Foreign Control of Skies Debated

With its poll numbers slipping and many issues vying for its attention, the Bush administration has quietly withdrawn its proposal to liberalize rules governing foreign ownership of U.S. airlines, officials say.

The proposal has stirred free market advocates who say it would pump much-needed capital into an industry that has lost $42 billion since 2001. It also has upset labor groups, lawmakers and some industry executives who say it could decimate "the crown jewel" of the U.S. transportation system when it is most vulnerable.

"Foreign ownership is a bad idea from a national perspective," said Mike Boyd, president of the Boyd Group, an Evergreen, Colo., airline consulting firm. He spoke in a telephone interview.

"Foreign investments in U.S. airlines will be for control. I firmly believe if you allow a foreign entity control of United Airlines, they will maximize their investment by selling it off, breaking it up. They don't care.

"I have no idea why the Bush administration would favor this."

The proposal by the Department of Transportation was first issued as a Notice of Proposed Rulemaking last November. After a 60-day public comment period that featured criticism from more than 100 members of Congress, DOT shelved the process.

In mid-2006, DOT said it was reviving its proposal to alter the definition of foreign ownership or "actual control" of U.S. airlines.

Rep. James Oberstar, D-Minn., ranking Democrat on the House Transportation and Infrastructure Committee, said the rulemaking proposal was unconstitutional because it bypassed Congress to amend a federal law. Other lawmakers criticized the proposal as a job killer for U.S. airline employees.

In August, DOT officials again said they were delaying their proposed rulemaking.

"It's our understanding the (Bush) administration has backed off its attempt to change the foreign ownership rules through a Notice of Proposed Rulemaking," said Jim Berard, Democratic communications director for the House Transportation and Infrastructure Committee, in a telephone interview.

"It appears to us the issue has been dropped."

But James Burnley isn't so sure. A Republican, he served as U.S. secretary of transportation from 1987 to 1989 under Presidents Ronald Reagan and George H.W. Bush. He has also been a transportation adviser to the current Bush White House.

"I think it will surface again," Burnley said in a telephone interview. "The reason it will is because the executive (branch) is driven by a desire to have Open Skies agreements with Great Britain and Europe. DOT will remain under a lot of pressure to figure this out."

Under a 1940 U.S. statute, only an airline that qualifies as "a citizen of the United States" may provide service between U.S. cities or on international routes obtained by the United States through international agreements.

The law says an airline may qualify as a U.S. airline only if it is "a corporation or association . . . which is under the "actual control" of U.S. citizens."

Federal statutes define "actual control" as requiring at least 75 percent of the voting shares of the airline to be held by U.S. citizens; two-thirds of the directors and officers must be U.S. citizens, according to federal law.

The DOT proposal would permit foreign investors to exercise control over all commercial aspects of U.S. airline operations. That would include aircraft fleet mix, routes, frequencies, classes of service and pricing.

DOT's new standard would require U.S. citizens to control only decisions affecting national defense, security, safety and corporate organizational documents.

Bush administration officials told Congress earlier this year that the European Union has made a long-sought Open Skies agreement between the United States and the European Union conditional on adoption of DOT's proposed rulemaking on foreign ownership. The proposed Open Skies agreement would allow a foreign carrier to fly from any point in the foreign country to any point in the United States.

"We want to conclude the (Open Skies) agreement -- not only for the market access that U.S. carriers will achieve, but because it can be expected to enhance the quality of competition across the Atlantic in a dramatic way and provide impetus for further aviation liberalization around the world," Jeffrey N. Shane, DOT's undersecretary for policy, told the Aviation Subcommittee of the House Transportation and Infrastructure Committee earlier this year.

"However," Shane continued, ". . . the decision to initiate this (rulemaking) proceeding was based on our assessment that the proposed change in the DOT approach was long overdue and is in the best interests of the United States, its air transportation industry and those that rely on that industry, not only for transport services, but also directly and indirectly for jobs."

Shane's remarks are available on the DOT Web site at .

Edward Wytkind, president of the AFL-CIO's Transportation Trades Department, testified before the Aviation Subcommittee on the same day Shane spoke.

Wytkind, whose department is affiliated with American Airlines mechanics' Transport Workers Union, said the proposed rules threaten U.S. airline jobs.

"The burden is on the (Bush) administration to make the case that allowing foreign entities to control U.S. airlines serves the best interests of the aviation industry, its employees and our nation," Wytkind said in testimony available on the DOT Web site.

"The problem with the department's stated rationale is that it is not supported by any real and persuasive evidence. The financial challenges confronting the industry are well known -- fuel prices have skyrocketed, pension obligations must be met, security costs and fees have increased, a system capacity crisis is looming, and air carriers have largely been unable to price their product at a level sufficient to achieve and maintain profitability.

"It is hard to understand how allowing foreign interests, including foreign airlines, to control U.S. carriers would solve any of these problems."

Burnley, the former DOT secretary and a senior member of the government and legislative practices at the law firm Venable LLP in Washington, D.C., doesn't believe foreign investors would purposefully ruin a U.S. airline.

"We have (airline) alliances today, and the dominant carriers tend to be the U.S. carriers," Burnley said. "In this day and age, it makes no difference who owns how much stock in an airline anywhere in the world."

Fred Russell, who follows the airline industry for Fredric E. Russell Investment Management Co. in Tulsa, agrees with Burnley.

"If foreigners invested in an U.S. airline, they would do everything they could to make it profitable and indispensable," Russell said. "If we give foreign airlines the ability to invest in and control U.S. airlines, we would have to do the same with U.S. rights overseas.

"The capital, efficiencies and investments in technology would benefit everyone."

Tim Wagner, spokesman for American Airlines, the largest carrier in the world, said the company hasn't adopted a position on DOT's proposed rulemaking on foreign ownership.

"Our position is airlines should abide by the rules," said Wagner, whose company employs 7,000 in Tulsa. "If the U.S. government changes the rules, we would abide by them like everybody else."

Similarly, the Air Transport Association, the trade group in Washington that represents the nation's airlines, doesn't favor or oppose a change in the rules governing foreign ownership of U.S. airlines.

However, Houston-based Continental Airlines opposes the DOT liberalizing foreign ownership rules.

"DOT proposes to unilaterally limit the application of the law to only certain aspects of airline management, while the statute requires that U.S. citizens have actual control over all aspects of airline operations," Continental said in a written statement.

"This shows that either the DOT has misinterpreted the law or has ignored the realities of internal airline management and how airlines operate. Actual control over day-to-day operations, including scheduling, pricing, employment and labor decisions and financing, provides foreign citizens actual control of the very areas DOT is trying to carve out. Airline operations cannot be split in the manner DOT is suggesting."

British Airways is one of four United Kingdom carriers that operate nonstop service from London's Heathrow Airport to U.S. gateways.

When the DOT proposed amending the foreign ownership rules last year, British Airways CEO Willie Walsh said that rules restricting foreign ownership hinder airline industry growth. He spoke to Business Travel News.

"Because government regulations have had a lot to say about foreign ownership and control -- where in most cases it cannot exceed 49 percent, or in the case of the United States, 25 percent -- we have not seen cross-national mergers and sensible economic rationalization that we see in every other global industry," Walsh said.

The DOT's proposed foreign ownership rulemaking is in limbo today, but it could be brought back to life, lawmakers said.



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