D.C. Circuit Vacates FAA Decision That Failed To Consider Effect On Competition
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  • D.C. Circuit Vacates FAA Decision That Failed To Consider Effect On Competition

    On May 21, 2021, a panel of the United States Court of Appeals for the D.C. Circuit vacated a decision by the Federal Aviation Administration (“FAA”) to retire takeoff and landing “slots” forfeited by Southwest Airlines (“Southwest”) at New Jersey’s Newark Liberty Airport (“EWR”), finding that, by failing to consider what impact the move would have on airline competition at the airport, the FAA had acted arbitrary and capricious and without substantial evidence, in violation of the federal Administrative Procedures Act (“APA”).  Judge Douglas H. Ginsburg wrote the opinion, which was joined by Judges Karen L. Henderson and Justin R. Walker.  The case is Spirit Airlines, Inc. v. United States Department of Transportation, 19-1248 (D.C. Cir., May 21, 2021).

    Since 1968, the FAA has regulated the number of flights that airlines are permitted to fly to and from EWR.  United Airlines (“United”), which maintains its primary hub in Newark, controls the bulk of these openings, or “slots,” and accounts for 72% of the airport’s activity during peak hours.  Half of the routes to and from EWR are only flown by United.  United’s alleged dominance at the airport raised concerns in 2010 when the airline sought to merge with its rival Continental Airlines, and the U.S. Department of Justice (“DOJ”) required United to forfeit 36 of its EWR slots, including 16 during peak hours, to discount rival Southwest Airlines (“Southwest”) as a condition for proceeding with its merger.

    In 2016, the FAA changed how it regulated traffic at EWR and permitted airlines to fly at the airport even when not granted slots by the FAA.  However, the agency noted during its 2016 rulemaking that excessive congestion at the airport may cause the agency to return to its earlier stricter approach.  If it did so, the FAA noted, legacy operators at the airport—namely United—would be privileged in the agency’s distribution of slots.

    In 2019, Southwest forfeited its slots at the airport and indicated to the FAA that it would no longer seek to fly routes to or from EWR.  Discount airline Spirit Airlines (“Spirit”) sought to assume Southwest’s peak hour slots, but the FAA, citing congestion at the airport, decided instead to retire the slots altogether.  In addition to Spirit, the DOJ and EWR’s operator both opposed the FAA decision and proposed an alternative approach that would allow Spirit to operate at the airport.  United’s share of EWR activity during peak hours under the FAA proposal was estimated to rise to 75%.

    Spirit appealed the FAA’s decision to the D.C. Circuit, which hears appeals of many agency decisions.  The panel sided with Spirit, and found that, while the FAA’s current system for regulating airport traffic was officially voluntary, the decision to retire slots was appealable because, in practice, it “foreclose[d] Spirit from operating as many peak-period flights as it would otherwise do” and “hinder[ed] Spirit’s ability to pursue business opportunities as surely as would an express prohibition.”

    On the merits, the panel ruled that the FAA had been arbitrary and capricious in its decision to retire the slots because it had not considered United’s alleged dominance at EWR, raised by the DOJ and others, or proposed alternative plans for addressing the congestion issue, and therefore had “ignore[d] an important aspect of the problem” under consideration.  Nor either, the panel found, was there any record that the FAA had considered evidence presented to it that excluding Spirit from the airport would have a deleterious impact on the prices paid by the airline customers.  One analysis by EWR’s operator found that rates dropped by about 45% when a new airline entered a route from EWR over which United had previously held a monopoly.  The FAA did not consider this or other similar evidence presented to it.

    Ruling in Spirit’s favor, the panel did not consider other arguments presented that the FAA’s decision had also violated other statutes governing its operations.

    The panel’s decision in Spirit Airlines is significant because it demonstrates that, where applicable, the APA can be used as a powerful tool to protect market competition without direct recourse to the antitrust laws.