Tuesday, February 10, 2009

The Future of Foreign Ownership Caps

Reuters is reporting that the Canadian Government is again contemplating easing restrictions on foreign investment in domestic airlines.  The proposed change, which was entered into a budget implementation bill introduced last Friday, would authorize raising the investment cap from 25% to 49%.  While the move has drawn the ire of both the separatist Bloc Quebecois and the New Democratic Party, liberal M.P. John McCallum has defended the proposal for allowing a carrier such as Air Canada to access needed foreign capital during the economic downturn.

If Canada's investment cap is raised, it certainly will be welcome with open arms across the Atlantic.  The Canada/EC Air Transport Agreement, initialled last December, envisages a phased (although highly contingent) removal of investment and cabotage restrictions between the two sides.  The first phase, which is expected to begin after the Agreement is signed this May during the annual Canada/EU Summit, will largely mirror the rights contained in the 2007 U.S./EC Air Transport Agreement.  Once Canada raises its foreign investment cap to 49%, it will receive seventh-freedom rights for cargo carriage.  While the Agreement's terminus ad quem is full ownership and control of each side's carriers by the other's nationals, there is no definite timetable for this to occur.

It will be interesting to see what (if any) pressure the pending Canadian legislation puts on the United States to follow suit.  Publicly, the U.S. position has remained steadfast that it will not lift its airline investment cap (set at 25%).  This should change.  U.S. carriers no less than Canadian ones could benefit from access to foreign capital.  In fact, the transatlantic aviation market could benefit from full transnational mergers.  With airline alliances under scrutiny for their alleged anticompetitive practices and their antitrust immunity potentially at risk, now would be the time to let them operate as normal actors in the global market, subject to robust but fair competition rules.  Alliances remain a "second best" option in the face of highly restrictive foreign investment limits--one that requires immunization to operate successfully.  If that is politically unpalatable, then the airlines must be allowed to exercise the best one: transnational mergers.  With consolidation opportunities dwindling in the domestic sphere and access to funding tight, the U.S. should join its neighbor to the north and move to eliminate this needlessly draconian and outmoded rule.


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