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02/28/86 Arrow Air, Inc., v. Elizabeth Hanford Dole

February 28, 1986




Before WRIGHT and GINSBURG, Circuit Judges, and MARKEY,* Chief Judge, United States Court of Appeals for the Federal Circuit.


Petition for Review of an Order of the Civil Aeronautics Board


Opinion for the Court filed by Chief Judge MARKEY.

MARKEY, Chief Judge: Arrow Air, Inc. (Arrow) petitions for review of Civil Aeronautics Board "Interpretation of Regulations Concerning Payment to Direct Air Carrier(s)," ER-1387 and SPR-194 (ER-1387), adopted and made effective August 17, 1984. See 49 Fed. Reg. 33,436 (Aug. 23, 1984).*fn1 We affirm. I. BACKGROUND

A. The Regulatory Background

During the 1950s and 1960s, charter air travel was limited almost exclusively to members of "affinity groups," organizations permitted to charter aircraft for out-together back-together (pro rata) transport of their members. See EDR-348 and SPDR-64, 43 Fed. Reg. 11,215, 11,215-16 (March 17, 1978).

CAB experimented with new charter packages in the late 1960s and early 1970s, applying restrictions intended "not only to maintain a legally sufficient distinction between charter and scheduled operations, but to protect scheduled carriers from the threat of excessive diversion of traffic to the new services." Id. at 11216. Because those restrictions proved onerous, unpopular, and largely unsuccessful, CAB gradually "liberalized" its regulatory policies.

The first authorized "nonaffinity charter" (Inclusive Tour Charter) required a seven-day stay and purchase of ground accommodations. Id. The second ("Travel Group Charter"), authorized in 1972, did not require a minimum-stay. CAB continued to require seat purchases 60 days before departure and a complex pricing formula. Id. Other innovations included the "One-stop-inclusive Tour Charter" in 1975 and the "Advance Booking Charter" (air-only) in 1976. Id. at 11,217.

As part of its 1972 charter reform, CAB promulgated proposed amendments to its economic regulations. The amendments of interest here required that direct air carriers (carriers), before performing one leg of a roundtrip charter, "must require full payment of the total price or the posting of a satisfactory bond for full payment." See EDR-223, 37 Fed. Reg. 5,826, 5,826 (March 21, 1972); 14 C.F.R. ยงยง 207.13(b), 208.32(e), 212.10(b) and 214.14(b) (1972). CAB's stated purpose was to prevent passenger stranding:

With the increase in the number of persons traveling abroad on charter trips, there have been instances in which persons participating in U.S.-originating pro rate charter trips have found, after their arrival in a foreign country, that no provision has been made for the return flight to the United States for which the participants had already paid. This has resulted in great inconvenience and distress on the part of stranded persons, particularly since many of them are students who have relatively limited funds available.

Id. at 5826.

Payment before departure of the total cost enabled smaller and smaller groups to book together through a charter operator. Typically, passengers flew out together but returned separately.

In EDR-348 (supra) the Board proposed Part 380 (enacted in SPR-149, 43 Fed. Reg. 36,604, Aug. 18, 1978), a comprehensive revision replacing several different charter forms with one simplified "Public Charter." Under Part 380, an individual could for the first time book as a group through a charter operator. For greater economic efficiency, charter organizers began contracting with carriers to fly "rotation" flights, i.e., those in which a plane flies out with one load of passengers and the next day flies back with a load of different passengers who had flown out at different times.

B. Arrow Air

In 1983 Arrow Air contracted with Value Vacations, a Public Charter operator, to provide transatlantic flights for an extensive charter program. A prospectus, filed with CAB as required by Part 380, listed more than 600 scheduled flights from March 1984 to January 1985, and offered "MIX 'N MATCH -- Select the departure and return flight of your choice -- ROUNDTRIP." A Value Vacations passenger could depart New York, Boston, Baltimore, or Pittsburgh, and fly to London, Glasgow, Shannon, Paris, Rome, Milan, Palermo, Frankfurt, Munich, or Zurich, travel without a fixed itinerary, and return on any returning flight listed in the prospectus.

In mid-summer of 1984, Value Vacations told CAB that on August 10 it would cancel its "MIX 'N MATCH" program "based on a dispute between Value and Arrow regarding the payment of funds." Value reported that 3,800 passengers who had departed the United States were currently in Europe and 900 passengers who had departed Europe were currently in the United States.

Arrow then advised CAB that it would not operate any charter flights after August 10, contending that it had no duty to return passengers it had transported one-way, even though those passengers had paid for a round trip. CAB responded that Arrow was "responsible for returning those passengers, regardless of the status of Value's payments, since the Board's regulations require the direct carrier to be paid in full for both legs of a round trip charter prior to commencement of travel." See August 16, 1984 Memorandum of Legal Adviser to the Director, Civil Aeronautics Board (Joint Appendix at 2).

In that August 16 Memorandum, the Legal Advisor noted:

Arrow is well aware of this interpretation, since a similar situation involving Arrow arose in 1982. At that time, Arrow requested a waiver to cancel its program with Travex, Inc., on less than 10 days' notice since Travex could not meet its payment schedule. Acting under delegated authority, the Director of BDA [Bureau of Domestic Affairs] granted the waiver and made it clear . . . that, since the carrier is required by these rules to collect in advance of the round-trip transportation of charter passengers, it is Arrow's responsibility to insure that they receive return service. Arrow did not appeal that decision.

The August 16 Memorandum advised CAB immediately to adopt proposed interpretation ER-1387 "to settle any remaining arguments on this point." It further noted that carriers had recently been exempted from certain tariff requirements so they could transport stranded passengers, an exemption that would "make it easier for Arrow to arrange lift on other carriers where necessary."

C. ER-1387

On August 16, 1984, CAB issued ER-1387, 49 Fed. Reg. 33,436, captioned as an interpretation of regulations, to explain "the Board's rules regarding payment to direct air carriers for charter transportation, and the carriers' corresponding obligation to provide return transportation where it has been paid for." Id. at 33,436.

CAB noted that carriers had denied all responsibility to return passengers when a charter operator discontinued its program. It observed that carriers' contracts with charter operators did not always coincide with the charter operators' contracts with passengers. Carriers often contracted by aircraft "rotation" (out-and-back round trip on successive days), while passengers arranged for round trips spanning a longer period. Thus, a substantial danger of stranding had arisen, a condition "contrary to the intent of rules," requiring that a carrier be pre-paid for both legs of a round-trip.

CAB also noted that the matter had been raised in a rulemaking proceeding, EDR-456, 48 Fed. Reg. 15,639 (April 12, 1983), in which CAB had proposed a major rewrite of the charter rules while retaining its prepayment rules. Commenting on EDR-456, CAB noted in ER-1387:

The Board reiterated that a direct air carrier now has the responsibility to provide return transportation to charter passengers who are already on their charter trips. There would be little point to the elaborate scheme of financial protection in the present charter rules, were it otherwise. The most common danger, the Board stated, that the depository account in particular is designed to protect against is the use of one participant's funds to pay for the transportation of another -- especially of one flying earlier. Such a "forward float" of participants' money poses a great danger that passengers at the end of a program, or of a high travel season, will find themselves with no transportation and no available refunds if sales do not meet the charter's expectations and the charterer defaults. The Board pointed out that it did not prohibit direct carriers and other charter operators from contracting for "rotations" as opposed to passenger round trips. However, when passenger strandings are at issue, there is no question that passengers must receive the transportation for which they have paid.

49 Fed. Reg. at 33,436.

Parties to proceeding EDR-456 had objected to the foregoing view, arguing that: (1) the prepayment rules assured safety of passengers' money when a charter operator defaulted; and (2) imposition of a duty to return would impose difficult, if not impossible, bookkeeping burdens on carriers.

In ER-1387, CAB rejected argument (1), saying that "mere protection of passengers' money is not the only question," and that passengers may be unable to purchase return transportation on short notice with the amount of their prepayment allocated to the return trip. In looking to existing regulations, CAB commented:

The point of the rules is that once the money for a round trip has passed to the direct air carrier, that carrier is deemed to have accepted the burden of transporting passengers both ways (not simply returning part of the money), regardless of the state of the ...

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