Lipner, Seth E.

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Pricing and Capacity Determination in International Air Transport: a Legal Analysis, by P. P. C. Haanappel

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Maryland Journal of International LawVolume 9 | Issue 2 Article 33Pricing and Capacity Determination inInternational Air Transport: a Legal Analysis, by P. P.C. HaanappelSeth E. LipnerFollow this and additional works at: http://digitalcommons.law.umaryland.edu/mjilPart of the International Law CommonsThis Article is brought to you for free and open access by DigitalCommons@UM Carey Law. It has been accepted for inclusion in Maryland Journal ofInternational Law by an authorized administrator of DigitalCommons@UM Carey Law. For more information, please contactsmccarty@law.umaryland.edu.Recommended CitationSeth E. Lipner, Pricing and Capacity Determination in International Air Transport: a Legal Analysis, by P. P. C. Haanappel, 9 Md. J. Int'l L.339 (1985).Available at: http://digitalcommons.law.umaryland.edu/mjil/vol9/iss2/33PRICING AND CAPACITY DETERMINATION IN INTERNATIONALAIR TRANSPORT: A LEGAL ANALYSIS. By P.P.C. Haanappel.Deventer, The Netherlands: Kluwer Law and Taxation Publishers, Inc.,1984, 210 pp.When I first opened Pricing and Capacity, and began to leaf throughits pages, the first thing to catch my eye was a table of abbreviations.' Astranger to the chaotic system of international regulation of commercialaviation might consider this an unusual way to start a book. This reviewer,however, reacted differently, for I had had the good fortune to study thisfascinating subject some years ago. I looked at the table of abbreviationswith the anticipation of renewing an old friendship.As I made my way through the Introduction and first chapter I won-dered whether and, if so, how fast, the subject would come back to me.Fortunately, the answer was "not long," for Professor Haanappel gives thereader little time to prepare. Take a deep breath, this book dives right in -and head first at that.The beginning of Pricing and Capacity reveals much about the natureof aviation law. The subject is incredibly complex, involving the interplay ofgovernments, international organizations, private businesses and the con-suming public. This complexity is compounded by a unique vocabulary, un-matched in any other area of legal literature.' Accordingly, an author's firsttask when writing about aviation law must be to introduce the neophyte tosuch terms and concepts as the five (eight?) freedoms,3 special and excur-sion fares, bilateralism, load factors, passenger-miles, traffic conferences,and so on and so on.It is not clear that Professor Haanappel successfully overcomes thisinitial difficulty. Because the author is extremely concise, and because fewconcrete examples are provided (this is a problem that plagues the entire1. P. HAANAPPEL, PRICING AND CAPACITY DETERMINATION IN INTERNATIONAL AIRTRANSPORT at xi (1983). It is interesting to note that Professor Matte, also of the faculty ofLaw and The Institute of Air and Space Law at McGill University, begins his treatise on thesame subject with a similar table. N. MATTE, TREATISE ON AIR-AERONAUTICAL LAW (1981).2. The air law vocabulary may even be responsible, at least in part, for that complexity,as well as for a certain amount of confusion. For an illustration, see A. LOWENFELD, AVIATIONLAW at 1-166 to 1-187 (2d ed. 1981).3. At the seminal Chicago Conference of 1944, the governments involved identified fivekinds of international air transport. Some authors have, since then, identified additional typesof traffic. Professor Haanappel states those variations, but does little to explain their signifi-cance, either theoretical or actual. See P. HAANAPPEL, supra note 1, at 11-12. But see A.LOWENFELD, supra note 2, at 2-28 to 2-42, where the tension between these variations isconsidered.(339)340 MD. JOURNAL OF INTERNATIONAL LAW & TRADEwork), there is little opportunity for the reader to pause and get his bear-ings and the beginner may surrender early on. The curious, however, willcontinue.Substantively, the book begins with a discussion of the role govern-ments play in international aviation policy and decision-making. The textinevitably takes the form of a chronicle, beginning with the Chicago Con-vention of 1944' and continuing through the various Bermuda regimes5 andbeyond, to the so-called Liberal Bilaterals.1 Interspersed are excerpts fromrelevant legal documents; each excerpt is followed by a fairly cogent expla-nation and an analysis, albeit a brief one.The author then turns to what is, perhaps, the most interesting, andundoubtedly most challenging aspect of aviation law: deregulation. In 1977,domestic deregulation in the United States forever changed the character ofall commercial aviation.7 Under the stewardship of its newly-appointedchairman, Alfred E. Kahn, the U.S. Civil Aeronautics Board set in motiona series of events which would literally reach around the world.Kahn remains a unique and colossal8 figure in the annals of commer-cial aviation. Neither a lawyer nor a flier, Kahn nevertheless profoundlyinfluenced both professions. We lawyers learned a great deal from Kahn,and Kahn was anxious to teach us. His approach to aviation is best summa-rized in one phrase. He was responding to a question by an interviewer,shortly after he was confirmed Chairman of the CAB. The question con-cerned his experience in formulating commercial aviation policy. Kahn toldthe New York Times that he had no experience and that to him "airplanesare nothing but marginal costs with wings."9 Most importantly, once con-firmed as Chairman, Kahn practiced what he preached: competition mustmake the basic decisions about prices and output (capacity). Kahn, at firstsinglehandedly, 10 and then with Congressional guidance,1 plotted aviation's4. P. HAANAPPEL, supra note 1, at 14-18. For a detailed discussion, see N. MATTE, supranote 1, at 127-227.5. P. HAANAPPEL, supra note 1, at 24-42. The book contains only selected portions of thevarious treaties. For full text see A. LOWENFELD, AVIATION LAW 371-415, 601-86 (DocumentSupp. 1981).6. A. LOWENFELD, supra note 5, at 42-43. A list of countries which have concluded suchagreements with the United States is contained in Appendix III. Id. at 189.7. For an extensive discussion, see A. LOWENFELD, supra note 2, at Chs. 4 & 5.8. Cf. W. SHAKESPEARE, JULIUS CAESAR 1, ii, 127-8 ("Why, Man, he doth bestrode thenarrow world Like a Colossus, and we petty Men Walk under his huge legs, and peep aboutTo find ourselves dishonorable graves.").9. N.Y. Times, Apr. 23, 1978, § 3, at 7, col. I.10. See generally, A. LOWENFELD, supra note 2, at 4-24 to 4-56. As Kahn told a televi-sion interviewer:I'm sworn to uphold the law, and the Federal Aviation Act does not permit me to deregu-[Vol. 9PRIVATE INTERNATIONAL LAWfuture course, and it lay not in regulation, but in the economics of themarketplace.Professor Haanappel, looking at these events from outside the UnitedStates, relates them in a matter-of-fact tone. In the end, however, he re-mains skeptical, not eager to come out of the safe regulatory environmentwhich has for so long dominated commercial aviation."2 In his discussion ofinternational deregulation, the author, for instance, quotes from PresidentCarter's Policy Statement as well as other legal and quasi-legal documents.But, true to his chosen title, the author confines himself to official state-ments, legal procedures, rules and regulations, all bearing on institutionaldecision-making in international aviation. 8 As an American greatly influ-enced by Kahn, the omission of any detailed discussions about the market-place and competition leaves this reader with an empty feeling."' Further-late entirely. I think it does offer me a fair amount of scope, however, to regulate moreobtrusively, as the Board has in the past, or less obtrusively, as I intend to do.Interview with Alfred E. Kahn, Chairman of the Civil Aeronautics Board, on the McNeil-Lehrer Report (Jan. 10, 1978), reprinted in A. LOWENFELD, supra note 2, at 4-25.11. The Airline Deregulation Act of 1978, Pub. L. No. 95-504, 92 Stat. 1705 (codified asscattered sections of 49 U.S.C. app. ch. 20), reprinted in A. LOWENFELD, supra note 2, at 4-57to 4-74 (where the Act is discussed at some length).12. The regulatory-cartelized framework which Professor Haanappel endorses shelterswaste, breeds inefficiency and deprives the consumer of free choice. See Lowenfeld, Deregula-tion - Is It Contagious?, in INTERNATIONAL AIR TRANSPORTATION IN THE EIGHTIES 31 (H.Wassenberg & H. Van Fenema eds. 1982). Professor Haanappel, remains one of IATA's few"friends." The European Commission, whose member countries have been supporters ofIATA, has stressed the need for freer competition in international air transport. See Memo-randum on The Contribution of The Communities to The Development of Air Transport Ser-vices, Bulletin of The Community, 5/79.13. P. HAANAPPEL, supra note 1, at 51-59.14. The book's discussion of economics is, in some instances, quite unsettling. For exam-ple, he states: " . . . [N]o pure and simple application of the law of supply and demand ispossible in the case of (international) air transport . . . [because the industry is] oligopolisticin character." P. HAANAPPEL, supra note 1, at 47. Just the opposite is true. Supply and de-mand function in the same way in oligopolistic markets as they do in competitive markets. Therules are the same; the outcomes are different because the inputs are different. Regulation(and cartelization to an even greater degree) simply perpetuates these anticompetitiveoutcomes.Oligopoly results in higher prices for consumers. Regulation (and cartelization) ensurethat these prices will remain high. Accepting Professor Haanappel's assumption, that if youremove the regulation you still have oligopoly, at least then you have interdependence, withoccasional outbursts of competition. The consumer is better off. Even if competition doesn'tbreak out, the possibility that it could is healthy. Competition means uncertainty. Perhaps thatis why the established airlines are the most vigorous proponents of regulation. ProfessorHaanappel's instant answer is that aviation is a public utility. There are other good arguments.The point merely is that these are the exciting issues in aviation today. It is in the resolution ofthese issues that the future lies. This book barely scratches the surface.1985]342 MD. JOURNAL OF INTERNATIONAL LAW & TRADEmore, -in spite of the fact that deregulation occurred some years ago, thereis little offered in the way of empirical data on whether deregulation hasbeen a success or a failure.Instead, the various segments of the book quote large sections of rele-vant statutory and other material, each section followed by a concise expla-nation, in understandable terms, and ending with a "Preliminary Evalua-tion." This "Preliminary Evaluation" is a device which the author useseffectively to pause and summarize. In these "Evaluations," however, asharp contrast is presented between the detail of the text on the one handand the superficiality of the evaluation offered on the other. Oversimplifica-tion abounds, almost to the point of disingenuousness.And perhaps herein lies one problem: after reading this book, I simplycannot decide to what audience it is addressed. If it is intended as a schol-arly treatise, it lacks sufficient insight and innovation. 15 If it is intended as ateaching tool, it lacks the incisive questions, the nagging problems, and thetroubling solutions which pervade this subject. 6 Most of all, it lacks theconcrete examples of actual successes and failures of the system, the stuffthat brings a law book to life. 17Instead, this book is simply a snapshot of the international regulatoryscheme, a tremendous amalgam of facts and generalities, details and proce-dures, conclusions and observations. An example is the chapter on theIATA,' 8 the cartel-trade association that dominates pricing and capacitydetermination. The chapter is both detailed and straightforward, and is un-doubtedly the most useful part of the book, perhaps because the author isan ardent supporter of the IATA."9 An attorney confronting IATA deci-15. See, e.g., A LOWENFELD, supra note 2; N. MATTE, supra note 1; SHAWCROSS &BEAUMONT, AIR LAW (4th Ed. 1977); A. SAMPSON, EMPIRES OF THE SKY (1977) (a criticalhistory of international aviation, written with Sampson's usual panache). See also B. CHENG,THE LAW OF INTERNATIONAL AIR TRANSPORT (1962).16. See, e.g., A. LOWENFELD, supra note 2, for the truly definitive work on the subject.The political science, industrial organization or regulated industry course may find interestinga collection of essays, INTERNATIONAL AIR TRANSPORT IN THE EIGHTIES (H. Wassenberg &H. Van Fenema eds. 1982).17. See infra text accompanying note 22.18. I.e., International Air Transport Association. A list of its members, and a good orga-nizational chart, appear in Appendices I & II.19. Professor Haanappel's views on this subject are made clear at the start: the openingsalvo is a quote from Sir William P. Hildred, the first Director-General of IATA, who was, forso many years, the most articulate defender of IATA ratemaking. See, e.g., Hearings on Mo-nopoly Problems in Regulated Industries before the Antitrust Subcomm. of the House Comm.on the Judiciary, 84th Cong., 2d Sess. (1956) (testimony of Sir Wm. Hildred), at 1023-54;reprinted in A. LOWENFELD, supra note 2, at 2-131 to 2-138. Suffice it to say that were it notfor Sir William, the IATA probably would not have survived even to this day.[Vol. 9PRIVATE INTERNATIONAL LAWsion-making for the first time may find this portion of the book to be use-ful.2 0 Furthermore, there is some interesting discussion of some subjects notnormally found in books on aviation law, such as agency commissions, cur-rency matters and cargo rates. 1But, unfortunately, when the book turns to non-IATA traffic,22 theemptiness of the earlier chapters returns. The Freddie Laker story, filledwith adversity and intrigue,22 receives only minor consideration. Further-more, the book is weak in economic analysis. For example, in the "Prelimi-nary Evaluation" following this chapter, the author ends by observing that"there are still a considerable number of scheduled international air routeswhere .. .air tariffs [are determined] without reference to multilateralIATA ratemaking machinery."2 4 True enough. But does it work? If so,how? And from whose perspective? The consumers? The governments in-volved? The carriers? What effect does international dipolmacy have on thesubject? What about other international considerations? Most of all, whateffect does economics have?Pricing and Capacity barely raises these questions, and presents fewconvincing solutions. In the final six pages, the author does present his con-clusions and projections.25 Unfortunately, I fear that only the most faithfulreader (and reviewer) will persevere to that point. Nevertheless, the bookwas interesting from my own perspective, for it allowed me to receive a longoverdue update2 6 on this marvelous subject. Yet even that update was bit-tersweet, for, rather than seeing the old problems solved, I saw newproblems with new, untested solutions. Of course, that is probably one ofthe things that first attracted me to this subject.Pricing and Capacity is an intensive introduction to international, gov-ernmental, and industry practice, as well as an overview of the history and20. S. ROSENFELD, THE REGULATION OF INTERNATIONAL COMMERCIAL AVIATION: THEINTERNATIONAL REGULATORY STRUCTURE (1984). This book, published by Oceana, wouldmake a far better desk reference for the airline lawyer; it is also written in loose-leaf form -an all-important feature in this constantly changing subject.21. P. HAANAPPEL, supra note 1, at 101-09.22. P. HAANAPPEL, supra note 1, at 117-38. These include non-IATA airlines as well ascharter carriers. The latter have, since 1974, been allowed to join IATA. To date, none hasdone so.23. For a chronical of the events involved, see A. LOWENFELD, supra note 2, at 5-48 to 5-71. A. SAMPSON, supra note 15, at 147-62. It is unusual that Professor Haanappel's bookhardly mentions the current law suit in Federal District Court in Washington. Certainly thatsuit merits some discussion in a legal analysis of international commercial aviation.24. P. HAANAPPEL, supra note I, at 123.25. Id. at 177-82.26. For example, and true to form, Professor Haanappel leads the reader paragraph byparagraph through the US-ECAC Memorandum of Understanding. Id. at 163-67.1985]344 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 9procedures of the IATA; a factual statement of who decides, and accordingto what rules, the prices and capacity in international air transportation.Sadly, however, Kahn's challenge goes unanswered: why can't the market-place do better?Seth E. Lipner** J.D., Albany Law School of Union University; LL.M., New York University School ofLaw; Assistant Professor of Law, Bernard M. Baruch College, City University of New York.

Pricing and Capacity Determination in International Air Transport: a Legal Analysis, by P. P. C. Haanappel

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