Foreign Ownership Debate Delays Open Skies




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17 May 2006 - A watershed commercial aviation treaty between the European Union and the United States is on hold as the airline industry and members of the U.S. Congress debate a U.S. Department of Transportation (DOT) proposal to encourage more foreign investment in U.S. carriers. If conflicting opinions expressed last week at a U.S. Senate hearing and the pessimism coming from certain European circles are indicators, the purported benefits of the new E.U.-U.S. open skies deal reached in November won't be realized for some time.
"The E.U. side will not receive a firm proposal to consider until later this year, and the earliest an agreement could come into force would be the summer 2007 traffic season, which begins in late March," according to a statement this week by Association of European Airlines secretary-general Ulrich Schulte-Strathaus. "We realize that this is a phased process, but it is regrettable that domestic pressures in the U.S. are creating unnecessary delay and give rise to all sorts of speculation."
Those domestic pressures spilled into Congress last week with U.S. airlines and elected federal officials lining up on both sides of the debate.
Those in favor said DOT's proposal--once finalized--would inject much-needed capital into U.S. airlines, foster competition, promote cross-border partnerships and convince European officials to accept the tentative E.U.-U.S. open skies deal. After that, they said, the door would be open for more liberalized aviation agreements around the world, notably in Asia.
Those opposed suggested job losses at a combined U.S.-foreign entity would first impact U.S. workers, and faulted DOT for circumventing Congressional authority and pandering to European negotiators.
During last week's hearing held by the U.S. Senate's subcommittee on aviation, Continental Airlines President Jeff Smisek said "both the original proposal, and now the supplemental proposal, would allow foreign citizens to control virtually every commercial aspect of a U.S. airline." That, he said, is a product of the "blind pursuit of a so-called open skies agreement with the E.U., which is anything but open. It gives U.S. [passenger-cargo] combination airlines like Continental little except the meaningless right to fly to London Heathrow airport without being permitted to land there. If we started doing that, we'd run out of airplanes pretty fast."
Smisek also accused DOT of telling each side what it wants to hear. The agency "is promising foreign investors that they will have control over U.S. airlines because otherwise the E.U. will refuse to sign the open skies agreement," he said. "And [DOT] is promising Congress that foreigners won't have control over U.S. airlines. So the proposed rule will create years of substantial uncertainty for both foreign and domestic investors as the legal and practical consequences are sorted out and, I assure you, litigated."
Capt. Duane Woerth, president of the U.S. Air Line Pilots Association, similarly accused DOT of bowing to European demands. "The [notice of proposed rule-making] assumes U.S. airlines are clamoring for foreign capital," he told the Senate committee. "The truth is, the NPRM represents the wish list, and now the demands, of E.U. airlines, not U.S. airlines and certainly not U.S. airline employees."
He added that U.S. policy should not be swayed by "arbitrary and artificial deadlines represented by scheduled meetings of E.U. ministers."
"ALPA does support an E.U. open skies agreement," Woerth continued, "but I find very objectionable the pre-conditions or side deals to good faith negotiations between the U.S. and E.U."
Several congressional Democrats also voiced concern about the foreign ownership proposal during the hearing, including New Jersey Sen. Frank Lautenberg, North Dakota Sen. Byron Dorgan and Minnesota Rep. James Oberstar.
Congressional Republicans speaking at the hearing said they supported the proposed rule, including Mississippi Sen. Trent Lott, Arizona Sen. John McCain and Florida Rep. John Mica. Some said they could not understand how minority interests held by foreign investors would lead to decisions to the detriment of U.S. airlines or the national interest.
"Reportedly, no decision to sign a comprehensive air transport agreement will be made by the E.U. unless DOT finalizes its rule-making on the definition of actual control of U.S. airlines," according to McCain's prepared statement. "But instead of applauding freer and more robust commercial relations with our neighbors across the Atlantic, some would rather turn inwards."
United Airlines also added its support, saying it would prefer the complete elimination of foreign ownership limits. "Outdated restrictions on foreign investment are applied stubbornly and uniquely on the airline industry," said Michael Whitaker, vice president of alliance, international and regulatory affairs, suggesting U.S. carriers have been disadvantaged as a result. "United, American and Delta no longer are the Big Three. Air France, Lufthansa and Japan Airlines now hold those spots."
As the debate simmers in Washington, Europe awaits clarity. "Only clear, meaningful and robust DOT rules will enhance the likelihood of a balanced E.U.-U.S. aviation agreement," said AEA's Schulte-Strathaus. "The issue is whether the U.S. is serious about treating global aviation like a mature industry."
DOT said it would accept public comments on the revised proposal through early July.