Order 98-2-3 / OST-97-2888 / United v Russia / February 4, 1998

POSTED February 5, 998

Order 98-2-3

Issued by the Department of Transportation on the 4th day of February, 1998

Complaint of

By this order we approve the complaint of United Air Lines, Inc. (United), against the Government of the Russian Federation (Russia). We have decided to defer a decision on the issue of appropriate sanctions.

In support of its complaint, United states that the 1993 Air Transport Agreement between the United States and the Russian Federation in Annex 1, Section VI, authorizes U.S. carriers to serve Russia under third-country code-sharing arrangements, and that consistent with those provisions, in July 1994 Russia approved United's code-share operations with Lufthansa for

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services between the United States and Moscow via Frankfurt. United states, however, that in March 1995, Russia refused to approve United's U.S.-Moscow Summer 1995 code-share schedule and ordered United to terminate its code-sharing services with Lufthansa on the basis that such operations were not permitted under a recent agreement between Germany and Russia. United further states that Russia has continued to prohibit United's code-share services despite objections made by the United States during April 1995 U.S.-Russia aviation negotiations, and despite German Government statements that it would allow such services. /1 Finally, United notes that Russia has permitted similar code-share operations between Northwest Airlines and KLM and between Delta Air Lines and Swissair, and argues that the Department should not permit Russia to decide which code-share services can be operated.

Based on the above, United urges the Department to impose proportional sanctions against the Russian carrier Aeroflot, specifically, that Aeroflot be prohibited from operating its nine weekly flights between Russia and Chicago, San Francisco, and Washington/Dulles. /2 United states that its flights to Frankfurt from each of these cities would connect to Lufthansa's Moscow flights and would provide competition to Aeroflot's services at these U.S. hubs. It also states that at the time it was forced to discontinue its code-share services, United and Lufthansa operated a total of 14 weekly code-share flights to Russia from Frankfurt. /3

Aeroflot urges that the Department dismiss United's complaint. Aeroflot argues that United's complaint is legally insufficient because (1) the United States and Russia, in April 1995, articulated their differing views regarding Section VI of Annex 1 of the Agreement and its applicability to the United/Lufthansa code-share arrangements; (2) the Annex of the Agreement has expired; and (3) United's complaint was filed after any possible obligation arising under the Annex to the Agreement expired.

Aeroflot acknowledges that the United/Lufthansa code-share raises unique and complex issues, in part, because of the Agreement between Russia and Germany, which affects the proposed code-share services, and that the July 1, 1997, letter from the German Ministry of Transport, stating that it would approve such services on the basis of reciprocity, raises additional

2/ Complaint at 12.

3/ Id.

4/ Alaska accompanied its answer with a motion for leave to file late. We granted that motion by Order 97-11

5/ United accompanied its response with a motion for leave to file an otherwise unauthorized document. We granted the motion by Order 97-11-3.

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questions. It maintains, however, that given the unique circumstances of this case, a diplomatic resolution is required as acknowledged by the Department in the context of other U. S.-Russia aviation matters. /6

Delta and Alaska filed in support of United's complaint. Delta states that it is also being denied the bilaterally-authorized right to operate third-country code-share service to Russia via Vienna pursuant to a code-share arrangement with Austrian Airlines (Austrian). Delta maintains that, while it was able to implement the service in June 1997, Russia soon threatened action against Austrian, forcing Delta to terminate the code-share service. Delta states that Russia claimed that the bilateral agreement between Russia and Austria, executed subsequent to the U.S.-Russia bilateral, allowed Russia to abrogate the U.S.-Russia agreement and deny Delta the right to conduct code-sharing services.

Delta agrees with United that it is inappropriate for Russia to preclude operation of thirdcountry code-shares based upon subsequent bilateral agreements with a third country (in Delta's case, Austria; in United's case, Germany) and urges the Department to issue an order approving United's complaint. Both Delta and Alaska state that the issue of sanctions should be deferred, however, until completion of the November 1997 bilateral consultations with Russia.

The Civic Parties urge the Department either to: (1) extend its action deadline for 45 days to permit further intergovernmental consultations; or (2) approve the complaint, but defer on sanctions pending review of diplomatic and commercial efforts to resolve the matter.

In its reply, United argues that, contrary to Aeroflot's allegations, it has been extremely diligent in seeking to resolve the issue without resort to formal complaint procedures. It states that it has met on several occasions with Russian authorities prior and subsequent to the filing of its complaint, in an effort to obtain restoration of its code-share rights, but to no avail. In addition, at various times throughout the period following the 1995 negotiations, diplomatic contacts were also made to resolve the issue, but no resolution was forthcoming. In these circumstances, United contends that Russia will not be forthcoming absent approval of United's complaint.

United further rejects Aeroflot's statements regarding Russia's interpretation of its obligations under the code-share term of the 1993 U. S.-Russia agreement, arguing that the United States did not acquiesce to Russia's interpretation of the code-share issues, but rather, "agreed to disagree" in an April 1995 Memorandum of Consultations (MOC) between the United States and Russia. United maintains that the 1995 MOC unequivocally stated U.S. dissatisfaction with Russia's interpretation, stating "it was the clear understanding of the negotiators of the Agreement that such cooperative arrangements would be authorized under Section VI of Annex I of the Agreement."

United further argues that expiration of the Annexes to the 1993 Agreement does not preclude the Department from granting United's complaint, since the statute provides for the

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Department to remedy "unjustifiable or unreasonable discriminatory, predatory or anticompetitive practices against an air carrier" whether or not it violates an effective bilateral agreement. United argues that Russia's actions against United's code-share services with Lufthansa are both discriminatory and anticompetitive particularly since that government has allowed other code-shares to operate. It further notes that the same Annex that provides for code sharing also contains the route authority under which Russian carriers such as Aeroflot operate scheduled services between the United States and Russia. Notwithstanding the expiration of this and other Annexes, both sides have proceeded to apply the terms of those Annexes to allow services covered by their terms to continue. United argues that neither side has the right unilaterally to pick and choose which parts of such a bilateral exchange should continue to apply.

United states that, even if Russia's interpretation of the Russia-Germany agreement were correct (with respect to a prohibition of third-country code-share services), the Russia-Germany agreement was concluded subsequent to the 1993 U.S.-Russia agreement and that, under principles of international law, the later Russia-Germany agreement would not affect U.S. rights contained in the earlier U.S.-Russia agreement. United contends that, if Aeroflot's interpretation of the law of treaties represents the views of its government, no nation could ever enter into an international agreement with Russia with any expectation that its rights under the agreement would be honored if a better deal came along. In any event, United states that whatever concern Russia may have had regarding the nature of third-country code-share rights under the Germany-Russia agreement were adequately addressed in the July 1, 1997, letter from the German Ministry of Transport, where Germany advised that it would be willing to approve such services on the basis of reciprocity.

Continental states that, because Annex l of the Agreement has expired, there is no bilateral basis for United's complaint, and that the Department should dismiss or defer action on the complaint until after completion of the U.S.-Russia aviation negotiations.

In its response to Continental's reply, United argues that Continental's support of Aeroflot in this matter is premised on code-sharing operations the carriers propose to operate on U.S.-Russia services.

The 1993 Air Transport Agreement between the United States and the Russian Federation provided valuable route rights for carriers of Russia and carriers of the United States to engage in air transportation between the countries. Included in that exchange of rights was the right of U.S. carriers to serve Russia under third-country code-sharing arrangements (Annex 1, Section VI). Pursuant to that 1993 Agreement, Russian carriers were authorized to serve a number of U.S. gateways and to expand their services to the United States. Similarly, United was designated and awarded frequencies to provide U.S.-Frankfurt-Moscow services under a codeshare arrangement with Lufthansa. Russia approved those services as consistent with the Agreement and those services operated for over a year. The Annex, which set forth each country's rights with respect to routes, code-share service, frequencies, etc., to the Agreement expired in May 1997. Both the U.S. and the Russian Federation have continued a regime under

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which both governments have continued aviation relations based on the Annex as a matter of comity and reciprocity.

Since the filing of United's complaint we have pursued diplomatic initiatives, including formal aviation negotiations, to reach a negotiated resolution to the issues raised in United's complaint. While this process has continued, we have extended the action deadline on United's complaint to facilitate our efforts toward a negotiated resolution. /7 Notwithstanding these efforts, Russia has continued to refuse to authorize the United/Lufthansa code-share operations, and we can no longer find that a resolution appears imminent. We, therefore, must act on United's complaint.

After careful consideration of all of the pleadings and issues in this case, we have decided to approve United's complaint. We will defer action, at this time, on the issue of sanctions.

The statute (49 U.S.C. section 41310) provides that, upon complaint or on our own initiative, when the Department determines that a foreign government has undertaken unjustifiable or unreasonable discriminatory practices against a U.S. carrier or has imposed unjustifiable or unreasonable restrictions on the access of a U.S. air carrier to foreign markets, we may take such action as we deem to be in the public interest. We find that under the circumstances of the operative aviation regime in existence between the United States and Russia, Russia's refusal to approve United's code-sharing service with Lufthansa on a U.S.-Frankfurt-Moscow routing constitutes such an unjustifiable and unreasonable discriminatory practice and imposes just such an unjustifiable and unreasonable restriction on United's access to Russia, warranting approval of United's complaint under the statute.

Although the Annexes to the agreement expired in May 1997, the United States has permitted Aeroflot and other Russian carriers, on the basis of comity and reciprocity, to continue to exercise the rights previously provided for and authorized under the aviation agreement, and in addition, has granted numerous extrabilateral awards of charter authority to foster Russian carrier operations. Indeed, Aeroflot has continued its operations to New York, Washington, Los Angeles, San Francisco, Anchorage, Seattle and Miami and operates over 20 flights per week between Russia and the United States. Khaborovsk Aviation Group, Magadan Airlines, and Transaero have also been permitted to continue their operations between the Russian Federation and the United States. In addition, Volga Dnepr has been awarded over 80 fifthfreedom charters over the past year using its AN- 124 aircraft.

On the other hand, for over two years, beginning prior to expiration of the Annex, Russia has refused to renew United's authority to serve Russia under its code-share arrangement with Lufthansa, services that Russia had previously approved and that the carriers had been operating. Although the United States has objected on several occasions, including during formal negotiations, Russia has continued to withhold approval of the United/Lufthansa codeshare services. Given these circumstances, the Russian Federation's failure to approve

7/ Orders 97-11-3, 97-12-ó, and 98-1-5.

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United's services clearly supports our making a determination under the statute. We find that Russia's actions withholding authority from United, over the objections of the United States, constitute an unjustifiable and unreasonable discriminatory practice and an unjustifiable and unreasonable restriction of United's access to the U.S.-Russia market that warrants approval of United's complaint under 49 U.S.C. 41310.

We have decided to defer a decision on appropriate sanctions at this time. While we find that Russia's actions warrant this action on our part, it is our hope that Russia will understand the seriousness with which we view its action and will now join us in a serious effort to resolve this dispute diplomatically. For all of these reasons, we have determined at this time that the public interest is best served if we defer action on the issue of sanctions while the diplomatic process continues.

ACCORDINGLY,

1. We approve the complaint filed by United Air Lines, Inc., in Docket OST-97-2888;

2. We find that the complaint filed by United Air Lines, Inc., against the Government of the Russian Federation, in Docket OST-97-2888, establishes an unjustifiable and unreasonable discriminatory practice against an air carrier and imposes an unjustifiable and unreasonable restriction on the market access of United Air Lines, Inc., with respect to its U.S.-Frankfurt-Moscow services pursuant to a code-share arrangement with Lufthansa German Airlines, and warrants approval under 49 U.S.C. section 413 10;

3. We defer action on the issue of imposing sanctions in this proceeding until further order of the Department; and

4. We will serve this order on Alaska Airlines, Inc., American Airlines, Inc.; Continental Airlines, Inc.; Delta Air Lines, Inc.; Evergreen International Airlines, Inc., Federal Express Corporation; Lufthansa German Airlines; Northwest Airlines, Inc.; Polar Air Cargo, Inc.; United Air Lines, Inc.; Aeroflot Russian International Airlines; Transaero Airlines, VolgaDnepr J.S. Cargo Airlines; the United States Department of State (Office of Aviation Negotiations); the Assistant U.S. Trade Representative; Office of the United States Trade

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Representative; the U S. Department of Commerce (Office of Service Industries); the Ambassador of the Russian Federation in Washington, DC; and the Air Transport Association.

By:

CHARLES A. HUNNICUTT

Assistant Secretary for Aviation and International Affairs

(SEAL)