Should we allow State Aviation Service to replace Parliament?

The State Aviation Service of Ukraine (the “SAS”) announced its intention to holdhearings on the new Aviation Regulations this week. As a reminder, SAS by its decision revoked Regulations of the Ministry of Infrastructure governing procedure for granting route licenses, and adopted the new rules. The public may have never known about the implications of the change, should Wizz Air not have felt directly affected and compelled to announce that it might have to leave Ukrainian market.

This caused public discussion, justifications from the SAS, and ultimately, change of heart by the Ministry of Justice.  The Regulations were put on hold, until all sides of the conflict are heard. According to Mr.Guk from MarchenkoDanevych, which are rigorously opposed to the new regulations, the hearings are scheduled to be held today. They will be attended by representatives of the Ukrainian carriers. No information is available on presence of journalists or representatives of the public.

Mr.Antonyuk (Head of SAS) insists that the rule requiring airlines to be controlled by Ukraine or Ukrainian citizens will stay, but admits that the SAS may reconsider pre-requisites for granting international route licenses. This suggests that SAS might be submitting to the pressure from the industry, and is willing to adjust the rules of the game to reflect interests of the broader range of the key players. At least, of the ones who can make their voice heard.

Those of us, however, who are not part of the aviation industry, should be less concerned about whether all Ukrainian air carriers end up being happy with the new regulations. Instead, our focus should be a more general impact of regulations and SAS proceedings on the state of matters in Ukraine, and, in particular, the rule of law in the country. Does SAS act in accordance with the law? Does it overstep the regulatory boundaries? Should we allow agencies such as SAS to overrule the Parliament?

There isabundant information on negative policy implications of the new rules and discussions of their anti-competitive nature and alleged illegality. At the same time, there are claims in defense of the draft regulation, which may sound legitimate to the public ear. The first such claim is that Ukraine needs local air travel, and to develop and serve such local routes should be “social responsibility” of the airlines. Second, limiting foreign travel benefits to locally controlled airlines is claimed to be standard practice in international aviation. Third, the new Regulation is alleged to protect national aviation industry and increase competition, and, through this, serve the public.

We address these claims from the legal point. We argue thatthese claims are not fully accurate or, to the extent that the policy considerations cited by the regulatormay be valid and ultimate objectives desirable, there are other, lawful options for achieving these ends.

To start, there are several basic legal principles. First, as opposed to individuals and legal entities, which may do whatever they choose unless expressly prohibited from doing so by law, state bodies may act only as directly prescribed by law. The regulator may not exceed its powers set by the legislation. It may not, in exercising its powers, use any instruments in addition to those expressly granted to them by law.  Second, any regulations issued by ministries or other agencies should be based on the law and international treaties.  The regulator may clarify the law, extend it, and if expressly allowed, issue regulatory norms. It must not, however, limit or amend principles set by the laws or international treaties.  In particular, the regulator may not override express norms of the law, including, in the case of SAS, those oftheAir Code of Ukraine,even if SAS deems such norms unreasonable.

1. “Social mission” of the airlines

Let us start with the claim of the regulator that airlines have “social mission”. To the extent the airlines want to earn on profitable international markets, they should serve local routes needed by the country. For this purpose, foreign route license should only be granted if the carrier served local route for at least 12 month, whether or not they would do so at a loss.

There are indeed situations where the state may desperately need some routes, which, however, for economic reasons, the airlines are not willing to serve. In the EU, for instance, this is done via the Public Service Obligations program, whereby the carriers receive subsidies to serve remote and island communities which would otherwise be cut off from the rest of the world.

Unfortunately for the regulator, Air Code of Ukraine provides a completely different solution, which cannot be overruled by subordinated legislation. Under article 96 of the Air Code, should there indeed be a need for a special route, the SAS should establish it, setting the requirements as to the frequency, regularity and even prices that the carriers may charge. The announcement should be published. If no airlines volunteer to accept the honor, SAS may organize a tender. To participate, airlines should submit proposals as to the form and amount of the remuneration and other benefits they expect to receive for servicing the line.

Thus, first, the legislator iscrystal clear – servinga “social” line is not an honorable duty of the carriers, but their free choice. Second, the airline should receive consideration and benefits for carrying out “social mission”, which may include various payments from the state, and other preferences. Third, the form and amount of the benefits are suggested by the airlines, and thus may not be set, but only approved by SAS.

2. Effective control or minimum ownership test

SAS claims that limiting foreign travel benefits to locally controlled airlines is standard for international aviation. The claim is partially valid. Majority of the bilateral treaties governing travel between two states indeed provide that the state may reject designation of the airline of another stateifless than 50% of the carrier is owned and/or effectively controlled by such other state or its nationals. The US legislation limits foreign ownership stake in airlines serving the country’s domestic market to 25 percent. At the same time, any EU air carrier can serve any routes within the EU – for instance, Ryanair (an airline registered in Ireland) maintains a very active presence on the Italian domestic market.

The argument of SAS, however, is not valid for at least several reasons. First, Air Code sets exhaustive list of grounds for refusal to grant route license. Such limitation is not there. Second, to the extent that a bilateral agreement contains such a requirement, it is incorporated into the route license terms automatically. This implies that an airline not meeting the requirement of the intergovernmental agreement would not receive the right to operate a route to a particular country, irrespective of what the Ukrainian aviation rules say. Thus, there is no need for additional general ruling, applicable to all carriers, irrespective of the foreign country involved. Third, depending on the country, the effective control test may not be relevant at all. For example, this will be the case if the national legislation of the destination country does not apply such test. Or the foreign country may grant right of travel in the absence of a bilateral agreement. Or the applicable treaty may provide for a different test. For example, draft Common Aviation Area Agreement between the EU member countries and Ukraine provides that effective control test is met where the control is exercisedthrough Ukrainian company with principal place of business in Ukraine. The test is similar to what is stipulated by the Aviation Code, and it may not be changed by the regulator.

3. Protection of Ukrainian carriers and encouraging competition

As indicated above, introduction of the effective control test as suggested by SAS results in imposition on Ukrainian air lines requirements which may be otherwise absent in international regulation of the aviation. Thus, carriers, which are incorporated in Ukraine, employ Ukrainians, pay taxes in Ukraine, will be prevented from making money on international routes only because they are controlled from abroad. Instead, the profit may go to foreign airlines not subject to such unnecessary limitations. Other pre-conditions to granting license are even more anti-competitive. As such, they may only be introduced by the Parliament, and not regulator.

It is thus overall clear that the SAS has in its rulemaking overstepped its authority. Instead of holding a hearing on changing the regulation, therefore, the reasonable action in these circumstances will be to repeal the new aviation rules, and to follow the proper legal procedure, should there be reasons to believe that the rules for designating Ukrainian carriers to fly internationally need changing.