Thursday, February 12, 2009
The last time negotiators from the United States and European Union were busy trying to finalize a far-reaching aviation agreement, Sir Richard Branson's brainchild Virgin America was looking down the barrel of intense scrutiny concerning its ownership structure. Now, with second-stage talks underway between the U.S. and EU, Virgin America could find itself back before the U.S. Department of Transportation to show that it remains owned and controlled by U.S. citizens. Rival carrier Alaska Airlines is asking the DOT to conduct "a careful and ongoing review" of Virgin America, stating that "[s]ince the issuance of their certificate, Virgin America's structure and operations have clearly changed; however, there is a lack of public information about those changes or how they may impact its citizenship status." Alaska Airlines further pointed to "[r]ecent questions about Virgin's ownership status establish[ing] a compelling need for a transparent review of its continuing compliance with [U.S. law]." In its petition to the DOT (Docket No. OST-2009-23307), Alaska Airlines cites substantial cash infusions (allegedly including the British Virgin Group), the possibility of two major U.S. investors pulling out, and a possible plan to create a "time share" ownership structure to satisfy U.S. citizenship rules as "important and potentially disturbing changes" to Virgin America which warrant reinvestigation.
The aeropolitical backdrop to this pending investigation should not be discounted. After failing to win DOT approval to begin operating services in December 2006, Virgin America's fortunes changed in March 2007 following a number of alterations to its ownership structure and its willingness to comply with further DOT demands. This aboutface by the DOT came just days before the EU Council of Transport Ministers was scheduled to finalize the terms of the U.S./EC Air Transport Agreement, though the DOT's decision forewent any explicit mention of that fact. Arguably, the DOT's approval stands on its own merits. Even a cursory reading of the proceedings reveals a careful analysis of Virgin America's ownership structure, and the subsequent conditions imposed on the carrier (including the removal of CEO Fred Reid) were substantive. What Alaska Airlines appears to be questioning (albeit indirectly) is the DOT's commitment to do more than simply rubberstamp contentious applications as a means of advancing U.S. international aviation policy.
A new investigation could go either way at this point. But surely the DOT realizes that an unfavorable result for Virgin America won't sit well across the Atlantic. Between the Obama Administration's apparent unwillingness to yield on foreign ownership restrictions and the recently proposed federal legislation which could threaten international airline alliances, the U.S. has done nothing to show its EU partners that it is willing to move forward on air transport liberalization. From the EU's perspective, there should be no issue with Virgin America's citizenship; the ownership and control rules are dinosaurs which have no place in a deregulated industry. So long as they remain and the right of Virgin America to fly hangs in the balance, the EU (and especially the UK) will be well-entitled to its discontent with U.S. aviation policy. Will this antipathy finally culminate in the EU (or its individual Member States) suspending rights under the 2007 Agreement? A decision in Virgin America's favor will only maintain the status quo; a finding against it could further tip the scales towards suspension and set international air transport liberalization back a decade.
Tuesday, February 10, 2009
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.