It Is Time For Foreign Investors

<B> It Is Time For Foreign Investors</B>

By Jeffrey Shane

<i>Former assistant secretary for policy and international affairs of DOT, Jeffrey Shane is a partner at Washington, D.C.-based law firm Wilmer, Cutler and Pickering.</i>

Even casual government-watchers are aware of the extent to which Congress and the Administration are concerned about the quality of airline competition at the moment. It is well known that business travelers are the customers most severely

affected by any deficiencies in the competitive structure. The rapid rise in unrestricted air fares--translating into a major increase in the cost of doing business for companies throughout the country--is eloquent testimony, many think, to the severity of the problem.

In one response to the competition issue earlier this year, the U.S. Department of Transportation proposed guidelines for identifying so-called "exclusionary practices"--an effort to quantify the circumstances in which DOT would launch an enforcement proceeding against an incumbent carrier for behavior apparently designed to drive a new entrant out of a market.

The proposal triggered a firestorm of opposition from the major airlines. Incipient reregulation, they called it, and Congress listened. As a result, despite many lawmakers' serious misgivings about the state of airline competition today, Congress included a provision in the new omnibus spending act prohibiting DOT from taking any action to implement its guidelines until well into next year.

It should be clear by now that any new enforcement policy proposed by DOT as a means of protecting new entrants, however well intentioned, will engender similar industry opposition.

Indeed, the major airlines may well prevail--at least as a political matter--in their argument that DOT regulatory intervention to protect a new entrant against robust competition from an incumbent is fundamentally at odds with the free market assumptions at the heart of the 20-year-old Airline Deregulation Act. Let the Justice Department deal with such problems, the major carriers will argue, under the antitrust laws.

Whatever the eventual outcome of that debate is, it clearly makes sense to explore other ways of facilitating more effective airline competition.

There is no lack of entrepreneurial spirit in the U.S. airline industry. But new airline companies rarely get off the ground simply because most investors don't think they are a good bet. DOT, which licenses new carriers, has reported that applications from startups have fallen off sharply in recent years.

Given that access to capital appears to be a major part of the problem, one easy but important step we can take to encourage new entries is to relax the anachronistic restrictions we have placed on new entrants' ability to tap the global capital market.

U.S. law prohibits DOT from licensing a new carrier unless at least 75 percent of its voting stock is "owned or controlled" by U.S. citizens. That 75:25 ratio is one of the world's strictest. To make things worse, years of administrative decision making by the Civil Aeronautics Board and DOT have resulted in an unforgiving rule that, even where the numerical tests are met, any "semblance" of foreign control renders an airline ineligible for a U.S. license.

The "semblance" doctrine--nowhere mandated by the statute--effectively relegates foreign investors to a passive role. Not many serious investors in new airline ventures are likely to be attracted under those circumstances. It is important to understand that a U.S. airline characterized by greater amounts of foreign capital and even foreign participation would not be a "foreign airline." It would remain a U.S. airline by every test that counts. It would be inspected by FAA in keeping with U.S. safety standards; it would fly U.S.-registered aircraft; it would employ U.S.-licensed crews; and it would make its aircraft available to the military on precisely the same terms that govern other U.S. airline commitments.

As in every other strategic industry, the government has effective tools to ensure our national security is not compromised by such investments in any way.

Last month Richard Branson, the chairman of Virgin Atlantic Airways, told a gathering in Washington that he had planned to launch a new airline in the U.S.--"Virgin America"--with an investment of at least $200 million. That was not an abstract aspiration; nearly a year of joint planning with a U.S. partner had gone into the venture.

Mr. Branson abandoned the idea only after concluding that U.S. law and policy would render him incapable of enjoying the corporate rights that any prudent investor would insist upon. He now urges the United States to rethink those rules.

In the meantime, American consumers must forgo the considerable benefits of having a new, well financed, and badly needed competitor in the domestic air travel market.

Giving entrepreneurs in the airline business the same access to international capital that other businesses enjoy might not be a panacea for the excessive concentration that appears to be driving up the cost of air travel in the United States. But surely it would help. Charles Hunnicutt, DOT's Assistant Secretary for Aviation and International Affairs, said in an important speech a few weeks ago that he and his staff were taking a hard look at the issue.

The business travel community has a significant stake in the outcome of that long overdue assessment.