There have been plenty of local hazards in store for those that have been brave enough to pioneer cross-border airline ownership deals
Foreign ownership limits receive a lot of blame for the airline industry's ailments. But life without restrictions can be perilous too. Airlines that already list their shares or own a subsidiary in another country have a story to tell of unexpected legal and political hazards that follow from cross-border ownership.
Their concerns are not about landing rights or foreign oversight of safety; every international carrier faces these. But another set of issues arises when an airline has foreign owners or owns a subsidiary in another country.
Peru's AeroContinente, for example, launched a subsidiary by the same name in Chile two years ago. It entered Chile's domestic market with the same aggressive low fares that had earned a reputation for its parent in Peru. Chile's incumbent airlines complained and Chile's competition commission ordered AeroContinente to raise its fares, claiming they were below costs. The order was reversed only after lengthy proceedings.
Six months later, Chilean prosecutors launched a criminal investigation, claiming AeroContinente Chile was engaged in money laundering with its Peruvian parent. A judge ordered the airline's assets to be seized. Without trial, the carrier was grounded for two and a half months. When the general manager flew to Santiago, he had to seek refuge in the Peruvian embassy to evade police.
On appeal, the seizure order was set aside, charges were dropped and AeroContinente Chile flew again. In the meantime, it lost most of its market share.
Wagner Canhedo, owner of Brazil's Vasp, has a similar tale concerning his majority ownership of Lloyd Aereo Boliviano (LAB). LAB was on the brink of bankruptcy last year when Canhedo sold his stake to a Bolivian businessman. Unions agitated for an inquiry into Canhedo's operation of LAB, alleging he had stripped assets to benefit Vasp. The result is another criminal investigation. Now there are calls for Canhedo to stand trial in Bolivia for LAB's mismanagement.
These cases raise concerns about even-handedness. If AeroContinente Chile were 100% Chilean-owned, or if Canhedo were a Bolivian, would we see these same proceedings? How likely is a foreign owner to become an easy scapegoat when things go wrong?
Exit penalties
Consider the case of the former SAirGroup in Europe. The group, formed around Swissair, held 49% stakes in Belgian flag carrier Sabena and France's AOM, Air Liberté and Air Littoral. All had a long history of making losses.
However, in 2001, when SAir, having run into financial difficulties, tried to untangle itself from its affiliates, it soon encountered obstacles. The Belgian government tried to hold SAir to a plan to increase its stake to 85%, threatened legal action and hinted at a refusal to ratify Switzerland's application to join the European common aviation area. There were similar problems in France. The costs associated with SAir's exit strategy played a major part in its downfall.
There are parallels with Air New Zealand's (ANZ) woes after the collapse of its Australian subsidiary, Ansett. The Australia-New Zealand regime comes as close as anything outside the European Union to a seamless commercial aviation border. For that reason it resembles a laboratory model for what it might be like if all foreign ownership caps for airlines disappeared. ANZ's case illustrates the question from two viewpoints because it both owned an airline in Australia and its own shares are publicly traded on the Australian stock exchange.
After Ansett's collapse last September, finger pointing proliferated on both sides of the Tasman Sea. Because of the shortfall between Ansett's assets and liabilities, Australian interests looked for ways to implicate the parent company and hold ANZ responsible. Asset-stripping charges against ANZ became prevalent.
ANZ paid Ansett's administrators a sizeable sum to settle all claims and the blame game subsided while administrators worked to salvage Ansett. When that failed at the end of February, the accusations resumed. In a report to Ansett's creditors, administrators again raised the spectre of an asset-stripping claim. They retreated only after ANZ reminded them of their settlement.
But that did not stop the politicians. Australia's shadow attorney-general offered a bill that would allow workers of a failed company to recover their full entitlements from parent or holding companies that had "materially contributed" to a corporate collapse. Under this proposal, a court could consider the extent to which the parent company took part in managing its subsidiary. To ensure that this reached ANZ, the proposal would apply retroactively.
Under normal rules, a corporate owner is insulated from that company's creditors. A creditor can pierce that corporate veil and recover assets from the owners only if they intermingle assets or use the corporate identity to perpetrate fraud. Rewriting this limited liability rule in the way Australia proposes would stand corporate law on its head. Moreover, its retrospective effect probably could not withstand constitutional challenge. For either or both reasons, Canberra so far has not adopted it. But it illustrates the kind of mischief a foreign owner can experience when its local airline unit faces trouble.
Directors of the parent airline can also find themselves named in foreign lawsuits if they are also directors of the subsidiary. ANZ directors who served on Ansett's board, including former ANZ chief executive Gary Toomey, now face claims of A$17 million ($9.5 million) in Australian courts from a travel compensation fund created on behalf of Ansett ticketholders. It appears that the claimants want to investigate accounting practices between ANZ and Ansett with the hope of reaching directly into ANZ's pocket. These claims arise under the laws of one Australian state, which illustrates the many ways in which a parent airline can get into trouble.
Even more bizarre problems can arise when an airline sells its shares overseas. In ANZ's case, it lists its stock on both the New Zealand and Australian exchanges. Like many New Zealand companies, it finds the robust Australian share market a better place to raise capital than its own.
Most New Zealand companies may list as a foreign-exempt corporation, meaning that so long as they comply with the rules of New Zealand's stock exchange, they may list in Australia without separately complying with Australia's rules.
The extent of this reciprocity has been tested in the case of ANZ. It is an example of the old adage that hard cases make bad law.
During ANZ's crisis last year, its share price took big swings. Trading in ANZ shares was twice halted in Auckland because of remarks by officials. When the dust settled, the market surveillance panel of New Zealand's stock exchange launched an investigation into the adequacy of ANZ's disclosures about its financial condition.
Three months later, the panel announced it had found some minor infractions, but nothing amounting to a breach of the rules about disclosures that could affect the share price. Investigators found ANZ's losses were in line with earlier warnings and that the airline had kept shareholders informed.
ASIC investigation
That would normally end the matter, but two weeks later the Australian Securities and Investment Commission (ASIC) decided to launch its own investigation into the same issue. Perhaps coincidentally, the ASIC announced this the day after Ansett's rescue collapsed, when anti-ANZ sentiment in Australia was high.
The ASIC investigation continues. The complication is that, because ANZ is a "foreign-exempt" company on the Australian stock exchange, the only relevant question would seem to be whether it complied with the rules of New Zealand's stock exchange. Yet that exchange had just cleared ANZ of any rule violation.
So what is the ASIC investigating? Since ANZ is only required to meet the rules of New Zealand's stock exchange, does the ASIC claim that New Zealand's own market surveillance panel misapplied its own rules? As one commentator puts it: "For a market surveillance body in one country to bring an action alleging a market surveillance body in another country has got its own rules wrong would be extraordinary."
But this apparently is not so extraordinary when a local airline owned and managed by foreigners has collapsed.
These incidents reveal there are real trade-offs involved in owning foreign airlines. Marketing people want to promote "seamless ties" between parent and subsidiary, but that is exactly what can get the parent airline in trouble.
If it instead follows the advice of corporate lawyers to keep a low profile in its subsidiary's country, using local directors and respecting its subsidiary's separate corporate identity, it will have fewer cross-border blues.
Source: Airline Business
