Friday, January 26, 2007
This past Wednesday, the Senate Committee on Commerce, Science and Transportation held hearings on the potential impact of airline mergers and industry consolidation. There was a particular focus on the possible US Airways - Delta merger. Further resources on this topic are: 1) a webcast of the Committee hearing; 2) written transcripts of testimony given at the hearing (including testimony from the CEO's of US Airways and Delta and the DOT's Assistant Secretary For Aviation and International Affairs); and 3) a Dallas Morning News story on the hearings. The House Transportation and Infrastructure Committee plans to hold hearings on airline consolidation next month as well.
Thursday, January 18, 2007
Virgin America Responds To DOT’s Show Cause Order
Late yesterday, Virgin America responded to the U.S. DOT’s decision to tentatively deny the carrier the economic fitness certificate it needs to operate due to concerns about the role of foreign investors in the carrier. In an unusual move, the carrier offered to remove the current CEO Fred Reid in response to criticism that he might have impermissibly close ties to UK citizen Richard Branson and the Virgin Group. Other important changes proposed by the carrier include: eliminating one of the three board seats previously awarded Branson's Virgin Group; raising another $20 million from U.S. investors; placing all of Virgin Group's shares in a voting trust supervised by a U.S. trustee; and the Virgin Group giving up veto or consent rights regarding various aspects of Virgin America’s operations or decisionmaking. The airline also rolled out a new website this week entitled "Let VA Fly!" that includes a grassroots campaign to get the public involved with lobbying the D.C. political establishment, and new details about the carrier's onboard product.
United Tentatively Wins China Route Case
On January 9, 2007, the U.S. DOT tentatively decided to allocate seven weekly combination frequencies to United so that it could serve the Washington D.C. (Dulles) - Beijing market with nonstop B-747 service. One important factor that caused the DOT to chose United’s proposal over competing proposals (from Northwest and Continental) was that, of the proposed U.S. gateways in the route case, the Washington D.C. area was the largest such U.S. gateway without any nonstop service to China. The DOT also found decisive the fact that United would provide significantly more U.S.-China capacity (46,000 more seats annually) than Continental’s competing proposal. The DOT further noted the "community of interest" between Washington D.C. and Beijing and the significant behind and beyond-gateway traffic flows that United would be able to generate to support the route. United is anxious to begin sales and marketing of the new service and has filed for pendente lite authority that, if granted, would allow the carrier to begin these activities before the finalization of the route award.
U.S.-EU Open Skies Agreement Developments
After a meeting in Brussels on January 10th and 11th, U.S. and EU negotiators are scheduled for a second round of talks (in Washington D.C. the week of February 5th) to examine and discuss proposals to replace the NPRM that would have liberalized restrictions limiting foreign control of U.S. airlines. According to a news release by the U.S. State Department, one proposal the EU might put forth as a substitute to the NPRM are changes pertaining to the "foreign ownership of non-voting stock in U.S. airlines." A small success from the recent talks in Brussels was an agreement that new EU members Bulgaria and Romania would be part of any U.S.-EU open skies agreement. U.S. negotiator John Byerly also expressed hopes that a U.S.-EU open skies agreement could still be finalized during the German presidency of the EU that ends on June 30, 2007.
U.S. Senate Will Hold Airline Merger Hearing
According to a recent Reuters article, the U.S. Senate Commerce Committee will hold a hearing to examine issues surrounding airline consolidation on January 24, 2007. The U.S. House of Representatives is also expected to hold hearings on the same topic in the near future.
EU To Open Negotiations With Canada On Comprehensive Aviation Agreement and Passenger Rights Ombudsman Decision
On January 9th the European Commission proposed to open negotiations with Canada on a comprehensive aviation agreement that would likely be similar in structure to the proposed U.S.-EU open skies agreement. Also, the European Ombudsman recently called for the Commission "to correct inaccurate and misleading information contained in leaflets, posters and a video presentation on air passenger rights."
Wednesday, January 3, 2007
US DOT Proposes To Deny Operating Certificate For Virgin America - Carrier Does Not Satisfy US Citizenship Requirement
On December 27, 2006 the US DOT issued a proposed decision that, if finalized, would deny potential new-entrant Virgin America the operating certificate that the carrier needs to being flying. The DOT found that Virgin America’s president and at least two-thirds of the officers and directors are US citizens, satisfying one of the statutory tests for showing that a US air carrier is a US citizen. However, the two other statutory tests for proving US citizenship were not satisfied, as less than 75 percent of Virgin America’s voting equity is held by US citizens and the carrier was found to be "actually controlled" by foreign citizens (the Virgin Group and Sir Richard Branson). Virgin America is expected file a formal objection to the finalization of the decision by January 10, 2007.
Despite the fact that Virgin America’s current corporate structure appears to clearly run afoul of the existing US citizenship requirements, this situation provides another example of how competition and consumer benefits can be stifled by the restrictive laws pertaining to foreign ownership and control of US airlines. According to an article in the San Francisco Chronicle, Virgin America has raised "$177 million in startup capital, hired a staff of 169 people, rented offices near [San Francisco International Airport] and ordered 33 planes." The airline had also waited for over a year for a decision on its application for an operating certificate. If Virgin America cannot begin operations, many of these costs could become "stranded costs" and investors and consumers will be deprived of the economic welfare benefits that an operating airline would provide.
The DOT’s recent decision not to proceed with a rule that would have liberalized the definition of "actual control" to allow more participation by foreign investors in some aspects of US airline operations was a missed opportunity that potentially could have created significant economic benefits for US airlines. At the very least, if the rule changes had been combined with a finalized US-EU open skies agreement, Virgin America would have a more clearly defined road map for meeting the "actual control" standard than the current "totality of the circumstances" test.