More Open Arms for Open Skies

The issue of 'foreign' control of U.S. airlines is becoming only one of timing.
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What would it be like to fly Virgin America?

Richard Branson

, the ever-wild-and-crazy chairman of

Virgin Atlantic

, would be more than happy to let you find out.

There is one little problem between Branson's grand scheme and his arrival at an airport near you: At the present time, an airline based in the United States can have no more than 25% foreign ownership.

Branson, who has been nibbling around several potential acquisition deals in the United States in the last year, has apparently decided that he won't settle for 25%. And he appears willing to work with the various regulatory agencies in an attempt to change the rules.

This week, yours truly was honored to be asked to speak at the 8th Annual

International Airline Symposium

, which was held in Phoenix. The question posed to the conference was a simple one: Are airline ownership and control restrictions, as they now exist, a dead issue? And if they are, how do we get from where we are now to a truly open-skies system, where not only routes are open to competition from all, but where foreign capital and ownership concerns are no longer relevant?

Branson's proposed U.S. airline, tentatively named Virgin America, was the hypothetical test case that was used as representatives from the U.S.

Department of Transportation, the Department of Defense, the European Union, European Commission

and labor unions met with high-level representatives of more than 35 airlines to consider and debate the issue.

Fred Reid, executive vice president of marketing for

Delta Air Lines

(DAL) - Get Report

, stated flatly, "A British owner of an American airline would be just as good an owner as an American one," although he then admitted that officially Delta had no stance on the issue.

Tony Fortnam,

British Airways'

(BAB) - Get Report

vice president of governmental affairs, did speak for the airline when he said, "We want to see freedom to fly passengers and cargo wherever it makes sense. Period."

At the end of the conference, one thing was certain: Market demands and globalization efforts sweeping other industries are going to make the issue of "foreign" control of U.S. airlines only one of timing -- which should be a blessing for fliers. That was the one point that all parties agreed upon: If you can buy a

BMW

that is made in South Carolina, why the heck can't you fly an airline from New York to Dallas that is owned by someone in the U.K.?

That's not to say the skies were all clear; there was plenty of room for conflicting opinion at the conference.

One thing that was perfectly clear was the position of the Department of Defense. Mary Lou McHugh, the assistant deputy undersecretary of defense for transportation policy, made the department's position quite clear. Because the DOD relies on a voluntary program entitled the Civil Reserve Air Fleet, or CRAF, program as a crucial part of our national defense policy, the idea that an airline operating in the U.S. would be majority-owned by a foreign national was of "great concern."

CRAF is the program that allows the DOD to use commercial aircraft and crews for defense emergencies. The one and only time this program has been implemented was during the Persian Gulf war.

Basically, the program, in which U.S. airlines participate voluntarily, allows the DOD to requisition aircraft and crews as needed to provide airlift of troops and cargo. This program thus allows the U.S. military to maintain a smaller fleet than it would require in an emergency.

"We could foresee potential conflicts of interest if we were to have a reason to use CRAF, and an airline operated in the U.S. was owned by a foreign national that was involved in the dispute," McHugh explained.

After McHugh raised this issue, Barry Humphries, Virgin Atlantic's director of governmental affairs, quickly countered, "So make participation in the CRAF program

mandatory

, not voluntary, for those airlines that have a majority of foreign ownership."

Needless to say, there was much debate concerning the ongoing rift between Great Britain and the European Union and European Commission on the issue of open skies, and the lawsuits the European Commission has now filed against European countries who have signed individual open-skies agreements with the U.S. Rene Fennes, the principal administrator for transport policy for the European Commission, summed up the E.C.'s position quickly when he said, "Yes, we are suing everyone."

At the conclusion of the conference, it appeared that participants thought the best chance for change in ownership rules lay in a possible E.U.-U.S. open-skies treaty, with Canada also participating in an overlapping North American treaty of some type. However, Rutger Jan toe Laer, director of

KLM Royal Dutch Airlines

(KLM)

, suggested that perhaps a Treaty of Phoenix could be hammered out as a result of the conference that clearly spelled out the open skies issues on an individual country by country basis.

"I do not think any of the issues raised here are insurmountable," said Kevin Mitchell, chairman of the

Business Travel Coalition

. Mitchell, whose organization works with corporate travel agents in an effort to manage ever-escalating business-class fares, looks forward to the possibility of new competition within the industry. "There is nothing negative with the idea of more competition. More competition would mean more innovation, and this would benefit both the passenger and the industry as a whole."

From the capital markets perspective (which I touched on in my presentation), it is clear from the support of IPOs like

Lufthansa's

last fall and

Air France's

this past February that there is strong support for airline equity offerings in both directions. Last week, Air France reported that 70% of the investors who gobbled up some 23% of the airline earlier this year were not French citizens.

In addition, we are looking at a bumper crop of new entrant carriers in the U.S., with tentatively named

New Air

having already secured some $130 million in private financing. However, not all new entrants can attract the likes of

George Soros

, as David Neeleman has managed to do with New Air. Many smaller airlines, like

Spirit Airlines

of Detroit and

WestJet Airlines

in Canada, hope to go public this year. Mark Kahan, Spirit's chief operating officer, said at the symposium this week that if the airline could accept foreign capital, there was no doubt its money concerns would be lessened.

David Banmiller, the chief executive of the new startup airline,

The Coast

of Portland, which is in the formation stage and seeking startup capital, says: "If we could accept foreign money, we'd be much closer to flying."

Holly Hegeman, based in Dallas, pilots the Wing Tips column for TheStreet.com. At time of publication, Hegeman held no positions in stocks discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. You can usually find Hegeman, publisher of PlaneBusiness Banter, buzzing around her airline industry Web site at

www.planebusiness.com. While she cannot provide investment advice or recommendations, she welcomes your feedback at

hhegeman@planebusiness.com.