<B> Investors Wanted?</B>
<I>Airlines Mull Opening To Foreign Capital</I>
By Jay Campbell
<I>Phoenix</I> - To the surprise of aviation policy makers and airlines, the idea of casting aside nationalism and opening up the airlines to ownership and control by foreigners is gaining support here and in Europe.
Advocates believe a move to eliminate or raise the current caps on foreign ownership of airlines--capped in the United States at 49 percent of equity and 25 percent of voting stock--could turn up competition through new entry and reduced reliance on alliances, give struggling major carriers better access to capital and help globalize an industry that is at once multinational and protectionist.
Airline government-relations executives, transport ministers, free market advocates and business travel executives from around the world met to debate the issue at the eighth annual Phoenix Aviation Symposium earlier this month. It was an event they couldn't resist calling cutting-edge.
Supporters said relaxing the controls is the next step in deregulation and could go so far as to unify the United States and the European Union under a common, free aviation regime. "We're in the middle of a trend, from airlines to global alliances to global airlines," said Ulrich Schulte-Strathaus, vice president of international relations for Lufthansa. And Lufthansa's former president, Fred Reid, now an executive with Delta, said that "globalization of citizenship is nothing but inevitable."
But there are a number of concerns that even the staunchest advocates do not minimize. The U.S. Department of Defense lays claim to civilian aircraft to move troops and equipment through the Civil Reserve Air Fleet program, in return for contracts on the DOD's massive travel business. DOD isn't sure it can trust the patriotism of foreign owners.
Labor unions also are wary of a change in ownership and an increase in competition that representatives said could result in lower wages and farmed-out jobs. They worry in particular that foreign owners might not hire unionized American workers.
The third major obstacle is a concept called reciprocity. The United States, observers said, shouldn't open its market and perhaps worsen its trade deficit, because the market would not be a fair trade for any bloc smaller than the EU. Closely tied to reciprocity is the issue of cabotage--the ability to fly unrestricted between two domestic points in a foreign country. Cabotage continues to surface as inexorably linked to the ownership and control debate, and complicates things because it is fiercely opposed by the unions.
<B><CENTER>Liberalization Groundswell</CENTER></B>
Supporters believe these issues can be addressed through negotiations, making way for any number of possibilities, from the scaling back of the alliance trend, to the creation of holding companies a la Frank Lorenzo's Texas Air Corp., to the end of the ancient bilateral system.
Already in the EU, concern over the citizenship of airline owners is waning. KLM Royal Dutch Airlines, for example, owns KLM UK, whose designated operating country is the United Kingdom. To address that case as well as Cathay Pacific in Hong Kong, the United Kingdom in 1997 amended its laws to allow airlines to participate in foreign bilateral agreements, aeronautical certification and safety oversight according to the designated operating country, not the nationality of owners.
For example, although it has Dutch owners, KLM UK's principle place of business is the U.K., so the British government negotiated on its behalf in aviation talks with non-EU member Switzerland.
There is a precedent for foreign airline investment, albeit without full management control. Holly Hegeman, CEO of PlaneBusiness.com, noted that 70 percent of the shares in Air France's recent selloff were purchased outside of France. American Airlines owns part of three foreign carriers, Aerolineas Argentinas, Canadian and Iberia; partner British Airways owns some of Iberia and Qantas. Even big chunks of Northwest and US Airways once were owned, if not fully controlled, by foreign carriers.
Large parts of the aviation services industry, such as maintenance, catering and ground services companies, are foreign-owned. And in the rest of the business world, it's clear citizenship is losing its urgency: Ford owns Jaguar, Nestlé owns Perrier and Daimler-Benz bought Chrysler.
"These global mergers are leaving aviation the odd man out," said Will Ris, American Airlines' vice president of government affairs. "It's hard to think of other businesses that have been left out. This conference will help sensitize the industry to the issue."
DaimlerChrysler and other companies that buy over $1 billion in air travel are supporting relaxed ownership laws as the final major barrier to airline competition, through their membership in the Business Travel Coalition. The group argues that such a change would bring capital to new entrants and would cause foreign owners such as Virgin Atlantic to start hubs here, increasing competition.
Others agree. "The current policy generates winners and losers," said Clifford Winston, senior fellow of the Washington-based Brookings Institute. "The winners are the government, the carriers and the unions; the losers are consumers. A change would reverse that. It's difficult to quantify the impact, but we have a generally good idea that fares will go down and service will go up."
Virgin Atlantic founder Richard Branson helped illuminate this topic last year by announcing his intention to fund a Virgin America operation, so long as he could control it. According to Barry Humphries, Virgin's director of government relations and external affairs, "The public wants better service at lower fares. They don't care if the airline is owned by Americans, foreigners or people from Mars. In fact, I think they'd be surprised we spent two and a half days here discussing it."
That said, Scott Gibson, senior fellow at the Economic Strategy Institute in Washington, zeroed in on the problem: "I believe it's a very difficult environment in which to make change because of the vested interests worldwide."
Patricia Friend, president of the Association of Flight Attendants, called both foreign ownership and cabotage "unnecessary and impractical," and noted that treating aviation as a commodity threatens safety. "We brought in foreign cars because there wasn't enough competition, but that's not the case here," she said. And, she added, "The established carriers with their collection of slots and their established hubs will not be threatened."
Duane Woerth, president of the Air Line Pilots Association, took a slightly more flexible, if still cautious, stance: "We would warn against the Big Bang theory of deregulating everything at once, ownership and cabotage included. We should be careful. It could be that not everything turns out as you hope."
The Dept. of Defense, represented by assistant deputy undersecretary Mary Lou McHugh, pointed out that the CRAF program provides the U.S. military with 93 percent of its troop movement capability and 41 percent of its cargo capability. Each airline participant plans annually for certain aircraft and crew to be called up. The personnel must be Americans. Within 24 hours, the DOD could take as many as 200 commercial jets, plus 438 more in twice that time.
"This system works and it isn't something we should discard lightly," McHugh said. "Where's our assurance that a foreign owner will participate every year, instead of perhaps attempting to grab domestic market share while competitors were committed to the CRAF?" Although she acknowledged that foreign-owned airlines also would want to take the incentive of DOD's business, she noted that "patriotism is still an issue. We get 100 percent of the FedEx fleet in large part because of CEO Fred Smith's patriotism."
Still, McHugh indicated that DOD might reconsider its stance if the issue were studied and the results were favorable. "It's fertile ground for analysis," she said.
The final major barrier, participants said, is the matter of trading reciprocity. While many believed that relaxing ownership laws is not linked to cabotage, others said it inevitably is. "This is a huge barrier because it would be inequitable to trade cabotage in the U.S. for cabotage in the Netherlands. Without equivalent reciprocity, this would have to be global," said American's Ris. "The other market would have to be at least as big as the EU."
For two years, the European Commission has been working to gain control over aviation negotiations through legal action against eight member countries that signed open skies agreements with the United States. Claiming the deals divide the single EU market and discriminate against EU carriers whose home countries have not signed such an accord, the EC has vowed to stop them to make way for an EU-U.S. deal.
"Within two years, we'll be successful," promised René Fennes, directorate general of air transport policy for the EC. "I think the U.S. is right to ask, 'How can we go beyond bilaterals and open skies?' I strongly propose that the real solution is a common aviation area between the U.S. and EU."
Others suggested an EU-North American deal might make sense, although a representative from Mexico said the possibility of foreigners owning Mexican airlines would be hard to swallow. Attendees from Asia said carriers there also would resist foreign investment.
But with or without an EC-wide deal, participants pointed to the existing American open skies policy as evidence that reciprocity isn't everything. "This reciprocity debate sounds a lot like what we went through on the open skies debates," said Mo Garfinkle, president of GKMG, the aviation consulting firm that organized the conference with Phoenix Sky Harbor Airport. "If we followed through with that, there never would have been Dutch-U.S. open skies and alliances."
The potential effect of open ownership on the now massive airline alliances was particularly contentious. While some participants said it was the bilateral system that gave birth to alliances, others said it is the network access that makes them appealing, and that would not disappear.
Industry veteran Randy Malin, principal in Malin & Associates of Los Gatos, Calif., argued that it is the very formation of alliances that should be telling governments to liberalize ownership.
"Yes, open skies is procompetitive," Malin said. "But you may notice that 27 seconds after open skies there's an alliance between that country's flag carrier and one of ours, immediately reducing the all-important gateway to gateway competition."
Alliances have two purposes, he noted: to "stop competing with each other and start beating up the other guy. There's one universal truth in this business--you don't compete with your partner. I question DOT's role as a marriage broker in light of the prohibitions against international mergers."
Acknowledging that "mergers are hell and alliances are a poor substitute," Malin suggested the solution is merging everything but the operating divisions, including labor groups. If labor wants to negotiate with the parent leadership, that's its choice.
Northwest Airlines senior vice president of corporate affairs Ben Hirst agreed: "A holding company structure would keep individual airlines intact, leave labor agreements undisturbed, allow for gradual brand integration, avoid antitrust issues and offer permanence."
This issue will resurface at a DOT aviation conference in Chicago in December, if not sooner. That would mark the one-year anniversary of Secretary of Transportation Rodney Slater's suggestion that DOT may propose a relaxation of the ownership laws. But DOT's representative in Phoenix stayed only long enough to announce the conference.
"I think it's a disgrace that the DOT hightailed it out of here," said Malin. "It's a very bad sign for what we hope to accomplish."
Still, supporters are encouraged that the issue filled a conference. Said Winston, "If I were asked two years ago whether there would be a serious debate about this, I'd have said 'You've got to be kidding.' "
"This now is actually a hot topic. A momentum is building that's impossible to stop," said Virgin's Humphries.