On May 25, 1995, in response to a formal request from AIC, FAA determined that AIC also had provided qualifying turnaround service during November 1990. . . .” FAA cited further language from the legislative history, emphasizing that the 1991 amendment was designed to “ensure that Hawaii does not become a dumping ground for Stage 2 aircraft. . . .” On the basis of these statements, FAA concluded that the Congress had intended to preclude an airline from flying an aircraft from the mainland to Hawaii, and then flying that same aircraft between two points in Hawaii in order to qualify the latter segment as turnaround service. Although AIC argued to FAA that one takeoff and one landing constituted a flight, under the 1991 amendment a flight qualifying as turnaround service consists of operation among “two or more points, all of which are within the state of Hawaii.” Thus, the 1991 provision clearly contemplates that such a flight may consist of more than one takeoff and one landing. AIC has maintained that two sections of the Airport Noise and Capacity Act direct the Secretary of Transportation to consider various competitive impacts of the requirements to phase out Stage 2 aircraft.However, these sections are not relevant for operations in Hawaii because the noise legislation’s mandatory phaseout of Stage 2 aircraft applies only in the contiguous 48 states on the U.S. mainland. Because AIC did not provide turnaround service at the time the Airport Noise and Capacity Act was passed, under an October 1996 amendment it must either cease serving Hawaii’s interisland cargo markets after September 30, 1998, or provide service with Stage 3 aircraft, as a company official has indicated it may do. Alternatively, the Congress could pass legislation temporarily extending AIC’s right to operate Stage 2 aircraft, which would allow the airline to continue interisland service without modifying the single aircraft that provides it. AIC’s Entry Into Interisland Markets Has Enhanced Competition

AIC’s November 1995 entry has enhanced competition in Hawaii’s interisland air cargo markets, most markedly by offering new service options for some customers. AIC Has Become the Second-Largest Airline Serving Hawaii’s Air Cargo Markets

Since November 1995, when AIC began providing scheduled interisland cargo service, it has acquired nearly one-fifth of the total market. If AIC takes such a step, there could be a discernible effect on a variety of interisland customers. The extent to which rates might increase in AIC’s absence remains unclear because there were only a few instances in which we were able to determine the effect AIC’s market presence has had on rates. Scope and Methodology

To determine the basis on which FAA revised its interpretation of turnaround service, we obtained detailed legal positions prepared by AIC, Aloha Airlines, and Hawaiian Airlines. Also in Washington, we met with the Federal Aviation Administration (FAA) attorney responsible for drafting the agency’s initial and revised interpretations of turnaround service. In Hilo, we met with a variety of agricultural producers who cultivate tropical plants and flowers destined primarily for mainland markets.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the basis for the Federal Aviation Administration's (FAA) revision of its interpretation of turnaround service in Hawaii, focusing on determining how American International Cargo's (AIC) November 1995 entry into the Hawaiian inter-island air cargo market with relatively noisy Stage 2 aircraft has affected--and how its potential future exit could affect--competition in Hawaii's air cargo markets.

What GAO Found

GAO noted that: (1) in May 1995, FAA determined that one segment of a flight AIC had been operating in November 1990 with a single Stage 2 aircraft included a takeoff and a landing in Hawaii and that it therefore qualified as inter-island turnaround service; (2) consequently, FAA concluded that, under the Airport Noise and Capacity Act, AIC could legally initiate scheduled inter-island service using its single Stage 2 aircraft; (3) however, after a formal inquiry from Aloha Airlines and a broader assessment of the legislation's intent, FAA revised its interpretation of turnaround service; (4) this revised decision held that the flight AIC was operating in November 1990 did not constitute turnaround service because it included points outside Hawaii; (5) GAO's review of relevant legislation and the legislative history found FAA's revised interpretation to be legally sound; (6) in particular, the flight that AIC conducted at the time the federal noise legislation was passed does not qualify as turnaround service--defined in a 1991 amendment as consisting of the operation of a flight between two or more points, all of which are within the state of Hawaii--and therefore does not render the airline exempt from statutory noise requirements; (7) AIC's November 1995 entry into Hawaii's inter-island markets has enhanced competition markedly by providing new services to a variety of customers; (8) for instance, since that date, AIC has offered scheduled daytime flights using large cargo containers--a service that its competitors do not offer; (9) this service has facilitated the delivery of time-sensitive express cargo and has helped to create new mainland markets for some of Hawaii's agricultural producers, who previously had to rely on ocean transportation; (10) in addition, although the airlines and their customers could not provide GAO with sufficient data to determine AIC's overall impact on rates, anecdotal information indicates that the company has introduced some price competition into inter-island markets; (11) consequently, while there could be a discernable effect on the breadth of services provided if AIC exits Hawaii's inter-island markets after September 30, 1998, the extent to which rates might increase remains unclear; (12) AIC told GAO that it wishes to continue serving Hawaii's inter-island markets after this date; and (13) however, absent federal legislation extending AIC's right to use Stage 2 aircraft, the airline will need to use Stage 3 aircraft to remain in these markets.