Monday, June 8, 2015

TAP Bidding Shows Lack of Concern for Foreign Ownership Rules

The Portuguese government appears to be proceeding with the sale of national carrier TAP despite the legal concerns about the bidding process that emerged last week. While the procedural improprieties raised by the administrative court are believed to be minor, a second area of potential legal concern has received less attention. The two leading bidders competing to acquire a controlling interest in the airline are investors associated with Latin American carriers Azul and Avianca. The European Union's requirement that community carriers be majority-owned by nationals of a European Union Member State would presumably prevent either of these bidders from obtaining the full 61 percent stake the Portuguese government is auctioning off. Foreign ownership and/or control would also endanger TAP's ability to operate international routes under Portugal's bilateral air services agreements  as well as the multilateral agreements to which Portugal is a party through its EU membership.

What explains the seeming lack of concern over TAP's likely sale to a non-European interest? In all likelihood, both the Portuguese government and the prospective buyers are confident a deal can be structured to evade the foreign ownership rules. Evidence of this attitude can be seen in a Wall Street Journal story from last week reporting that if Azul's investors, if successful in their bid for TAP, would keep the two airlines separate "for legal reasons" and coordinate their operations through an alliance. Local partners can probably be found to ensure sufficient European ownership of TAP, or perhaps the winning bidder will be content to take a 49 percent stake and exert significant managerial influence as Etihad has done with some of its recent European investments. Creative work-arounds such as these have become increasingly prevalent throughout international aviation. At some point policy makers need to consider the utility of maintaining foreign ownership restrictions that are only loosely enforced and add layers of complexity onto airlines' corporate structures to preserve a fiction of legal compliance.

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