March 7, 2009
Slouching Toward Protectionism
The House Transportation and Infrastructure Committee approved the FAA Reauthorization Act of 2009. Section 801 of the bill, as discussed last week on the blog, could foreclose to foreign citizens all middle and upper management positions in U.S. airlines. The provision, which was first made part of the stillborn 2007 FAA Reauthorization Act by Rep. James Oberstar, is clearly antithetical to the U.S.'s pursuit of "Open Skies" and is more than enough to warrant alarm among EU leaders looking to enhance the 2007 U.S./EC Air Transport Agreement. Now Rep. Oberstar has gone a step further, attaching his proposal to sunset antitrust immunity for transnational airline alliances to the FAA legislation. The result is a protectionist package which could set air transport liberalization back decades.
It is difficult to discern just what Rep. Oberstar is trying to achieve. If his concern is primarily that antitrust immunity has anticompetitive effects, then he should push for what the airlines truly need: the ability to execute transnational mergers. But as Section 801 makes plainly clear, Rep. Oberstar has no interest in opening up U.S. carriers to foreign investment or even substantial foreign involvement. International airline alliances have been the industry's ingenious (albeit unstable) response to nationality restrictions; take them away and the airlines are back to the "good old days" of interlining agreements which are both inefficient and costly to consumers. Equally troubling is that U.S. airlines may lose many of their hard won traffic rights into the EU. Under the 2007 agreement, the Community or, perhaps, the individual Member States acting unilaterally, may suspend rights if they are not satisfied that sufficient progress has been made toward a second stage agreement. There is likely nothing the U.S. could offer its primary aviation trading partner to compensate for the loss its carriers' capacity to form strategic partnerships.
Those entertaining the notion that Rep. Oberstar's proposals are either prudent or wise ought to reflect on the now-defunct air services agreement signed between the U.S. and the United Kingdom in 1977 (commonly referred to as "Bermuda II"). Seen as the high water mark of British protectionism, Bermuda II imposed artificial and highly politicized controls on fares, routes, and capacity and kept London Heathrow locked to all but two American carriers. Only with the signing of the 2007 U.S./EC agreement was Bermuda II fully overcome. U.S. airlines cannot afford to operate under these constraints again and yet Rep. Oberstar's own brand of protectionism may lead to reinaugurating them as normative for international civil aviation. At that point the transatlantic marketplace becomes the theater for an aviation trade war: U.S. airlines will be the casualties and consumers the collateral damage.
March 2, 2009
The Return of Section 801
Those who have followed Rep. James Oberstar's crusade to bind international aviation in new regulatory strictures may not be surprised to learn that Section 801 from the stillborn FAA Reauthorization Act of 2007, H.R. 2881, 110th Cong. (2007), is part of the 2009 version, H.R. 915, 111st Cong. (2009). The section would amend the statutory provisions on ownership and control of U.S. airlines by mandating that
an air carrier shall not be deemed to be under the actual control of citizens of the United States unless citizens of the United States control all matters pertaining to the business and structure of the air carrier, including operational matters such as marketing, branding, fleet composition, route selection, pricing, and labor relations.
A 2007 letter to Rep. Oberstar from Rep. John L. Mica, ranking Republican member of the House Transportation and Infrastructure Committee, warned that the language could be interpreted by a future Administration as requiring that all middle and upper management positions in U.S. airlines be occupied by U.S. citizens. Not surprisingly, Rep. Oberstar has chosen not to heed that warning.
Clearly, the language is not in the "spirit" of the 2007 U.S./EC Air Transport Agreement. If the bill passes with the new control requirements intact, it would throw another bolt on the door to authentic liberalization and likely sour the ongoing negotiations for a second stage agreement. The language may also contradict the 2007 Agreement's provisions for branding and franchising opportunities (cf. Article 10(8) & Annex 5). Between this proposed amendment and a pending bill which could very well mark the end of the international aviation alliance system (discussed on the blog here and here), Rep. Oberstar appears to be charting a course for the international aviation industry away from "Open Skies" and back under the dark clouds of regulatory dominance and managed trade.