Should we allow foreign ownership of US
investors to buy into US airlines, or to start their own new
carriers, would bring a badly needed breath of fresh air -
and fresh money - to a failing industry.
The solution to the current
problems in the airline industry is not to give away more
billions of taxpayers money (see this
article). We should keep the government - and our taxpayers
dollars - out of private industry.
Why do we need government
bailouts when there's a better solution at hand? International
investors are keen to invest into the US air transportation
market. We should encourage them, not ban them, from doing this.
Why Are There Restrictions on
The restrictions on
international ownership of US airlines are a historical remnant
of a different era. Their origins date back to the days of
sailing ships in the 19th century. During the period of airline
regulation they were of course extended, and since then these
restrictions have been perpetuated primarily due to the
political fact that US airlines are a very effective lobbying
group, whereas international investors have virtually no
lobbying clout in Washington.
There are actually two very
different restrictions that prevent a full open market for
airlines in the US at present. Opponents of an open market have
tended to try and mix together the 'worst' of each issue as
support for their opposition to the other concept. So let's
clearly understand these two different concepts :
Cabotage or Eighth Freedom
The so called 'Freedoms of
the Air' spell out, by international treaty, how airlines based
in one country can operate over and in other countries. These
freedoms of the air are defined and
The US does not currently
allow this Eighth Freedom to international carriers, and it
hides behind the bilateral concept of 'we will only let a
foreign country's carriers participate in our market if the
foreign country has a similar sized market and lets our carriers
participate in their market, too'.
Although we think that the
US should allow cabotage, this article does not cover that
topic. We are discussing only and exclusively the next point -
foreign ownership of US based and US incorporated carriers.
Foreign Ownership of US based
This is totally different to
cabotage. The US limits the amount of foreign ownership in its
domestic airlines to a maximum of 49%, with a maximum of 25%
Most other countries have
similar protective provisions limiting ownership of their
airlines, but there are some notable exceptions - for example,
the Australian government allowed Sir Richard Branson to start
up an airline called Virgin Blue. In return for this permission,
Sir Richard had to agree that the airline would be incorporated
in Australia under Australian law, and that it would be staffed
and managed by Australians, and have an Australian board of
directors. The net result has been tremendously beneficial to
the Australian public, while the major carrier (Qantas) does not
seem to have been unduly harmed, either.
A number of myths and
misunderstood half-truths have been offered as reasons to
'protect' the US carriers from fair free open-market
competition. But most of these half-truths apply only to
restrictions on cabotage, and have no relevance to allowing
foreign ownership of domestic, US based, airlines.
None of these allegations
stand up to scrutiny, so let's look at them.
Myth 1 : We Need US Carriers
for National Security
As recently as 3 April 2003
(the day I'm writing this), Speaker Dennis Hastert used this
argument to defend Congress' $3.2 billion airline aid plan. He
said '[it is necessary that] we don't have a whole industry
collapse at a time when maybe we need it most' (referring,
presumably, to the Iraqi conflict).
It is true that there is a
program (the CRAF - Civil Reserve Air Fleet) whereby US airlines
hire planes to the military when needed, giving the military
additional airlift capacity. But this program would apply
equally to any US based, US incorporated airline, no matter
where the shareholders were based.
A US corporation is bound by
US laws, no matter who or where its shareholders are based.
Furthermore, the US airlines
are generously remunerated in return for their military
one recent study suggested it would be cheaper and better if
the US government simply tendered for charters on the open
Myth 2 : Foreign Airlines Don't
Have the Same Security Standards
Maybe foreign airlines do,
maybe they don't have the same security standards as US
airlines. But, who cares? This is a red herring argument,
because we're not talking about foreign airlines. We're talking
about a US airline, subject to all US regulations and controls.
Sure, the airline may be
owned in part or by whole by off-shore investors, but it is a US
airline, operated by US permanent residents and citizens, and
following all US standards and procedures.
Myth 3 : Foreign Airlines Don't
Have the Same Safety Standards
The answer to this myth is
exactly the same as the answer to myth #2.
Myth 4 : Foreign Airlines Would
Take Away Jobs from Americans
A US based carrier is
subject to the same laws for who it can employ, no matter who
its owners might be. All US carriers have to employ either
lawfully admitted foreign nationals on special work visas, or US
permanent residents, and indeed, for some jobs, they can only
employ full US citizens.
There is no difference in
these laws if the airline is owned by people in London or Little
Myth 5 : A Foreign Airline
would replace High Paying Jobs with Low Paying Jobs
Any company is free to set
whatever terms of employment it can agree upon with its workers
(and possibly the unions that represent them).
And, in case anyone hasn't
noticed, all those 'high paying' airline jobs are under massive
threat at present as the traditional carriers lay off staff and
reduce the wages (and pension plans!) of those that remain.
All new startup airlines are
building their operations on lower employee costs than the
traditional carriers. And their staff seem to be delighted to
accept the opportunity to work with them, too. They're surely
not complaining, so why should we!
Myth 6 : A Foreign Airline
would 'cherry pick' only the Profitable Routes
This myth suggests that the
foreign (owned) airline would only fly on the 'easy major routes
that any airline can make a profit on'. By reducing the ability
of the existing airlines to make profits on the major routes,
the existing airlines would no longer be able to subsidize the
other loss-making routes that they currently operate as a public
As recently as this week, a
noted travel writer commented 'having a national airline
protects the nation's transportation network from being at the
mercy of foreign carriers to whom profits are more important
than whether the country's capital has daily service from New
York, Chicago, Tokyo, or Timbuktu.'
This myth is full of
nonsense in several areas. Any start-up airline, no matter who
or where their owners are, carefully works out a business plan
that has them concentrating on some 'easy' routes that they
think they can make a profit on. As the new airline grows, they
build out from their core routes so as to grow their total
network in an organic manner.
The second piece of nonsense
is there is no such thing as an 'easy' major route that any
airline can make a profit on! If there was, then all airlines
would be on that route already, and more, totally US owned,
airlines would be starting up to add more services to that
The third piece of nonsense
is that none of the major airlines operate as a social charity.
If they can't make money on a route, they will stop flying it.
Plain and simple. All 'for profit' airlines work on the same
basis, no matter where their shareholders sit.
The ownership of a new
startup airline again makes no substantial difference to the
external marketplace factors that influence all airlines and
their present operations.
Myth 7 - Profits will be Taken
Some people have made the
ridiculous suggestion that allowing foreigners to own US
airlines means that they'll take all the profits offshore and
somehow harm the US economy in the process.
Look around you. Exactly
which US carrier is making so much profit that transferring some
share of it offshore would harm the economy!?
Even in a very good year,
shareholder dividends rarely exceed a very few percent of total
revenue - repatriation of dividends is a negligible matter.
And such concerns haven't
prevented foreign ownership of just about every other type of
company (with the exception of media outlets and shipping
companies). So let's allow foreign ownership of airlines, too.
The so-called 'protection'
of our domestic airline business is not helping anyone. It does
not seem to be helping the airlines, who, in financial terms
have never performed well - indeed, long before 9/11, the
spectacularly successful investor Warren Buffett described his
investment into the airline industry as 'temporary insanity' and
went on to say "So I now have this 800 [telephone] number, and
if I ever get the urge to buy an airline stock I dial this
number. And I say my name is Warren, and I’m an 'air-o-holic',
and then this guy talks me down on the other end [of the
More importantly, protection
is not helping us, the traveling public, either. Service is
dreadful on most major carriers and getting worse. The amazingly
low air fares that we read about in Europe ($20-50 roundtrip
fares for medium distance international travel) offered by
profitable airlines remain an impossible dream here, because the
US carriers have never had to restructure their businesses to
meet modern competitors with different business models.
The ultimate display of
failed protectionism happened this last week in Canada, where
Air Canada, now almost the only major remaining airline in
Canada, declared bankruptcy. If an airline that has almost the
complete market entirely to itself can't break even, let alone
make a profit, what is the point of protection? Who benefited
from protectionism in Canada? Not the public. Not the airline.
Not the government. Everyone lost out.
Who or what are we
protecting, and against who or what?
Our entire society has been
very successfully built on the premise of free enterprise, and
the abolition of tariffs and trade barriers. Why should the
failing airline industry be an exception to this cornerstone of
The Good News
And now, for the surprising
and good news. Some proven successful international airline
operators want to set up airlines in the US. Perhaps the best
chance for a revival in the US airline industry is offered by
British entrepreneur and founder of Virgin Atlantic Airways,
Virgin Express and Virgin Blue (as well as Virgin Trains and
many other companies), Sir Richard Branson. He wants to start up
a US domestic airline - he believes that he can create a
profitable and well run domestic airline here, the same as he
has already done in Australia.
Rather than give another
$3.2 billion to our failing domestic carriers now, merely to
perpetuate their bad management until the next handout request,
shouldn't we instead open our skies to any and all
entrepreneurs? Perhaps we should even give the $3.2 billion to
If foreign entrepreneurs
meet all our federal regulations for establishing a US airline,
we would all be the beneficiaries of their enterprise, as
this study confirms.
We stand to benefit from
more competition, lower fares, better service, and no more
taxpayer bailouts of old, irrelevant airlines that should be
allowed to quietly expire and disappear.
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4 April 2003, last update
20 Jul 2020
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