Foreigners Can Up Stake in U.S. Airlines

Seeking to help the ailing U.S. airline industry find new sources of funds, the Bush Administration reversed itself Wednesday and said it will begin permitting foreign investors to acquire up to 49% of domestic air carriers.

The decision allows KLM Royal Dutch Airlines to continue its $400-million investment in NWA Inc., the Eagan, Minn.-based parent of Northwest Airlines. The Transportation Department previously had ordered KLM to reduce its stake by $225 million to avoid the appearance of control over Northwest.

The new policy isn’t expected to attract huge waves of foreign investment right away. But it might provide the United States with a bargaining chip in its continuing negotiations with Britain over access to London’s Heathrow Airport, since British Airways is known to be interested in owning a U.S. airline.

“These steps will allow U.S. airlines to attract additional foreign capital,” Transportation Secretary Samuel K. Skinner said during a speech here. “They will not compromise national security, and they will not diminish our ability to foster a more open and competitive international aviation marketplace.”

Skinner suggested that the agency’s action would help airlines recover from a brutal year in which the domestic industry lost a record $2 billion and several carriers--including Pan American World Airways, Eastern Airlines and Continental Airlines--filed for bankruptcy or began liquidation.

“We have concluded that one of the most important steps we can take . . . is to create an environment more receptive to foreign investment in the U.S. airline industry,” he said.

In his speech, Skinner also blasted the airlines’ union employees for making too much money at a time when the industry is losing money. He said the average pilot salary of $90,000 was five times the average American’s earnings, while the average airline employee’s salary overall was twice the national average.

Skinner’s remarks came as the nation’s two largest airlines--United and American--are engaged in difficult contract negotiations. Union spokesmen reacted angrily.

“It sounds like (American Airlines Chairman Robert A.) Crandall wrote his speech,” said Tom Hunt, a spokesman for American Airlines pilots.

Several money-losing airlines, including Northwest and USAir, have called for relaxation of the investment rules. Federal law restricts foreign ownership of voting stock to 25%, but until recently the government interpreted the law to apply to nonvoting stock as well.

Besides allowing KLM to own up to 49% of Northwest, the department also allowed KLM to name three members to an expanded Northwest board of directors.

“It’s significant that (Skinner) is allowing the foreign ownership stakes to be increased,” said Thomas Longman, an airline industry analyst for Bear, Stearns & Co. in New York. However, Longman said, “there’s a large question as to which foreign airlines would be able to undertake this type of investment right now because of economic conditions.”

Jon Ash, managing director of Global Aviation, a Washington consulting firm, said the new policy might help in next week’s negotiations over access to Heathrow.

Expansion-hungry British Airways has argued against letting the two largest U.S. airlines--United and American--fly to London’s most desirable airport. But it might drop its objections now that it has the opportunity to make a large investment, possibly in USAir or in Chicago-based Midway Airlines.

Last year’s industry losses have been attributed to large debt burdens accumulated during airline takeovers, higher jet fuel prices caused by the Persian Gulf conflict and reduced travel by Americans concerned about the recession and possible terrorism.

Eastern Airlines, which fell victim to a bitter labor dispute, limped along for nearly two years under the protection of a bankruptcy court before finally shutting down last week. Continental Airlines landed in bankruptcy court in December, and Pan Am Corp. filed for protection from creditors earlier this month.

Meanwhile, the Transportation Department said it had approved an application by KLM to fly its own planes between Minneapolis-St. Paul and Amsterdam under a program to expand international air service to more American cities.

Robert W. Stewart reported from Washington and Denise Gellene reported from Los Angeles.