Airlines Facing Protectionist Threat To Foreign Investment

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The Bush Administration wants to change the percentage of foreign investment in U.S. airlines, but the Senate Appropriations Committee voted 19-6 last week to bar the rule starting in the year beginning Oct. 1. This action may threaten an aviation agreement with the European Union, according to Bloomberg.

Sen. Ted Stevens (R-Alaska) proposed a question to Bloomberg. He asked if a U.S. airline, owned in part by foreign interests, would allow the transportation of U.S. troops in wartime. Stevens added, “They're not just carriers. They're an essential arm of our total defense strategy.”

The Bush Administration's proposal would increase the amount of available capital for financially strapped U.S. airlines. The purchase of airplanes and the addition of routes would be possible decisions that would come with their investment, although Bloomberg reports that the rule would increase foreign investment opportunities while keeping the current limit of voting stock at 25 percent.

The rule is necessary for the signing of the European Union's “open skies” treaty. Expanding U.S.–EU flying is a positive goal, but airlines such as Continental Airlines Inc. would not be able to compete with larger airlines to win take-off and landing slots at Heathrow Airport in London, according to Bloomberg. Continental opposes the “open sky” rule, although Delta Air Lines Inc., United Airlines and FedEx Corp. do not. reports that trade negotiations with the EU on the point of foreign ownership is tradeoff for the U.S. to gain access to landing rights at London's Heathrow Airport. These landing rights are only enjoyed by American Airlines and United Airlines, on a limited basis.

The Air Line Pilots Association represents 61,000 pilots that fly for 40 U.S. and Canadian airlines and the fear they voice is that this is another Dubai ports deal, according to Bloomberg reports that organized labor also opposes the foreign ownership rule, concerned that it would cost American jobs. The House already blocked the rule in their version of the $69 billion spending bill funding transportation, Treasury and other programs.

The president may just be responding positively to calls for airline deregulation. The Travel Insider wrote, “…International investors are keen to invest into the US air transportation market. We should encourage them, not ban them, from doing this.” The Airline Deregulation Act of 1978 allowed limited free market forces for the U.S. airline industry and Travel Insider was pressing for expanded deregulation in 2003.

The Eight Freedom Rights are also called "Freedoms of the Air” in negotiations. These rights allow airlines based in one country to operate over and in other countries, although the U.S. does not allow Eighth Freedom Rights to all international carriers. The U.S. reasoning is “We will only let a foreign country's carriers participate in our market if the foreign country has a similar sized market and lets our carriers participate in their market too,” according to The Travel Insider.

The arguments may go deeper. Foreign ownership of domestic airlines is limited to 49 percent, while control is limited to a maximum of 25 percent. Other countries have similar ownership and control provisions, with Australia being the exception. They allowed Sir Richard Branson to start up his Virgin Blue Airlines, provided the airline would be incorporated in Australia under Australian law and staffed and managed by Australians, with an Australian board of directors. Qantas has not been harmed with the addition of Virgin Blue into their market mix, according to The Travel Insider.

Legislators are employing thin allegations to make their points, according to The Travel Insider. One of which is the Civil Reserve Air Fleet (CRAF), whereby U.S. airlines would hire planes to the military, as necessary, to provide additional airlift capacity in times of emergency. This applies to U.S. incorporated airlines only, bound by U.S. laws, irregardless of where the shareholders are located.

Another allegation is that foreign airlines do not have the same security or safety standards, except we are still talking about U.S. airlines that have to conform to U.S. controls and regulations. This also applies to the myth that foreign airlines would take away U.S. jobs, to a point. U.S. airlines must hire U.S. permanent residents and lawfully admitted foreign nationals on special work visas, according to The Travel Insider.

These are thin excuses that may lead to a possible result for our protectionism. That is, the bankruptcy of Air Canada in April 2003. Air Canada is the only remaining airline in Canada, according to The Travel Insider.

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