needed to ensure that fees

charged for essential airport facilities and services are reasonable. The lengthy

dispute between airlines and the City of Los Angeles Department of Airports (LAX)

is the principal example of these issues in practice. The national airport system, as

created by Congress, is a closed loop financing system based on reasonable fees for

aeronautical facilities. As such, it was premised on the fact that commercial service

airports are owned, almost without exception, by public entities that do not have

shareholders or a profit motive. Until recently, disputes over rates and charges

were minimal, in part because the economics of developing and expanding

commercial airports were uncertain, and, therefore, local airport authorities and

municipalities eagerly insulated themselves from most economic operating risks by

entering into residual agreements. Under these agreements, the airlines, through

airport fees and charges, paid for all operating revenue shortfalls, no matter how
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great. Thus, while a local municipality gained the considerable economic benefits

derived from having a commercial service airport, it bore little or no financial risk

associated with the operation of that airport.

                        Local airport authorities willingly sought residual agreements when

the risk of operating costs exceeding nonlanding fee revenues was significant. But

as airports became increasingly viable economically, some local airport authorities

and municipalities sought to generate and take profits from them. To preclude local

municipalities from generating revenues in excess of costs or diverting airport

revenues to nonairport uses, Congressional legislation has long required that all

airport fees be “reasonable,” 3/ which courts have consistently interpreted as not

“excessive in relation to costs incurred by [the airport].” 4/ Further, Congress

expressly prohibited the diversion of airport revenues to general municipal

purposes. Id. at 49 U.S.C. § 47107(b)(1)(A). In addition, the Anti-Head Tax Act of

1973 (“AHTA”), codified as 49 U.S.C. § 40116, was passed expressly to prohibit

3/    Section 511 of the Airport and Airway Improvement Act of 1982, recodified as
49 U.S.C. § 47107; 61 Fed. Reg. 31994, 31995 (June 21, 1996).

4/     See, e.g., American Airlines, Inc. v. Massachusetts Port Auth., 560 F.2d 1036,
1038 (1st Cir. 1977). See also City of Los Angeles Department of Airports v. DOT,
103 F.3d 1027, 1029 (D.C. Cir. 1997) (by adopting a compensation methodology,
airports became obligated to set fees based upon “the actual costs to the City of
maintaining and operating the airfield and apron”). New England Legal Found. v.
Massachusetts Port Auth., 883 F.2d 157, 169 (1st Cir. 1989) (“reasonable” fee is one
that “fairly and rationally reflects the cost to users that are comparably situated”);
Raleigh-Durham Airport Auth. v. Delta Air Lines, Inc., 429 F. Supp. 1069 (E.D.N.C.
1976) (construing analogous state statute); Northwest Airlines, Inc. v. County of
Kent, 738 F. Supp. 1112, 1120 (W.D. Mich. 1990) (AHTA requires airport to assess
no more than a “break-even” charge for aircraft parking), aff‟d on other grounds,
955 F.2d 1054, 1061 (6th Cir. 1992) (“A fee assessed is reasonable as long as it is
based on some fair approximation of the cost of providing the facilities and
services.”), aff‟d, 510 U.S. 355 (1994).
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airports from generating a “financial windfall” to the detriment of air commerce

through the imposition of a per person local head tax. 5/

                        Notwithstanding these legislative constraints and the numerous

judicial decisions mandating that aeronautical revenues be “fairly consonant with

the costs incurred,” 6/ more aggressive airport authorities like LAX sought to

generate revenues considerably in excess of actual costs, over the strenuous

objections of airport users, and to allocate municipal operating costs to airports. As

airport fee disputes began to escalate, Congress, in August 1994, enacted

Section 113 of the Federal Aviation Administration Authorization Act (“FAAA Act”),

codified as 49 U.S.C. § 47129 (1994), which mandates that the Secretary establish

regulations or guidelines for determining when an airport fee is reasonable. 49

U.S.C. § 47129(b)(2). 7/

5/     See S. Rep. No. 93-12 [hereinafter “Senate Report”], reprinted in 1973
U.S.C.C.A.N. 1434, 1446. The passage of the FAAA Act is strong evidence that
Congress, like the airlines, does not believe that airports, in the absences of such
constraints, will act in the interest of the traveling public instead of their own
parochial interest.

6/     American Airlines, Inc. v. Massachusetts Port Auth., 560 F.2d 1036, 1039
(1st Cir. 1977).

7/      In Northwest Airlines, Inc. v. County of Kent, supra note 4, which preceded
and, in part, motivated Congress to pass into law the FAAA Act, the Court
emphasized that “the Department of Transportation has regulatory authority to
enforce the federal aviation laws, including the AHTA and the AAIA, so there is no
cause for courts to offer a substitute for „conventional public utility regulation‟”
(citation omitted). 510 U.S. at 371.

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            B.          The Secretary’s Initial Airport Rates and Charges Policy

                        In response to the FAAA Act, the Secretary, after soliciting extensive

public comments, issued his “Policy Regarding Airport Rates and Charges” (“Initial

Policy”). See 60 Fed. Reg. 6906. The Initial Policy, consistent with prior law,

established a “revenue cap” for an airport‟s total aeronautical fees. Under the

revenue cap provision, “[r]evenues from aeronautical fees may not exceed the cost to

the airport proprietor of providing airport services and facilities currently in

aeronautical use unless otherwise agreed to by the affected aeronautical users.”

Initial Policy § 2.1, 60 Fed. Reg. 6916. This provision, the centerpiece of the entire

regulatory scheme, confirmed the long-standing principle that total aeronautical

user fees must be based on an airport‟s actual cost of delivering services to those

users. Without such a revenue cap, airports would be free to use their monopoly

position to generate excessive revenues at the expense of the airlines and the

traveling public. 8/

                        Significantly, the Secretary found no basis for determining the value of

nonairfield aeronautical facilities differently from airfield facilities. The

Department defined aeronautical activities covered by the Initial Policy as “any

activity that involves, makes possible, is required for the safety of the operations of,

or is otherwise directly related to, the operation of aircraft,” including “services

8/     After issuance of the Initial Policy, DOT independently reached the same
conclusion in an adjudicatory context, holding that, under preexisting law, the
reasonableness requirement mandated that fees be “based on the costs associated
with an airline‟s use of airport facilities.” Los Angeles International Airport Rates
Proceedings, Order 95-6-36, at 13, Docket 50176 (DOT June 30, 1995). See also
City of Los Angeles Department of Airports, 103 F.3d at 1035.

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provided by air carriers related directly and substantially to the movement of

passengers, baggage, mail and cargo on the airport.” All such “essential” airport

activities were expressly included under the revenue cap. 60 Fed. Reg. 6915.

                        The Initial Policy‟s revenue cap limitation did not apply, however, to

fees for other “nonessential” airport activities even when those activities were

undertaken by airlines. Such activities may include facilities such as reservation

centers, headquarters offices, and flight kitchens. Because “[s]uch facilities need

not be located on an airport,” DOT determined that it could “[r]ely on the normal

forces of competition for commercial or industrial property to assure that the fees

for such property are not excessive.” Id. Conversely, because essential airport

activities must be located on the airport and therefore are not subject to market

competition, DOT determined that fees for those facilities and services must be

constrained by the revenue cap to ensure that airports would not reap excessive fees

from such activities. Thus the Secretary clearly recognized the need to restrain the

market power of the airports over all essential airport facilities and services.

                        Consistent with this position, the Initial Policy did not allow airports

to charge imputed interest on funds invested in aeronautical facilities that were

derived from aeronautical sources. The Initial Policy allowed airports to charge

airlines fictional “imputed interest” on funds used for aeronautical investment only

when those funds were derived from nonaeronautical sources. 9/ See Initial Policy

§ 2.3.1, 60 Fed. Reg. 6916.

9/    Thus, for example, an airport could not charge airlines for an amortized
portion of the cost of a new runway and then assess an “imputed interest” charge on
the same airlines for that same runway.
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            C.          The Revised Policy

                        Notwithstanding the Secretary‟s recognition in the Initial Policy of the

need to limit fees for essential aeronautical activities to actual cost, DOT abruptly

reversed course. On September 8, 1995, DOT proposed a dramatically revised

airport rates and charges policy and invited public comment. See 60 Fed. Reg.

47012. On June 21, 1996, the Department promulgated regulations in

substantially the same form as had been proposed. See 61 Fed. Reg. 31994

(“Revised Policy”). In the Revised Policy, DOT totally eliminated the revenue cap

requirement except for fees associated with the use of airfield land, and permitted

airports to charge imputed interest on funds derived from nonairfield aeronautical

sources. As DOT recognized, the Revised Policy presented a “substantial

modification” of its prior policy on these issues, which “relaxes restrictions imposed

on airport proprietors” by the earlier policy. Id. DOT removed the revenue cap on

nonairfield aeronautical facilities based on the assumptions -- erroneous, in our

view -- that nonairfield fees would be regulated by “market” forces and that airport

proprietors in the past had not routinely imposed unreasonably high fees for

nonairfield aeronautical facilities. Id. at 32008. Thus DOT announced that it

would henceforth “rely on market discipline to assure that these fees which are

largely negotiated, are reasonable and did not result in the generation of excessive

profit [or rate of return.]” Id. In the Revised Policy, DOT also announced that it

would investigate nonairfield aeronautical fees only in “exceptional,”

“extraordinary,” and “rare” situations. Id. at 31994, 32007, 32008.

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                        DOT‟s rationale for regulating airfield fees and abandoning any

guidelines with respect to fees for all other airport facilities such as terminals, cargo

facilities, and baggage handling systems was based on the assertion that “[t]he

airfield and the public use roadways are common use facilities, and their use is

more or less fungible,” while “other facilities are generally leased on an exclusive or

preferential use basis” and “are much less fungible.” Id. at 32007. Thus, according

to the Department, the revenue cap “could prevent these differences from being

fully recognized in establishing fees,” while the elimination of guidelines “would

permit these differences to be fully recognized and would continue current industry

practices.” Id.

                        Further, DOT asserted that the statutory requirement that federally

funded airports use airport revenues only for airport purposes (see 49 U.S.C.

§ 47107(b)) decreased airports‟ incentives to charge excessive fees for nonairfield

facilities and services. 61 Fed. Reg. 32008-09. DOT relied in part upon “the

relative lack of disputes between carriers and airport proprietors over the

reasonableness of fees for such facilities, even those deemed essential by the

carriers.” Id. at 32007.

                        As noted, the Revised Policy also altered the prior provisions governing

imputed interest. Whereas the Initial Policy had prohibited imputed interest

charges on any funds obtained from aeronautical users, whether from airfield or

nonairfield fees and services, the Revised Policy allowed such charges “on funds

used to finance airfield capital investments for aeronautical use or lands acquired

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for airfield use . . . except to the extent that the funds are generated by airfield

fees.” Revised Policy § 2.4.1., 61 Fed. Reg. 32019.

            D.          Court of Appeals Proceedings

                        Both ATA and the City of Los Angeles Department of Airports (LAX)

filed petitions for review with the United States Court of Appeals for the District of

Columbia Circuit challenging the validity of the Department‟s Revised Policy. 10/

ATA challenged those portions of the Revised Policy relating to (1) the revised

revenue cap, (2) the Department‟s abandonment of its historical cost-based

approach for nonairfield aeronautical facilities fees, and (3) the allowance of

“imputed interest” charges on funds derived from aeronautical users. In turn, LAX

challenged the continuing requirement that historical costs be used to value airfield


                        Following extensive briefing and argument, the Court issued its

decision on August 1, 1997. In that decision, the Court upheld DOT‟s authority to

issue substantive guidelines governing airport rates and charges, holding that the

governing statute authorized the Secretary “to require a particular methodology for

all airports -- so long as the methodology is itself reasonable.” 119 F.3d at 41

(emphasis in original). While upholding DOT‟s authority to issue substantive

guidelines, the Court faulted the Revised Policy‟s approach in several respects.

First, the Court agreed with ATA that DOT had improperly failed to exercise its

oversight over nonairfield aeronautical fees and had drawn untenable distinctions

10/   See Air Transp. Ass‟n of America v. DOT, 119 F.3d 38, as amended by 129
F.3d 625 (D.C. Cir 1997) (“the ATA decision”).
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between airfield facilities and other essential aeronautical facilities. The Court was

particularly troubled by DOT‟s laissez-faire approach to nonairfield aeronautical

facilities, pointing to the agency‟s adoption of a regulation that merely states any

reasonable methodology will suffice for nonairfield fees. Id. The Court concluded

that the Secretary‟s distinctions between airfield and nonairfield aeronautical fees

were internally inconsistent and therefore arbitrary and capricious. Id. at 41-43.

                        Second, the Court rejected DOT‟s attempt to rely on the lack of prior

disputes over nonairfield fees, because it was not until the Policy was revised in

1996 that airports had formal guidance that they could charge nonairfield fees

greater than costs. Id. at 42. In light of the Policy‟s lack of effective oversight over

such fees, the Court found “little reason to expect [airports] will not” assess such

fees, whether by “negotiated” agreement or by fiat. Id. As a result, the Court held

that the Policy on nonairfield fees “provide[d] no real guidance as to how the

Secretary will determine reasonableness.” Id. at 43. The Court held that even if

DOT could identify with greater precision how purported restraints on airports‟

monopoly power affected their ability to impose nonairfield fees (which the Court

appeared to doubt), the Policy was nevertheless “internally inconsistent” because

the monopoly power of airports is clearly the same with respect to both airfield and

nonairfield fees. Id. In sum, the Court made clear that all of the agency‟s asserted

reasons for exempting nonairfield fees from scrutiny were untenable.

                        Third, the Court held that DOT had not adequately explained its

requirement that airports must value their land at its historic costs. The Court

faulted the agency for having failed to provide an adequate explanation of why

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administrative difficulties favored historic cost for airfield fees but not for

nonairfield fees. Id. at 43-44. Finally, the Court vacated those portions of the

Policy dealing with imputed interest, on the ground that DOT had not adequately

explained why imputed interest should be allowed on funds received from

nonairfield fees, but not on funds received from airfield fees.

                        Accordingly, the Court (as subsequently clarified in its order on

rehearing) vacated the affected provisions of the Policy and remanded the

proceeding to DOT for further consideration of the issues raised by the Court.


                        The Secretary has both the power and the obligation to adopt

definitive guidelines governing the reasonableness of airport fees and charges.

Section 511 of the Airport and Airway Improvement Act, 49 U.S.C. § 47107 (1994),

requires that all fees levied by airports against aeronautical users be “reasonable.”

This requirement has long been recognized by both the Department and the federal

courts. 11/ Likewise, the Anti-Head Tax Act allows a publicly owned airport to

collect only reasonable landing fees and charges from aeronautical users. 49 U.S.C.

§ 40116(e)(2). In August 1994, Congress enacted Section 113 of the FAAA Act, 49

U.S.C. § 47129. Under this provision, the Secretary, while prohibited from setting

the level of airport fees, was required to issue “final regulations, policy statements,

or guidelines” setting forth the contours of “reasonable” airport fees.

11/         See supra note 4, at 5.
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                        The nature and extent of the Secretary‟s ability to issue specific

regulations governing all determinations as to the reasonableness of fees was

resolved by the Court of Appeals in the ATA decision. There, the Court found

totally unpersuasive the arguments of intervenor Los Angeles that (1) the Secretary

lacked the authority to select a particular methodology for determining

reasonableness; (2) each airport was entitled to use essentially any methodology for

determining fees; and (3) the Secretary was relegated to a passive role in

determining whether such fees were reasonable. 119 F.3d at 40-41. On the

contrary, the Court held that Section 113 not only permitted, but expressly

“obligate[d],” the Secretary to publish final regulations or guidelines to be used by

DOT to determine whether fees are reasonable. Id. at 40. The Court held that

Section 113:

                        certainly implies that Congress intended the Secretary to
                        fashion a quasi-legislative uniform approach to
                        measuring the reasonableness of airport fees. That the
                        Secretary is not authorized actually to set the fee itself
                        means that each airport necessarily has some discretion
                        in the application of the Secretary‟s guidelines, but it
                        hardly can be read to mean that the Secretary was not
                        authorized to require a particular methodology for all
                        airports -- so long as that methodology is itself
                        reasonable. [Id. at 41 (emphasis in original).]

                        The Court confirmed that the Secretary was obligated to adopt

guidelines more definitive than those simply stating that any reasonable

methodology will suffice. The Court held that DOT‟s position that any reasonable

methodology was acceptable for valuing nonairfield assets “surely is inadequate

under the APA” and “provides no real guidance as to how the Secretary will

determine reasonableness.” Id. at 43. Thus the Court held that Section 113 may
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“actually require the Secretary to set forth a full quasi-legislative standard rather

than developing those standards through a case-by-case approach.” Id.

Accordingly, DOT‟s failure to identify in its Revised Policy an appropriate

methodology for assessing the reasonableness of fees for essential nonairfield

facilities and services was held to be arbitrary and capricious. Id. at 41.

                        In contrast to the existing policy, the Secretary‟s Initial Policy did not

suffer from these defects. Establishing a revenue cap on fees for essential

aeronautical facilities and using the historical cost method of valuation provided

both a rational and understandable methodology for determining the

reasonableness of airport fees. ATA and RAA strongly believe that the Secretary

was correct on these issues.


                        Many owners of commercial service airports in the United States have

locational monopolies and benefit from significant barriers to entry precluding the

development of a competing airport. Thus, as explained below and in the attached

declarations, most commercial service airports have extensive market power and

the ability to charge excessive fees for both the airfield and nonairfield facilities and

services necessary for efficient and economically rational passenger and cargo

airlines operations.

            A.          Analysis of Market and Monopoly Power

                        To assist ATA and the Department in analyzing the market power of

airports, ATA retained Professor Richard J. Gilbert, Professor of Economics at the

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University of California at Berkeley and from 1993 to 1995 the highest ranking

economist in the Antitrust Division of the United States Department of Justice, 12/

and Daniel M. Kasper, an economist with extensive knowledge and involvement in

aviation regulatory matters, including airport fees and charges. 13/

                        To determine whether airports possess significant market and/or

monopoly power, their market power must be analyzed taking into consideration

the relevant market, competition within that market, market concentration, and

barriers to entry preventing new competitors. Market power is the ability to

increase profitably prices above competitive levels over a significant period of time.

Market power becomes monopoly power when a provider has the power to control

the market price or to exclude competition. Gilbert Decl. ¶ 6.

                        To standardize the analysis of factors affecting market power and to

determine whether potential mergers are likely to result in undesirable market or

12/     From 1994 to 1996, Professor Gilbert also served as Vice Chairman of the
American Bar Association‟s Antitrust Section Committee on Economics. He has
testified before numerous U.S. courts, regulatory commissions, and Congress on
economic policy issues and has been an associate editor of the Journal of Economic
Theory, the Journal of Industrial Economics, and the Review of Industrial
Organization. Declaration of Richard J. Gilbert dated February 1, 1999 (“Gilbert
Decl.”) ¶ 3, attached hereto as Exhibit A.

13/    Mr. Kasper formerly served at the United States Civil Aeronautics Board as
Director of the Bureau of International Aviation. From 1993 to 1997, he was a
Partner and Chairman of the Transportation Industry Program at Coopers &
Lybrand LLP, and from 1983 to 1993, he was Corporate Director and Head of the
Transportation Practice for Harbridge House, Inc., a management consulting firm
acquired by Coopers & Lybrand. Declaration of Daniel M. Kasper dated
February 1, 1999 (“Kasper Decl.”) ¶ 2, attached hereto as Exhibit B. Previously, he
served on the faculties of the Harvard University Graduate School of Business and
the University of Southern California School of Business Administration, teaching
in the fields of economics and government regulation.

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monopoly power, the United States Department of Justice and the Federal Trade

Commission jointly developed and issued their Horizontal Merger Guidelines.

Under these guidelines, a relevant market has two components: product and

geographic. A relevant product market consists of all products and services viewed

by consumers as being close substitutes for each other. A relevant geographic

market is that territory in which firms that sell such products and services are

considered by consumers to be substitutes. A group of products and services

constitutes a relevant product market if a seller or group of sellers that is not

subject to price regulation would find it profitable to increase significantly over

competitive levels the price of those products and services because customers would

not turn to other products or services. Similarly, a geographic region constitutes a

relevant geographic market if a seller or group of sellers that are the only present

and future sellers of the relevant product or service in the area, and who are not

subject to price regulation, would find it profitable to increase prices significantly

over competitive levels. Id. at ¶¶ 7-10.

                        Once the relevant market is defined, the identity of market

participants and their market shares can be determined. Both existing competitors,

if any, and any potential future competitors who could enter the market in a timely

manner without incurring significant sunk costs, are considered. From this

analysis, market concentration is calculated. Market concentration is important to

distinguish between markets where there are sufficient participants to make

competitive conduct likely, and highly concentrated markets where competition is

less likely and the potential for market power is greater. Id. at ¶¶ 12-13.

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                        The most commonly recognized measure of market concentration is the

Herfindahl-Hirschman Index (“HHI”). This index is calculated by squaring the

individual market shares of each seller in the relevant market, and then adding

those sums together. For example, a market with two competitors having 40% and

60% shares of the market would have an HHI value of 402 + 602 = 5,200. A market

served by only one provider would have an HHI index of 10,000 (1002), while a

market with many competitors each having a very small percentage of the market

would have an extremely low HHI value -- near zero. If the HHI value is below

1,000, economists deem the market to be unconcentrated and the existence of

market power unlikely. If the HHI value is between 1,000 and 1,800, the market is

considered “moderately concentrated,” while a market with an index above 1,800 is

considered “highly concentrated.” Id. at ¶¶ 14-15.

                        If a market is highly concentrated, barriers to entry, if any, must be

examined next to determine whether the existing providers have substantial

market power. If there are few significant barriers to entry, existing firms in that

market are not likely to be able to exert significant market power, since any

attempt to raise prices above competitive levels would attract new competitors. On

the other hand, the presence of significant barriers to entry will preclude entry by

new competitors, thereby allowing the existing providers to exercise substantial

market power. Id. at ¶ 18.

                        Barriers to entry exist in many forms and can include the

unavailability of needed resources such as large parcels of land at competitive

locations, the lack of competitive financing, or regulatory barriers prohibiting

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development of a competitive facility. Economies of scale also can create significant

barriers to entry. Where fixed costs to enter a market are large relative to the size

of the market, the market is most likely to be served by only one provider who will

have a monopoly. In such markets, there will be no competition. Hence, absent

restrictions, there will be no constraints on the market power of the monopolist. Id.

at ¶ 19; Kasper Decl. ¶¶ 6-12.

            B.          Application of the Analysis of Market Power to Airports

                        Application of these factors to the market for essential airport facilities

and services demonstrates the tremendous market power of airport providers. As

both the Court of Appeals in the ATA decision and economic experts recognize,

airlines not only require the use of airfields, but other airport facilities and services

that are essential for their operations, including among others, terminal facilities

for passenger and baggage check-in, security screening facilities, boarding gates,

baggage transfer and handling facilities, cargo facilities, line maintenance and

ground service equipment maintenance facilities, and operations offices. 119 F.3d

at 42; Gilbert Decl. ¶¶ 23-24, 38; Kasper Decl. ¶ 35. While other services such as

flight kitchens, reservation centers, and certain maintenance facilities might be

handled as efficiently elsewhere, that is not true as to airfield and essential

nonairfield services and facilities over which airports can exercise their locational

monopoly power. 14/ Because airlines must have access to airfield, terminal, and

14/   For example, passengers cannot board an aircraft at an off-airport location;
thus boarding gates or other boarding facilities are required. Similarly, baggage
transfer and handling facilities are needed on-site because of the tremendous
economies of scale arising from airlines jointly sharing all or part of these systems
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other facilities directly related to the safe and efficient transportation of passengers,

baggage, cargo, and mail, airports can exercise their market power through their

rates and charges for airfield, or essential nonairfield facilities or both, absent

regulatory constraints. See 119 F.3d at 41; Gilbert Decl. ¶¶ 23-26; Kasper Decl.

¶ 35. Thus each of these essential air transportation facilities is part of the

relevant market for airport services.

                        The relevant geographic market is an individual airport if airlines do

not view alternative airports as being acceptable substitutes. Significantly, many,

if not most, communities are served by only one commercial airport. Gilbert Decl.

¶¶ 5, 28, 48. As a result, the relevant market for airport facilities is either a

monopoly with only one competitor or a highly concentrated market with very few

competitors, 15/ having the ability to impose noncompetitive pricing absent low

barriers to the entry of additional competitors. Gilbert Decl. ¶¶ 32, 48.

                        Importantly, significant barriers do preclude the entry of new

competing airports. The market for commercial airport services has exceptionally

high barriers to entry, as evidenced by the fact that between 1970 and 1997, only

[Footnote continued]

and for the convenience of all passengers. In addition, on-site facilities are needed
to transfer baggage of connecting passengers between different aircraft and
different airlines and for the handling of international travelers who must, upon
arrival, reclaim their baggage and clear immigrations, customs, and agricultural
inspections before boarding connecting flights or leaving the airport. Likewise,
passenger check-in and security screening facilities are essential services that
cannot effectively or efficiently be performed off-site.

15/         Gilbert Decl. ¶¶ 5, 28-30, 32, 48.

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two major commercial airports have opened and both airports were built as

replacement facilities. Kasper Decl. ¶¶ 8-15.

                        The barriers precluding the development of competitive airports are

numerous. First, acquiring large parcels of land at a location competitive with the

existing airport would be required for the construction of runways, taxiways, access

roads, terminal and air traffic control facilities, parking facilities, and a buffer zone

between the airport and the surrounding communities. In most cities, the cost to

acquire such land would be prohibitive. As LAX‟s own real estate experts

acknowledged in that proceeding:

                               There are no urban sites in Los Angeles that can
                        provide an alternative airport development site. In
                        addition, the cost of acquiring such a site would be
                        prohibitive. [Parkcenter Realty Advisors Report at 13,
                        Jan. 29, 1993), LAX Ex. 14, DOT Dkt. 51076, First LAX
                        Proceeding. (Exhibit C attached hereto).]

Further, given the amount of land required, developing a new airport is not feasible

without the power of eminent domain. Because most existing airports are owned by

local municipal authorities, there is no incentive for them to use their power of

eminent domain to assist a potential new competitor that might undercut their

market power. Gilbert Decl. ¶ 35; Kasper Decl. ¶¶ 8, 10-11.

                        Second, any new competitor would need to make an enormous capital

investment to develop a new airport. While smaller airports may cost several

hundred million dollars, the Denver airport, the most recently constructed new

major airport, cost in excess of $4 billion and took 10 years to plan and construct.

Gilbert Decl. ¶ 34; Kasper Decl. ¶ 8.

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                        Further, local governments can prevent competition by withholding

the necessary zoning licenses and other approvals required to build a new airport.

Given the widespread antipathy of local residents and their political resistance to

the construction of new airports due to concerns about increased traffic, noise,

congestion, and pollution, denying the necessary zoning and building permits may

be explained by local governments as appropriate and reasonable. Kasper Decl.

¶¶ 11-12.

                        Another significant barrier is the inability of a new airport competitor,

particularly private developers, to secure financing on a basis competitive with that

available to the existing airport operator. Most commercial service airports are

owned by municipal or state authorities, and enjoy access to tax advantaged

funding in the form of state or municipal tax-free bonds. The inability of a private

developer to secure similar financing could render a competing airport

uneconomical. Kasper Decl. ¶ 13-14. In addition, federal funding grants needed by

most commercial service airports effectively require that airports operate on a cost

basis, severely reducing or eliminating any real prospect for private development of

new commercial service airports.

                        Finally, economies of scale severely limit the entry of new competitors.

The fixed cost to construct an airport is so significant in relation to the revenues

generated that several airlines and significant traffic are required to support each

airport. With many airports operating at less than full capacity, the development of

a competing airfield could raise, not lower, the cost to airport users. Thus there are

substantial barriers to entry. As a result, the potential for entry of new competitors

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is not likely to discipline any actual or attempted exercise of market power by

airports. Gilbert Decl. ¶¶ 19, 34-37, 48; Kasper Decl. ¶¶ 8-14.

                        Even in the few metropolitan areas with sufficient air traffic to sustain

more than one commercial airport, competition does not exist among the local

airports for several reasons. In most of these localities, one airport authority

controls most or all of the local airports. For example, in the New York City

metropolitan area, the New York/New Jersey Port Authority owns and operates all

three major airports: Newark, La Guardia, and Kennedy. The City of Chicago

owns and operates both O‟Hare and Midway, while the City of Los Angeles operates

not only Los Angeles International Airport but also the Ontario, Van Nuys, and

Palmdale airports. Gilbert Decl. ¶ 32; Kasper Decl. ¶ 11.

                        Moreover, individual airports within a region may not be close

substitutes for one another due to capacity or operational restrictions such as slot

constraints (Reagan National, La Guardia, Kennedy, and O‟Hare), perimeter rules

(Reagan National, La Guardia, and Love Field), and noise and curfew restrictions

(Reagan National, Long Beach, and Burbank). In addition, some airports have

runways too small to accommodate the larger commercial aircraft or lack

immigration, customs, and agriculture control facilities to handle international

flights. Thus, even in the areas served by more than one airport, individual

airports may not be effective substitutes for other local airports. In short, for most

airlines, there is no independent, competitive substitute for the airport or airports

operated by the local airport authority. Gilbert Decl. ¶¶ 28-32, 48; Kasper

Decl. ¶ 10.

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                        More important, airlines that have significant investments in their

operations at one airport cannot, without significant cost, shift their operations to

another local airport even in the absence of capacity restrictions or other

limitations. In sum, it is difficult to imagine a more effective set of barriers

precluding entry of competitors than those enjoyed by existing airports. As a result,

competition between airports cannot reasonably be expected to prevent airports

from exercising the market power they enjoy. Without the threat of potential or

actual competition, in markets served by a single airport or airport authority,

airlines are highly vulnerable to the market power of that airport or airport

authority. Kasper Decl. ¶ 15. This situation describes the vast majority of markets

in the United States. Gilbert Decl. ¶¶ 27, 48.

                        It was a recognition of this market power that was the basis for DOT‟s

final and interim regulations requiring airfield charges to be based on historical

cost. In justifying that requirement, DOT explained that “airport proprietors may

enjoy locational monopoly power” over airfield assets. 60 Fed. Reg. 47013. In

support of this policy, the Director of the FAA Office of Aviation Policy and Plans

expressly opined at a public hearing on September 20, 1995, that “the proposed

policy and its rationale clearly articulates that there is obviously a locational

monopoly power associated with the airfield and if the airline wants to serve that

locale in general, it must use that particular airfield facility.” 16

16/   FAA Office of Aviation Policy and Plans Hearing on Sept. 20, 1995,
Transcript at 920; 95 Public Hearing at 51.

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                        DOT, through its prior policies, is not alone in recognizing the

monopoly power of airports. Congress‟s enactment of the AHTA was in response to

its concerns that airports, if not constrained, would charge monopoly prices. As

Judge Posner stated in Indianapolis Airport Auth. v. American Airlines, Congress

recognized that “unless forbidden to do so by state or federal law” an airport

proprietor “can charge a monopoly price for the use of its airport -- that is, a price in

excess of the cost of operating the airport . . . .” 733 F.2d 1262, 1267 (7th Cir. 1984),

disapproved on other grounds, Northwest Airlines, Inc. v. County of Kent, 510 U.S.

355, 371 (1994). The monopoly power of existing airports is so obvious that Judge

Posner in Indianapolis felt free to take judicial notice that a fairly typical airport,

the Indianapolis International, exists as a locational monopoly. 733 F.2d at 1266-

67. 17/ Indeed, Congress enacted the AHTA to preclude local airports from

generating fees that “would be used to gain financial windfalls,” and that would

“inhibit the flow of interstate commerce and the growth and development of air

transportation.” Senate Report, 1973 U.S.C.C.A.N. at 1435, 1446. 18/

17/   See also Air Transport Ass‟n v. City & County of San Francisco, 992 F. Supp.
1149, 1180 (N.D. Cal. 1998). (SFO has a “monopoly position as the airport

18/    See also 49 U.S.C. § 47101(a)(13) (federal policy that airports “should not
seek to create revenue surpluses that exceed the amounts to be used for airport
system purposes” and for other lawful purposes); Note, Airline Deregulation and
Airport Regulation, 93 Yale L.J. 319, 323 (1983) (AHTA was enacted to restrain
monopoly power of local airports and “to prevent revenues from airport user fees
from exceeding airport operational and capital costs”); 140 Cong. Rec. H7117 (daily
ed. Aug. 8, 1994) (rates and charges provisions of FAAA Act were adopted to
prevent localities from “view[ing] their local airports as a cash cow that can be
milked to the detriment of airline passengers”) (statement of Rep. Clinger).

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                        The Federal Trade Commission‟s Bureau of Economics has similarly

agreed that airports generally possess market power:

                        [A]irport services generally are not produced in
                        competitive markets. Many metropolitan areas have only
                        one airport, and only a very few metropolitan areas have
                        more than two. Further, entry into the market for airport
                        services is far from easy. The construction of a new
                        airport, or the expansion of an existing airport, is time
                        consuming; among other factors, entrants face substantial
                        regulatory burdens at local, state and federal levels.
                        Accordingly, incumbent airport operators might possess
                        market power in the pricing of airport services. 19/

                        Moreover, in its most recent opinion regarding LAX‟s airfield fees,

DOT expressly recognized the lack of competitive substitutes for a major airport

such as Los Angeles. The Secretary found that

                        no airport or combination of airports in the Los Angeles
                        metropolitan area could substitute for LAX if the city were able
                        to close LAX and use its land for nonairport purposes. The area
                        contains other airports -- Ontario, Hollywood-Burbank, Long
                        Beach, and Orange County, but they are relatively small and
                        could not handle the volume of passengers and cargo served by
                        LAX. In 1993, for example, seventy-three percent of the
                        domestic passengers using an airport in that area used LAX,
                        and virtually all of the international passengers using a Los
                        Angeles area airport used LAX. None of the area‟s other
                        airports served as much as ten percent of the area‟s total
                        domestic passengers in that year. . . . The record indicates,
                        however, that LAX is the best possible location for a major
                        airport for Los Angeles and that there is no good alternative site
                        for an airport. 20/

19/ Comments of Staff of the Bureau of Economics of the Federal Trade
Commission to DOT dated Sept. 14, 1994, at 11-12.

20/    Final Decision on Remand, Order 97-12-31, at 17 (Dec. 23, 1997). These
views are consistent with the views held by the international community. For
example, the Commission of the European Union (EU) in promulgating its own
directive on airport charges found the provision of airport services and facilities to
be “a monopoly situation.” Proposal for a Council Directive on Airport Charges,
97/C 257/03, Official Journal of the European Communities, 22/8/97, Para. 12. In
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                        Even LAX‟s own expert consultants acknowledge that many airports

are like monopolies with no pricing constraints.

                        Many airports, by virtue of location and large capital
                        requirements, are like monopolies and are not constrained by
                        competition from charging exorbitant prices. Moreover,
                        commercial service airports, while not providing essential public
                        services like a water utility, have characteristics of economic
                        necessity which make them utility-like public infrastructure
                        assets; thus, demand may be less sensitive to price than in other
                        less “essential” industries. 21/

            C.          Airports Possess Significant Market Power Notwithstanding
                        the Existence of Other Nearby Airports

                        It is clear that many communities in the United States have only one

airport. In those areas, that airport is a monopoly with a 100% market share and

an HHI market concentration value of 10,000. Given the significant barriers to

entry and the absence of effective guidelines constraining the use of its market

[Footnote continued]

its comments on airport charges, the EC‟s Economic and Social Committee stated
that “. . . the airport management body is in a monopoly situation as regards the
provision of airport facilities and services for which charges are levied . . . .”
Opinion of the Economic and Social Committee on the Proposal for a Council
Directive on Airport Charges, 98/C73/08, 9/3/98, Para. 1.1.1. Likewise, the
Committee of the Regions noted that: “. . . the facilities and services provided by
the airport company . . . by their nature, can only be provided by the airport. In
view of this monopoly, the level of charges must be in reasonable relation to the
overall cost incurred in the provision of these facilities and services.” Opinion of the
Committee on the Regions on the “Proposal for a Council Directive on Airport
Charges,” 98/C 64/08, 27/2/98, Para. 2.3. See Kasper Decl. ¶¶ 20-22.

21/   John F. Brown Company, Financial Support for the General Fund, Part II,
Supplemental Report, June 1990, prepared for the Board of Airport Commissioners,
Department of Airports, City of Los Angeles, California, at 23. (Exhibit D attached

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power, such an airport can freely exercise its market power without fear of

competition. Gilbert Decl. ¶¶ 5, 28, 32; Kasper Decl. ¶ 9-10.

                        The question remains as to whether major airports in markets having

one or more nearby airports also have the power to impose excessive fees. To

answer this question, Professor Gilbert undertook a detailed analysis of the Los

Angeles market for airport services to determine the market power of LAX to

increase landing fees significantly, notwithstanding potential competition from four

nearby airports: Long Beach, Burbank, Ontario, and Orange County, all within 56

miles of LAX. Professor Gilbert found that between 1990 and 1998, LAX increased

its landing fees 346%, to prices significantly higher than all other airports in the

region. In a competitive market, LAX‟s higher prices relative to those of nearby

airports would be expected to transfer airline demand from LAX to other nearby

airports, thereby reducing demand at LAX. Alternatively, if LAX possesses

significant market power, any decline in demand at LAX would be relatively small.

Gilbert Decl. ¶¶ 39-43.

                        Based on his regression analysis, Professor Gilbert found that LAX

does possess significant market power. To determine whether the change in

landing fees at LAX relative to other airports significantly affected the demand for

LAX‟s services, Professor Gilbert analyzed all aircraft arrivals and departures in

the Los Angeles area. This analysis was undertaken to determine whether the

share of capacity committed to LAX between 1990 and 1997, as an origin, a

destination, or an intermediate stop, was affected by the level of landing fees. For

this analysis, he used the Department‟s T100 database on flight operations of all air

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carriers. Id. at ¶ 45. In his analysis, he separately reviewed short haul flights (less

than 500 miles) and long haul flights because of the possibility that short haul

flights might be easier to reroute and thus more sensitive to landing fee increases.


                        Professor Gilbert‟s regression model shows that significant increases in

fees at LAX have “only a very limited effect on LAX‟s share of all capacity.” Id. at

¶ 46. Professor Gilbert was able to conclude that a 100% increase in LAX landing

fees was accompanied by only a 1% to 2% decrease in LAX‟s share of all arriving

and departing capacity. Id. Professor Gilbert found that airline capacity did not

shift across airports in response to changes in fees at LAX, which demonstrates that

LAX has significant market power and that it was profitable for LAX to increase

significantly its landing fees, notwithstanding the presence of other airports in the

area. Id. From this study, it can be determined that even in markets with multiple

airports, the existence of other nearby airports is not likely to diminish a major

commercial service airport‟s market power or inhibit the exercise of that power. Id.

at ¶ 48.


                        Apart from the residual agreements currently in effect that contain

provisions limiting airport fees and frequently require agreement between the

airport and airlines before major new projects and costs are undertaken, there are

no existing restraints that effectively limit an airport‟s exercise of its market power

over essential airport facilities. The Revised Policy does not create a mechanism to

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restrain airports. The Secretary previously relied on the belief that “even if an

individual airport does have such [market] power, it will not use it,” 119 F.3d at 42,

but the Court held that belief to be ill-founded. The Court recognized that the

ability of airports and airlines to negotiate fee agreements in the past without

controversy was not a “reliable guide” for the future, because prior to 1994, airports

may have operated under the belief that fees were limited to cost. Id. Further, the

Court noted that individual airlines may have entered into fee agreements with

airports to secure access to these airports “even if they are monopolists” because

“[all other] competitors at an airport would also be paying the same monopoly rent.”

Id. In addition, the Secretary‟s suggestion that the prohibition against the

diversion of airport revenues would keep fees reasonable and deter the buildup of

unnecessary surpluses was rejected because it would not contain costs and “could

lead to competition to build the Taj Mahal of airports.” Id. at 43. 22/ Thus the

22/    The prohibition against revenue diversion will not protect airport users
because, as a Congressional investigation into airport revenue diversion found, 19
of the 30 airport authorities investigated were legally or illegally diverting airport
revenues elsewhere. Committee on Appropriations, U.S. House of Representatives‟
Report on the Diversion of Airport Revenues from Commercial Air Service Airports
in the United States, Dec. 1993, at iv-v; 14-28. The investigation further found that
revenue diversion was occurring through a wide variety of means and for different
purposes, including millions in aid for such nonairport uses as a homeless shelter
program. Id. at 22. Moreover, revenue diversion was found to be occurring,
notwithstanding the FAA‟s reliance on (1) sponsor compliance self-certifications,
(2) audits by independent accounting firms pursuant to the Single Audit Act of
1984, and (3) DOT Office of Inspector General audits, including those generated by
third-party complaints from airlines. Id. at iii. Accordingly, irrespective of whether
revenue diversion by some airport authorities is legally permitted under
grandfathering provisions of the AAIA, or is occurring illegally as the congressional
investigation found, it is clear that the prohibition against revenue diversion cannot
be relied upon as a barrier against the imposition of excessive user fees. See also
FAA Report No. AV-1998 20 (“[F]rom August 1991 to March 1998, the Office of
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Court recognized the need for regulatory oversight and guidelines establishing the

reasonableness of fees.

                        On occasion, airports also have argued that competition among

airports, at least for connecting hub traffic, is sufficient to protect airlines against

the exercise of airport market power. This argument is equally specious. Only a

small fraction of all commercial service airports serve as airline hubs. Thus any

protection created by such rivalry, theoretically, at most, would affect airlines from

excessive fees in only a few markets. Kasper Decl. ¶ 16. However, in light of the

practical difficulties and huge expense involved in the relocation of an airline‟s hub

operations, there is little, if any, likelihood airlines will relocate their hub facilities

elsewhere because of the imposition of significantly higher landing fees at an

existing hub. Thus it is not reasonable to rely on competition among airports for

connecting hub traffic to protect airport users from an airport‟s market power.

Kasper Decl. ¶¶ 16-17.

                        Accordingly, in the absence of meaningful guidelines by the Secretary,

airports will have the ability to impose noncompetitive prices on airlines and other

airport tenants.

[Footnote continued]

Inspector General issued 56 audit-reports identifying over $233 million in
prohibited airport revenue diversions.”)

       This evidence amply demonstrates how airports, contrary to the interests of
the traveling public, have diverted millions of dollars collected from airport uses for
projects not sanctioned by the FAA nor in any way related to the traveling public,
much less to enhance air travel. Thus the claims of many airports that their actions
are taken in the best interest of the traveling public and local traveling community
are not consistent with their documented conduct to the contrary.
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                        In vacating the Secretary‟s Revised Policy, the Court made clear its

concerns that the policy did not adequately prevent airports from exercising their

monopoly power over essential airport facilities and services, and that DOT was

inconsistent in its treatment of airfield and other essential nonairfield assets.

These dual concerns can be addressed best by readopting the Department‟s Initial

Policy, which required that total fees for all essential airport facilities not exceed

actual operating costs (including capital cost and reasonable reserves) and that all

essential airport assets be valued at historical cost.

            A.          All Essential Airport Assets Should Be Valued at Historical

                        DOT has long recognized that the valuation of airfield assets based on

historical costs best reflects the intent of Congress. On no less than five separate

occasions, the Secretary has determined that the valuation of airfield assets should

be based on historical cost 23/ and that charges for airfield assets based on fair

market value are “unreasonable.” Final Decision on Remand at 7. Further, the

23/    Initial Policy, 60 Fed. Reg. at 6911; Revised Policy, 61 Fed. Reg. at 31994;
Los Angeles International Airport Rates Proceeding (“First LAX Rate Proceeding”),
Order 95-6-36 (June 30, 1995); Second Los Angeles International Airport Rates
Proceeding (“Second LAX Rate Proceeding”), Order 95-12-33 (Dec. 22, 1995); and,
Los Angeles International Airport Rates Proceeding (“Final Decision on Remand”),
Order 97-12-31 (Dec. 23, 1997) (Fees were unreasonable insofar as they included a
rental cost for the airfield and apron land based on the land‟s estimated fair market

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Court of Appeals‟ ruling and Professor Gilbert‟s declaration make clear that no

justification exists for treating airfield and essential nonairfield assets differently

because an airport‟s significant market power can be used to extract monopoly

profits from either or both sources. Thus the historical cost valuation requirement

should be extended to essential nonairfield assets as well. The Secretary‟s rationale

for requiring that airfield assets be valued at historical cost is equally applicable in

all respects to the valuation of essential airport terminal and other facilities and

services. Consequently, all airfield and essential nonairfield aeronautical assets

should be treated alike and valued at historical cost, not fair market value.

                        We agree with the Department that there are numerous reasons for

requiring the fees for essential airport facilities to be based on historical cost. See

note 23, supra. First, a historical cost requirement provides an effective, indeed a

critical, means of constraining an airport‟s market power and bears a direct

relationship to the airport‟s cost of providing those services. In contrast, valuations

based on fair market value bear no relation to an airport‟s costs of acquiring airport

assets or providing airport services to airport users.

                        Second, the use of historical cost is the most widely accepted

methodology for valuing the assets of local government enterprise functions such as

airports. The financial and accounting standards issued by the Financial

Accounting Standards Board, which form the basis of Generally Accepted

Accounting Principles (“GAAP”), expressly require the use of historical cost for

valuing such municipal assets. 60 Fed. Reg. at 6911.

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                        Third, historical cost has long been the methodology used to establish

rates in regulated industries. While DOT has acknowledged that rates charged by

airports are not “perfectly analogous” to public utility rates, it nevertheless has

concluded that “many of the reasons for the use of historical cost app[lied] to both

public and private enterprise activities.” Id.

                        Fourth, the Secretary has already determined that historical costs are

easier to determine and verify, likely to generate less controversy, and easier to

administer than valuations based on fair market value. Historical cost is the

simplest to determine and the least controversial method of valuation because asset

values are set only once at the time of acquisition and are based on the actual cost

to construct or acquire that facility. Id. In contrast, valuations based on fair

market value change constantly based on a wide variety of factors. Kasper Decl.

¶¶ 42-43.

                        The Court of Appeals was incorrect when it stated, in dicta, that the

fair market method of valuation could be as simple and lacking in controversy as

the historical cost method. The Court incorrectly assumed that (1) such valuations

are not likely to be controversial, as allegedly evidenced by the decision of the

airlines to not challenge the land values in the related LAX proceeding; (2) “airports

need only appraise the [fair] market value of the land once in order to bring it into

the rate base”; (3) there often is a “ready market in [land] parcels sufficiently

comparable for a professional appraiser to extrapolate with some confidence”; and

(4) there is no need to reconstruct a “hypothetical asset” to perform the valuation.

119 F.3d at 44 (quoting 103 F.3d at 1033).

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                        First, airlines are likely to contest vigorously the fair market valuation

of airfield and other assets if this methodology were sanctioned by the

Department. 24/ Given the economic incentives of airports to secure overly high

valuations, the challenges to these valuations are likely to be both frequent and

costly. Kasper Decl. ¶ 42-43. As the Department itself noted in issuing its Revised

Policy, disputes involving rates and charges were few and far between when the

cost basis for valuing airport assets was historical cost. In contrast, the only two

significant cases where valuations were not based on historical cost (LAX and

London‟s Heathrow Airport) have engendered extensive litigation and substantial

commitments of time and resources by the parties and the Department. Kasper

Decl. ¶ 43.

                        Second, the fair market value of land and other assets is not static, as

the Court seems to suggest, but changes constantly. While the Court assumed that

the fair market value of land would need to be determined only once, LAX, for

example, has advised its own experts of its intent to redetermine the fair market

value of its airport property “at least once every five years.” 25/ One airport abroad,

London‟s Heathrow Airport, which uses the fair market methodology, reappraises

24/    The fact that the airlines elected not to challenge the land appraisal in the
prior LAX proceeding, given their focus on the numerous other important policy
issues at stake in that litigation, is not evidence that such challenges are not likely
to be forthcoming in the future.

25/   DOT Dkt. 50176, LAX Ex. 74, Letter from M. Brown to F. Levy (Oct. 12,
1992) (Exhibit E attached hereto); Final Decision on Remand at 28-29.

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its property at least every two years. 26/ Such periodic reappraisals are not only

time consuming and expensive, but clearly likely to generate more controversy than

valuations based on historical cost.

                        Further, the determination of the fair market value of airport land and

other airport assets is significantly more difficult than determining historical cost.

There is no easy objective method for determining the value of a large parcel of land

such as the LAX airfield. Airfield land cannot appropriately be appraised based on

comparable sales of land, as the Court assumes, because, as LAX‟s own experts

recognized, a “meaningful analysis on a direct comparison basis is not possible”

because of “the numerous differences in the development of such a large property

and current environmental and political considerations.” 27/ LAX‟s appraisers

concluded at the time of their appraisal, in January of 1993, that redevelopment of

airfield land would not be feasible since the market could not absorb more space

and that financing for such a huge commercial/industrial project was virtually

nonexistent. Thus they could not rely, as the Court suggested, on comparable land

sales and development projects to determine the fair market value of the LAX

airfield. Id.

                        Instead, LAX‟s expert appraisers determined fair market value of the

airfield land based on a “hypothetical development approach” based on “the

26/    Final Decision on Remand at 28 n.19; Kasper Decl. ¶ 45. Generally accepted
accounting principles in the United Kingdom, but not in the United States, allow a
regulated industry to use value methodologies other than historical cost. Kasper
Decl. ¶ 45.

27/         Final Decision on Remand at 27 (quoting LAX Ex. 14, at 21).

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estimated anticipated revenues which would be derived from the sale of finished,

commercial/industrial sites of a theoretical development over the projected term of

the project.” Id. Such a calculation relies on estimates as to land development and

construction costs, indirect cost, financing cost, and a profit for the developer, all of

which would be highly judgmental, if not speculative, and create greater

controversy. Id. Thus the Court‟s assumption that the calculation of the fair

market value of airfield land would not be difficult because of the availability of

data from comparable sales and the lack of a need to reconstruct a hypothetical

asset is incorrect. Terminal facilities would be equally difficult to value at fair

market because of the lack of comparable sales data, the effect of technological

changes, and the inability to use such facilities for any other purposes.

                        Further complicating any appraisal of airport property, as the

Department recognizes, is the fact that “when the estimate of fair market value is

based on land adjoining the airport, the estimate uses land parcels whose value is

greatly influenced by their location near the airport, . . . which can lead to

„bootstrap‟ accounting.” Id. at 28. If, on the other hand, “the estimate is based on

land that is not near the airport, as was largely true of the estimate made by the

[LAX] appraisal firm, the validity of the estimate will depend on whether the land

used for the calculation is comparable to the airfield land, an issue which may be

difficult to resolve.” Id. For all of these reasons, valuation of all airport facilities

and services that airlines need at airports to provide air transportation services

should be based on historical cost.

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                        In addition, the Department needs to address the very real issue of

excessive spending by airports for unnecessary or overly expensive facilities and

services not warranted under a cost-benefit analysis. Neither a revenue cap on

overall aeronautical revenues nor a requirement to limit asset valuations to

historical cost addresses this issue. The Department should consider requiring that

major improvements or expansions of airport facilities be mutually agreed upon by

the airport and airlines or justified by the airport through a cost-benefit analysis

approved by DOT. Similarly, Passenger Facility Charges (“PFCs”) should be

strictly monitored by the Department and limited to projects that enhance airport

capacity and are meritorious under a cost-benefit analysis.

            B.          Airport Claims of Lost Opportunity Cost Are Not Valid and Do
                        Not Justify the Valuation of Assets Based on Fair Market

                        Airport providers assert that fees based on the fair market value of

their assets (both airfield and nonairfield) are both “reasonable” and justified based

on lost opportunity cost -- the value the asset could have earned if employed in its

best alternative use. They assert that the fair market value methodology best

reflects the actual economic worth of their assets and provides a basis to calculate

the opportunity cost associated with those assets. However, the Department has

repeatedly rejected this argument and agreed with ATA that airports such as LAX

“incur[ ] no opportunity cost” when airport assets are used for airport purposes.

Final Decision on Remand at 12-13. Most U.S. airports have entered into contracts

with the FAA that require them to continue to operate as an airport in exchange for

extensive federal airport grant funding. As a result, airports have no opportunity to
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use their airfield assets for other purposes. The same rationale applies equally to

all other essential airport facilities and services.

                        Airports, by accepting federal grant funding, agree to the conditions

set forth in 49 U.S.C. § 47107. One of these conditions requires the grant recipient

to continue operating the airport as an airport, 49 U.S.C. § 47107(a)(1). This

statute requires that “[t]he airport will be available for public use on reasonable

conditions and without unjust discrimination.” This requirement applies not only

to airfield land, but to all other essential airport facilities and services that

comprise an “airport.” 28/ Another condition requires the airport operator to

maintain a current layout plan approved by the Secretary and bars the airport

operator from making any changes in the airport or any of its facilities if the change

does not comply with the approved plan and if the Secretary decides that the

change “may affect adversely the safety, utility, or efficiency of the airport.”

49 U.S.C. § 47107(a)(16). Thus airports that have accepted federal grant funding

are contractually bound to continue to use their airports as airports. Because there

are no other permitted uses of these assets, airports have no valid claim that they

otherwise could generate greater revenues from other uses. Final Decision on

Remand at 13-14.

                        The vast majority of commercial service airports in the United States

have accepted federal grant funding. Attached hereto as Exhibit F is a listing of

airports that have received federal airport grants since 1982. These grants total in

28/   See also 49 U.S.C. § 47107(a)(7) and Airport Compliance Requirements,
Order No. 5190.6A, ¶¶ 2-2, at 3, 4-5, at 14.

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excess of $6.7 billion. More detailed information on the grants accepted by many

major airports in larger metropolitan areas is attached as Exhibit G. From this

documentation, it is readily apparent that these and other airports will be bound by

federal grant restrictions for many years to come. Thus the Secretary is correct in

concluding that airports, having no opportunity to use their airport facilities for any

other purpose, incur no lost opportunity costs. Final Decision on Remand at 13;

Kasper Decl. ¶ 46 n. 23.

                        The Department also has properly rejected airport claims that

opportunity costs can be incurred in using property for a purpose that is legally

required. As the Secretary has held, when an airport voluntarily obligates itself to

continue operating as an airport, it presumably concluded that the use of its

property as an airport was the property‟s best and highest use and that the benefits

obtained from the airport amply covered the cost of using the property as an airport.

Further, in return for such a commitment, the airports received large amounts of

federal funding. Final Decision on Remand at 15. Thus each of the above reasons

supports the use of historical costs in the valuation of not only airfield but essential

nonairfield assets.

            C.          Contrary to Airport Claims, the Use of Historical Cost in the
                        Absence of Voluntary Fee Agreements between the Parties Is
                        Neither Unfair nor Inconsistent with Economic Efficiency

                        The use of historical cost for valuing essential airport assets does not

preclude an airport from being totally self-sufficient and recovering all direct and

indirect costs, establishing reasonable reserves, and recovering all costs for the

improvement or expansion of essential airport facilities, including debt service.
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Thus the imposition of a historical cost requirement in no way inhibits the efficient

and effective operation of an airport. Significantly, this approach is more consistent

with the congressional intent of developing a self-sustaining, cost-based airport


                        In contrast, permitting fees to be based on the fair market value of

airport assets will result in the buildup of unnecessary surpluses that will permit, if

not encourage, less vigilance in controlling costs, provide greater opportunity for the

diversion of airport revenues, and encourage the expenditure of funds for unneeded

or more lavish facilities than required. Kasper Decl. ¶¶ 27-28. More important, it

will result in airlines paying excessive and unreasonable fees that increase the

airlines‟ costs and may result in significant increases in fees paid by the traveling


                        Further, there is no basis for airports to claim that constraints on user

charges will deprive them of their property rights or result in inefficiencies by

forcing airports to charge less than economically efficient prices for the use of

airport assets. The critical assumption underlying this argument -- that airport fee

restrictions would take away from airports rights they currently have -- is simply

wrong. In reality, airport proprietors have previously bargained away those rights

by accepting substantial limitations on the use of their property in the form of

federal grant requirements. The effect of these limitations, willingly accepted by

airport authorities at the time they determined to participate in the national air

transportation system and to accept federal funding grants, was to transfer what

economists call “property rights” from airports to airport users in exchange for

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federal funding and the considerable economic benefits derived from having air

transportation service to their community. Further, as aptly demonstrated by

Nobel economic laureate Ronald Coase, the allocation of property rights between

parties under such circumstances affects the distribution of benefits between the

parties, not economic efficiency. Kasper Decl. ¶ 50.


                        Under the Revised Policy, airports could charge imputed interest on

the investment of funds derived from all nonairfield sources but not from funds

generated from airfield fees. Revised Policy ¶ 2.4.1, 61 Fed. Reg. 32019. In

vacating this portion of the Revised Policy, the Court found the inconsistent

treatment of funds generated from airfield and nonairfield sources inappropriate

and the Secretary‟s supporting rationale inadequate. Simply put, the issue is

whether imputed interest is ever appropriate on the investment of funds generated

from surplus fees charged to airport users for essential airport services. ATA and

RAA emphatically believes the answer is no.

                        The Secretary has at all times recognized that imputed interest should

not be permitted on airfield investments generated from excess airfield fees. The

reasons for that prohibition have been well stated by the Department. Charging

imputed interest on funds derived from airfield revenues would require airfield

users to finance airfield investments twice, once in the form of excess fees for use of

the airfield and again in the form of the imputed interest on the subsequent

investment of those excess funds. 61 Fed. Reg. 32001. The Department‟s rationale
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is sound and equally applicable to surplus funds from fees for all other essential

airport facilities.

                        Airports have no lost opportunity costs when investing excess funds in

aeronautical facilities. The generation of these excess funds results from an airport

charging unreasonable fees -- those in excess of the costs of service, including

reasonable reserves. As such, the imposition of imputed interest upon the

subsequent expenditure of these excess funds is neither warranted nor prudent

because it actually rewards an airport for charging excessive fees. Second, as the

Department recognizes, the use of surplus funds from aeronautical sources “does

not carry with it any implicit cost to the airport for the use of capital since the

reserve was generated by direct charge to users.” 29/ This remains true of

investment of surplus funds from both airfield and other aeronautical sources.

Because an airport can invest airport funds only in the airport, an airport has no

lost-opportunity cost arising from forgoing more profitable investments elsewhere.

Moreover, an airport, through direct charges to the airlines and other users, is

entitled to recoup the entire cost of its investment in any airport facility, including

debt service. Thus, from the airport‟s perspective, its cost of capital for any airport

facility funded by aeronautical fees is zero.

                        To the extent an airport funds such facilities through excess fees

previously collected from the airlines, the airlines will pay twice. First, but for the

excess charges by the airport, these funds would have belonged to and remained

with the airlines. The airlines, which have no restrictions on the investment of

29/         Initial Policy, 60 Fed. Reg. 6909.
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their surplus funds, could have invested these funds elsewhere prior to the time

they were needed for airport purposes. Thus, unlike airports, the airlines have lost

this investment income. Second, airlines will be charged again under the guise of

“imputed interest” when these excess funds are reinvested by the airport in other

essential aeronautical facilities. Hence imputed interest is clearly not appropriate

or reasonable.

                        In contrast, the lack of imputed interest on excess aeronautical fees for

essential facilities and services will cause absolutely no harm to the airports or

create any disincentives to invest in needed improvements or expansions for the

reasons previously stated -- all such facilities and related debt service, including

reasonable reserves, can be charged by the airports directly to the airlines and other

users under existing regulations. Thus no reasonable basis exists for the Secretary

to allow imputed interest on the reinvestment of excess aeronautical fees.


                        In summary, most airports are locational monopolies with significant

market power and the ability to impose unreasonable fees and charges for essential

airport facilities and services. Federal law has long sought to restrain this market

power by requiring that airport rates and charges be “reasonable,” and by

prohibiting the imposition of any charges (other than PFCs) directly or indirectly on

the traveling public. Under the federal scheme, DOT has the responsibility of

enforcing these restrictions. The Department‟s current policy on airport rates and

charges fails to carry out that responsibility, as the Court of Appeals clearly

recognized in the ATA decision. To better fulfill its obligation to constrain airports‟
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ability to exercise their market power and protect the public interest, the

Department should (1) prohibit airports, absent a negotiated fee agreement, from

charging for all essential aeronautical facilities and services fees that exceed the

actual cost of providing and operating such facilities and services; (2) require that

all essential aeronautical assets be valued at historical cost; (3) require that major

airport expansion or improvement projects be mutually agreed upon by the airport

and airlines or justified by the airport through a cost-benefit analysis approved by

DOT; and (4) prohibit airports from charging imputed interest or, at a minimum,

prohibit imputed interest charges on funds derived from aeronautical sources and

invested in aeronautical facilities.

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