Polar Air Cargo? [Archive]

ikea monster

31st Mar 2006, 23:52

Guess where GSS are going to aquire the 4th Freighter ?????.

Economic Regulation Group
Economic Policy and International Aviation

Ms Esther Agbor
IASD
Department for Transport
1/25 Great Minster House
76 Marsham Street
London
SW1P 4DR

30 March 2006

Dear Esther

APPLICATION BY BRITISH AIRWAYS TO LEASE A FOREIGN-REGISTERED AIRCRAFT

1. Thank you for your letter of 17 February 2006. Our advice is as follows.
The application

2. Details of the application:
Applicant: British Airways plc Lessor: Atlas Air
Aircraft: Boeing 747-200F N528MC or substitute Type of lease: Wet
Duration of the proposed lease: 1 April 2006 until 20 September 2006
Temporary needs or exceptional circumstances that give rise to the application

3. BA has had a temporary waiver to wet lease one Boeing 747 freighter from 2 September 2004 until 31 March 2006. It has now applied to extend this lease for a further six months until 20 September 2006. This takes the period of the lease to 25 months in all. The minute statement to Council Regulation (EEC) 2407/92 states that for the purposes of Article 8.3 of the Regulation, short-term leases would normally cover periods of up to a traffic season. BA therefore needs to demonstrate that there are exceptional circumstances in order to satisfy the criteria in Article 8.3.
4. BA’s application states that it requires a further extension to the lease as there are currently no suitable aircraft on the UK register. It says that since the last waiver was applied for there has been a significant shift in trading conditions that has forced it to rethink its current strategy on freighters. Aviation fuel prices are expected to remain at high levels for the foreseeable future and this has made a Boeing 747-200F uneconomical for BA World Cargo. This extension is required in order to satisfy contractual obligations and to allow BA time to accommodate its customers’ traffic flows. The waiver is sought on the grounds that the circumstances faced by BA are exceptional as there are no aircraft in the UK market compatible with the existing GSS operation at a time when it needs to support its existing programme and customers. BA points out that other European authorities continue to approve similar wet lease arrangements.
Objections/representations

5. The application was published in the CAA’s Official Record Series 2 on
21 February 2006 and has drawn objections from the British Air Line Pilots Association (BALPA), the Independent Pilots Association (IPA) and 50 individuals. Copies of these objections are enclosed. They are summarised below.
6. BALPA objects to the extension of the wet lease of the aircraft to two years, as this does not comply with the requirement for exceptional circumstances or a temporary need. BALPA’s reasons remain unchanged from its previous objections in July 2004 and September 2005. The US does not permit any reciprocal arrangements for EU wet lease arrangements into the US which it believes removes any business parity. Additionally, BALPA believes that there are sufficient Boeing 747-200 flight crews amongst the existing GSS crews to operate the aircraft, and that GSS is in the process of acquiring a fourth aircraft which will be UK registered and crewed by UK/EU nationals, almost certainly precluding the need to lease an aircraft from overseas. Even if this were not available, then a dry lease arrangement could be undertaken.
7. BALPA says that it will be very disappointed if approval for this wet lease is granted again. It says that its objections under the Department’s transparent procedures appear to be routinely ignored, making it quite obvious that this is just a paperwork exercise and that the government has zero interest in supporting UK industry.
8. IPA says that six years ago it witnessed the start of a long-running saga in which BA attempted to outsource to Atlas Air its cargo operation which, although UK based, was operated and crewed by US citizens. IPA strongly objected to this, believing it clearly outside both the spirit and the letter of the regulations governing wet leasing. Despite this BA was allowed to play the system using successive “temporary” extensions. IPA wishes to highlight that this situation has unfortunately arisen again, and to restate its strong opposition to the wet leasing of this aircraft. It believes that if a “temporary” six-month lease is allowed then it is likely that the aircraft will be in the UK for much longer. It is unthinkable that the US Government would permit British aircraft to be based in the US on a similar basis.
9. The 50 objections from individuals follow a broadly similar theme, although many say that the lease has been in place for four years, which is factually incorrect. The principal points being made, with a broad indication of the number of objectors raising these or similar points, are summarised below:
? (44) This practice has continued for several years, is taking jobs from UK/European pilots, engineers and UK aviation generally, and stunting the flow of new pilots.
? (28) A US-registered aircraft and US crew flying out of the UK for a UK company should not be permitted when the US authorities would not permit a US operator to make use of a UK-registered aircraft with UK (or EU) crew operating in the USA.
? (14) Although short-term leases may be reasonable, this lease can no longer be considered temporary; BA has done one-year deals with Atlas confident of manipulating the system.
? (6) There are dedicated freighter aircraft (or passenger aircraft for conversion) available. GSS could have had a fourth aircraft operating for BA a year ago.
? (5) This is a flagging-out operation, and is a flagrant abuse of the system to keep costs down and not to cover a short-term requirement.
? (3) BA is stalling the expansion of GSS, saying there is insufficient capacity yet continually utilising US aircraft and pilots when GSS (or another European operator) could do the work. It is more profitable for Atlas to fly the contract than to supply an aircraft to GSS.
? (3) BA has made a late application in order to reduce the opportunity for objection.
10. One objector later qualified the response to say that in view of BA’s late application it might be more in the interests of unemployed pilots to allow a grace period for the lease on condition that BA sourced a European alternative within six months, thus preventing the business passing to a foreign carrier.
BA response to the objections

11. BA was given the opportunity to respond to each of these objections. A copy of its response forms a confidential annex to this letter, because BA has asked that two sentences be regarded as containing commercially sensitive material. The non-confidential part of BA’s response is summarised below.
12. BA sympathises with the views expressed by BALPA and individuals regarding the unwillingness of the US to allow UK/EU registered aircraft to be wet leased to US companies, but this is an issue that is being addressed under the proposed EU-US aviation agreement and is therefore not relevant to this application. It says that in any case the US position on wet leasing does not detract from the fact that there are currently no suitable aircraft on the UK register.
13. BA notes that many of the objections say that the aircraft are crewed by US pilots thus taking away jobs from British and European pilots. BA says that the reality is that almost half of BA’s Boeing 747-200F services are crewed by British and European pilots. The lease has been in place for 18 months, since September 2004, not four years. During this period both BA and GSS have made strenuous efforts to source an appropriate Boeing 747-200F or 747-400F to place on the UK register, but unfortunately no suitable aircraft fitting all aspects of BA’s business model was available. BA goes on to repeat the justification for the extension that it gave in its original application (paragraph 4 above).
CAA comments

Background

14. BA does not operate dedicated freighter aircraft itself. Instead, freighter aircraft are operated on its behalf by GSS, the holder of a separate operating licence and AOC. GSS was set up in 2001 as a UK all-cargo carrier whose principal business is providing aircraft on long-term wet leases to other airlines. Operations commenced in June 2002 using a Boeing 747-400F leased from Atlas Air and two similar aircraft joined the fleet in October 2002 and August 2003. All three are on the UK register. The company is majority owned by a British entrepreneur and by Atlas Air, who hold the minority shareholding.
15. In order to supplement the GSS fleet, BA has been wet leasing a fourth, US-registered, Boeing 747-200F aircraft from Atlas Air. The -200F is an older variant of the Boeing 747 that is no longer in production, having been superseded by the
-400F. Dedicated freighter 747s are either new-build or can be converted from passenger aircraft (-200 or -400) by specialist engineering companies.
CAA policy on leasing

16. The CAA's Statement of Policies says that airlines should be free to choose the aircraft they employ and, subject to Article 8.3 of Council Regulation (EEC) 2407/92, that the CAA will advocate a liberal policy when advising the Department on these applications.
17. A large part of the objections to this lease centre on the use of a US-registered aircraft and US-licensed crews when the US authorities will not permit a reciprocal arrangement involving the wet lease of UK-registered aircraft in the US market. The CAA has been a strong advocate of a true Open Aviation Area where the EU and US airline markets could join together in a free trade zone, removing artificial restrictions that currently act as a constraint. However, the lack of leasing reciprocity with any country has to be dealt with at government or European level in the formulation of the negotiating strategy with the other government concerned, rather than something to be challenged in the context of a specific application. The Secretary of State has made clear in respect of a previous application by BA to wet lease an Atlas Boeing 747 freighter that he takes a similar view, and that UK airlines should have the right to wet lease foreign-registered aircraft, from whatever source, if they meet the conditions of Community legislation.
18. It is also worth noting the CAA’s view that the European rules governing leasing are in need of review. Our response to the European Commission's 2003 consultation document on the review of the legislation that introduced the EU single market in aviation in 1993 mentioned both the economic and safety aspects of leasing under Regulation 2407/92 . We believe that restraint on the ability of Community airlines to lease aircraft should be kept to the absolute minimum that is consistent with the maintenance of high and uniform standards of air safety among Community air carriers. We accordingly advocate the removal of restrictions imposed solely on the grounds of economic considerations, in order to give carriers maximum flexibility.
19. However, we are required to provide the Department with advice in the context of the current legislation, specifically (i) whether the applicant has demonstrated a genuine commercial need for the aircraft within its own operations; (ii) whether the applicant is excessively dependent on aircraft registered in a non-EEA state; and (iii) whether we believe that the application meets the criteria for an Article 8.3 waiver.
CAA advice

(i) Genuine commercial need
20. We believe that BA has demonstrated a genuine commercial need for the aircraft within its own operations.
(ii) Excessive dependence
21. BA would clearly not be excessively dependent on non-EEA registered aircraft.
(iii) Article 8.3 criteria
22. Because BA has leased the Atlas aircraft continuously since September 2004, a period exceeding a traffic season, BA must, as noted above, demonstrate exceptional circumstances in order to meet the criteria for an Article 8.3 waiver. The CAA has advised the Department about this lease on three previous occasions, in letters dated 9 August 2004 (original application for seven months), 14 April 2005 (six-month extension) and 21 October 2005 (further six-month extension). All three letters concluded that the criteria of Article 8.3 had been met. The second and third letters based this conclusion on our view that there were exceptional circumstances. BA had a pressing commercial need for more freighter capacity to operate in new markets, there were no UK-registered aircraft available, and it was taking longer than usual to source a suitable aircraft for UK registration, which was consistent with the considerable prevailing demand for dedicated freighters and the consequent lack of aircraft available. In August 2004 BA was seeking a Boeing 747-400F aircraft to add to the GSS fleet, but none was available. BA expected a limited number to become available in 2005, without knowing a precise date. By April 2005 BA still had no firm date, and appeared to have widened its search to include the Boeing 747-200F variant. In October 2005, BA said it had still been unable to source a suitable aircraft despite strenuous efforts, but remained confident that an aircraft could be sourced, crewed and UK registered by April 2006.
23. BA’s response to objectors to the current application for a further six-month extension states that it has been unable to source an aircraft “that fitted all aspects of BA’s business model”; that it is now rethinking its strategy on freighters because of market conditions; and that it regards the older 747-200F freighter variant as uneconomical for the airline. The lease extension is required to satisfy contractual obligations and to allow BA time to accommodate its customers’ traffic flows. BA believes the circumstances remain exceptional as there are no aircraft in the UK market compatible with the GSS operation. We also understand that the FAA would not permit BA to dry lease a US-registered aircraft, as suggested by certain respondents.
24. The CAA has considered the latest application against the change in circumstances described in BA’s submissions. The main consideration in our regarding the original circumstances relating to this lease as exceptional was that BA had made a firm commitment to placing an aircraft on the UK register to join the existing three that were registered to GSS in 2002–2003. The extended period of the lease resulted from BA apparently being frustrated in sourcing an aircraft in the short term by the lack of available aircraft in the market.
25. Our interpretation of BA’s submissions is that it no longer proposes to place an aircraft on the UK register while it rethinks its strategy on freighters, and requires the Atlas aircraft to continue to fulfil existing contracts meanwhile. BA’s only justification for meeting the exceptional circumstances criterion for an Article 8.3 waiver appears to be that there are no suitable UK-registered aircraft available. We see no evidence, for example, of BA needing to lease an aircraft to test unproven markets before committing to adding an aircraft to the register, which was a justification that BA relied upon when its freighter operation was less mature. The Atlas aircraft now appears to be leased purely for commercial reasons because this is the most efficient way that BA can meet the needs of BA’s customers. This is an approach that from a purely economic perspective might make sense, however we are obliged to consider whether the continued existence of exceptional circumstances has been demonstrated, as required by Regulation 2407/92, in view of the extended duration of the lease.
26. Our view is that we have seen no convincing evidence that there is anything particularly exceptional about the revised circumstances. We note that other UK operators in the same position would reasonably assume that they would be required to place their aircraft on the UK register.
Recommendation
27. From the evidence we have seen, we see little justification for recommending that a further extension to the Article 8.3 waiver should be granted. However, BA clearly will have some contractual commitments to customers, and it is not obvious that there is another UK operator that would have the capacity to absorb those commitments at short notice. Failure to secure the requested extension would therefore either result in the transfer of the cargo to foreign operators, and/or would cause at best inconvenience and at worst severe difficulties for UK shippers.
28. We therefore recommend that a temporary waiver be issued to allow BA a short period during which it can disengage from the Atlas lease in a way that causes minimum disruption to its customers. No other UK airline would appear to be greatly disadvantaged by a temporary approval of this sort. We suggest that the period allowed be agreed following consultation between BA, the Department and the CAA, but that it should be short term and should in no event exceed the period currently applied for. BA referred to a need to fulfil existing contractual commitments, but no account should be taken of any contract with Atlas, which should have been only short-term and dependent on the necessary leasing permissions being in place.
29. I am copying this letter to Graham Bunsell at BAWC, Carolyn Evans at BALPA, Ian Wrathall at the IPA and all of the individual objectors. This letter does not contain information that is subject to section 23 of the Civil Aviation Act 1982, except in the confidential annex which contains commercially sensitive information, and which is therefore not being copied to the objectors.
Yours sincerely

Trevor Metson

Its about time the playing field was levelled,