Monday, August 15, 2011

What "Is" is When It Comes to Foreign Ownership and US Airlines

In 1998, when asked during his impeachment trial if he was in a relationship with White House intern Monica Lewinsky, then-President Clinton  famously parsed, "It depends on what the meaning of the world 'is' is."  The same sort of some-see-it-blurry line exists when talking about the rules preventing American commercial  airlines from foreign ownership.

With the purchase by Asia Fountain Investment and seven other associated entities of 24.4 million shares of AMR, a foreign interest now owns 7.3%  of the parent of American Airlines, a spokesman for American Airlines confirmed today. 

This isn't the first time big foreign investment dollars got sucked into the engines of the Dallas-based airline. In 2006, the Iceland investment company FLGroup, bought nearly as many shares, held them for a little over a year and then sold nearly all of them but not before griping about the opacity of AMR in its individual business units. 

American is not alone in accepting the help of strangers. Bob Herbst of, credits the German flag carrier Lufthansa with pulling JetBlue's fat out of the fire back in 2007, by investing $300 million in the then-struggling New York airline.

Still, as airlines around the world swap shares and make alliances, the Federal Aviation Act restricts ownership and control of domestic airlines to United States citizens.  Just what "ownership and control" means in real terms has been interpreted as 75% of voting interest and two-thirds of the board of directors and mangers must be Americans. 

How well that works is illustrated by Virgin America's clever routing through the regulations in order to become an American-owned airline despite it being a part of the empire of British knight, Sir Richard Branson. (Read Lori Ranson's head-spinning account of how that was accomplished, here.)

"Airlines are the only businesses that have these restrictions," Bob Herbst said of the federal rules in a phone call today. In the next three or four years he predicts "things are going to change."

The question for the U.S. carriers is whether that change will come soon enough. While the past few years have been a troubled time for U.S. airlines, the growth of some international carriers has been nothing short of spectacular. Fueled by an enlarged middle class and an acquired taste for travel, airlines are in a boom period in China, India, Southeast Asia, the Middle East and Brazil. Airplane manufacturers from Airbus to Boeing, from Bombardier to Embraer are churning out airplanes as fast as they can tighten the final bolt. 

In fact, according to the International Air Transport Association, when it comes market capitalization, none of the five biggest airlines in the world are American. Check out China Airlines, Singapore, Cathay Pacific, China Southern and South America's LATAM

U.S. airlines are left watching the party, creating code-shares and partnership agreements with foreign airlines, and wondering just how adequate a substitute these deals are for the real thing.

"No other industry in the world has such restrictions," the American Airlines communication director Sean Collins told me in an email this evening, echoing the sentiments of Bob Herbst and many others. "The European Union has made changing this law its highest priority in its discussions with the United States. We believe it is time for a serious conversation about this issue in the interest of creating a stronger, more successful global airline industry."

Some of the global players are having a relationship. What is the effect of 53-year old regulations that prevent American airlines from joining in? Perhaps it is time to ask what the definition of "is" is.


Giles said...

I have no problem with foreign ownership of US carriers, provided the certificate holders are required to comply with 14 CFR 121. PS: Good luck with CRAF.

Anonymous said...

2 main points to consider:

1. Foreign control would inevitably lead to outsourcing of pilots/ mechanics, etc. which would lower safety standards.

2. The U.S. military contracts with U.S. airlines (Civil Reserve Air Fleet) to move troops around and having foreign-owned U.S. airlines doing this is an obvious conflict of interest. It might go something like this: "Hey American Airlines (now owned by China), could you please fly our troops to China so we can invade you?"

Anonymous said...

1) Why would outsourcing lower standards? Simply apply the same safety rules. There are many very safe Non US airlines flying around the world.

2) if you need to move troops around, maybe you could just use an airline owned by an ally??

Bob Crandall said...

Before we decide to let foreign nationals control U. S. airlines, it would be useful to examine the question of why the U. S. airlines, so long dominant in the world, came to their present shrunken presence in world aviation.

I think it because our government, on a never ending quest to make everything less expensive for consumers, and out of its ideological conviction that the market is always right, allowed foreign airlines access to the huge U. S. market at a time when U. S. carriers were gaining market share around the world. (And when one U. S. airline chose to rescue Lufthansa from its then pressing problems)

Before we proceed to the next step and turn over ownership as well, someone should explain why a foreign airline, which will have no economic or political interest in providing an integrated U. S. transportation network,would want to own one of our perpetually under-performing carriers. The answer, I think, is improved access to and control over domestic traffic flows that complement international routes -- and nothing more.

We have already allowed U. S. airlines to outsource large chunks of heavy maintenance to overseas locations (at the expense of many high skill, middle class jobs) where the FAA is unable to apply the same standards routinely applicable to domestic maintenance activities. Shall we now go further still?

The logic of all this escapes me -- and seems entirely inconsistent with preserving, increasing and improving U. S. based jobs and fixing the flagging U. S. economy.

Anonymous said...

What does the U.S. gain from allowing foreign airlines to own U.S. airlines? Roughly 42% of worldwide air traffic is flown in the U.S. alone. What do we get by allowing foreign airlines into our markets?

Allowing foreign ownership of U.S. Airlines is a bad idea for a number of reasons.

1. Foreign control would lead to outsourcing of tens of thousand of U.S. jobs at a time when our economy is already hurting from decades of outsourcing of middle class jobs.

2. The U.S. Airlines have a CRAF obligation which would be compromised by politics if the U.S. military had to negotiate with foreign owned airlines every time we needed to move our troops.

3. Foreign ownership will make it much harder for the FAA to regulate airline maintenance, training and safety standards. Safety will be compromised. There is a major hull loss weekly around the world because of the lack of safety standards by foreign carriers.

4. Many of the favorite foreign airlines mentioned in this debate are State-owned airlines. Emirates is a prime example. State owned airlines hurt the entire for-profit airline industry because they can operate with much higher costs and drive the for-profit airlines out of business.

Those that promote Foreign ownership are simply anti-American. What is really frustrating is the Republican Party here in the U.S. wears its patriotism on its sleeve at the same time promoting anti-American policies such as outsourcing U.S. jobs!

NovusOrdo said...

It is a basic economic principle that international trade is mutually beneficial as it allows for specialization in the production of goods and services. None of the arguments against liberalizing the antiquated foreign ownership rules presented here explain why this principle would not apply to aviation.

The outsourcing and CRAF arguments are red herrings meant to incite fear. We are talking about U.S. incorporated airlines with foreign shareholders: CRAF would continue to apply. Moreover, it's not like CRAF requires the carriers to fly for free. What investor would say no to a targeted subsidy? As for the outsourcing arguments, there is no evidence whatsoever that outsourcing has reduced U.S. airline safety.

Protectionism is bad for the U.S. economy. It reduces the competitiveness of U.S. firms and slows down the continuous transformation and modernization of the economy. Those that promote protectionist policies are simply anti-American.

Grady said...

The esteemed Mr. Crandall and the anonymous poster said it best.

Foreign ownership will only lead to foreign outsourcing. As a pilot in the USA and a strong believer in America, I can only agree and fear this. You have to remember - As the world becomes global, what are they really doing? Becoming us (or our standard). Also remember, America has farther to come down than the world has to come up. People complain about how businesses are shipping jobs over seas to avoid our "high cost" of business - well there is a reason it costs more here - BETTER STANDARDS and YEARS of experience.

Why would anyone continue to sell out America for short-term profit or gain is beyond me and the most despicable of behavior. I would almost go as far to call such behavior economic treason. Just something to think about the next time you support China and their human-rights, environmental, health, policies by buying cheaply at Costco, etc.

Also, like others have mentioned, CRAF and the conflict of interest there. We should be doing more in-house, not chasing the short term buck, especially defense! Why else was the constitution put in place if not for the common defence!? Isn't that why the US government exists? Let's start looking at economic policies for what they really are, wars of a new kind that need defending our American people and values and experience.

One last thought. When the G8 summit happened post the banking crisis, and President Obama went to meet with the Chinese Premier, do you know what the Chinese Premier told him? He told him America no longer saves enough and produces enough and that our continued economic slide (if this was not corrected) would put the whole world in jeopardy. Truer words were never spoken and that is pretty bad coming from the Chinese. Even they understand the value of capitalism and economics better than we do. It is all about balance and symbiotic growth. Listen to Warren Buffett talk sometime and you will get what I am driving at. To over simplify, the Rich can't get richer unless the Poor come up as well.

Like the great Nobel Prize winning economist Dr. Nash once proved, if you do what is best for yourself and the group you get the optimal mathematical sum/outcome. When is congress and to an extent business(the ones that outsource for short term gain) going to grasp this concept?! When will the American people finally put THEIR workers, and THEIR businesses, and THEIR futures ahead for once?! Hopefully right NOW.

Kenny said...

It is about oversight. It will have to change if the US wants to have any air carriers left by 2020.

Anonymous said...

I second most of what was said above. The Worldwide Airline industry is a joke...Just do a little research. Many foreign carriers are completely state-owned and most are partially owned by the state. U.S. Airlines are 100% publicly owned and as a result must make a profit. State-owned carriers have much higher costs and as a result have newer aircraft, better amenities, more employees per customer etc etc. In practice even partial state-ownership allows the funneling of that countries tax payer dollars to shore up balance sheets. So to the average consumer or industry commentator/blogster the foreign carriers SEEM to be better-run companies, this is simply not the case.

Look at Emirates, Saudia, Thai, Turkish,etc. all state-owned, even
Air France is 18.6 % state-owned, even one of the darlings
of the airline industry Virgin Atlantic is 49% owned by THE
investment arm of the Singapore Government.

So I've got a couple of questions?

1. Do we really want foreign governments running our airlines/mass transportation system?

2. Is it fair that U.S. Airlines have to compete against carriers that can sustain costs much higher than break-even costs?

3. Why aren't we our arguing in the World Trade Organization for an end to State-owned airlines?

4. Why is it foreign governments seem to have their domestic company's backs while our government and a certain political party actively promotes giving our industries and jobs away?

Jim Lewis

najmun_noor said...

First off, its an honor blogging on the same site with Mr. Crandall.

Second, the level playing field is just not there. State owned airlines are at a huge advantage. US carriers never want that subsidy but the quid pro quo gets the rug pulled from under the feet.

Having said that and considering the ocean changes that Boeing enacted in the form of outsourcing (or any other angle to it) in the manufacture of the Dreamliner, this should be a concern at all level.

Look, trans National (or dare I say Trans Pacific) equity swaps in the industry may have been in vogue for as long as collaborative overtures among airlines. These date as far back as the Singapore Airline/Delta equity swap that may have actually set the trend.

These are initiatives emanating from the US. The industry gained from the experience of US carriers in the hub and spoke concept (and the humongous gains from the knowledge), collaborative efforts, marketing expertise as the fallout from deregulation...what happened today spilled over worlwide d/a/tomorrow.

But what about deregulation itself in the overseas markets...its been pick and choose for them.

While conflicts in management style and its assimilation glaringly suspect on a level playing field of size and varying degrees of capitalization of potential partners, emphasis on cost and profit centers and an ocean of difference in the client base can be a serious deterrent.

The perception of key decision makers entrusted with the accommodation (or even the lack of if) talent and skill into the US is not blameworthy. Sovereignty of the skies is important but so is acumen of players in the US

Can this really change ? Or, the right question: is there a need to? Perhaps not, with the industry bouncing back to be robust in the US as elsewhere.