LEGAL IMPLICATIONS OF AIRLINE COOPERATION: SOME LEGAL ISSUES AND CONSEQUENCES ARISING FROM THE RISE OF AIRLINE STRATEGIC ALLIANCES AND INTEGRATION IN THE INTERNATIONAL DIMENSION

• Citation: (2001) 13 SAcLJ 296
• Date: 01 December 2001
• Published date: 01 December 2001

Abstract

The current legal regime lags behind economic realities and there is a need for faster changes in the law, domestic and international, to reflect these developments. This paper first focuses on legal issues arising from the most popular form of airline alliance, namely the allocation of civil liability for breach of contract and air disaster cases in code-sharing arrangements. Secondly, some examples will be given of the legal effects of strategic alliances and airline integration on the evolution of bilateral air services negotiations and agreements. Finally, some interesting legal considerations will be made on the potential harmonisation of laws in relation to the international air transport order. As the commercial methods and legal repercussions from airline cooperation is dynamic and multi-faceted, this paper is not meant to be exhaustive but will hopefully provoke further thought and discourse on these issues within the aviation legal community.

Introduction

International airline alliances and airline integration are rapidly becoming a major part and an increasingly common feature of the international air transportation industry. Although international aviation has become very competitive, significant government limitations in which airlines operate remain. This is due to the tradition of aviation rights being regarded as valuable rights to be traded between countries on a bilateral basis.

Faced with such political and legal restrictions in a capital intensive industry, and with reduced operating margins but limited options for reduction of costs, inter-airline strategic groupings and alliances are developed out of economic inventiveness. Airlines have been assiduously finding ways to develop business opportunities to exploit economies of scale and obtain marketing benefits within the existing international regulatory framework.1 It remains for the law to follow where the invisible

hand leads (especially in liberalisation of the regulatory regime) and also to establish a framework in order to tackle foreseeable consequences that may arise from such alliances and which may result in civil (especially extraterritorial) disputes.

What are “International Airline Alliances”?

There exists a continuum of cooperation and variations in the type of cooperation.2 This is significant and a main feature of airline alliances.3 There is no specific definition of the term simply because it is dynamic, flexible, covers a wide range of cooperative arrangements and comes in many forms. Alliances can range from a statement of common interest, coordination of frequent flyer programmes, interlining to block space agreements, or coordination of marketing, code-sharing, franchising, joint freight flights, joint services, equity links/investments, joint ventures, etc.4 It could even involve takeovers and mergers, and so on.5

Other than taking several forms, alliances also vary in the extent of their coordination and geographical coverage. They may be route-specific (involving coordination of activities or flights between specific city-pairs) or more complex alliances to coordinate cost-sharing and marketing initiatives over larger geographical areas (such as between countries or regions). In some cases, the networks of international carriers have been so closely inter-linked as to provide the appearance of seemingly global network (eg. the Star Alliance Network).

“Code-sharing”6: The Fastest Rising Form of Global Strategic Alliance

The most prominent type of air alliance today must be code-share cooperation. Technically, code-sharing is an arrangement between two carriers that allows them to sell seats on each other’s flights under their own designator code. In the case of connecting flights of two or more code-sharing carriers,7 the passenger’s entire flight is displayed as a single carrier service on the Computerised Reservations System (CRS).

From the customers’ perspective it gives the impression of an online service and offers some features related to this service such as single check-in, common frequent flyer programme and coordinated flight schedule. Code-sharing covers a wide range of services, as do the major strategic alliances, but more often it involves a single service or a small network of services. A stronger form of code-sharing involves blocked space arrangements. In this case, one carrier buys space on another airline’s aircraft that it sells in its own right and thus uses its own designator code.

Such an arrangement is accompanied by a decision to engage in a variety of other joint activities contemplating some level of integrated operations in operational and marketing activities.

Current code-share arrangements are made between carriers and implemented through existing rights coupled with special provisions under bilateral agreements. In many instances, passengers have no understanding of this economic practice or the fact that they may have contracted to fly on one airline but actually end up sitting in another.8

Aviation law generally encompasses regulatory and liability work. The former involves matters such as aircraft safety standards, certification, licensing and regulation as well as interpretation of agreements, etc. The latter includes civil litigation under domestic and international aviation law arising from breach of contract, aircraft accidents or crashes, etc.

The prominent issues that arises for consideration in the relationship between the consumers on the one hand and the code-sharing carriers on the other are as follows:

1. (a) Does the consumer have the right to sue, on a contractual basis, for breach of contract if he is not satisfied with a transfer and/ or the safety record and/or services offered by a ‘partner carrier’ of the airline they had expected to fly on (especially in situations where the marketing airline company is a more prominent one than the operating airline)?

2. (b) In the event of an accident during a flight, whether in a single flight or a series of flights to a destination, or in the event of an air disaster, what are the legal principles of liability under such code-sharing arrangements (ie. to whom should passengers or their representatives address their claims for damages)?

Consumers’ Contractual Rights to Flight Safety, Quality of Service and Other Arrangements

One can envision the fallout and potential civil action taken against code-sharing partners by a disgruntled passenger where the aircraft operating under agreement between the airlines is one which the customer did not bargain for when it comes to the level of service and/or safety, which may be a significant reason he entered into the contract for air carriage. Factors such as the standard of safety and service can reasonably be considered implied terms of a contract especially when they have been widely touted to be of a certain high level.9 Take a hypothetical case involving lower standards of service (and/or less service) as well as a poorer safety record and multiply that with long distances, inconvenient baggage transfers (or mis-transfers), etc10 and the potential for lawsuits against the contracting airline for breach of contract increases.

There are several different sorts of complaints which can be made:

1. (a) A consumer can complain that he had entered into a contract with an airline under the misimpression that he was to be carried on an aircraft/carrier belonging to that airline when in fact, he was carried, on the whole or part of the journey, on the carrier of another or others (in a group alliance situation), and he would not have entered into the said contract if he had known of that fact.

1. (b) The consumer can alternatively complain that he entered into the contract paying more than what he would have if he had known the identity of the actual carrier, taking into mind such factors as money/cost, safety and services.

Airlines should ensure that the customer is made aware of the existence or even potential of such transfer/interlining arrangements before entering into the contract, and that there is ample opportunity for the consumer to make an informed decision on whether to enter into that contract at that price with that arrangement. In practice, airlines tend not to inform passengers of the possibility of their being transferred to another carrier,11 hence it is doubtful that the customer is aware of any changes in the carrier he will be transported upon.

As this is largely a matter of private civil law, it shall not be further considered in detail in this paper. The reason to bring this up for consideration is that this is an aspect of code-sharing alliances that should not be ignored and merits some discussion in the context of every jurisdiction, especially in the large countries or group of countries with domestic code-sharing alliances (such as the US).

Allocation of Liability in Code-sharing Arrangements: Who Carries the Liability for Accidents or Disasters? 12

i. Issues Relating to Code-sharing and Passenger Liability 13

Several questions arise as to the relevance of the passenger liability regime in the face of code-sharing arrangements: Who can and should action be taken against (legal liability)? Do the limitation of liability (damages) provisions under the Warsaw/Montreal Regimes apply with respect to each carrier against which action can be taken?

It is important that we have clear rules of liability as both the airline companies and the consumers/passengers have legitimate concerns tied up with air travel and the implications of code-sharing in the liability field:

1. (a) The Airline’s concern — to avoid liability, but if liable, to ensure that the liability (damages) limitations under the applicable

1. Conventions apply.14 To do so, airlines must, inter alia, ensure that their “airline partners” in code-sharing operations belong to a country which is signatory to a Convention which...