The Aviation Industry: Storm Clouds In Sight

Sunday, June 1, 2008 - 00:00

Editor: Would you tell our readers something about your professional experience?

Robinson: I am an aviation attorney with Cozen O'Connor, representing airlines, aircraft operators, fixed base operators, repair stations and manufacturers in litigation. This work relates primarily to aviation accidents and commercial disputes, but travel-related claims against airlines are also a significant part of my practice.

Editor: The spike in oil prices has been front page news. How has this development affected the commercial airline industry?

Robinson: Rising fuel costs have had a direct impact on airlines' profitability. One year ago, the airlines were again moving towards profitability - the first real success following 9/11 - but that trend has been completely reversed as a result of rising fuel prices. In fact, in just the last month or so, we have seen four or five carriers go into bankruptcy as a direct consequence of this dramatic increase. Initially airlines jumped at the chance to buy the new Boeing 787 Dreamliner, with its promised 20 percent increase in fuel efficiency, but, since that plane was first announced, fuel costs have doubled and then doubled again.

Editor: Where do you see fuel prices heading in the future?

Robinson: I am not sure anyone, inside the industry or attempting to analyze it from the outside, has a very clear answer to that question. Speaking for myself, I do not believe we will ever return to oil selling at $30 a barrel. I think we are in a new reality here - at $100-plus for a barrel of oil - and it is one to which we must adjust. To be sure, there are experiments underway with synthetic fuel and biofuels which may, in the long run, give us some relief from petroleum-based fuels. However, they are not in current use commercially. My sense is that, so long as people are willing to pay more than $100 a barrel, it will sell at that level. Certainly OPEC has no incentive - other than the social upheaval that may derive from depressed economic conditions - to lower the price to the levels we previously enjoyed.

Editor: On the legislative front, there has been a movement in Congress for a "Passenger Bill of Rights." What does this proposal involve? Are we likely to see some form of protection for passengers facing excessive delays?

Robinson: To put this in context, earlier this year, the Court of Appeals for the Second Circuit struck down a New York State law that would have provided certain protections for airline passengers subject to excessive ground delays. Everyone has experienced, or knows those who have experienced, the situation where an aircraft pulls back from the gate, only to sit for hours without being able to either take off or return to the terminal. That law was struck down because aviation, by its nature, requires a federal solution.

Right now, both Congress and the Department of Transportation are moving to enact some form of federal protection for airline passengers. Once enacted, this regulation would specify the maximum ramp delays permitted and would require assurances of adequate food, water, medical facilities and the like, and access to lavatories for stranded passengers. Failure to provide for the passengers in this way would create a cause of action and enable a passenger to sue in court for damages. The European Union already has a passenger bill of rights in force, and we have seen a rise in passenger-related litigation surrounding delays in Europe. What's more, there are firms focusing on collecting data from companies on their employees who may have been delayed in their business travel for the purpose of bringing claims against the airlines. Once we have something like a passenger bill of rights enacted here, I think we can expect to see an upswing in travel-related claims. And I think such legislation is inevitable at this point.

Editor: Given the potential for such an increase, what can the airlines do to prepare for travel-related claims?

Robinson: The rise in travel-related claims is being driven by a number of factors, including aircraft capacity and weather. It is simply more profitable to fly full planes, and we have seen an increase in demand for air travel to the point where we are now above pre-9/11 levels.

But, when you fly full planes there is no margin for error with respect to mechanical problems or the weather. Delays often result in unhappy passengers and that, in turn, can lead to litigation that is little short of ridiculous. I am currently handling a case where a passenger is suing the airline because her seat did not recline. I have handled cases in the past where the passenger sued because the seat did recline. Passengers sue because they have not received a free meal on the flight.

Just recently I read an article ("See You in Court," Christopher Elliott, Tribune Media Services, May 6, 2008) encouraging passengers to sue rather than go through the airline's complaints department because that course seemed, according to the article, more profitable: bringing a small claims action does not cost much, and the airline might not appear for its day in court. I think the airlines should be far more aggressive in defending these smaller claims. Such a claim can in some cases be removed to federal court, where the airline has a more level playing field on which to defend itself.

Editor: The Open Skies Agreement between the European Union and the United States came into force recently. What effect will that have on travelers and our domestic air carriers?

Robinson: The Open Skies Agreement went into effect in March, essentially allowing direct flights to cities in Europe from cities to the United States and vice versa. This means that our domestic markets are now open to foreign competition - and that American carriers will be able to fly directly to more destinations in Europe.

The immediate impact will be greater competition among carriers, and this may result in falling prices for the passengers. Over the longer term, this development may encourage our domestic airlines to merge or combine to better compete with overseas carriers. The latter, of course, are often flag carriers of their respective countries, or they are otherwise supported by their respective governments. If a number of American carriers merge, however - and I am mindful of the agreement between Delta and Northwest - the efficiencies resulting from an increase in size may enable them to win market share in the face of the new competition posed by European carriers in U.S. markets. Such mergers would also help American carriers compete in the newly opened European markets.

Editor: With all current challenges, what is your outlook for the future of the aviation market in the coming years?

Robinson: I think the market will be turbulent. There are four factors we've discussed: fuel, competition, capacity and capital. Together these are serious challenges for the aviation market

Fuel costs, which we've discussed, are causing a squeeze on profits and have forced airlines to add fuel surcharges to ticket prices, which have reached over $50 for a round trip ticket.

And, as we've covered, the Open Skies Agreement brings additional competition to airlines, a positive in the long run. The airlines are going to have to adapt to this new competitive environment, however. I believe that if they can achieve efficiencies in size they will do so, but the effort is going to be considerable.

Capacity is a driver as well. Planes filled with passengers equals profitability for the industry. But, if a particular flight is grounded - for mechanical or weather reasons - the airline cannot simply absorb those passengers on another flight. This quandary contributes, of course, to the public's perception of airline performance, and at present it is as low as it has ever been.

Limited access to capital is something that affects all airlines. The recent bankruptcies of air carriers are only one part of this story. The emerging market for very light jets has been shaken as well by the lack of available capital, driving manufacturers to cut production, lay off workers or simply shut their doors. For example, DayJet, a pioneer in air taxi operations, announced recently that it was cutting its fleet of very light jets by half and laying off a third of its staff and deferring its orders for 1,400 more aircrafts. So we can see the ripples from the credit crunch move in all directions.

These are difficult, and very exciting, times for the aviation industry. For those who can persevere in this environment, the future is bright. But I suspect that we will see some significant challenges over the next few years.

Please email the interviewee at jrobinson@cozen.com with questions about this interview.