Downturn prompts new look at ownership caps

In a sign of the times, three nations are preparing to relax their rules on foreign ownership of airlines.

These changes all stem from growing concerns about airline access to capital at a time of falling yields, skittish investors, and battered bank balance sheets. Making foreign investment easier is seen as part of the fix for these ills.

Waiting for luck is like waiting for death, a Japanese proverb warns. Rather than wait, some airlines are pressing for these relaxed ownership caps. In Canada, Australia, and India their arguments have reached sympathetic ears. Paradoxically, at the same time, US lawmakers seem headed the opposite direction with a move to tighten US control over US carriers.

Canada’s plan to ease foreign caps predates the current downturn, but the financial crisis has added to its momentum. A competition review commission proposed to raise the current foreign cap from 25% to 49%, but only for investors from other countries that set their own cap at 49%.

Endorsing this proposal, Canada’s government has included it a budget bill that seems certain to pass. Both Air Canada and WestJet favour it, arguing it will allow "enhanced access to capital".

This may be true, but Canada’s major airlines already offer shares with variable voting rights - a concept pioneered by Air Canada - that allow foreigners to own any number of shares but limits their aggregate voting rights to 25%. The bill’s effect will be to lift those voting rights to 49% and encourage other nations to follow suit.

The changes proposed in Australia and India focus on whether and how much foreign airlines should be allowed to invest in local carriers. Both countries permit foreigners to own up to 49%, but India bars any ownership by foreign carriers and Australia restricts it in the case of Qantas.

The special Qantas rule is a vestige of privatisation. It caps total ownership by a single foreign company at 25% and ownership by a group of foreign companies at 35%.

Right before word leaked of merger talks between Qantas and British Airways, Australia’s transport minister unveiled a proposal to lift these limit on foreign ownership in Qantas - whether by one or a group of foreign companies - to 49%. This would put Qantas on the same footing as any other Australian international carrier.

As it turned out, this proposal had nothing to do with BA’s short-lived romance with Qantas, and Canberra still plans to go ahead with the change.

India’s proposed change may be of more interest to BA. During a visit to Hyderabad in January, BA chief executive Willie Walsh told reporters that BA wants to strike deals with India’s carriers, but is currently limited to codeshares. Under Indian law, he complains, "foreign airlines cannot invest in domestic airlines."

Other carriers also want equity-based alliances in India. Indeed, years ago Singapore Airlines tried unsuccessfully to launch its own Indian airline. Air France-KLM has also been linked with talks over a stake in Kingfisher about a stake if the current law changes.

India’s cash-starved airlines are eager for a change. They expect to lose up to $2 billion in the fiscal year ending March 31.

Arun Mishra, joint secretary in India’s civil aviation ministry, recently told an aviation conference that his government will decide "very soon" on allowing foreign airlines to invest in domestic carriers. The only debate seems to be over whether the cap should be 25% or 49%, with the aviation ministry favouring the lower limit.

With this trend toward relaxed foreign caps, it seems odd that the US now would be moving the opposite direction. Yet, if proposed legislation is any sign, it is. Jim Oberstar, veteran chair of the US House Transportation Committee, has introduced a bill designed to block any repeat of the abortive Bush-era attempt by the department of transportation to redefine the meaning of foreign "control" in US carriers. Oberstar’s bill, which would mandate that all "business . . . and operational matters" be decided by US citizens, reflects a territorial squabble between Congress and the regulators over who should define airline nationality. It is only occurring now because Democrats control Congress and the White House.

Oberstar’s bill has nothing to do with the financial crisis or the need it highlights to re-think the rules of airline ownership.

Source: Airline Business