United States: Aviation: USA Overview - May 2013

Last Updated: June 5 2013
Article by Timothy J. Lynes

Regulation of aviation operations

Regulatory bodies and laws

Aviation in the United States is regulated primarily by the Department of Transportation and the Federal Aviation Administration (FAA) pursuant to Title 14 of the Code of Federal Regulations (the Federal Aviation Regulations), 49 USC (the Transportation Code) and the corresponding regulations.

Safety regulation

The FAA regulates the safety of commercial and private air transport. Screening passengers and ensuring onboard security is the responsibility of the Department of Homeland Security's Transportation Security Administration. The National Transportation Safety Board conducts non-criminal aircraft accident investigations.

The Federal Aviation Regulations (14 CFR Section 1.1) define a 'commercial operator' as:

"A person who, for compensation or hire, engages in the carriage by aircraft in air commerce of persons or property... [W]here it is doubtful that an operator is for 'compensation or hire', the test applied is whether the carriage by air is merely incidental to the person's other business or is, in itself a major enterprise for profit."

An 'air carrier' means "a person who undertakes directly by lease, or other arrangement, to engage in air transportation". The operations of US air carriers and commercial operators are regulated by Parts 119, 121 and 135 of the Federal Aviation Regulations. All other private operations are regulated under Part 91. Large private operations are also regulated under Part 125.

Market access

Applicants seeking air carrier operating authority must acquire a certificate of public convenience and necessity, granted by the Department of Transportation under Chapter 411 of the Transportation Code and Part 201 of the Federal Aviation Regulations. For certain smaller operations, an exemption application may be filed pursuant to Part 298 of the Federal Aviation Regulations. Application for a certificate of public convenience and necessity must be made in writing and verified, and the carrier must demonstrate that it is "fit, willing and able" to provide the proposed operations and comply with the rules and regulations. The applicant must:

  • have the managerial skills and technical ability to provide the service;
  • have access to financial resources to begin operations without posing undue risk to consumers; abd
  • show a willingness and ability to comply with applicable regulations.

If the applicant certifies fitness and the Department of Transportation learns of any special issues, the application is handled with a show cause order. The certificate specifies the terminal and intermediate points between which the air carrier is authorised to engage in transportation. The operating authority is not effective until the applicant has been certified by the FAA to conduct operations under the relevant category and it has obtained adequate liability insurance.(1)

If seeking an exemption, the applicant may file an application pursuant to Part 298 of the Federal Aviation Regulations, which establishes a class of air carrier known as 'air taxi operators' and provides certain exemptions from the economic regulations of the Transportation Code. An air taxi operator:

  • does not generally use large aircraft;
  • does not hold a certificate of public convenience and necessity;
  • has liability insurance; and
  • has registered with the Department of Transportation as an air taxi operator.

Financial fitness requirements

To acquire a certificate of public convenience and necessity, an applicant must demonstrate financial fitness. The Department of Transportation has not identified specific financial fitness criteria. However, for a new applicant, the Department of Transportation imposes a 90-day 'zero revenue' test. This test requires proof of available funding to cover pre-operating costs plus a working capital reserve adequate to fund projected expenses for three months of flight operations without revenue.(2) Filing for bankruptcy is grounds for enhanced scrutiny by the Department of Transportation.

Nationality of ownership and control requirements

The Department of Transportation requires that an applicant for a certificate of public convenience and necessity be a US citizen. The president and two-thirds of the board of directors and other managing officers of the corporation must be US citizens and 75% of the voting interest in the corporation must be owned or controlled by US citizens.(3) The Department of Transportation has interpreted this requirement to mean that US citizens must also be in actual control of the carrier and must have control of at least 51% of non-voting equity and 75% of voting equity.(4) Foreign entities may control up to 25% of the stock and no more than 49% of the combined stock and debt. Furthermore, the air transport agreement executed by the United States and the European Union in 2007 provides that an EU national's ownership of more than 50% of a US carrier will not be deemed itself to constitute actual control of the US carrier and each situation is to be considered case by case.

Route approval and licensing procedures

Part 121E of the Federal Aviation Regulations prescribes rules for obtaining approval for routes by certificate holders conducting domestic or flag operations. The certificate holder must show that it can conduct satisfactorily scheduled operations between each regular, provisional and refuelling airport over that route, and that the services and facilities are available and adequate.

International routes are governed by the relevant bilateral or multilateral aviation treaties. In line with these treaties, the Department of Transportation issues international routes in competitive proceedings, and the president approves them in light of foreign policy and national defence considerations.(5) The factors that the Department of Transportation considers in making this determination include:

  • market structure;
  • route integration;
  • fare and service proposals;
  • incumbency; and
  • the speed at which the applicant could enter the market.

There are requirements that affect and limitations on the number of flights that airlines may operate out of certain high-density airports.

Part 302 of the Federal Aviation Regulations establishes procedures for the conduct of all aviation economic proceedings before the Department of Transportation. This includes, among other things, US air carrier certificate procedures, foreign air carrier permit licensing and certificate cases involving international rates. Administrative law judges recommend or make initial decisions that are subject to approval by the relevant Department of Transportation decision maker, which is generally the assistant secretary for aviation and international affairs. The secretary of transportation may exercise the authority of the assistant secretary if the secretary believes that a decision involves an important question of national transportation policy.(6)

Competition issues

Like other US industries, the airline industry is subject to US federal antitrust law, which is intended to preserve competition and open markets. Thus, as a general matter, the strong US policy of protecting and maintaining open, competitive markets applies to aviation.

In addition to the application of basic antitrust principles, the Department of Transportation has authority over airlines operating in the United States. It is also authorised to apply antitrust-type policies and principles in its regulatory role to ensure that airlines operate in the public interest.

Foreign air carriers

The Department of Transportation must grant economic authority to a foreign air carrier navigating foreign aircraft in order to operate flights in the United States. Under Section 41301 of the Transportation Code, the Department of Transportation may award a foreign air carrier permit. Alternatively, the Department of Transportation may grant an exemption from this permit requirement pursuant to Section 40109 of the Transportation Code.

Part 211.20 of the Federal Aviation Regulations establishes the specific details that an applicant must provide to obtain a foreign air carrier permit or exemption. The applicant must comply fully with the requirements of this regulation, and the Department of Transportation may require an applicant to provide additional information as necessary. The air transportation proposed must either be covered by an air transport agreement between the United States and the applicant's home country or be available in the home country on the basis of reciprocity or comity. Once an application is filed, the applicant must serve a copy of the completed application to US carriers that serve the applicant's home country. The Department of Transportation further publishes public notice of all applications so that any interested party may comment. Although opposition to an application will not be cause for the Department of Transportation to deny the application, the Department of Transportation will consider such opposition in rendering its decision.

An applicant will obtain a foreign air carrier permit or exemption if granting such will serve the public interest. The Department of Transportation sets forth a number of factors that it evaluates in determining whether the value of an applicant's service to, and within, the United States serves the public interest. These include whether an effective aviation security agreement is in place between the United States and the home country, and whether the FAA has identified any safety problems with the carrier.

Pursuant to Part 129, a foreign air carrier, in addition to receiving its exemption or permit from the Department of Transportation, must obtain FAA operations specifications. Applications must be submitted to the applicable FAA Flight Standards District Office, the location of which is based on the principal place of business of the applicant. Part 129 of the Federal Aviation Regulations also requires that the foreign air carriers operate in accordance with the minimum international standards of the Convention on International Civil Aviation Organisation, such as:

  • airworthiness and registration certificates;
  • maintenance programmes;
  • flight crewmember certificates;
  • aircraft communication and navigation equipment;
  • collision avoidance systems;
  • air traffic rules and procedures; and
  • aircraft and flight deck security.

Additional rules in Part 212 of the Federal Aviation Regulations may apply to charter flights originating in the United States that are conducted by a foreign air carrier. Prior authorisation is required for such charter flights, but the Department of Transportation may issue a blanket authorisation or grant a waiver of such requirement if the waiver is in the public interest.(7)

Services to remote destinations

Chapter 417(2) of the Transportation Code provides for subsidised basic essential air service to underserved rural markets. This service ensures transport to a hub airport with convenient connecting flights to a number of destinations. The minimum requirements for basic essential air service include:

  • two daily round trips, six days a week;
  • flights at reasonable times, considering the needs of passengers with connecting flights; and
  • prices that are not excessive compared to the prices of other air carriers serving similar places.

With certain exceptions, service must be provided in an aircraft with an effective capacity of at least 15 passengers, and at least two engines and two pilots. The requirements for essential air service in Alaska are less stringent.(8) The FAA Modernisation and Reform Act 2012 (HR 658) was signed by the president on February 14 2012, and Section 421 of that act limits the programme's eligibility to airports (other than those in Alaska and Hawaii and those located more than 175 miles from the nearest large or medium hub airport) that have an average of 10 enplanements per service day or more. The secretary may waive this requirement in certain circumstances.

Charter services

In addition to acquiring a certificate of public necessity and convenience from the Department of Transportation or an exemption under Part 298 of the Federal Aviation Regulations, a charter service provider must comply with the operating rules for charter services under Part 135 of the Federal Aviation Regulations. It contains some rules in addition to Part 91, which governs the operation of all aircraft.

Section 41104 of the Transportation Code imposes additional restrictions on charter services. The secretary of transportation may restrict the marketability, flexibility, accessibility or variety of charter air transportation (where a certificate of public convenience and necessity has been issued), but only to the extent required by the public interest. An air carrier may not provide, in an aircraft designed for more than nine passenger seats, regularly scheduled charter air transportation, unless such transportation is to and from an airport with an operating certificate issued under Part 139 of the Federal Aviation Regulations. This restriction does not apply where the departure time, departure location and arrival location are negotiated with the customer or the customer's representative. This restriction does not apply in Alaska.

Regulation of airfares

Domestic airfares are not regulated. International fares are regulated pursuant to Chapter 415 of the Transportation Code and international rate proceedings are conducted in accordance with Part 302E of the Federal Aviation Regulations. Rates must be reasonable and not unreasonably discriminatory, and every air carrier and foreign air carrier must file tariffs with the secretary of transportation showing the prices for foreign air transportation. The secretary of transportation may not decide that a fare is unreasonable on the basis that the fare is too low or too high if the proposed fare is neither 5% higher nor 50% lower than the standard foreign fare level established by the secretary of transportation.(9) Tariffs must be filed and maintained pursuant to Part 221 of the Federal Aviation Regulations.

Aircraft

Registration of aircraft

The registration of aircraft is the responsibility of the FAA. Under the Transportation Code and the Federal Aviation Regulations, an aircraft is eligible for registration only if its owner is a US citizen and the aircraft is not registered under the laws of a foreign country. The citizenship requirement applies to individuals and partnerships, provided that each member thereof is a citizen. It also applies to corporations provided that the president, at least two-thirds of the board of directors and other managing officers, and owners of at least 75% of the voting stock are citizens.(10)

An aircraft may be registered only in the owner's name; the term 'owner' includes a buyer or a lessee under a conditional sale contract. Under Part 47.9 of the Federal Aviation Regulations, the owner need not meet the US citizenship requirement if:

  • it is organised and doing business under the laws of the United States or any of its states;
  • the aircraft is based and primarily used in the United States (which the FAA has interpreted to mean that 60% of flight hours are accumulated during non-stop flights between two points in the United States in each six-month period); and
  • the owner or lessee certifies as to the use and submits semi-annual reports to the FAA as to actual flight hours.

Under Part 47.8 of the Federal Aviation Regulations, a shareholder voting trust may also be used to qualify a domestic corporation that is owned by foreign shareholders as a US citizen for the purpose of registration of an aircraft. The applicant must submit to the FAA registry a copy of the voting trust agreement, which identifies each voting interest of the applicant and is binding on each voting trustee, the applicant corporation, all foreign stockholders and each party to the transaction. The applicant must submit affidavits from each voting trustee, wherein he or she represents that he or she is a US citizen and that there is no reason why any other party to the agreement might influence his or her independent judgement. The voting trust agreement must provide for the succession of a voting trustee; if the voting trust is modified such that US citizens hold less than 75% control of the voting interests, the holder loses citizenship.

Pursuant to Part 47.7 of the Federal Aviation Regulations, an owner's trust over the aircraft may also be used to satisfy the US citizenship registration requirements. In this case, the foreign beneficial owner of the aircraft places the aircraft in a trust with a US citizen owner trustee. The trustee must also submit an affidavit to the FAA stating that it is not aware of any reason or relationship as a result of which the non-US citizen beneficiary would have more than 25% aggregate power to influence or limit the trustee's authority. The trust itself must contain similar provisions.

Finally, Part 47 of the Federal Aviation Regulations was amended in October 2010 so that, over a three-year period, the registration of all aircraft registered before October 1 2010 will terminate, and such aircraft will be required to renew their registration to maintain US civil aircraft status. Furthermore, for all aircraft registered on or after October 1 2010, the registration will have a recurrent three-year expiry.

Registering aircraft mortgages and charges

Section 44107 of the Transportation Code provides for a system for recording conveyances, bills of sale, mortgages, contracts and other instruments affecting interest in or title to an aircraft. Part 49 of the Federal Aviation Regulations covers the recording of title and security documents. There is no US citizenship requirement or other limit as to who may be a mortgagee. To be recorded, the instrument must identify all aircraft by make, model, serial number and US registration number. The fee for recording any conveyance or instrument is $5. No fee is required for recording a bill of sale that accompanies an application for aircraft registration and the proper fee under Part 47 of the Federal Aviation Regulations.

Recorded documents may be amended, and any amendment must be signed by both parties to the original instrument and filed with the registry. Each mortgage or other conveyance filed with the registry is valid and perfected from the time of filing as to all persons with whatever priority is given by state law.

The United States has also ratified the Convention on International Interests in Mobile Equipment, which permits liens, contracts for sale and international interests in aircraft objects to be perfected by notation on an electronic international registry. The convention creates an international interest that is recognised in all contracting states and provides creditors with a range of default remedies.

The convention applies to transactions involving aircraft objects concluded after March 1 2006 and where, at the time of the transaction closing, either the aircraft is registered in the United States or the debtor is situated in the United States. Aircraft objects include fixed-wing aircraft certificated to transport at least eight persons or more than 6,050 pounds (lbs) of goods and airframes for helicopters certificated to carry at least five persons or goods in excess of 990lbs. All aircraft engines producing at least 550 horsepower, whether jet or propeller driven, must also be recorded.

Part 49F of the Federal Aviation Regulations sets out the requirements for authorisation to transmit information to the international registry. Persons wishing to file their interest with the international registry must first obtain an access number, which is done by filing Form 8050-135 with the FAA along with any documents representing the transaction that meet the requirements of Part 49C. These documents include an aircraft bill of sale, contract of conditional sale, a mortgage, an assignment of a mortgage or other instruments affecting title to, or an interest in, aircraft. Once an access number has been authorised, parties may list their interest in an aircraft on the electronic international registry without filing any documents thereto (ie, bill of sale or aircraft registration).

Right to detain aircraft

Air navigation authorities in the United States generally have no specific rights to detain aircraft for unpaid navigation charges. To the extent that an air carrier has unpaid debts to any party and is not otherwise under bankruptcy court protection, creditors that obtain a judgment against an aircraft operator have the same rights as any other judgment creditors under applicable state or federal law. Aircraft creditors that are consensual lien holders of aircraft also generally have the ability to foreclose on their liens on the occurrence of an event of default and seize the aircraft, again subject to applicable state laws and federal bankruptcy laws. Furthermore, under Section 46304 of the Transportation Code, an aircraft may be subject to a lien if involved in a violation for which a civil penalty is applicable. The violations include failure to comply with a number of parts of the Transportation Code, including the proper procedure for certification. Any aircraft subject to a lien may be seized and placed in the custody of the FAA or the Department of Transportation until the amount is paid or another solution has been arranged.

Maintenance of aircraft

Part 43 of the Federal Aviation Regulations prescribes the rules governing the maintenance, preventive maintenance, rebuilding and alteration of aircraft, and stipulates that any aircraft repair requires the services of a certified mechanic or repairman, as provided in Part 65 of the Federal Aviation Regulations. The holder of an air carrier operating certificate or an operating certificate issued under Part 121 or 135 may perform maintenance, preventive maintenance and alternatives as provided in Part 121 or 135.(11)

To read this article in full, please click here.

Originally published by International Law Office

Footnotes

1 See Paul Dempsey and Laurence Gesell, Air Commerce and the Law (2004), 226– 231.

2 See, for example, Application of Sunbird Airways Inc, Department of Transportation Order 94-6-30 (1994).

3 See Part 204.2(c)(3) of the Federal Aviation Regulations.

4 See, for example, DHL Airways Inc, Docket No OST-2002-13089-549 Recommended Decision of ALJ, pp35–38; Air Commerce and the Law at 232.

5 Air Commerce and the Law at 233.

6 See Part 302.18(c) of the Federal Aviation Regulations.

7 See Parts 212.9 and 212.12 of the Federal Aviation Regulations.

8 See also Part 271 of the Federal Aviation Regulations.

9 49 USC Sections 41501, 41504 and 41509.

10 See Part 47.2 of the Federal Aviation Regulations.

11 See Part 43.3 of the Federal Aviation Regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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