Viewpoints : The Prospect of Foreign-Owned U.S. Airlines
S ince 1936, it has been illegal for foreign companies to own more than 25% of a U.S. airline. But with the United States pushing for liberalization of markets worldwide and the nation’s airlines in a deep slump--some predict that the industry could lose $2 billion next year--some government and industry officials now say they would welcome increased foreign ownership.
For a discussion on lifting the restrictions on foreign ownership of U.S. airlines, Sharon Bernstein interviewed Alfred Kahn, retired professor of economics at Cornell University who presided over airline deregulation while head of the Civil Aeronautics Board in the early 1980s, and Tim Neale, communications director for the Air Transport Assn., a U.S. airline industry trade group.
Why should we allow foreign companies to own U.S. airlines?
Neale: Some airlines are really struggling right now with the higher cost of fuel and demand for air transportation shrinking because of the recession. The Department of Transportation is looking at this as a way to provide additional resources to companies having a hard time.
Kahn: The domestic industry is threatened with considerably more concentration, with a number of carriers in a weakened condition. At the same time, foreign airlines have expressed interest in acquiring ownership stakes in American carriers because they are prevented from taking part in U.S. domestic traffic and therefore are severely disadvantaged in competing with American carriers internationally. And we have here a confluence of interests between American consumers, whom we would like to see continue to be protected by competition, and foreign carriers that are looking for American partners with whom to exchange traffic.
How would foreign ownership help U.S. airlines?
Kahn: One of the main problems at Continental, Eastern and TWA is very weak balance sheets. They have heavy debt burdens and in some instances an inability to finance the (acquisition) of more fuel-efficient planes. If foreigners are willing to infuse capital, it would pay off debt and purchase more fuel-efficient aircraft.
There was an interesting case a year and a half ago, in which KLM Royal Dutch Airlines applied for permission to offer nonstop transatlantic service to 10 cities that do not have it. KLM felt it could develop the traffic and freight. At almost the identical time, Braniff was going out of business. Two of the 10 cities that KLM asked permission to serve were Kansas City (Mo.) and Orlando (Fla.), which were Braniff hubs. Here is a perfect example--KLM could have used the feed (of American passengers), bought Braniff and kept it alive.
Are the airlines in favor of it?
Neale: The airlines at this point think that the restriction probably should be eased, but we haven’t gotten beyond that. We don’t have agreement among all the carriers as to whether you should lift the restrictions entirely or just a certain percentage, or what other restrictions should be applied.
Who is opposed? Why would some companies want restrictions?
Neale: It’s possible that there might be union opposition. Generally, unions are not in favor of letting foreign concerns take over a U.S. industry or parts of it. They are looking to protect jobs.
Another concern you’d have to look at would be national security. That was the original intent of the restrictions, which were put into effect in 1936. (Then-President Franklin D.) Roosevelt felt it was important to ensure that our airline industry remained in U.S. hands.
From the government’s standpoint, the national security concerns will be substantial and certainly will be on everyone’s mind. The airlines have always been considered a very important defense asset, and right now they’re being used to move troops, since the military doesn’t have enough planes to move them. That might prevent them from allowing foreign companies to own more than 49% of a U.S. carrier.
Kahn: I think opposition really comes from xenophobia. It’s the feeling that we don’t want dirty foreigners running American airlines. Maybe there’s some vague association to security interests, and maybe there’s some protectionist impulses from American carriers who don’t want the competition infused with foreign capital. It’s xenophobia and protectionism.
This whole issue of cabotage--the right to transport freight and passengers within a country--is part of the history of transportation. It’s also in merchant shipping that cabotage is one of the deadly sins. You do not permit dirty foreigners to carry domestic traffic.
How would a plan to boost foreign ownership work?
Neale: In general, the airlines think it would be good to ease the current restrictions, but we just don’t know by how much. One possibility would be to allow foreign companies to own just part of a U.S. airline. If you eliminate the cap on ownership altogether, then you are giving foreign carriers an opportunity to establish a big transportation system here, simply by buying an airline.
The industry would certainly want the government to pay close attention to whether or not we get reciprocity from other countries. Obviously, if there were no restriction on foreign ownership, then a foreign airline could buy a U.S. airline outright, and in that case they would in essence be getting cabotage rights--the right to transport passengers from one U.S. city to another, without any international travel involved--in the United States.
One of the main concerns of the U.S. airlines would be whether or not they have comparable rights overseas. And by comparable, I don’t mean that in exchange for giving KLM the right to buy controlling interest in a U.S. carrier, U.S. companies would have the right to buy controlling interest in a Dutch carrier, because the two markets are so different. On the other hand, if U.S. companies were allowed cabotage rights for the entire European market, then you have some kind of parity.
Kahn: I see some attractiveness in the idea of doing it on a reciprocal basis. That is to say, while our interests would be best served simply by saying, ‘Let anybody come in,’ I think it would be politically more palatable if we did it on a reciprocal basis. It might also be an incentive for foreign countries to pursue more liberal aviation policies as well. But if the imposition of a reciprocity requirement were to defeat what I think is in our interest, then I would not insist on reciprocity.
Is this the best way to help airlines out of their financial crunch?
Kahn: I feel that it’s the best hope today, but that’s because I am reluctant to subsidize airlines, or even give them temporary subsidies or give them fuel at a reduced rate. The idea of deregulation is that a company has got to survive in the market.
