Open Skies? Pols Debate Foreign Flyers

A controversial plan might make it easier for foreigners to own more of U.S. carriers.
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The Bush administration's controversial proposal to reduce the barrier to foreign ownership of U.S. airlines could face its toughest test next week.

The House Aviation Subcommittee has scheduled a Feb. 8 hearing on the Transportation Department's plan, "primarily to examine whether the department can make this change through rule-making," said Jim Berard, minority spokesman for the committee.

The proposed change "bypasses Congress, and there is some evidence that it may even violate the law," Berard said. "And since we make the law, we're more than a little interested."

Limiting foreign ownership of domestic airlines has long been a tenet of U.S. aviation policy, but the steady creep of globalization is calling the restrictions into question.

In November, the DOT said it wanted to alter its rules, changing the interpretation of a provision of the law that governs "actual control" of a U.S. airline. While foreign investors would still be limited to 25% of the voting stock, the change would allow foreigners to have "actual control" of the carrier and to make management decisions.

The intent, the DOT has said, is to provide easier access to foreign capital for U.S. airlines. Foreign investors still would be limited to 49% of the nonvoting stock in an airline.

The timing is linked to talks with the European Union aimed at implementing a trans-Atlantic Open Skies agreement as early as this year. That agreement would generally allow flights between Europe and the U.S. with minimal restrictions.

Additionally, any EU airline flying from Europe could pick up passengers at a U.S. airport and fly them to a third country, using what's known as "fifth freedom" rights. However, it wouldn't give them the right to carry passengers between U.S. destinations, a practice called cabotage.

The EU has indicated that approval of the Open Skies deal hinges on the U.S. relaxing its ownership laws.

The seemingly limited change in Transportation Department policy has sparked fierce debate. Carriers such as

United Airlines

(UALAQ)

, which has strong global partnerships, and aircraft maker

Boeing

(BA) - Get Report

are supportive. Labor unions and

Continental Airlines

(CAL) - Get Report

, which has weaker global partnerships, are opposed.

British Airways

(BAB) - Get Report

, the biggest trans-Atlantic carrier with about 100 daily flights between the U.K. and the Americas, says the change doesn't go far enough. And the world's biggest airline, American Airlines, a unit of

AMR

(AMR)

, hasn't taken a position.

Asked about the DOT's proposed change during a conference call last week, Continental executives called the change "arbitrary and capricious," and said foreign ownership rule changes should be decided by Congress. Continental President Jeff Smisek asked whether the change "is the price the DOT is willing to pay" to get the EU nations to sign the Open Skies pact.

"The EU countries are of course waiting because they're very cautious and worried that the rulemaking is not going to be successful and will be challenged in court, as I can assure you it will be," Smisek said.

CEO Larry Kellner questioned how the DOT can propose to cede control to an investor who holds 25% of a company, saying that such a rule would usurp the usual concept of shareholder control. Kellner also said access to London's congested Heathrow Airport remains the key issue for Continental in the Open Skies agreement, because "the ability to fly to Heathrow without the ability to land isn't worth a lot."

In a recent speech in New York, British Airways Chairman Martin Broughton also challenged the value of allowing more control while continuing to restrict foreigners to one-quarter ownership. The idea seems "designed to give the appearance of change without really changing anything," he said. "It's a recipe for confusion."

Broughton said the deal on the table, in which the EU offers Open Skies for the DOT's new interpretation of ownership rights, is uneven.

The EU would allow 100% ownership and control of its airlines to an investor with no caveats. However, he says the U.S. is offering little in the way of ownership and also insists on unlimited fifth freedom rights that let U.S. carriers fly between European countries, while European carriers primarily gain the right to fly between Latin America and the U.S.

The U.S. also rejects cabotage, which would let foreign carriers fly between U.S. markets. Broughton said he would much prefer an "open market" model.

Meanwhile, in a recent filing with the DOT, Boeing offered strong support for the department's rulemaking and for the efforts by the U.S. and the EU to liberalize global aviation.

Boeing called the DOT's rule change "a positive step in the evolution of international aviation.

"The world has become a much more global marketplace in aviation and virtually every other economic arena since the advent of the jet age," the company said. "The U.S. and the EU should be commended for taking steps to ensure the aviation world of the 21st century keeps up with these changes."