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Indianapolis Airport Authority v. American Airlines Inc.

May 10, 1984

INDIANAPOLIS AIRPORT AUTHORITY, PLAINTIFF-APPELLANT,
v.
AMERICAN AIRLINES, INC., ET AL., DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 80 C 1228 -- Cale J. Holder, Judge.

Posner, Coffey, and Flaum, Circuit Judges.

Author: Posner

POSNER, Circuit Judge.

The Indianapolis Airport Authority appeals from a decision invalidating the user fees that it imposes on airlines; the appellees are six airlines that among them carry more than 90 percent of the passengers who use the Indianapolis International Airport. The 15-year leases under which each of the airlines operated expired on August 31, 1980, and because the parties had been unable to agree on terms for new leases, the airport authority -- a local governmental body established pursuant to the Indiana Airport Authorities Act, Ind. Code §§ 8-22-3-1 et seq. -- enacted an ordinance (later amended) setting new fees effective September 1, 1980. When the airlines refused to pay the new fees, which were almost double those in the expired leases, and continued paying at the old level, the Authority brought this diversity action to collect the difference between the new fees and the old -- some $2 million. In the district court the airlines successfully defended their refusal to comply with the ordinance on the ground that the fee schedule in the ordinance was unreasonable under a variety of statutory (state and federal) and constitutional grounds, and they also persuaded the court that they were holdover tenants entitled under Indiana law to continue paying at the old lease rate until the Authority stopped accepting payments at that rate.

The main issue is whether the airport authority, in setting a new schedule of fees for the airlines, could disregard the revenues it obtains from airport concessionaires, in particular several car rental agencies and the operator of the airport's parking lot. The ordinance allocates the annual costs of operating the airport among the different classes of user -- mainly interstate airlines, operators of private planes ("general aviation"), and concessionaires -- largely on the basis of how much runway, hangar, terminal, and other indoor and outdoor airport space each class uses. (For services such as firefighting that have no fixed locale -- obviously, the firemen and their equipment go wherever the fire is -- a different method of allocation is used that we discuss later.) Since the concessionaires use much less space than the airlines, only a modest fraction of the aiport's costs was allocated to them -- in round numbers, $100,000 to the car rental agencies and $900,000 to the operator of the parking lot -- compared to $3 million to the airlines. The ordinance requires the airlines to pay landing fees and other charges calculated to yield the full $3 million, even though the airport gets from its concessionaires a rental income that greatly exceeds the costs allocated to the concessionaires -- about $3.5 million from the car rental agencies and the parking lot alone, compared to costs as we have said of about $1 million. The ordinance thus is calculated to yield the airport a total income substantially greater than its total costs, the excess being approximated by the difference between the airport costs allocated to the concessionaires and the airport rentals they pay.

The reasonableness of the concession rentals themselves is not in issue in this case -- only the reasonableness of the fees charged the airlines. The basis of the airlines' complaint about those fees, however, is that the airport is required to and has failed to take its concession rentals into account in determining what fees to impose on the airlines.

The Indiana Airport Authorities Act authorizes airport authorities, such as the appellant, "To adopt a schedule of reasonable charges and to collect them from all users of facilities and services within the [airport] district." Ind. Code § 8-22-3-11(9). However, reasonableness is not defined in the statute, and the statute has not been interpreted by the Indiana courts with reference to the issues in this case. The Federal Anti-Head-Tax Act forbids any state agency to "levy or collect a tax, fee, head charge, or other charge, directly or indirectly, on persons traveling in air commerce or on the carriage of persons traveling in air commerce . . .," 49 U.S.C. § 1513(a), other than "reasonable rental charges, landing fees, and other service charges from aircraft operators for the use of airport facilities," 49 U.S.C. § 1513(b). Again, reasonableness is not defined, but the statute has a history and a context that enable us to give meaning to the term. Airport authorities, to raise revenues, had taken to imposing "head taxes" on passengers emplaning at their airports. Congress decided that "the head tax is an unnecessary burden on interstate commerce, that it is discriminatory, and that it has a stifling effect on air transportation," most of which, of course, is interstate. H.R. Rep. No. 157, 93d Cong., 1st Sess. 4 (1973). We may assume that what is unreasonable under the federal act is also unreasonable under the state act; but, in any event, if there is a clash, the federal act must of course prevail. Another federal act is invoked, the Airport and Airway Development Act of 1970, 49 U.S.C. § 1718(a)(1) (1976 ed.), now 49 U.S.C. § 2210(a)(1), which requires that airports receiving federal subsidies -- such as the Indianapolis airport -- be "available for public use on fair and reasonable terms and without unjust discrimination. . . ." It is unclear whether this act was intended to be enforceable by airport users, such as the appellee airlines; but it will not be necessary in this case to resolve this question, or determine whether the challenged user fees are unreasonable under this act.

Besides the Federal Anti-Head-Tax Act and important to understanding it, the appellees invoke the commerce clause of the Constitution (Art. I, § 8, cl. 3), which has been interpreted to forbid the states to discriminate against interstate commerce. See, e.g., Southern Pac. Co. v. Arizona, 325 U.S. 761, 767-68, 89 L. Ed. 1915, 65 S. Ct. 1515 (1945), and for this circuit's most recent application of the clause W.C.M. Window Co. v. Bernardi, 730 F.2d 486 (7th Cir. 1984). Although the clause as written is a grant of authority to Congress to regulate interstate (and foreign) commerce rather than an independent limitation on state power, the Supreme Court, building on a dictum by John Marshall in Gibbons v. Ogden, 22 U.S. (9 Wheat.), 1, 197-209, 6 L. Ed. 23 (1824), early on interpreted the clause as prohibiting of its own force, without need for congressional action, state action that discriminates against interstate commerce. See, e.g., Cooley v. Board of Wardens, 53 U.S. (12 How.) 299, 319, 13 L. Ed. 996 (1851). Although controversial, see, e.g., Kitch, Regulation and the American Common Market, in Regulation, Federalism, and Interstate Commerce 7, 20-22 (Tarlock ed. 1981), this interpretation of the commerce clause can be defended on the practical ground that Congress is too busy -- and maybe as James Madison feared too factionalized -- to police every infringement of the policy (implied by a number of separate provisions of the Constitution) that the United States be a single "common market" for goods and services. See Eule, Laying the Dormant Commerce Clause to Rest, 91 Yale L.J. 425, 431-32 (1982). But this ground fails when Congress has exercised its regulatory power. "Once Congress acts, courts are not free to review state taxes or other regulations under the dormant Commerce Clause. When Congress has struck the balance it deems appropriate, the courts are no longer needed to prevent States from burdening commerce, and it matters not that the courts would invalidate the state tax or regulation under the Commerce Clause in the absence of congressional action." Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 154, 71 L. Ed. 2d 21, 102 S. Ct. 894 (1982). Congress has acted here, in the Anti-Head-Tax Act, by forbidding airport authorities to charge unreasonable rates, directly or indirectly, to interstate airlines. Therefore, when those rates are challenged, the only question is whether they are consistent with the congressional policy.

We are asked by an amicus curiae to consider the bearing of the Convention on International Civil Aviation ("the Chicago Convention," as it is known), 61 Stat. 1180. A treaty of the United States, see British Caledonian Airways Ltd. v. Bond, 214 U.S. App. D.C. 335, 665 F.2d 1153, 1159 n. 3 (D.C. Cir. 1981), the Convention has the force of a federal statute. But it does not regulate airport fees. It establishes a Council with broad powers and the Council has recommended standards that require that landing fees and other aiport charges be reasonable, but these standards are issued under a provision of the Convention, Article 55, relating to the "permissive" functions of the Council, and actions taken in discharge of those functions are not intended to have the force of law.

Two facts together persuade us that the district court was correct in concluding that the ordinance was unreasonable under the applicable state and federal standards in disregarding the airport's concession revenues. The first is monopoly. We take judicial notice of the fact that only six airports in Indiana are served by airlines other than commuter airlines and that Indianapolis International Airport is the only one in the central part of the state except for Purdue University Airport in Lafayette. See U.S. Dept. of Transportation, Federal Aviation Administration, National Airport System Plan: Revised Statistics 1980-1989, at 141 (1980). The Purdue airport is tiny compared to the Indianapolis airport; the 22,940 passengers who emplaned there in 1982 were less than 2 percent of the 1,382,391 who emplaned at Indianapolis that year. U.S. Dept. of Transportation, Federal Aviation Administration, U.S. Airport Emplanement Activity for CY 1982, at V(II-R)-29 (July 1, 1983). As no one in this lawsuit has advanced the improbable proposition that the Purdue airport is a feasible substitute for most of even many of the passengers who now use the Indianapolis airport, we may assume that except for travelers whose origination or destination is near the borders of the state (and who can therefore use the airports just across the state line, in Chicago, Louisville, and Cincinnati), most people traveling by air to and from Indiana have to use the Indianapolis airport.

Therefore, unless forbidden to do so by state or federal law, the Indianapolis Airport Authority can charge a monopoly price for the use of its airport -- that is, a price in excess of the cost of operating the airport (including debt service). Of course the sky is not the limit. If the Authority charged too high a price many people would stop using the airport.For example, some of those traveling out of the state would fly out of small airports in the state and switch planes at the nearest major airport in a neighboring state; or they would drive, or take a bus or train, to their destination. But for most people these would be such grossly inferior alternatives to using the Indianapolis airport that they would rather pay even a hefty premium than switch. And it would make no economic difference whether this premium was charged to the passenger directly as he came into or left the airport or to the airline that carried him. If it was charged to the airline, the airline could turn around and raise its ticket prices to passengers to and from Indianapolis; if it was charged to the passenger the airline could absorb the charge by reducing those prices. Whether airline or passenger ultimately bears the cost of an airport fee depends on the conditions of supply and demand rather than on who is assessed the charge. All this was recognized by the Congress that passed the Anti-Head-Tax Act. See S. Rep. No. 12, 93d Cong., 1st Sess. 22 (1973).

It should be clear without extended discussion that a monopoly price is an unreasonable price. Locational monopoly -- the type of monopoly that the Indianapolis airport enjoys -- is one of the traditional levers by which a state can (if not prevented) unreasonably burden interstate commerce, see Note, Airline Deregulation and Airport Regulation, 93 Yale L.J. 319, 322 (1983), and the Anti-Head-Tax Act was passed as we said earlier in order to prevent the placing of unreasonable burdens on interstate air transportation. The Senate Report refers to the "financial windfalls" that states or cities could obtain from imposing head taxes or equivalent taxes on the airlines or their passengers. See S. Rep. No. 12, supra, at 17. If the Indianapolis airport did not have monopoly power it could not extract revenues vastly in excess of its costs, which is what it has done by the combination of user fees and concession rentals shown on this record.

It is not enough for the airlines to show that the airport has monopoly power; it must also show that this power is being used to impose unreasonable rates, directly or indirectly, on the airlines or airline passengers, and not on other entities that are neither formal nor actual parties to this case. Here the second critical fact comes into play, which is that the people who use the concessions at the Indianapolis airport are, with rare exceptions, airline passengers. Although some airports adjacent to large cities (the Milwaukee airport for example) have meeting facilities that attract nonpassengers, the Indianapolis airport does not. The parking lot is used by emplaning passengers and by people picking up deplaning passengers. The car rental agencies are used by emplaning and deplaning passengers, and likewise the food stands and newsstands. This means that when the airport charges a rental fee to concessionaires it is as if it were charging a landing fee to the airlines or imposing a head tax on the passengers. If a traveler is willing to pay $140 to fly from Indianapolis to (say) New York, it should be a matter of indifference to him whether he pays $100 for the ticket, $10 in head tax, and $30 for parking; or $120 for the ticket and $20 for parking, with no head tax. What matters to him is the total cost that he must incur to make the flight, rather than the form in which the cost is distributed among the various items that he must buy.

According to the Indianapolis Airport Authority's own figures, the annual cost to it of providing rental space and other services to the parking lot and the car rental agencies is only $1 million, yet it collects $3.5 million in annual rent from these concessions. The concessionaires recoup this expense in the prices they charge their customers -- the airline passengers -- and it is thus the passengers who end up paying the $2.5 million in net revenues that the Authority obtains from the concessionaires. When concession rentals -- paid ultimately by the passengers or (in the form of reduced ticket prices) the airlines -- that are more than three times the cost that the Authority itself allocates to the concessions are added to the airline user fees that also fall on either the airlines or their passengers, the result is an exaction that is wholly disproportionate to the costs to the airport of serving the airlines and their passengers, and is therefore unreasonable under the state and federal statutes. It is unreasonable whether done to evade the statutes, or to price discriminate against the more affluent passengers (heavy users of concessions services), or for other reasons. And it is unreasonable even though we may assume that all of the Authority's income must be plowed back into airport development. See Ind. Code §§ 8-22-3-11, -25, -28, -29. No one can say how much of the overcharge extracted from the airlines' passenger will return to them in this way. The Authority might decide to use most of it for the benefit of general-aviation users, or pour it into "gold-plating" improvements that would give airline users a higher quality of airport services, at a higher price, than they wanted.

The problem of the Authority's disregarding its concession income in setting user fees has analogies in conventional public utility regulation. Many regulated firms have unregulated affiliates. A good example (at least before the recent changes in the structure and regulation of the telephone industry) is the manufacture of telephones -- which has never been a regulated activity -- by affiliates of regulated telephone companies. A telephone company might be tempted to evade rate regulation by having its manufacturing affiliate charge exorbitant prices (nominally to it) for telephones and by passing on the overcharge to the telephone ratepayers in the form of higher rates for telephone service. The ratepayers would end up paying monopoly prices, despite regulation. The regulatory agencies, however, were alert to the danger and successfully asserted the power to limit the profits of the manufacturing subsidiaries. See, e.g., Illinois Bell Tel. Co. v. Illinois Commerce Comm'n, 55 Ill. 2d 443, 483-84, 303 N.E.2d 364, 376 (1973); 1 Kahn, The Economics of Regulation 28 n. 20 (1970); cf. Smith v. Illinois Bell Tel. Co., 282 U.S. 133, 152-53, 75 L. Ed. 255, 51 S. Ct. 65 (1930).No agency has regulatory authority over the rate practices of the Indianapolis Airport Authority; instead the duty of regulation falls to the courts in the enforcement of the state and federal statutes forbidding unreasonable rates. But this just means that we must imagine ourselves in the role of a regulatory agency (though with more circumscribed powers, because of the limitations that Article III places on federal judicial power, see e.g., Federal Radio Comm'n v. General Elec. Co., 281 U.S. 464, 469, 74 L. Ed. 969, 50 S. Ct. 389 (1930)) that is charged with preventing airport authorities from setting exorbitant rates to airlines or their passengers. By charging its concessionaires rent far in excess of the cost to the Authority of providing them with space and services (while charging the airlines landing fees equal to their full costs), knowing that the concessionaires will try to pass on their rental expenses to the passengers (their customers), the Authority is doing the same kind of thing that the telephone companies would have been doing if they had been allowed to charge their subscribers indirectly for exaggerated costs that the companies had allocated to manufacturing telephones. True, it is not exactly the same thing. The telephone subscriber has to have a telephone if he wants telephone service, and in the heyday of telephone regulation he could get the telephone only from the telephone company. The passengers who uses Indianapolis International Airport does not have to use the parking lot or a car rental agency; there are other ways of getting to and from the airport. But the existence of alternatives just limits -- it does not destroy -- the Authority's power to extract by indirection the profits that its locational monopoly makes possible. Its big surplus of concession income over the costs of providing space and other facilities and services to the concessionaires shows this.

The Authority cites cases such as FPC v. United Gas Pipe Line Co., 386 U.S. 237, 243, 18 L. Ed. 2d 18, 87 S. Ct. 1003 (1976), for the proposition that a utility's income from unregulated activities (here, the concessions) should not be attributed to the regulated activities (the runways and other facilities used by the airlines). We have no quarrel with the proposition in the abstract but point out that implicit in it is the assumption that the customers for a utility's unregulated services are different peopole from the customers for its regulated services. If they are the same people, the utility can (if permitted) evade the regulatory ceiling on rates to its regulated customers by charging them excessive prices for the unregulated services they buy. This is what the Authority has tried to do here, since it is the airline passengers, in their capacity as patrons of the airport concessions, or the airlines, who will in the end bear the cost of the heavy rentals that the ...


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