Docket OST-97-2329 (Docket 50176) / Docket OST-95-474 / May 27, 1997

Intervenor Airports Council International - North America ("ACI-NA") submits this reply brief to respond to some of the more serious misstatements of applicable law and rate-setting principles made by the complainant Airlines.

The Airlines write as if the decision in City of Los Angeles Department of Airports v. United States Department of Transportation, 103 F.3d 1027 (D.C. Cir. 1997) ("LAX I") had never been issued, and blithely urge the Department to adopt a per se rule forbidding airport owners and operators from ever using fair market valuation ("FMV") for land in an airfield rate base. The Airlines assert that such use of FMV is contrary to the "purpose" of the statutory requirement that landing fees be "reasonable"—set forth in the Anti-Head Tax Act (49 U.S.C. § 40116), § 113 of the Federal Aviation Administration Authorization Act of 1994 (49 U.S.C. § 47129), and 49 U.S.C. § 47101(a)(12)—as read in light of the "purpose" of the grant assurances statute (49 U.S.C. § 47107). See Airlines' Opening Brief at 3-9. But LAX/expressly held that the federal statutory requirements that airport rates be reasonable do not forbid the use of FMV or require the use of historic cost in airport ratemaking. 103 F.3d at 1032-33. The Department cannot possibly divine such a per se requirement from the general purposes underlying these statutes, especially since the express statutory language has already been construed by the Court of Appeals as not containing any such requirement. See, e.g., Board of Governors of the Federal Reserve System v. Dimension Financial Corp., 474 U.S. 361, 373-74 (1986) (no effect may be given to purported "plain purpose" of statute that is not reflected in the "plain language of the statute itself"). The Airlines' appeal to general statutory "purposes" is flatly inconsistent with TAXI and must therefore be rejected.

In any case, the Airlines mischaracterize the Congressional intent reflected in these statutes. Congress has never manifested any intent to require the use of only one method to establish "reasonable" airport rates and charges. Rather, by allowing airport owners to calculate fees using "either a compensatory or residual fee methodology or any combination thereof" and by forbidding the Secretary from setting "the level of the fee," 49 U.S.C. §§ 47129(a)(2) & (a)(3), Congress has expressed its intent to allow substantial flexibility in airport rate-setting. The "financial windfall" language selectively quoted by the Airlines from the legislative history of the Anti-Head Tax Act was an explanation for why Congress chose to ban head taxes and had nothing to do with explaining what Congress meant by the broad and flexible term "reasonable" which it used to describe the airport user fees that are permitted by the AHTA. See 49 U.S.C. § 40116(e)(2); S. Rep. No. 93-12, reprinted in 1973 U.S.C.C.A.N. 1434, 1446 & 1455. /1

The Airlines also mischaracterize judicial precedent. For example, American Airlines, Inc. v. Massachusetts Port Authority, 560 F.2d 1036 (1st Cir. 1977), did not hold, as the Airlines suggest, that landing fees may not be based on the fair market value of airfield land (see Airlines' Opening Brief at 5). In fact, there was no issue in that case about the valuation of the rate base. Rather, the Court held that an airport is not required to limit its landing fees to "the quantum of benefit received by an airline." 560 F.2d at 1039 (rejecting proposed cost-benefit test).

The Airlines assert in the alternative that because Northwest Airlines, Inc. v County of Kent, Michigan, 510 U.S. 355 (1994) ("Kent County"), upheld as reasonable a particular compensatory ratemaking methodology designed to recover costs that were measured in an accounting rather than an economic manner, subsequent legislation making explicit the discretion of airport proprietors to employ a compensatory methodology (49 U.S.C. § 47129(a)(2)) must be read to require the use of historic costs (an accounting measure) and preclude the use of opportunity costs measured by fair market value (an economic measure of cost). See Airlines' Opening Brief at 4-5. This is non sequitur substituting for argument. In the appeal of this very case, the Court of Appeals rejected a virtually identical argument by the Airlines, as follows: "That the use

1/ Contrary to the Airlines' assertion (see Airlines' Opening Brief at 7-8), 49 U.S.C. § 47101(a)(13) does not define or limit the "costs" upon which fees may be based. Rather, it only expresses Congressional policy that, in setting fees, airports should not seek to create revenue surpluses that exceed the amounts to be used for authorized airport purposes.

of historic cost is reasonable under a residual fee regime does not, however, demonstrate that its use is uniquely indicated under a compensatory regime." LAX 1, 103 F.3d at 1033. In exactly the same way, the fact that use of historic costs as a basis for compensatory ratemaking has been upheld as reasonable does not establish that use of historic cost is mandatory — or use of alternative measures prohibited — under compensatory ratemaking.

Throughout their brief, the Airlines complain that LADOA will be able to make "profits" under its compensatory rate making methodology if it is permitted to use FMV for airfield land included in its rate base. See Airlines' Brief at 7-8, 10-13, 17-19. The Airlines appear to use this term in two different, but equally misplaced ways.

First, the Airlines complain that LADOA's total revenue stream—including both aeronautical as well as non-aeronautical revenues—produces an overall "surplus" that exceeds the current out-of-pocket costs of running the airport. See Airlines' Brief at 7, 13, 18. This line of argument is nothing more than a revival with new words of the cross-crediting arguments rejected in Kent County. The Supreme Court has held that the AHTA does not bar airports from generating surpluses, and that an airport is under no obligation to reduce its aeronautical charges merely because its aggregate revenues (including non-aeronautical revenues) exceed its current out-of-pocket expenses. 510 U.S. at , 114 S.Ct. at 865. The existence of such an accounting surplus does not show that LADOA's landing fees are unreasonable. Id; /2

Second, the Airlines assert that the use of FMV could result in "windfall profits" unrelated to historical costs. See Airlines' Opening Brief at 19. But the setting of rates using the undisputed FMV of land devoted to use as an airfield and thus withheld from alternative uses does not constitute a "windfall" of any kind; it Amply represents the recovery of what the airfield is worth. There is nothing unreasonable about valuing the airfield in economic rather than accounting terms. LAX I, 103 F.3d at 1032.

Conclusion.

For the reasons stated above and in ACI's initial brief, the Department should uphold LADOA's use of fair market valuation of airfield land in setting its landing fees.

Respectfully submitted,

Patricia A. Hahn

General Counsel ACI-NA

Scott P. Lewis

Kenneth W. Salinger

PALMER & DODGE LLP

2/ Even if the Airlines could establish, in an accounting sense, that LADOA would be able to generate surplus aeronautical revenue using FMV, they have not shown, and could not show, that given LADOA's enormous capital needs, there has been a "progressive accumulation of substantial amounts of surplus aeronautical revenue" of the sort that the Department has said might warrant an FAA inquiry into whether the LADOA was complying with its obligation to make the Airport available "on fair and reasonable terms." See DOT Final Policy on Airport Rates and Charges, 14.2.1, 61 Fed. Reg. 32021 (June 21, 1996).