A late US offer on ownership and control may not be enough to spur a breakthrough on liberalisation talks between the European Union (EU) and the USA.

As Open Skies negotiations with the European Commission (EC) headed into their final sessions of the year, US officials proposed a major reinterpretation of limits on foreign investments in and control of US air carriers. The consultation period for the new offer will last until early next year, putting back any possible deal until spring 2006 at the earliest.

Jeff Shane, the US transportation undersecretary for policy, says the proposal will promote transatlantic co-operation by moving away from a strict interpretation of the 25% voting-power limit on foreign investment in US flag carriers. This restriction has proved to be a key stumbling block in EU-US talks.

Instead, Shane says the USA will review investment proposals with an eye to allowing more say in day-to-day airline management decisions on operations, marketing, route selection, pricing, employment and labour matters – so long as US citizens still headed the carrier concerned and formed the majority of its board.

Foreign investors would have no say in safety or security matters or in any military airlift commitments the carrier may have with the government. That would meet the criterion of “actual control” that congress inserted into statutory language less than two years ago.

Shane explains: “If you’re a foreign airline you’d be kissing your money goodbye if you invested in a US carrier with no say over how your money would be spent.” He told the International Aviation Club in Washington that it was precisely this lack of active participation that led KLM to withdraw its $400 million investment in Northwest Airlines in 1997.

European carriers are still waiting to see the finer details of the US proposal. “There is something there to work with. You would need to cleverly structure deals that would, in effect, give you control,” says Geert Goeteyn, Brussels-based partner at law firm Howrey. It is, however, unclear whether this is possible. “There is a need for far more legal clarification. Companies would be very wary of investing as the interpretable guidelines drawn up by the DoT (Transportation Department) are open to challenge. Their legal certainty is less than ideal. The risk is that the goalposts would be changed all the time,” says Goeteyn.

Shane insists that the DoT is offering only to clarify the criteria for review of investment applications; it will not change the law because only congress can do that. Such latitude is well within the administrative discretion of regulators at the department, lawyers say.

The plan, although limited, will, Shane says, encourage larger-scale liberalisation because its freer interpretations will apply only to investment by carriers or citizens of nations that have Open Skies treaties with the USA and that themselves have liberalised ownership and investment rules. “I won’t stand here and pretend that we don’t care whether the rule change will have a positive impact on the EU-US talks. Of course we do,” said Shane.

The USA has been under pressure to make substantive changes to the restrictions on ownership and control in return for improved market access to Europe – particularly London Heathrow. Under the restrictive US/UK Bermuda II agreement, only British Airways, Virgin Atlantic, United Airlines and American Airlines have access to the lucrative Heathrow-US market.

If the current EU-US talks break down, the odds increase that the EC will compel the UK to renounce its US bilateral some time in 2006, as the commission has said it will. But against that time factor, negotiators will balance their hopes or calculations that the USA might offer still more, or at least enough to make opening up Heathrow more palatable. BA has made clear that it believes the US offer does not go far enough, and wants Brussels to hold out for a deal that would allow foreign investors to control at least 51% of voting stock.

Virgin Atlantic called the ownership offer “a transparent device to fool the EU into agreeing to an unbalanced deal”, although bmi, currently excluded from the Heathrow-US market under Bermuda II, has applauded the move. Continental Airlines, while saying it favours liberalisation, called the investment proposal “a blatant attempt to circumvent the law that the DoT has been unable to convince congress to change. It is tantamount to allowing foreign airlines to operate domestic flights within the USA.”

Goeteyn believes that Continental’s criticism of the deal is partly driven by its desire to ensure nothing much happens without it getting full access to Heathrow. Both Continental and Delta have been expanding their international operations, particularly on the transatlantic (see table below), and have long coveted access to yield-friendly Heathrow traffic.

Delta, which has strong relations with Air France and the SkyTeam alliance, is confident of getting slots at Heathrow through its alliance partners, but Continental would find it more difficult to get conveniently timed slots.

The DoT’s need to implement change without going through congress is very real. Congress, in the face of strong labour objections, has refused to change the law on ownership and control. The regulations that DoT has proposed could not become final before mid-January, and this has helped buttress the belief that any larger breakthrough would have to wait until then – if at all.  

Source: Airline Business