[Federal Register Volume 71, Number 21 (Wednesday, February 1, 2006)]
[Notices]
[Pages 5404-5406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-1322]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

[Docket OST-2005-21790]


Notice on the Essential Air Service Code-Sharing Pilot Program

AGENCY: Office of the Secretary, DOT.

ACTION: Notice.

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SUMMARY: Vision 100--Century of Aviation Reauthorization Act, Public 
Law 108-176, Title IV, subtitle A, section 406 requires the Secretary 
of Transportation to establish a pilot program, under which the 
Secretary would have discretion to require air carriers receiving 
Essential Air Service (EAS) subsidy and major carriers serving large 
hub airports to participate in code-sharing arrangements for up to 10 
EAS communities. Public comments were invited about such a prospective 
program; all of the comments raised objections, particularly concerns 
that the Department would use the authority to force carriers to 
participate involuntarily in the program. This Notice discusses the 
comments, advises of the establishment of the pilot program, solicits 
applications for participation in the program, and specifies issues 
that should be addressed in such applications.

FOR FURTHER INFORMATION CONTACT: Kevin Schlemmer, U.S. Department of 
Transportation, Office of Aviation Analysis, 400 7th Street, SW., 
Washington, DC 20590. Telephone (202) 366-3176. E-mail: 
[email protected].

SUPPLEMENTARY INFORMATION: The Essential Air Service program, 
established in 1978 by the Airline Deregulation Act, Public Law 95-504, 
enables small communities that were served by certificated air carriers 
before deregulation to maintain at least a minimal level of scheduled 
air service. Under this program, the Department currently provides 
subsidies to air carriers so that approximately 150 rural communities, 
including 37 in Alaska, can receive such service. DOT's program 
determines the minimum level of service at each community by specifying 
a hub through which the community is linked to the national 
transportation system, a minimum number of round trips and available 
seats that must be provided to that hub, certain characteristics of the 
aircraft to be used, and the maximum number of permissible intermediate 
stops to the hub.
    A code-sharing agreement is a marketing arrangement between two 
carriers that allows one to publish schedules and sell tickets on 
flights operated by another. Typically, code-sharing allows carriers to 
broaden their network of destinations, to feed additional passengers to 
their hub airports, and to serve destinations that they could not 
otherwise serve on a profitable basis. Major airlines now commonly 
enter into voluntary code-share contracts with others, including 
smaller, regional carriers. Most airports covered under the EAS program 
have service provided by a carrier that has at least one major 
airline's code attached to its flights out of the airport. However, 
some carriers that provide subsidized service under the EAS program do 
not have any code-share arrangements in some of the markets that they 
serve.
    On December 12, 2003, President Bush signed the Vision 100--Century 
of Aviation Reauthorization Act, Public Law 108-176. Title IV, subtitle 
A, section 406 of that statute required the Secretary of Transportation 
to establish a pilot program, under which the Secretary would have 
discretion to require air carriers receiving EAS subsidy and major 
carriers serving large hub airports to participate in code-sharing 
arrangements for up to 10 EAS communities. Section 406 provides as 
follows:

Code-Sharing Program

    (a) In General.--The Secretary of Transportation shall establish a 
pilot program under which the Secretary may require air carriers 
providing air service with compensation under subchapter II of chapter 
417 of title 49, United States code, and major carriers (as defined in 
section 41716(a)(2) of such title) serving large hub airports (as 
defined in section 40102 of such title) to participate in multiple 
code-sharing arrangements consistent with normal industry practice 
whenever and wherever the Secretary determines that such multiple

[[Page 5405]]

code-sharing arrangements would improve air transportation services.
    Limitation.--The Secretary may not require air carriers to 
participate in the pilot program under this section for more than 10 
communities receiving service under subchapter II of chapter 417 of 
title 49, United States Code.
    On July 12, 2005, the Department solicited expressions of interest 
by air carriers regarding participation in the pilot program, 
suggestions as to how such a pilot program might be structured, and 
other comments concerning the practical aspects of mandating code-share 
arrangements. 70 FR 40098 (July 12, 2005).
    Comments: We received comments from the Air Transport Association 
of America, Inc. (ATA), American Airlines, Inc. (American), The Boyd 
Group, Inc., Pacific Wings Airlines Limited (Pacific Wings), the 
Regional Airline Association (RAA), Southwest Airlines Co. (Southwest), 
and United Air Lines, Inc. (United).
    All commenters objected in some manner to a mandated code-sharing 
program. Commenters also typically questioned the legal authority of 
DOT to enforce such a regulation, cited the apparent conflict of a 
mandated program with the laws and policies promoting deregulation of 
the airline industry, and asserted that carriers would experience 
substantial difficulties and costs in implementing such a program.
    ATA, American, The Boyd Group, RAA, and Southwest all strongly 
opposed the mandatory aspect of participation in the program. ATA 
believed intrusive government involvement would seriously harm the 
dynamics of commercially viable code-share relationships. American, 
Southwest and The Boyd Group noted the considerable expense and close 
coordination required for code-share relationships even among willing 
participants. United stated that it desires to make its route decisions 
voluntarily and coordinate with EAS providers based on code-share 
relationships that strengthen its product and route network. Pacific 
Wings generally objected, but stated that it could support mandatory 
code-sharing in limited cases with certain restrictions in Hawaii, an 
area that the carrier serves. RAA noted that, while it is a strong 
supporter of the EAS program in general, it would prefer to see 
carriers enter into any program voluntarily.
    A number of commenters questioned DOT's legal authority to mediate 
or intervene when code-share parties under any such program disagreed 
over the terms of the commitment. ATA asserted that such involvement 
would constitute a ``serious intrusion into the commercial processes 
through which code-share arrangements are established in the free 
market.'' Moreover, RAA contended that DOT does not have the 
operational or financial expertise to structure and administer such a 
program. American echoes this, arguing that such interference is 
antithetical to free enterprise. In a similar vein, Southwest 
maintained that compulsory code-sharing would be inconsistent with a 
deregulated industry and would require an unequivocal expression by 
Congress to re-regulate the industry before the Department should 
consider implementation. And United stated that DOT cannot force two 
independent carriers into a code-share agreement any more that it can 
force a carrier to enter an EAS market.
    Difficulty and oversight of implementation are other concerns 
cited. In RAA's view, highly complicated issues are involved, among 
them the terms and conditions of contracts including liability for such 
matters as lost baggage and bumped passengers, coordination of 
schedules, passenger and freight pricing, allocation of airport 
facilities and staff, family assistance assignments, frequent flier 
programs, and revenue sharing. The Boyd Group and Southwest echo RAA in 
raising concerns as to the complexity of these issues. While Pacific 
Wings believed that DOT could help facilitate code-sharing by dealing 
with technological issues of real-time connections to the host's 
computer reservations system (CRS) to manage inventory, confirm 
reservations, and reaccommodate passengers, United points to a more 
practical matter: it has a shortage of 4 digit flight numbers and the 
company already has to sacrifice certain code-share markets due to the 
technological problem of flight number shortages.
    Several commenters questioned the potential effectiveness of any 
such program. The Boyd Group says that, before this program is 
implemented, the entire EAS program should first be reevaluated and 
updated to adjust to the air transportation system that has changed 
considerably since the industry was deregulated in 1978. It stated that 
while code-sharing would appear to boost traffic at EAS communities, it 
does not in fact necessarily do this. RAA further expressed doubt 
whether a mandatory code-share program would increase enplanements, 
especially where there is a major airport within reasonable driving 
distance.
    American, Southwest, and RAA further noted that the plain language 
used in the statute specifies only that the Secretary ``may'' require 
air carriers to participate. Southwest argued that this plain language 
does not mandate that DOT require major carrier participation. American 
urged that, during a time of unprecedented distress in the industry, 
the DOT should not harm major carriers by imposing ``substantial non-
recoverable costs'' that this program would entail. It stated that, 
should DOT err and implement this program, several limitations should 
be imposed, including limiting the display of the major carrier's code 
on flights operated by the EAS carrier between the EAS point and the 
large hub airport, limiting the mandated code sharing to one EAS route 
per major carrier, and not entering into agreement with any EAS carrier 
unless it has been in operation for at least five years. It also would 
have the Department require that any EAS partner have compatible 
systems interfaces with the major carrier (including electronic 
ticketing capability), and be a full participant in the Airline 
Reporting Corporation (ARC) before the EAS carrier could apply for a 
mandatory code-share agreement. American further proposed that all 
implementation and recurring expenses be borne by the EAS carrier.
    Decision: We generally agree with the commenters that requiring 
code-sharing between unwilling partners would raise serious policy and 
practical issues. From a policy standpoint, we acknowledge that 
requiring and enforcing involuntary code-sharing would intrude on 
carrier management of rates, routes, and services in a manner that is, 
at a minimum, inconsistent with the basic thrust of the Airline 
Deregulation Act of 1978 and its implementing Federal policies. From a 
practical standpoint, even if we were inclined to require code-sharing, 
the implementation problems would be difficult, if not impossible, to 
overcome. Under a voluntary arrangement, the major carrier could work 
with the EAS carrier to delineate the specific details of revenue 
sharing arrangements and technical considerations within the scope of 
their business plans and methods. However, because major airlines are 
under considerable pressure to control costs, when they devote valuable 
and sometimes scarce resources (such as planning staff, gate agents, 
and ramp space) they should be confident that there would be a positive 
revenue outcome for each carrier. Compelling a carrier to enter into an 
arrangement may cause financial losses. Gate space at hub airports for 
small aircraft is a concern, as some airlines

[[Page 5406]]

have no room for additional aircraft at their existing gates. Some 
airports now require aircraft parked on certain gates to have a minimum 
amount of seats and, generally, the EAS carriers would not meet that 
requirement.
    Nonetheless, under some circumstances, code-sharing can make EAS 
more attractive to customers, increasing traffic and reducing subsidy 
costs. We agree that carriers should be encouraged to expand code-
sharing to small and underserved communities, and look to whether the 
obstacles some perceive can be overcome. While we find the comments 
highly persuasive, we are unwilling to state categorically that there 
are no circumstances where mandatory code-sharing might work. 
Therefore, we will fulfill our statutory obligation to establish a 
program, and in doing so encourage any carrier interested in 
participating in it to submit an application in the context of 
particular communities or goals. In doing so, however, an applicant 
should address why its proposal should be implemented in a manner in 
which the various objections discussed above can be resolved or 
minimized. If it has a particular code-share partner in mind, it should 
address any specific objections that carrier has to participating with 
it in a code-share relationship. This program is limited to subsidized 
EAS communities. Proposals should be thorough, with a well-laid out 
plan why the proposed arrangement would be beneficial to the community 
and the carriers involved. Applicants that do not satisfactorily 
address the concerns that we have outlined in this Notice, and the 
concerns of the partner(s) with which it wishes to establish a code-
share relationship, should expect to have their applications rejected. 
Applicants should file any such applications in Docket No. OST-2005-
21790.

    Issued in Washington, DC on January 26, 2006.
Michael W. Reynolds,
Acting Assistant Secretary for Aviation and International Affairs.
[FR Doc. E6-1322 Filed 1-31-06; 8:45 am]
BILLING CODE 4910-62-P