Ownership rules: Stepping stones

Alliance joint ventures and concessions on ownership rules have eaten away at the edges of industry ownership and control caps, writes David Knibb in Seattle. But what will it take to change them?

Two recent European decisions reveal much about the complex realities of transatlantic aviation. In the first, European Union transport ministers agreed to join the USA in signing a protocol that embodies the second stage of an EU-US air transport agreement, even though it leaves the most thorny issue - airline ownership and control - unresolved. Less than three weeks later, the European Commission said it would accept conditions offered by American Airlines, British Airways and Iberia, giving the oneworld alliance clearance for the same anti-trust immunity already enjoyed by SkyTeam and Star Alliance across the Atlantic.

How much these two decisions affect each other is a matter of some debate. Some say they are unrelated; others claim that the one makes the other largely irrelevant. By this latter view, now that all three global alliances have immunised joint ventures across the Atlantic, it hardly matters that the EU failed in its second effort to obtain US concessions on foreign ownership and control.

Everyone agrees that current ownership and control caps block airlines from merging across borders, and that anti-trust immunity for alliances is essentially the only way airlines have found to gain some merger-like benefits. Anti-trust immunity is "a work-around", concedes John Byerly, who is about to retire as US deputy assistant secretary of state for transportation.

Immunised joint ventures across the Atlantic now combine the routes and resources of 20 airlines into three massive super-carriers. As Joaquín Almunia, European Commission vice-president responsible for competition policy, explained when the EC announced its oneworld decision, these "transatlantic joint ventures - to all intents and purposes - allow airlines to operate as single entities on routes between Europe and North America". The US Department of Transportation agrees, claiming that the commercial effects of an alliance are "similar to those resulting from a merger of airline operations".

The success of anti-trust immunity as a way around ownership and control caps proves the advice in a popular song: "If you can't be with the one you love, then love the one you're with."

VIRTUAL BENEFITS

These virtual mergers may even offer advantages over real mergers. Jeffrey Shane, former US under-secretary of transportation for policy, now a partner in the Washington law firm of Hogan & Hartson, and Warren Dean Jr, aviation law partner at Washington's Thompson Coburn, argued in an American Bar Association paper earlier this year that alliances allow airlines "to respond more efficiently to changes in the commercial environment without incurring the costs, delays, complications, or permanent commitments associated with a full merger".

If alliances can be bigger and more adaptable than mergers, then why does it matter if the USA relaxes its ban on foreigners controlling a US airline or owning more than 25% of its voting shares? Have immunised alliances become a more flexible solution that makes ownership and control superfluous?

Not so, says law professor Brian Havel, director of DePaul University International Aviation Law Institute in Chicago, and author of Beyond Open Skies: A New Regime for International Aviation. "You cannot duplicate the efficiencies and cost rationalisations of a merger in an alliance," he warns.

Alliances are more cumbersome, Havel suggests, because "you are still dealing with separate management teams and cultures over each member of the alliance, some of which may be quite poor". Yes, alliances are flexible, he concedes, but maybe too flexible. They are inherently unstable because members can leave - as Continental did when it abandoned SkyTeam for Star - and governments can change their minds about anti-trust immunity. Both, Havel warns, "can adversely impact long-term planning".

In the final analysis, Havel insists, airlines should have the right to choose between alliances and mergers. Depending on market conditions, one may be better than the other. "If alliances are the best way to go, then fine. But if they're not, if they prove unstable or better opportunities present themselves, airlines should not be straitjacketed by archaic and protectionist regulations on cross-border investment," he says.

CONSOLIDATION TASTER

Fabio Gamba, deputy secretary general of the Association of European Airlines and observer to the stage two negotiations, also does not see the issue as one of alliances versus ownership. He views alliances as only one form of airline co-operation in a continuum that runs from codeshares all the way through to full merger. "Alliances are only a first step toward consolidation," he says, "they are not in lieu of it."

Non-aligned carriers such as Virgin Atlantic dismiss this debate as beside the point. The kind of access to the US market that alliance members enjoy with US partners is, for unaligned carriers, a mirage. They cannot even control their own US franchises, as Virgin Atlantic learned the hard way with Virgin America. Non-aligned carriers have no option but to push for change in the US law on ownership and control.

Europe's interest in transforming US policy has not changed. Not only does the cap disparity - 25% in the USA versus 49% in Europe - continue to rankle, but the AEA's Gamba, echoing Daniel Calleja, director of the EC's air transport directorate, insists that Europe needs to go further than 49% and jettison ownership caps. Without this flexibility to form cross-border carriers, Gamba argues, the Europeans cannot compete with emerging sixth-freedom powerhouses, such as Middle East carrier Emirates.

Hence, Europe has been muted in welcoming both the trilogy of transatlantic alliances that oneworld completes, and the second stage EU-US air agreement. Both are steps in the right direction, but the second stage protocol in particular remains very much a work in progress.

The US Congress showed no willingness to budge, and until it did, negotiators could talk about ownership and control until they were blue in the face and change nothing. Both sides finally recognised this and agreed to wrap up the deal with the other points they had settled and leave the bigger battle for another day.

When the final package was unveiled, European officials tried to hide their disappointment by touting the second stage protocol as "a major breakthrough". Piercing through this, one commentator labelled such remarks as "an exercise in the art of contradiction". All parties now concede that the only breakthroughs came in what John Byerly calls a "significant" US recognition that ownership and control remains "an open issue" and an agreed "framework" for discussing it.

"This was the first attempt to build regulatory convergence between the EU and USA," Gamba observes. But with few incentives and no timetable, the new accord's treatment of ownership and control is, in his view, "at best, an interim solution". Gamba expresses only personal views, but they seem to match those of the AEA.

"What we have is a process, and a commitment from the USA that they will continue to talk about liberalising ownership and control," says the AEA. "That in itself is a step forward, but it is not where we hoped we would be."

The European Parliament has yet to ratify this agreement. It has little choice but to approve, but one measure of the parliament's lack of enthusiasm was its motion in June for a resolution calling on the European Commission "to start the process of third stage negotiations with a view to include . . . additional foreign investment opportunities".

Phase two empowers a joint committee of EU-US representatives to consider future amendments. This is the "framework" for ongoing discussion of ownership and control regulations. Both the EU and the USA, per the accord, "commit to the shared goal of continuing to remove market access barriers... including enhancing the access of their airlines to global capital markets".

If and when both sides allow each other's nationals to "majority own...and effectively control" the other's airlines, US carriers will gain certain seventh freedoms beyond Europe. This parallels a similar grant to European carriers of seventh freedoms beyond the USA after Europe takes certain steps to cut night curfews.

The only waiver of ownership/control under the agreement comes if Americans or Europeans acquire third country carriers. Should Lufthansa, for instance, buy a Russian carrier, the USA would waive its insistence on Russian nationality for that carrier, but only if Russia had an open skies agreement with the USA and "a record of co-operation...with both" the USA and EU.

As Professor Havel explains: "If Russia was being defiant about giving traffic rights to US or EU airlines, the Lufthansa-owned Russian carrier may not be eligible for a nationality clause waiver."

The seventh freedom carrots, Havel predicts, "will not be enough on their own to entice the USA to remove its ownership and control rules". John Byerly is even more pessimistic about any short-term breakthrough. "To be honest," he says, "the prospect of enactment of any legislative change [in the near future] is very, very low."

One of the reasons is Congressman James Oberstar, chairman of the US House transportation committee, and a staunch defender of current US ownership and control caps. Unashamedly, he sees himself as a champion of US airline unions, who fear more foreign influence will send jobs offshore.

Mindful of this, during second stage negotiations the EU sponsored forums with labour leaders on both sides of the Atlantic. It also agreed to Article 17, which promises that "opportunities created by the agreement are not intended to undermine labour standards or the labour-related rights and principles contained in the parties' respective laws".

LABOUR SUSPICIONS REMAIN

But US labour unions remain unmoved. Underscoring their ongoing suspicion of any relaxation in the rules, four US unions representing airline employees formed a new coalition this summer so that they can speak on such issues "with one voice". As Gamba notes: "The US unions are much more vocal than their counterparts in Europe. European unions have learned to survive with 27 social systems. Twenty-eight [after adding the USA] is just one more - no big deal."

Oberstar's committee has proposed two amendments to a Federal Aviation Administration reauthorisation bill that would tighten US law even more. One would restrict anti-trust immunity for airline alliances; the other would further limit foreign control of US airlines. Even if these do not survive negotiations over the FAA bill, nothing prevents Oberstar from proposing them again as standalone laws.

European officials call his move to tighten foreign control "a restrictive clarification". On the proposal to limit anti-trust immunity, Havel notes that if alliances are taken away as a second-best option, ironically this could force US airlines to become more vocal about the need to relax ownership/control. Curiously, so far they have mostly watched this debate from the sidelines.

As Havel notes: "The current 25% cap on foreign ownership has been in place since 1938. It has survived airline deregulation, the Open Skies policy, and the US/EU agreement." With a key congressman now trying to tighten the rules even more, what are the realistic chances that the USA will ever relax on who may own or control its airlines?

The second stage agreement sets no deadline. "The USA could take no action on foreign ownership rights for a decade and risk nothing," says Havel. Either side could denounce the treaty, he notes, and "the mere threat of denunciation would be enough to bring the other party back to the negotiating table". But no one foresees such a move. "It would be politically delicate and extremely unlikely," Gamba predicts.

"I wouldn't rule out a 'third stage' or, rather, a future round of negotiations," says Havel. "The USA and EU are still going to be talking to each other through the forum of the joint committee. If there are seismic shifts in the international air transport market on either side of the Atlantic," Havel predicts, "one party or the other" will want to talk.

EXTERNAL PRESSURES

The pressure for change on ownership and control, in Havel's view, will "have to come from outside the USA". What kind of pressure would it take? "I don't think either the IATA Agenda for Freedom or the EU's pursuit of liberal global agreements will change the US rules anytime soon," Havel responds.

"If the EU can lock down very liberal agreements [that address] ownership and control rights with some other significant markets, perhaps the USA will feel pressured. But for that scenario to be realistic", he adds, the significant markets would need to include "at least Canada and Australia".

Australia and the EU are talking now about a new Open Skies agreement; Canada and the EU already have one. Yet the Canadian accord is unlikely to generate any short-term pressure. It contains no timetable and there has been no visible movement on ownership and control. Canada-EU talks over a new free trade agreement are under way, and they could add some impetus to speed up the process, but nothing is imminent.

On all fronts the news seems to be the same - incremental movement is under way, the trend lines point toward liberalisation, but it is far too early to foresee the kind of breakthrough that might cause the USA to rethink its long-standing policy.

Nevertheless, as Byerly prepares to ride off into the sunset, he predicts this inexorable trend toward liberalisation will eventually bring change. "It will lead the USA," he predicts, "to evaluate whether the current law on ownership and control continues to be in the national interest." Meanwhile, no one is holding their breath.

Source: Airline Business