Open Skies: Less than meets the eye

The foreigners are coming, the foreigners are coming. Well maybe next year.  At least not just yet if they’re here to buy US airlines. That’s despite a big blast by US transportation officials that made a lot headlines about the US lowering barriers to foreign investment in airlines.

It comes at an interesting time: the US and its major airline partner, the EC, are in the midst of the most recent last chance attempt at an Open Skies agreement, and airline ownership and control is one of the key stumbling points. In the next-to-last last chance, the US offered rules recognizing common European ownership in return for relaxed landing and gate restrictions for airline wanting to fly into London Heathrow. In the last one before that, back in spring 2003, Transportation Secretary Norm Mineta asked Congress to change the law that keeps non-US citizens from owning more than 25% control of an airline here. But the 2003 ownership change proposals have simply sat and languished with no one in Congress willing to act on them. Now though they’re trying again, with a plan not to change the law itself but to change the rules about how they interpret the rules; the details are important but perhaps important as the message being sent: we’re trying to change.

In the past, US officials have stretched the rules a little so that a carrier in dire straits could raise money by selling non-voting shares –as was the case when it allowed the first big infusion, by KLM, into Northwest n 1991. That cleared the way for the sale of UP to 49% of a carrier so long as voting power remains one fourth or less in foreign control. But in other cases, they have been strict, in one instance, actually shutting down a carrier in Hawaii named Discovery because its real owners were not US citizens. Some airline chiefs in particular United’s Glenn Tilton have been vocal in calling for an end to the foreign investment rules, as have many in the EC, but noting has happened. After all, labour (as in the pilot unions that give political and campaign contributions to many members of Congress) is opposed, opposed opposed, and the administration hasn’t been able to find anyone in Congress who really wanted to carry water on this. Some in the Pentagon are also opposed, because they don’t want any possible interference when they draft airlines for special airlift emergencies. And after The DoT concluded a very lengthy and complicated review of the Deutsche Post investment in DHL and Astar, the air cargo carrier, that allowed the investment to go ahead, lawyers and others were unsure what the rules really meant.

The proposal that DoT officials published in the official list of US regulations, called the Federal Register, does little to change the language of the law; what it does do is to make formal the recent interpretations such as that in the KLM/Northwest investment (big stake, limited control) or the DHL case (being a major customer doesn’t mean actual control). The US insists that everyday airline decisions such as marketing, routing, etc. would be the same no matter the citizenship of the owners. ABN AMRO securities analyst Andrew Lobbenberg also sees the importance in the subtext, since “it appears rather surreal that allowing Europeans greater access to owning US carriers could be so important”. His conclusion: the US is “moving towards a concept based on an airline’s principle place of business being the US” rather than considering equity stakes, direct or indirect, as crucial tests of control.

While some like bmi/British Midlands cautiously welcomed the US move, others did not; Continental Airlines blasted the move as “a blatant attempt” to bypass Congress. Although the SkyTeam member supports congressional action to change the existing law, it accused the DoT of being “blinded” by the desire to secure a deal with the EC. And Virgin Atlantic called the move “a transparent device to fool the EU into agreeing to an imbalanced deal” and said, “In simple terms, the EU must not trade access to Heathrow – its most valuable asset – for anything less than a true open aviation agreement. Each side has a number of cards in its hand but the EU holds the ace (Heathrow) and it should only play it to end the game”.

The new rules would apply only to countries with Open Skies deals with the US and with matching investment rules. This fact, however nuanced, though it could increase pressure on the EU to reach a deal with the US, would still leave barriers in place for investors from Japan and China, both of which lack Open Skies deals.

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