[Federal Register Volume 59, Number 186 (Tuesday, September 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23789]


[[Page Unknown]]

[Federal Register: September 27, 1994]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

 

Order Proposing Clarification of Contract Bulk Fare Exemption 
Authority

SUMMARY: We are publishing the order in its entirety as an appendix to 
this document.

DATES: Issued in Washington, DC., September 21, 1994.

FOR FURTHER INFORMATION CONTACT: Patricia Thomas, Office of Aviation 
Analysis, Room 6401, 202-366-9721, or William J. Wagner, Office of 
Assistant General Counsel for Aviation Enforcement and Proceedings, 
Room 4116, 202-366-9342, U.S. Department of Transportation, 400 Seventh 
Street, SW., Washington, DC 205590.
John V. Coleman,
Director, Office of Aviation Analysis.

[Docket 44369; Order 94-9-31]

Exemption of Persons Who Contract for the Purchase of Blocks of Seats 
on Scheduled Service Pursuant to Applicable Tariffs for Resale to the 
Public

Order to Show Cause

Summary
    By this order, we are proposing to clarify the extent to which 
activities by contract bulk fare operators are covered by the exemption 
granted to such persons by Order 88-9-2.
Background
    By Order 81-7-109, the Civil Aeronautics Board (the Board) granted 
to persons who contract for blocks of seats with U.S. and foreign 
direct air carriers a blanket exemption from the requirements of 
sections 401, 402, and 403 of the Federal Aviation Act (the Act)\1\ and 
of part 221 of the Board's regulations to the extent necessary to allow 
such persons, commonly referred to as ``contract bulk fare operators,'' 
to resell the seats without filing tariffs or themselves having to 
obtain a certificate of public convenience and necessity or a foreign 
air carrier permit, as applicable.\2\ By Order 88-9-2, the Department 
continued this exemption.
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    \1\Pub. L. 103-272, enacted July 5, 1994, revised and recodified 
the Federal Aviation Act within Subtitle VII of Title 49 United 
States Code (Transportation) (the statute). For convenience in this 
order, we will refer both to the old section numbers in the Act and 
the new section numbers in the statute. The applicable provisions of 
sections 401, 402, and 403 are now contained in Subpart II (Economic 
Regulation) of Subtitle VII.
    \2\Under 49 U.S.C. 40102(a)(2) (see former section 101(3) of the 
Act), any person who engages, either directly or indirectly, in air 
transportation operations is deemed to be an air carrier. 49 U.S.C. 
40109 (see former section 101(3)) provides that air carriers not 
directly engaged in the operation of aircraft (i.e., ``indirect'' 
air carriers) may be relieved from certain provisions of the statute 
to the extent and for such periods as the Secretary of 
Transportation decides are in the public interest.
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    Traditionally, the marketing arrangement authorized by this 
exemption has been utilized by direct air carriers as an additional 
tool to enhance their marketing efforts but which is incidental to 
their overall scheduled service operations. The blanket exemption 
allows these direct air carriers to contract to sell a portion of their 
seats to middlemen (contract bulk fare operators). These contractors 
are then free to sell individual tickets to customers, either with or 
without a ground package, at whatever price their business judgments 
dictate. The contractors generally pay for the seats in advance and are 
sometimes subject to cancellation penalties for returning unsold 
seats.\3\ The direct air carrier continues to market seats on these 
flights on its own behalf through the normal air transportation 
distribution system.
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    \3\See Orders 80-2-112 and 81-7-109.
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    The exemption is subject to certain disclosure and consumer 
protection provisions, specifically (a) that any direct air carrier 
implementing such marketing programs shall file tariff rules that 
clearly describe the relationship that exists between the direct air 
carrier and the passenger and that establish that, upon payment by the 
passenger, the direct air carrier bears the responsibility for 
safeguarding the passenger's money; (b) that any direct air carrier and 
any contractor operating under the exemption shall insure that 
consumers receive clear and conspicuous notice before payment of any 
special contractual conditions imposed either by the contractor or by 
the direct air carrier that are applicable to the passenger,\4\ and (c) 
that any direct air carrier implementing these marketing programs in 
foreign air transportation must file tariffs that state the prices to 
be charged to the contractor.\5\
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    \4\These conditions include the following: the terms and amount 
of any cancellation penalties, fees for reservation changes, or 
other special charges; limits on voluntary refunds--specifically, 
notice that clearly informs the passenger of risks in the event of 
voluntary cancellation by stating the exact amount of the applicable 
refund for such cancellation; limits on involuntary refunds, 
rerouting or ticket reissuance rights; limits on ticket 
endorsability or special ticket purchase; check-in or reconfirmation 
requirements; if true, the fact that the passenger may be assessed 
price increases after ticket purchase; if true, the fact that flight 
dates and times are not guaranteed at the time of purchase; and 
information on the allocation of responsibility between the 
contractor and direct air carrier for the passenger's funds and 
transportation. See Orders 86-9-61 and 88-9-2.
    \5\Originally, the exemption granted by Order 81-7-109 also 
required that direct air carriers file with the Board the names and 
addresses of each contractor. This condition was eliminated by Order 
88-9-2.
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Current Usage
    We have recently been faced with two novel situations in which U.S. 
direct air carriers and their contractors are attempting to avail 
themselves of this exemption.
    In the first, the contractor uses the exemption to sell scheduled 
service in conjunction with an existing U.S. direct air carrier pending 
Department action on the contractor's own application for certificate 
or commuter authority. Indeed, the relationship between the contractor-
applicant and the direct air carrier, while portrayed as a contract 
bulk fare arrangement, in fact can be substantially more. The 
contractor-applicant may provide the ground handling, may be involved 
in hiring personnel to staff the operation, and may even arrange for 
the aircraft to be used in the service. The contract operations may 
also be in markets that are geographically distinct from the 
``regular'' scheduled operations of the direct air carrier. The 
situation is compounded by the fact that the direct air carrier may 
also register with the Department to use the trade name of the 
contractor-applicant for these services.\6\ Typically, all of these 
arrangements are scheduled to terminate upon the contractor-applicant's 
receipt of its own operating authority.
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    \6\Part 215 of the Department's Regulations (14 CFR part 215) 
establishes a regulatory system of registration and notification by 
air carriers who propose to use a trade name. Upon compliance with 
these requirements, use of the trade name is typically allowed. 
However, the Department will not register a trade name when it is 
certain that use of such name would constitute an unlawful holding 
out under 49 U.S.C. 41101(a) (see former section 401(a) of the Act) 
or there is a significant potential for, or actual, public confusion 
or other unfair or deceptive practices prohibited by 49 U.S.C. 41712 
(see former section 411 of the Act). If the registration of an air 
carrier trade name will help effectuate an arrangement that will 
unlawfully circumvent our fitness standards, we have the authority 
to reject the name registration.
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    In the second situation, the U.S. direct air carrier and contractor 
seek to convert an existing Public Charter program in which they are 
parties to scheduled service through use of the contract bulk fare 
exemption. Often, the direct air carrier holds charter-only authority 
and files an application with the Department seeking scheduled 
authority in order to operate under a contract bulk fare arrangement. 
In some cases, the operations represented by the contract bulk fare 
arrangement constitute most, if not all, of the scheduled operations 
proposed by the direct air carrier. In general, these operations are 
indistinguishable from charter flights, except that the contractor and 
direct air carrier are not subject to the consumer protection 
requirements applicable to Public Charter flights contained in 14 CFR 
part 380. Those rules require, among other things, the establishment of 
escrow accounts and surety arrangements for the protection of passenger 
funds, and the signing of operator-participant contracts that detail 
the rights and obligations of the passenger, charter operator, and 
direct air carrier.
    Common to both situations is the fact that, in markets covered by 
the bulk fare contract, the contractor has agreed to buy the entire, or 
virtually the entire, capacity of the aircraft and is responsible for 
all of the marketing of that capacity. Normally, the direct air carrier 
does not perform any marketing function and does not sell air 
transportation on its own behalf in the markets covered by the 
contract. Rather, its sole function is to operate the aircraft for 
which it is paid a set price.
Discussion
    The statute establishes a regulatory framework for conducting air 
transportation operations that balances a liberal entry policy for new 
air carriers, both direct and indirect, with Congress' concern for 
operational safety and consumer protection. Under the statute, a person 
who wants to engage in air transportation of passengers has two 
choices; either be found fit as an airline (i.e., direct air carrier) 
or qualify as an indirect air carrier. In the case of the person who 
seeks to operate as a U.S. direct air carrier, that person has to meet 
a three-part test of demonstrating that it has the managerial 
competence, financial capability, and compliance disposition to operate 
the proposed airline safely and without imposing an undue risk on the 
public.\7\ Until the Department finds that the applicant is fit to 
operate and it is issued appropriate direct air carrier authority, it 
is prohibited from advertising or otherwise holding out its services to 
the public (see 14 CFR 201.5). The intent of this rule is to prevent 
companies who have not or cannot meet the Department's rigorous fitness 
test from collecting money from potential passengers, thus exposing 
them to financial risks. While ultimately many applicants may be found 
fit and given U.S. direct air carrier authority, often this is not 
before a number of substantive changes have been made in the management 
team, ownership structure, or financial arrangements undertaken by the 
applicant. To allow such applicants to commence operations under the 
guise of a contract bulk fare arrangement prior to being found fit 
poses a potentially serious risk to consumers that we believe is not in 
the public interest.
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    \7\The applicant must also demonstrate that it is a U.S. citizen 
as defined in 49 U.S.C. 40102(a)(15) (see former section 101(16) of 
the Act).
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    In the case where an entity does not want to operate as a direct 
air carrier or its agent, but still wants to market air transportation 
on its own behalf, it is not subject to a fitness review, but must 
comply with the requirements that the Department has established to 
ensure that consumer funds and expectations are protected. This means 
complying with the consumer protection provisions of the Public Charter 
rules (14 CFR part 380) or, in limited circumstances, the conditions of 
the contract bulk fare exemption.
    In our view, the fundamental characteristic that distinguishes the 
typical contract bulk fare marketing arrangement contemplated in the 
exemption from the two situations described above lies in who is the 
true ``operator'' of the services in an economic sense--who has 
control. In the typical contract bulk fare arrangement, that control 
rests with the direct air carrier. Although the contractor assumes the 
risk for those seats that it has purchased from the direct air carrier, 
the direct air carrier has control over the scheduling of the flights 
involved, allocation of seat inventory, and ultimate responsibility for 
safeguarding the passengers' money. Moreover, since a contract bulk 
fare arrangement is merely one of a number of marketing tools used by a 
direct air carrier, that arrangement would be incidental to the overall 
scheduled operations of the direct air carrier. The risk of exposure to 
the direct air carrier from one contractor would therefore also be 
limited.
    On the other hand, in the contractor-applicant and charter-
conversion situations, the contractor is the ``true'' operator in an 
economic sense, and the purported contract bulk fare arrangements are 
the driving force behind the operation. Although the direct air carrier 
is responsible for the operation of the flight, the contractor controls 
the scheduling, allocation of inventory, and price, and bears that risk 
for marketing most, if not the total capacity, of the aircraft. Under 
these circumstances, it is difficult to distinguish these operations 
from those performed by a direct air carrier under a wet lease 
arrangement or by a charter operator under the Public Charter rules. 
More importantly, if the contract bulk fare operator should for any 
reason fail to remit collected funds, the direct air carrier 
nevertheless ultimately bears the responsibility to the passengers for 
either providing the air transportation or paying refunds. While this 
may not pose any undue risk in the case of a carrier with other 
substantial operations, in the situations described above, the amount 
of monies for which the direct air carrier could be held liable may be 
so great as to endanger its own economic viability and ultimately 
adversely affect its other customers.
Decision
    We continue to believe that the contract bulk fare concept can be a 
valuable marketing tool for direct air carriers, and, where properly 
used, that the conditions imposed in our exemption orders provide 
adequate protection for consumers. However, when the Board originally 
granted--and we continued--the contract bulk fare exemption, it was 
envisioned that this authority would be used by existing scheduled 
carriers as a tool to expand their marketing capabilities, and that 
such contracts would be incidental to their other scheduled operations. 
It was not envisioned that applicants for direct air carrier authority 
could use the contract bulk fare mechanism as a means of ``jump-
starting'' their proposed operations prior to being found fit, or that 
these arrangements would be used as a means of avoiding the Public 
Charter consumer protection requirements. Thus, it is our view that the 
two situations described above were not intended to be covered by the 
exemption granted by Orders 81-7-109 and 88-9-2. More importantly, the 
arrangements have the potential to create great risks for consumers, 
since they could be used to circumvent our fitness requirements or the 
consumer protection provisions of our charter rules.
    Therefore, we have tentatively decided to amend the exemption to 
require that the direct air carrier be, as discussed above, the 
``true'' operator of the service in an economic sense and the contract 
bulk fare arrangement be incidental to that carrier's overall scheduled 
operations. The direct air carrier may not use a contract bulk fare 
arrangement as the only means of holding out its scheduled services, 
but must, in fact, be holding out on its own behalf the scheduled air 
services that are also being sold under the contract bulk fare 
arrangement. Practically speaking, this means that the direct air 
carrier would be responsible for holding out scheduled service in its 
own name through the traditional marketing mechanisms of the industry, 
such as listing its flights in the Official Airline Guides or major 
computer reservations systems, or using travel agents or 
advertisements.
    We do not wish to preclude the customary use by direct air carriers 
of the contract bulk fare exemption in the many resort or vacation 
markets in which they currently use it as an additional tool to expand 
the marketing of their scheduled service by selling seats to tour or 
cruise operators for packaging and resale. The direct air carriers 
involved in the these situations typically have extensive scheduled 
service operations elsewhere and the particular services involved in 
the contract bulk fare arrangement are under the ultimate economic 
control of the direct air carrier. We would consider these operations 
to be incidental to the overall scheduled operations of the direct air 
carrier even if it were to result in the sale of a large portion or 
even a majority of the seats in a particular market. In such 
circumstances, the contract bulk fare operations would not pose an 
undue risk to consumers or to the direct air carrier.
    While we have been considering a clarification of the existing 
exemption, we have taken no action against contract bulk fare 
arrangements in which contractors could sell up to 85 percent of the 
seats on each flight in the markets in question.\8\ However, such 
arrangements would not be permitted in the future to the extent that 
they are inconsistent with the policies we are proposing here. We will, 
however, consider requests for individual exemptions in specific cases. 
Moreover, in reviewing applications to register trade names and for new 
scheduled authority, we propose to apply the policies expressed in this 
order. Thus, if we are convinced that the use by a direct air carrier 
of the trade name of a contractor would constitute an unlawful holding 
out under section 41101(a) or should there be a significant potential 
for, or actual, public confusion or other unfair or deceptive practices 
prohibited by section 41712, we would not register the trade name for 
the direct air carrier. Nor would we approve an initial scheduled 
service application for U.S. certificate or commuter authority which 
relies primarily on a contract bulk fare arrangement as the underlying 
basis for the proposed scheduled operations.
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    \8\See, e.g., Orders 94-6-39, Mahalo Air, Inc., and 94-3-38, 
Great American Airways, Inc. In those orders, we also noted our 
concerns over the use of contract bulk fare arrangements as the 
primary means of marketing specific scheduled services, and 
indicated our intent to re-examine and clarify our policies with 
regard to such arrangements.
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Objections
    We will give interested persons 15 days following the date of 
issuance of this order to show cause why the tentative findings and 
conclusions set forth here should not be made final; answers to 
objections will be due within 10 days thereafter. We expect such 
persons to direct their objections, if any, to the policies proposed in 
this order. We will not entertain general, vague, or unsupported 
objections. If no objections are filed, we will issue an order that 
will make final our tentative findings and conclusions.
    Accordingly,
    1. We direct all interested persons to show cause why we should not 
issue an order making final the tentative findings and conclusions 
stated above to amend the exemption granted by Order 88-9-2, that 
permits the use of contract bulk fare arrangements, to provide that the 
use of such arrangements for scheduled services must be incidental to 
the overall scheduled services of the direct air carrier, and that the 
direct air carrier must hold out the same scheduled service as its own 
and exercise ultimate economic control over the service.
    2. We direct any interested persons having objections to the 
issuance of an order making final the tentative findings and 
conclusions stated above to file them with the Documentary Services 
Division, Department of Transportation, 400 Seventh Street, SW, 
Washington, D.C. 20590, in Docket 44369, no later than 15 days after 
the date of issuance of this order; answers to objections shall be 
filed no later than 10 days thereafter.
    3. If timely and properly supported objections are filed, we will 
accord full consideration to the matters or issues raised by the 
objections before we take further action.
    4. In the event that no objections are filed, we will consider all 
further procedural steps to be waived and we will enter an order making 
final our tentative findings and conclusions.
    5. We will publish a copy of this order in the Federal Register.
    By:

Patrick V. Murphy,
Acting Assistant Secretary for Aviation and International Affairs.
[FR Doc. 94-23789 Filed 9-26-94; 8:45 am]
BILLING CODE 4910-62-P-M