ALEXANDER CAMPBELL / LONDON & AARON KARP / WASHINGTON DC
A European/US aviation treaty designed to shake up traditional bilaterals could also have an impact on foreign ownership laws affecting US airlines
Rules governing airline ownership seem rooted in another age, when airlines were seen as part of a state's infrastructure and identity, and aircraft emblazoned with the national flag linked the country's capital with the world. Routes were set by complex bilateral treaties and aircraft could be requisitioned by the government in a national crisis.
That cosy set-up began to come under pressure two decades ago, with US deregulation, the formation of the European Union and the emergence of global alliances all chipping away at the system. But it was the trauma of 11 September, and the subsequent collapse in airline fortunes, that was the biggest catalyst for change. With airlines all over the world in the red, US majors battling for survival and the crash of two European flag carriers, the need for a more business-like approach to airline ownership has become clear.
In any other industry sector - from chemicals to retailing to telecommunications - such a financial crisis would have prompted a spate of rationalisation, with stronger businesses driving economies of scale by acquiring or buying equity stakes in rivals, and the weakest companies going to the wall. In airlines, the process has been sluggish, with states continuing to bail out ailing flag carriers, political opposition to takeovers, bilaterals that give airlines a national identity and restrict market entry and - in the biggest aviation market, the USA - rules banning foreign ownership and restricting government contracts to domestic carriers.
Now, however, the days of a system that has been in place since the Second World War appear numbered. An International Civil Aviation Organisation conference in March endorsed the idea of relaxed ownership rules with a clear consensus among national regulators, says air transport director Chris Lyle.
Questions of control
At present, nationality is defined by the term "ownership and effective control", the "effective control" clause explaining why even a 100% US-owned company, such asDHLAirways, can have its nationality called into question. ICAO's most recent meeting, in Montreal this March, suggested (it has no power to do more) that the criteria should be changed to "principal place of business" and "effective regulatory control".
In a development that may lead indirectly to more liberalised ownership rules, the European Court of Justice (ECJ) ruled in November 2002 that existing bilateral deals between several European Union member states and the USA broke European law by refusing to treat airlines from different member states equally. These bilateral deals define, for example, how many flights UK airlines can operate to the USA and which airports they can use. But the airlines must be UK-owned - thus contravening a principle of EUlaw that prohibits discrimination between member states.
Even if European governments agreed to abolish this discrimination, the European Commission argues that it would have little practical effect - airlines attempting to operate under another nation's bilateral agreement could still be refused permission to land in the USA. Therefore, the ECsays, it needs negotiating power to produce a new EC-USA aviation treaty.
The 2002 ECJ decision will not affect how an airline is defined, for example as "German" or "Italian". But by encouraging the negotiation of a new transatlantic aviation treaty, it will sidestep the restrictions on airline operations that the current combination of ownership-based nationality rules and nation-to-nation bilateral treaties impose. And EC negotiators are pressing for the treaty to include more relaxed rules on foreign ownership of US airlines.
In a visit to Washington DC late last year, EC negotiator Ludolf van Hasselt said the EC would ask the USA to go a "step further" than traditional open skies accords and eliminate - or at least loosen - ownership and control regulations. The EC wants European airlines and investors to be given the right to invest in, own or start airlines in the USA, which is forbidden by US regulations. Van Hasselt, head of air transport agreements for the EC's directorate-general for energy and transport, said "cross-border investments" should be allowed in commercial aviation and emphasised that such rights should be included in an EU/USA open skies agreement.
The inability of foreign carriers to invest in US airlines is "an anomaly that must be addressed now", said Hasselt. He suggested struggling US airlines would benefit from access to foreign capital.
The US Department of Transportation has written to Congress supporting the EU's appeal, not only on grounds of reciprocity but also because it believes foreign investment would help US carriers recover. The department wrote: "Raising the ceiling [from 25% to 49%] on the percentage of voting shares that can be owned by foreign citizens - without changing the requirement that US carriers be controlled by US citizens - would be consistent with foreign investment restrictions that apply to airlines in European Union countries and those of other US bilateral partners. Achieving a consistent approach in the investment area could facilitate the USA reaching new aviation agreements, thus expanding opportunities for US carriers."
Opening the way to foreign investment and ownership in national carriers would give airlines access to foreign capital markets. But two years into the crisis, European airline stock prices remain generally low, suggesting that the problem is not lack of capital, but lack of demand. The few airlines that have seen rising stock prices, such as the low-cost carriers, tend to be listed in large stock markets such as London, where access to capital is relatively easy. Outside Europe, the situation is different. For example, Qantas, currently restricted to 49% foreign ownership, last year campaigned for the cap to be lifted, saying it needed access to more capital than Australian investors could provide.
This could also help US carriers recover from the crisis. The DoT told Congress: "The proposal to allow greater access to foreign capital markets would expand the resources potentially available to US carriers as they restructure their operations in response to the challenges of today's domestic and international aviation realities."
Loosening restrictions
However, loosening ownership restrictions would open the US domestic market to foreign-funded competition, such as the planned Virgin-branded low-cost operator which Sir Richard Brandon's Virgin Group wants to launch later this year (Flight International, 6-12May). ICAO's proposal to change the definition of ownership to a "principal place of business" would allow Virgin to take a majority stake in a new US carrier - after years of lobbying for a change in ownership laws, the group has decided to work within existing rules and take only a minority stake in its proposed US offshoot. The DHL Airways case may appear an example of an opposing trend - tightening up the definition of "US-controlled" beyond even ownership and staffing requirements - but the details of the DHL debate show that the key issue is not ownership, but access to federal contracts. Even if DHL Airways were entirely US-owned, UPS and FedEx lawyers say efforts to bar it from competing for federal work would continue.
Easing the path
Looser ownership restrictions - in terms of both foreign-ownership laws and bilateral agreements - would also ease the path to airline consolidation. The proposed relaxation in the USA would allow foreign airlines, for example, to shore up alliance partners, strengthening existing airline alliances and financially troubled but strategically important US partner airlines. For intra-European mergers to take place, a new bilateral service agreement or a change in the definition of "nationality" would not be enough - the merger would also need to clear EU competition regulators. US airlines trying to acquire European carriers would face the same concerns, while European airlines attempting to buy into the US market would need regulatory clearance on both sides of the Atlantic and the complete lifting of current US ownership caps. Set against this is the obvious desire of US carriers for foreign capital - as expressed through the DoT - and the acknowledged need for further consolidation both sides of the Atlantic which relaxed ownership laws would help achieve.
Source: Flight International
