Time To Change Foreign Ownership Laws
<B> Time To Change Foreign Ownership Laws</B>
By Kevin P. Mitchell
The two-year-old U.S. airline competition debate has yielded important results. The U.S. Congress, Department of Transportation and Department of Justice are taking strong steps to address industry structural, competitive behavioral and airport access issues. Investor confidence in the low-fare segment of the industry is returning.
Indeed, new airline applications are once again flowing into DOT. It now makes sense to turn to the best long-range opportunity to open U.S. hub markets to greater competition: reform of foreign ownership laws.
Travel managers can be advocates for change and demonstrate to company senior management that they are engaged in industry issues that impact on the long-term cost structure of business travel.
The Business Travel Coalition supports reforming U.S. laws that restrict foreign ownership of U.S. airlines to 25 percent of voting stock. The Business Travel Coalition supports reform because of its symbiotic relationship to adequate domestic competition levels in the United States and international air transport trade liberalization. There are important reasons why reform would be beneficial for the health of domestic U.S. competition:
1. Start-up airlines would have greater access to capital.
2. In a seller's market like the one in which we find ourselves today, foreign-owned new entrants could provide choices and alternatives that would discipline prices.
3. In a buyer's market, like the early 1990s, major airlines would have greater access to foreign capital--as Northwest and USAir required.
Importantly, foreign ownership reform is a necessary condition for international deregulation and true trade liberalization. Currently, airline alliances are somewhat effective proxies for mergers disallowed by foreign ownership laws.
However, alliances hamstring an industry trying to globalize. In other globalizing industries, assets, product offerings, capacity, financial allocations and management structures are being rationalized.
Moreover, airline alliances can create market distortions that might cause government regulators to overlay remedies--sometimes conflicting remedies--which further distort the marketplace.
These inefficiencies increase costs and drive up business airfares.
Obstacles To Reform
1. U.S. Department of Defense Concerns
The Civil Reserve Air Fleet program makes available hundreds of commercial aircraft in times of national emergencies. One concern is the pressure a hostile country could put on a foreign owner of a U.S. airline with regard to providing DOD planes and crews. DOD does not want a dispute with a foreigner in a time of crisis. DOD needs to be assured that no proposal will be put forward until it is satisfied its concerns are addressed.
2. Jobs
Airline employees have several concerns, and like DOD, they need to be partners in the process of reform. Some concerns are that:
a) foreign-owned airlines would not be unionized
b) reform would act as a a tripwire for further investment in alliances with incremental flying going to European partners
c) U.S. carriers could be relegated to mere "feeder" status. For example, British Airways could buy American Airlines, and over time, the better, long-haul pilot jobs could go to British Airways.
3. Reciprocity
Ours is a unique domestic market, with 27.5 percent of the world's scheduled airline passenger miles flown between points in the United States. The next three largest domestic markets--Russia, Japan and China--are each less than 10 percent the size of the U.S. market and restrict Americans in terms of ownership and access to their markets. Why would we want to deny ourselves the benefits of increased competition just because other countries do not open up their relatively small markets?
Now is a good time for reform
The domestic U.S. competition debate has caused all manner of issues to be raised. What was unthinkable just a year ago is now fair game for discussion. The proposed phase out of the High Density Rule governing takeoff and landing timeslots at some airports is one example. The debate is moving quickly, the environment supportive.
Consider:
* After 20 years of deregulation, U.S. carriers are relatively efficient; no one is seriously concerned that new competition from foreigners would obliterate our civilian fleet leaving the U.S. at risk in a time of war.
* Business fares and travel managers' frustrations are at record levels; there is a growing national constituency for reform.
* There is increasing recognition in government, academic and industry circles that the current model for opening up foreign markets, with codesharing and antitrust immunization, is outliving its usefulness. Reforming our foreign ownership laws could substantially strengthen our hand in calling for open global aviation markets.
In conclusion, 20 years ago when the U.S. deregulated its airline industry, there was no action-forcing event, no eureka. But there was a unique set of circumstances; timing was right. Indeed, in hindsight, it seems strange that there was once a world in which the federal government set the price of air travel.
Likewise, today there is no single event that will rivet policymakers' attention to reform of foreign ownership laws. However, there is a unique set of circumstances and the timing is right.
I have little doubt that 20 years from now, industry observers will muse over how the United States, as the leading proponent of free flows of capital, trade and ideas, once closed its aviation markets to the world.
<I>Kevin P. Mitchell is chairman of the Business Travel Coalition in Lafayette Hill, Pa.