A COMPETITIVE EQUILIBRIUM BETWEEN DOMESTIC AIRLINES AND EXPORTS: ANALYSIS OF US CASE LAW

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices .’

The aviation industry is a highly dynamic sector dueto the surfeit of fiancial resources and capital thatare involved in it. Deregulation and liberalization of the industry has minimized the barriers of entry and simultaneously facilitates in the entry of new players into the market. This, in turn, has given rise to intense competition among the various airline operators.

A sine qua non of an operator in the airline industry is the extensive fiancial capital requirements to operate and compete with its counterparts. Hence, governmental agencies and institutions provide various forms of fiancial aid to airline operators in order to fabricate a balanced and healthy competitive environment within the industry. However, they should also take into consideration, the status quo of the domestic airline operators before authorizing colossal amounts of fiancial aid to overseas airline operators, in order to avoid a predicament of irregular competition. The case of Delta Airlines Inc. v. Export-Import Bank of the United States attained widespread prominence in this aspect as it determined the outcome of providing extensive fiancial loans and guarantees to airline operators outside the United States. The paramount issue in this case was, whether the interests of the domestic airline operators would be adversely affcted if a domestic agency or institution provides fiancial aid to a foreign airline operator.

The Financer

Aircraft manufacturers in the US depend profoundly on the Export-Import Bank of the United States (the Bank) to provide loans and loan guarantees to their foreign customers at competitive interest rates. However, the Bank only provides fiancial aid to foreign customers who purchase US manufactured goods or commodities. Hence, domestic airline operators in the US contend that these foreign airline operators receive an unfair advantage due to the exclusive fiancial aid provided to them by the Bank. In this scenario, foreign airline operators are provided with an additional source of fiance to fund their purchase of US manufactured planes and other aeronautical equipment, which in turn, facilitates their operations.

The Bank is governed by the provisions of the ExportImport Bank Act of 1945 (the Bank Act) which has expressly laid down that the Bank can authorize loans, guarantees, insurance and credit with the objective of increasing employment of US workers. The Bank is also placed with the responsibility to process loan applications with flxibility and effiency so that US exporters do not lose an opportunity to export their goods or commodities. However, the Bank cannot issue a fiancial guarantee for the production of any commodity for export by any other country, if:

1. that commodity is available in surplus in the world markets; or
2. the future production capacity of that country is expected to compete with the US’ production of the same, similar or competing commodity.

The Bank Act has further provided that the Bank has to conduct a detailed economic analysis of any loan application in order to determine the potential effcts of that proposed fiancial transaction on the respective domestic industry. Therefore, the Bank has implemented certain economic impact procedures [EIPs] to meet the statutory obligations that have been laid down in the Bank Act. These EIPs help in determining the negative economic impact that any proposed fiancial transaction could have on the US domestic market. Financial transactions that do not pass any one of these EIPs would be subject to an extensive review process. A Chronicle of the American Airline Industry The complications with regard to providing fiancial aid to foreign airline operators commenced when the Bank had approved Air India’s application for loan guarantees for the purchase of particular Boeing aircrafts. The domestic airline operators of US saw this as a substantial disadvantage as they were not eligible to obtain any fiancial aid from the Bank. Subsequently, the aggrieved Air Transport Association and Delta Air Lines sued the Bank on the grounds that the Bank had not complied with the statutory requirements of the Bank Act before authorizing the loan guarantees. They contended that the capability of domestic airline operators to compete with their foreign counterparts would be hindered if the Bank provided the latter with considerable fiancial support at competitive interest rates. They further claimed that the Bank had neglected to consider the competitive status of the domestic airline operators of US, as their comparatively weaker position would cause them to incur substantial damages.

Passenger Seats in an Aircraft: Exportable Good or Exportable Service?

The Bank had brought about certain amendments to its EIPs in 2001 in order to exclude transactions involving ‘exportable services’ from the extensive review process. Therefore, the Bank’s fiancing of foreign airline operators was excluded from the economic impact analysis or any extensive review process as it resulted in the production of an exportable service and not an exportable good or commodity.

Delta Air Lines argued that the Bank had failed to adhere to the statutory obligations under the Bank Act as the seat capacity that they produced was a commodity and not a service. Therefore, the Bank had assisted in the increase in production of seat capacity by fiancially aiding Air India. This would directly lead to an oversupply of aircrafts and seat capacity in the international markets. They further contended that they had to cancel their non-stop passenger service from New York to Mumbai as Air India had floded the international markets with an over-supply of seat capacity. The wrangle in this dispute was with regard to the nature of seat capacity that was provided by the airline operators. Delta Air Lines claimed that the foremost misconception by the Bank was with regard to the extent of the ambit of the terms ‘exportable goods’ and ‘exportable services’. They contended that the seat capacity that an airline operator produces is an exportable good. Therefore, the seat capacity of a foreign airline operator would considerably increase if the Bank fiancially supports them for purchasing aircrafts from a US aircraft manufacturer.

After examining the contentions of the learned counsels of both sides, the US District Court for the District of Columbia took the view that the seat capacity of an airline operator is an exportable service and not an exportable good. The court further held that the Bank Act has conferred the Bank with the authority to decide on the EIPs that it should follow, in order to ensure that the domestic markets are not affcted by any transactions. Subsequently, Delta Air Lines fied an appeal at the US Court of Appeals. This court authorized the Bank to proceed with the fiancial aid that was being provided to Air India. However, the Bank was asked to provide an explanation regarding the impact of the transaction on the domestic airline industry of US. The court further upheld the view of the District Court in regard that the seat capacity which an airline operator produces does not fall under the domain of the terms, ‘good’ or ‘commodity’ with regard to the Bank Act.

Since seat capacity was acknowledged as a service, the US Congress passed the Export-Import Bank Reauthorization Act of 2012 which directed the Bank to make necessary amendments in its EIPs. Subsequently, the Bank made certain amendments in its EIPs and included additional guidelines for the review of potential economic impact on exportable services. Therefore, the Bank will now have to conduct a review of a potential economic impact on the domestic airline industry before authorizing a transaction regarding the sale of aircrafts to an overseas customer. This amendment in the Bank’s EIPs provides signifiant relief to the domestic airline operators in the US as the Bank will also have to consider the economic impact on the domestic airline operators and not just the domestic aircraft manufacturers.