[Senate Hearing 109-1124]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1124
REVIEWING THE DEPARTMENT OF
TRANSPORTATION'S NOTICE OF PROPOSED
RULEMAKING THAT CLARIFIES THE RULES
REGARDING FOREIGN INVESTMENT
IN U.S. AIR CARRIERS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON AVIATION
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 9, 2006
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
------
SUBCOMMITTEE ON AVIATION
CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska JOHN D. ROCKEFELLER IV, West
JOHN McCAIN, Arizona Virginia, Ranking
TRENT LOTT, Mississippi DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine BARBARA BOXER, California
GORDON H. SMITH, Oregon MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada FRANK R. LAUTENBERG, New Jersey
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire E. BENJAMIN NELSON, Nebraska
JIM DeMINT, South Carolina MARK PRYOR, Arkansas
C O N T E N T S
----------
Page
Hearing held on May 9, 2006...................................... 1
Statement of Senator Burns....................................... 1
Statement of Senator Dorgan...................................... 2
Statement of Senator Lautenberg.................................. 3
Statement of Senator Lott........................................ 11
Statement of Senator McCain...................................... 2
Statement of Senator Pryor....................................... 22
Witnesses
Mica, Hon. John, U.S. Representative from Florida................ 5
Oberstar, Hon. James L., U.S. Representative from Minnesota...... 7
Prepared statement........................................... 9
Shane, Hon. Jeffrey N., Under Secretary of Transportation for
Policy, Department of Transportation........................... 11
Prepared statement........................................... 14
Smith, Frederick W., Chairman, President, and CEO, FedEx
Corporation.................................................... 24
Prepared statement........................................... 26
Smisek, Jeffery, President, Continental Airlines, Inc............ 28
Prepared statement........................................... 33
Report from JPMorgan, dated May 5, 2006, entitled, ``Goodbye
Open Skies--A U.S.-EU Aviation Deal Founders Again''....... 30
Whitaker, Michael G., Senior Vice President--Alliances,
International and Regulatory Affairs, United Airlines.......... 42
Prepared statement........................................... 43
Woerth, Captain Duane, President, Air Line Pilots Association
(ALPA)......................................................... 47
Prepared statement........................................... 49
Appendix
Boyanton, Jr., Earl B., Assistant Deputy Under Secretary of
Defense (Transportation Policy), prepared statement............ 61
Ensign, Hon. John, U.S. Senator from Nevada, prepared statement.. 61
Response to written questions submitted to Hon. Jeffrey N. Shane
by:
Hon. Daniel K. Inouye........................................ 67
Hon. Frank R. Lautenberg..................................... 70
Hon. Ted Stevens............................................. 64
Response to written questions submitted by Hon. Ted Stevens to:
Michael G. Whitaker.......................................... 72
Jeffery Smisek............................................... 71
Captain Duane Woerth......................................... 73
REVIEWING THE DEPARTMENT OF
TRANSPORTATION'S NOTICE OF PROPOSED
RULEMAKING THAT CLARIFIES THE RULES
REGARDING FOREIGN INVESTMENT
IN U.S. AIR CARRIERS
----------
TUESDAY, MAY 9, 2006
U.S. Senate,
Subcommittee on Aviation,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:30 p.m. in
room SD-562, Dirksen Senate Office Building, Hon. Conrad Burns,
Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. CONRAD BURNS,
U.S. SENATOR FROM MONTANA
Senator Burns. We'll call the Committee to order. And we've
got a lot of ground to cover today. And I want to thank my
friend from North Dakota for being here. And there'll be other
members. They wrote--they said they'd be here, but, you know,
they're not always the most reliable attenders at times. So, we
will get started.
I want to thank everyone for coming today. Before we start,
I want to say we still send our ``Get Well'' greetings to the
Ranking Member of this committee, Senator Rockefeller. He has
had surgery, and he's still convalescing, I think, is the
correct word. And he's still recuperating, and we wish him a
speedy return, because I'm--we're going to need some help on
some issues, coming up.
Today, we review the recently issued Department of
Transportation supplemental notice of proposed rulemaking that
seems to clarify the rules regarding foreign investment in U.S.
air carriers.
Since 1926, Federal law has required U.S. air carriers,
including cargo carriers, to be owned or controlled by citizens
of the United States. The Department of Transportation is
tasked with enforcing those statutes. One criteria of that
enforcement is a citizenship review of who is in actual control
of the airline. The interpretation and impacts of actual
control of an airline will be examined today.
Currently, both the House and Senate versions of the
supplemental appropriations bill contain, in one form or
another, provisions blocking this rulemaking. Conference
meetings will soon commence on that bill, and I am hopeful that
this hearing will assist us in making a principled decision on
how to ultimately address this issue. Like many of my
colleagues, I'm concerned about the possible impact such change
would have on the CRAF program, along with the overall safety
and security, is the application of such a rule plausible in a
real corporate structure, and is it the right thing to do for
aviation industry as a whole? Additionally, will further
liberalization and foreign investment opportunities for
airlines equate to better service and opportunity for my
constituents? Route structure and availability are certainly on
my mind. And I would like to be confident that rural markets
would not be harmed by these new policies. I think everyone is
also aware of the possible comprehensive Open Skies Aviation
Agreement with Europe hangs in the balance. Our decision to
move forward will certainly affect that negotiation's outcome.
And I want to thank everyone for coming today. And now I
recognize Senator Dorgan, from North Dakota.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
You're all familiar, of course, with hula-hoops and
frisbees and slip-n-slides. They are all products produced by
Whammo Corporation, which has just been purchased by the
Chinese. No one heard a whisper from me about that purchase. I
could care less whether there's foreign ownership of frisbees.
But foreign ownership and control of U.S. airlines is of
concern to me. And it's interesting to me that there is a
rulemaking now on Federal law in which an agency is parsing
words to try to understand, What do the two words, ``actual
control,'' really mean? Only in Washington would we not
understand what ``actual control'' really means. And my sense
is that we are rushing, at 100 miles an hour, of course, toward
a whole range of international interests and interconnections.
It is a global economy, a global world, largely without the
rules having kept pace. With respect to this issue, this single
issue in which we legislated long ago, and have long-
established Federal law, that is the foreign ownership and/or
control of airlines, I'd like us to slow down just a bit, think
a bit, and come to a conclusion that makes sense for this
country, for our economic security interests, and for our
national security interests.
I was troubled, when I read the briefing for this hearing,
to understand how much we must pay some of the most well
educated, bright people that are available to be hired who
cannot understand the two words, ``actual control,'' it's
something perhaps we can visit about the rest of the afternoon.
Mr. Chairman, thank you very much.
Senator Burns. We've always had problems with definitions.
Now, the former Chairman of the Full Committee, Senator
McCain.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Senator McCain. Thank you very much, Mr. Chairman. Thank
you for holding this hearing.
As you mentioned, in 1926 Congress enacted the Air Commerce
Act, which restricted foreign ownership of any U.S. airline to
49 percent. The government's goal at that time was, in part, to
protect a fledgling industry. Twelve years later, protectionist
leanings prevailed again, and foreign investors were limited to
owning 25 percent of the voting stock of domestic air carriers.
Forty years after that, the airline industry was generally
deregulated. But 80 years after Calvin Coolidge signed the Air
Commerce Act into law, and nearly 30 years after deregulation,
we have yet to eliminate several regulatory restrictions on the
airline industry, including the Perimeter Rule, the Wright
Amendment, and the topic of today's hearing, legislation that
severely restricts foreign ownership of domestic airlines.
The President, in 2003, proposed loosening the ownership
restrictions to lower the foreign ownership threshold back to
49 percent. Congressional opposition scuttled that effort.
A review of the Department of Transportation's proposed
rule show that it's a modest proposal, at best. Nevertheless,
the emergency supplemental for Iraq and Katrina--Iraq and
Katrina--that's now in conference, contains a provision that
would delay the rulemaking until the end of this fiscal year.
What relation that has to do with Katrina and Iraq escapes me.
Over the past 4 years, we've seen some of our Nation's
largest airlines falter into bankruptcy--US Airways, United,
Northwest, Delta. At one point last year, four of the Nation's
seven largest airlines were in bankruptcy. And to recover from
these bankruptcies and to sustain their operations, our
Nation's airlines need sources of funding and a broader ability
to enter into cooperative agreements with foreign carriers.
This is not a theoretical problem. According to a 2003 GAO
report, foreign airlines have attempted to invest in, and
influence the operations of, U.S. airlines several times. The
report notes that foreign airlines have, on occasion, invested
significant amounts of capital into U.S. airlines, only to
later dis-invest, due, in part, to U.S. policies concerning
airline control. Rather than limiting the sources of funding
for our Nation's airlines, we should be making sure they have
all the capital they need to manage and expand their operations
domestically and abroad.
So, Mr. Chairman, we're back to the old protectionist issue
again. And since we've made so little progress in the past, we
will probably continue these protectionist policies, to the
detriment of American economy, to the detriment of the American
airlines, and certainly to the detriment of the airline
passenger. I hope that someday we will wake up and recognize
that we live in a global economy, and one in which foreign
investment in our airlines can be very helpful, rather than
harmful. And I would say that this issue, we have visited and
revisited on numerous occasions. But I thank the Chairman for
holding this hearing.
Senator Burns. Senator Lautenberg?
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thanks, Mr. Chairman. I appreciate your
holding this hearing.
The question of foreign control of U.S. airlines, a
critical issue, has implications for the safety of the air
passengers, as well as our national security. Three years ago,
Congress updated aviation law to specify that U.S. citizens
must have ``actual control''--and we could have a debate about
those couple of words, over our domestic airlines.
The law is pretty clear. ``Actual control,'' means exactly
what it says. However, this proposal, from the Bush
Administration, performs all kinds of legal acrobatics to
circumvent Congress and the law.
Now, I was formerly a CEO, and I witnessed, personally, how
tough it is to keep everybody working toward the same goal
within an organization when their particular departmental or
private interests differ. And it separates loyalties at times.
But that is what the Administration is proposing to do with the
ownership of domestic airlines.
We have a chart. As a matter of fact, it's a pretty
interesting art form, I thought, but it does show the confusion
that exists by virtue of the fact that shareholders now have
their particular--their particular opportunities--can you see
it? Because I can't. But----
[Laughter.]
Senator Lautenberg.--the red indicates--those areas, the
red circles--indicate those areas that would still be left to
American control. And that's kind of interesting, to see how
that might serve as a flow chart for a morning meeting. The
only thing clear about this chart is that the Administration's
proposal would be a recipe for confusion.
Now, domestic airlines obviously play a significant role in
our national defense. And in times of war or national
emergency, the Department of Defense might need the airlines to
transport materials, or even personnel.
Now, there is a section called ``CRAF,'' which is designed
to be reserved for decisionmaking by the American Government
when there is conflict at our doorstep, but the chart doesn't
look like a way to maximize the safety of our airlines or the
security of our Nation. It looks more like something we might
see from the senior management of a company like Enron. Now,
can you imagine, if we have a difference of mission with the
French, they could start calling them ``Freedom fries'' again.
It would be terrible.
But how do we entrust that function of our society? And as
Senator McCain pointed out, the fact is, we went full bore to
try and provide the liquidity that our airlines needed to work,
over $20 billion since 9/11. Do we just say that, ``Well, OK,
that was an investment to keep our guys going?'' But what
happens when that company is owned and controlled by another
foreign national or a foreign government and they run into
financial problems? Do we then say, ``OK, well, you're not
going to be operating between Chicago and New York, and L.A.
and Chicago. We're not going to keep you going. You're a
foreign entity?'' Those kind of decisions tell me that this is
not a particularly good idea and certainly deserves far more
debate than we're going to have here this morning.
So, we're going to consider opening the door to more
foreign control of and investment in our airlines. We ought to
go about it the right way, and changes to the law ought to be
aired before this committee. I had the opportunity over the
years to join with Congressman Oberstar in some very
significant aviation matters; in particular, the downing of Pan
Am 103 and how essential it was that we had the full
cooperation of a friendly nation. But if we didn't have, we'd
never have been able to understand what took place in those
days. And so, we're back, Jim, on a similar track today. We've
got to protect our opportunity to direct our airlines as we
think they should function.
Thank you very much, Mr. Chairman.
Senator Burns. Thank you, Senator.
Senator Stevens, as Chairman of the Full Committee, do you
have a statement?
The Chairman. No.
Senator Burns. We are joined today by two distinguished
Members of the House of Representatives, and we'd like to hear
from them now. We have the Honorable John Mica, representing
the 7th District of Florida.
Representative Mica, thanks for joining us today.
STATEMENT OF HON. JOHN MICA,
U.S. REPRESENTATIVE FROM FLORIDA
Representative Mica. Thank you, Chairman Burns and
distinguished members of the panel. Pleased to be with you and
have this opportunity to----
Senator Burns. You just have to pull it up a little bit
closer to you.
Representative Mica. Is that it? OK. Don't want to miss a
word here. I'm pleased to be with you.
Senator Burns. Hanging on every one of them.
Representative Mica. Thank you. I know you will.
[Laughter.]
Representative Mica. Again, I'm pleased to present
testimony on this important issue of foreign investment on the
pending historic United States-European Union agreement.
Today's hearing on the DOT rule in the supplemental
offering that's been provided, and the United States-EU
agreement, could present Congress with a very clear, but stark,
choice. And that is, will the United States continue to lead,
or will we abdicate a leadership role by succumbing to
unfounded fears relating to this matter?
I, for one, believe the United States should continue to
lead. The U.S.-EU Open Skies Agreement creates the largest and
the most important air service market in the entire world. It
has the potential to be a watershed event in commercial
aviation, and is long overdue.
The benefits to, first of all, airlines, to consumers to
shippers and to economies on both sides of the Atlantic, all of
these benefits, really, if we look at them, are unquestioned.
Potential benefits also will be seen by the U.S. airframe,
aircraft engine, and avionic manufacturers. And they hold the
potential for being tremendous advantages. Today, we have some
70 Open Skies Agreements with air service trading partners,
large and small, and also some of those with mature and also
expanding economies.
Mr. Chairman, by every measure, Open Skies has been a
success for all of us. It's expanded competitive choices for
consumers, passengers, and shippers alike. By building
efficient air service trade bridges and expanding them between
the U.S. in virtually every corner of the world, it's created
superhighways in the sky for global trade and commercial
activity. Building on this success last fall, the U.S. and some
25 Member States of the EU reached a text agreement to fully
open the transatlantic services and markets on a multilateral
basis. That provisional agreement presents a very historic
opportunity for the United States to leap beyond a patchwork of
Open Skies and restrictive bilateral agreements with some of
these European countries. And, in their place, I think we can
substitute a wide-ranging multilateral Open Skies pact, and
that's what's in the offering.
Significantly, one of the newly opened markets will be the
United Kingdom, whose--unfortunately, their restrictive
aviation policy has harmed consumers on both sides of the
Atlantic for nearly three decades. Given decades of Heathrow-
access-related frustration, this development, I believe, will
be especially welcome. There's an active market for Heathrow
slots, as the recent experience of carriers such as Qantas, the
United Emirates, and Jet Airways shows. Carriers that rely on
this secondary market can quickly build meaningful slot
positions at Heathrow. This market option isn't without cost,
and it requires hard work. But, quite clearly, there is a
market-based alternative to sitting still and fighting much
needed change.
Last November, DOT announced a proposal to expand
opportunities for cross-border investments in airlines by
allowing foreign investors to participate more actively in the
day-to-day commercial decisions of U.S. airlines, and I believe
they did that without running afoul of the statutory
requirements that U.S. citizens have--and we've heard the
term--``actual control'' of these airlines.
Mr. Chairman, let me be absolutely clear. If DOT's rule did
not adequately protect the safety, security, and national
defense and Civil Reserve Air Fleet requirements, I'd be the
first Member of Congress in line to oppose any change. As much
as I support the U.S.-EU Agreement, I'd never risk safety and
security or national defense to attain it.
I was pleased that DOT has recently issued a supplemental
offering to its original proposal that elaborates further on
safeguards to fully protect safety, security, and national
defense issues. And I think you'll hear a little bit more from
the Administration on the specifics of that.
Finally, let me say, DOT's proposed rule is not mandatory.
To the contrary, it's discretionary. In fact, it offers U.S.
carriers an additional option to secure capital in the U.S.
market on commercially-reasonable rates, and that's just like
every other--just about every other industry you can name in
America.
So, again, I think that we also endanger, by not moving
forward, the serious loss of credibility in our efforts to
continue--continuing open and critical air service in some of
the Southeastern Asia markets, China, Hong Kong, Japan, and, of
course, as I said, the United Kingdom. And, finally, you can
look for billions and billions of dollars in economic benefits
to consumers, economic opportunities, jobs, creation of new
opportunities for some of our struggling carriers in our
industry.
So, I think we're at a critical junction. I hope that we'll
look very carefully at the provisions that FAA is--has crafted,
and that we'll leave here not with a lot of rhetoric, but
maintaining the U.S. leadership in global aviation.
So, I look forward to hearing from my colleague in the
House, and thank you for the opportunity to present my case.
Senator Burns. Thank you. And now, our good friend and
distinguished Member of Congress, Jim Oberstar. Thank you for
coming today, and we look forward to your testimony.
STATEMENT OF HON. JAMES L. OBERSTAR,
U.S. REPRESENTATIVE FROM MINNESOTA
Representative Oberstar. Thank you very much, Mr.
Chairman--Burns--and Chairman Stevens, colleagues, several
former colleagues in the House, now in our other--distinguished
other body. I appreciate that you are holding this hearing. You
recognize the significance, the importance of this NPRM and
this negotiation with the European community has for the future
of aviation.
And I listened with attention to what Senator McCain said
about protectionism. In 1944, as the U.S. was--and our allies
were drawing--could see the end coming in World War II,
President Roosevelt convened an aviation conference in Chicago
to map out the post-War shape of aviation, sent a telegram to
Winston Churchill, in which he said, ``Let not the dead hand of
protectionism stifle the promise of a great market in
aviation.'' Churchill's response was to say that--he'd come out
of World War II, America, as the--unscathed, it has the biggest
aviation fleet in the world, we'll all be at a disadvantage.
And the British, on behalf of themselves and others, negotiated
what we know today as bilateral regime in what we know as the
Chicago conference.
In 1989--well, first, in 1978, I voted for deregulation,
thought it would energize the aviation sector, and it did.
Fares are, on average, $6 and a half billion a year less for
travelers today than they were pre-deregulation, and to the
benefit of air travelers. But in 1989, as Chair of the Aviation
Subcommittee at a conference in Europe, I proposed to the
European community, having done my graduate studies at the
College of Europe, knowing all that it took to create the
European economic community, that, ``We throw out the
bilaterals, negotiate a single Open Skies agreement. But, if
you don't, then we, the United States, will negotiate with you,
country by country, and we'll get the better of the deal.''
They weren't ready then. They weren't ready in 1944. They
weren't ready in 1989. Now maybe they are. But the U.S.
negotiators have thrown in something that has little, if
anything, to do with Open Skies exchange of commerce, rights
for rights, and values for values, and that is the ownership
issue.
Now, whether or not you agree with foreign investment in
U.S. airlines, you should agree that that decision should be
made by the legislative body and not by the Executive Branch,
unless you want to duck the issue. For 65 years, aviation in
the world's largest open air trade market, the United States,
two-thirds of all air travelers last year traveled in our
airspace. We account for more than half of all the aircraft in
the world in commercial aviation. We account for more than
half, maybe two-thirds, depending on how you calculate it, the
world's value in aviation in the U.S. marketplace. Every other
country wants to get into our market to deal here. But under
the bilaterals--if we had done steel trade in the same way that
we do aviation trade, bilaterals, we wouldn't have lost the
steel industry, we wouldn't have lost other industries, because
we trade value for value and rights for rights. Done under an
Open Skies, it's gone. That's fine. You can trade on what basis
you want.
But the issue, for 65 years, has been, an airline qualifies
as a citizen of the United States that provides service between
cities in the United States or on international routes
negotiated by the U.S. in our international trade agreements.
``Citizen of the United States'' is further defined as one--as
an airline that is under the control--and I'll give you the
exact words--``corporation or association which is under the
actual control of U.S. citizens.'' You don't need a dictionary
to understand what ``actual control'' means. Clearly, the
Department of State or Department of Transportation does not
have the authority on its own to limit the requirement of
actual control as proposed in their notice of proposed
rulemaking to a requirement of control only over safety, over
security, and over the Civil Reserve Air Fleet.
Our courts have held that an Executive Branch agency has
discretion to interpret a statute, but does not have the
discretion to conflict with the plain meaning of the law.
Now, how can you have actual control if the rule limits
that control to certain policies of an airline, but not others?
Under the NPRM, they--a foreign investor, foreign carrier, can
decide fleet size, fleet composition--that is, what type and
model of aircraft they fly in their fleet--which markets to
serve, which markets to pull out of. The decision is very
clear.
Now, this make-up of control could decide that the foreign
interest is going to change the fleet composition and take out
the DC-10s and the 747s that are part of the Civil Reserve Air
Fleet. Now, years ago I held hearings on that subject of the
CRAF program, when we reauthorized it. In the current
engagement in Iraq, CRAF was activated in February of 2003.
Fifty-one passenger aircraft, 11 airlines, moved 11,000 tons of
cargo and 254,000 troops. We have 1,293 aircraft in 39 U.S.
airlines committed to the Civil Reserve Air Fleet. Foreign
carrier can simply say, ``I'm not going to have 747s. They're
whales. They consume too much fuel. We're not going to have DC-
10s in that fleet. They consume too much fuel.'' And during
Gulf War I, those Civil Reserve Air Fleet aircraft flew troops
and equipment into the Gulf and deadheaded back, while our
competitors are flying revenue passengers out of the war zone
into the United States. Now, is that the future that you want
for aviation for the United States?
So, they ran up against a wall, against that issue, and
have issued a clarification. This is it, 75 pages of
clarification of what they mean by ``actual control.'' And it's
not in the rule. This is in the preamble to the rule.
So, now they go and say they're having--they're
reinterpreting the standard and are going to say that the
requirement in the law is that the President of a U.S. airline
must be a citizen of the United States--all right, that's
fine--must be independent of foreign control--that's right. The
President of the airline would have to be divorced from all
commercial decisions if a foreign owner controls that airline.
It would be inconsistent with a U.S. person who is President of
the airline under foreign control to do other than what the
foreign ownership wants it to do.
So, how does that President of the U.S. airline be a
President only for safety, only for security, and only for the
CRAF program, has nothing to say about all those yellow dots--
I'm sorry, blue dots that Senator Lautenberg has on this chart.
That's a very graphic description of what happens under the
foreign ownership initiative in this document.
Senator Burns. Can you wrap up----
Representative Oberstar. OK.
Senator Burns.--pretty quick? I've got a pretty full panel,
and I don't want to be subject to a filibuster here.
Representative Oberstar. Excuse my enthusiasm for the
subject matter, Mr. Chairman----
Senator Burns. No, you're very----
Representative Oberstar.--but you're not going to hear this
stuff from some of these other witnesses, and I just want to be
very clear that--you know, you're going to hear, ``Oh, we've
got such a good deal.'' We heard that before, in the Carter
Administration, under Bermuda II negotiations, ``Oh, we've got
such a good deal. We can't let this go.'' And, as a result,
we've been strangled in the British market, which is half of
the U.S. North Atlantic trade.
This deal can sit on the table until the Congress has had
an opportunity to decide what it wants to do, and not the
Department of Transportation.
[The prepared statement of Mr. Oberstar follows:]
Prepared Statement of Hon. James L. Oberstar,
U.S. Representative from Minnesota
Chairman Burns, Ranking Member Rockefeller, you are holding
this hearing because you recognize that our government is
engaged in one of the most important aviation policy decisions
since deregulation was enacted in 1978: the DOT's proposal on
foreign ownership.
The NPRM on foreign ownership in effect would trade away
the crown jewel of American transportation--our Nation's
airlines--at their most vulnerable moment, to their foreign
competitors. This would be done to conclude an Open Skies
agreement with the European Union, an Agreement which State and
DOT describe as a major breakthrough, but which in reality,
would provide only limited benefits for United States'
airlines, given the difficulty of getting slots to implement
the new rights that our carriers will get at Heathrow.
Our negotiations team will likely tell you, as they have
said in other venues: ``If we don't conclude this agreement
now, this opportunity will be the last.'' Don't fall for that
siren song--I've heard it before--at Bermuda, during the Carter
Presidency. I heard it during the Reagan Administration, in
negotiations on cargo rights with South Korea and Japan. I
said, ``Go back and do better; we can wait.'' The U.S. accounts
for two-thirds of the world's aviation market. Foreign carriers
are dying to get in--they can enter our market when we enter
theirs, on terms that balance the benefits--value for value,
rights for rights.
For the past 65 years, U.S. commercial aviation has been
guided by a statute, which provides that only an airline that
qualifies as ``a citizen of the United States'' may provide
service between cities in the U.S., or on international routes
obtained by the U.S. through international agreements. The law
clearly says that an airline may qualify as a U.S. airline,
only if the airline is ``a corporation or association . . .
which is under the `actual control' of U.S. citizens.''
Under DOT's proposed new standard, foreign investors would
be allowed to exercise control over all commercial aspects of
U.S. airline operations, including fleet mix, routes,
frequencies, classes of service, and pricing etc. U.S. citizens
would be required to control only decisions affecting the Civil
Reserve Air Fleet (CRAF), transportation security, safety and
organizational documents.
It is clear to me that the Department does not have the
legal authority to limit the requirement of ``actual control,''
to a requirement of control over only safety, security and CRAF
decisions (and not over other economic decisions). Our courts
have held that although an Executive Branch agency has
discretion to interpret a statute, an agency does not have
discretion to make interpretations that conflict with the
``plain meaning'' of the law.
I do not see how it can be consistent with the plain
meaning of ``actual control'' to limit that term to a
requirement of control over some policies of an airline, but
not control over many important decisions, such as the rates to
be charged and the service to be operated.
Moreover, the proposed new interpretation of ``actual
control'' is inconsistent with the requirement in the law that
``the President'' of a U.S. airline must be a citizen of the
United States. DOT has correctly ruled that not only must the
President be a U.S. citizen in the technical sense, but he must
also be independent of foreign control. This means that if an
airline decided to allow foreign interests to control
commercial decisions, the President of the airline could not
carry out the policies of the foreign investors, because he
would then lose his status as a U.S. citizen. The President,
then, would have to be divorced from all commercial decisions.
Surely, when the law required that the President of an airline
must be a U.S. citizen, it meant a President who ran the entire
airline, not just safety, security and the CRAF program.
I would note that one of your witnesses today, Federal
Express, stated in its initial comments in October 2003 on the
foreign control issue that ``while the issue of citizenship is
the center of noisy debate among aviation law pundits, the
Department presently has no legal authority, nor any mandate
from Congress, to make changes to its implementation of the
U.S. citizenship requirements of 49 U.S.C. 40102(a)(15).'' I
agree with Fed Ex's assessment of the legal limitations on
DOT's authority.
If DOT's new standard is allowed to be implemented, there
could be serious consequences for our national aviation system,
particularly since the most likely foreign investors would be
foreign airlines or persons with interests in foreign airlines.
Foreign interests could restructure the route system and fleet
of a U.S. airline so that the U.S. airline would become, in
effect, a ``feeder'' for the international operations of a
foreign carrier. This could limit service and competition in
markets served by the U.S. airlines, particularly service to
small communities.
There could also be effects on national security: A foreign
investor could decide to take an airline out of the CRAF
program, or it could accomplish this indirectly by changing the
fleet mix of a U.S. airline to reduce the number of large,
wide-body civilian aircraft that the Department of Defense
relies on to supplement its military fleet in times of national
emergencies.
In addition, U.S. airline employees could lose high-quality
job opportunities, in favor of employees of the foreign
carrier. There could be similar effects on other aviation
industry employees. Foreign investors would be inclined to
support the purchase of aircraft produced by foreign companies,
and to have the airline use foreign repair stations.
The Department's Supplemental Notice of Proposed Rulemaking
(SNPRM), issued last week, does not change the fact that DOT
has stretched its interpretation of ``actual control'' well
beyond the plain meaning of the statute.
The SNPRM proposes several new limitations on foreign
control, such as a requirement that an airline's stockholders
must retain the right to revoke a delegation of control to
foreign investors. These ``requirements'' are not part of the
actual proposed regulation, but are ``obiter-dicta'' discussed
in the preamble. Even the discussion of this and other
requirements is vague, and would leave the Department with
virtually unlimited discretion as to the exact limitation that
will be required when the Department is asked to approve a
specific proposal for foreign control.
To make matters worse, the SNPRM indicates that the DOT
will not use public procedures to decide upon most proposals
for foreign control. The exact limitations will be worked out
in private negotiations between DOT and the foreign investors.
If the SNPRM becomes final, it is certain that prospective
foreign investors will not want to run the risk that their
right to control might be revoked. They will propose
limitations on the process for revocation to ensure that it
will never be exercised. Since DOT strongly supports foreign
investment, it will have every incentive to accept limitations
that undermine the right to revoke.
Let's be honest with ourselves, in the real world, it is
not realistic to rely on shareholder action as a check on
foreign control. They don't do it even in domestic affairs.
Shareholders of major corporations do not ordinarily vote on
policy issues. A corporate law expert has advised me that
getting a shareholder vote to revoke a delegation of control to
foreign investors would be about as difficult as passing an
amendment to the U.S. Constitution!
Whatever the specifics of the power to revoke, it will be
meaningless in most cases. How likely is it that shareholders
will exercise a power to revoke when the consequences might be
the withdrawal of the foreign investor's financial support, or
expensive litigation over whether the power to revoke was
properly exercised?
I have been deeply concerned, as have many of my House
colleagues, that under the DOT's proposal, the foreign
interests that controlled an airline would also control safety,
security, and the CRAF program. The SNPRM attempts to meet our
concerns by claiming that under the proposal, foreign interests
would not be allowed to supervise the managers responsible for
safety, security or CRAF, or to control their budgets, and
compensation. This seems unrealistic. Does this mean that a
Vice President for Security would have unlimited budget
authority and unfettered authority to set his or her
compensation? In reality, when it comes to a specific case, a
foreign investor is likely to insist on conditions that do not
isolate it from all decisions affecting safety, security or
CRAF.
Late last year, 189 of my colleagues, including Chairman
Don Young, joined me to introduce H.R. 4542, which prohibits
the DOT, for 1 year, from issuing any final decision or final
rule on the NPRM that would change its interpretation of what
constitutes ``actual control'' of a U.S. airline.
I urge the Senate to preserve the language in the defense
supplemental appropriations that would prohibit the DOT from
implementing this rule for the rest of the fiscal year. We must
ensure that any changes in the law will come from Congress--not
by Administrative fiat.
If, in the unfortunate circumstance that the DOT proposal
is made final before Congress can act, I strongly believe that
the final rule will have a short life span. The new policy is
certain to be challenged in court. I cannot imagine a court
agreeing with the Department that it is consistent with the
``plain meaning'' of the requirement of ``actual control'' to
only require control of an airline's decisions on safety,
security and the CRAF program. Nor would a court accept the
DOT's argument that the requirement that the President of an
airline must be a U.S. citizen can be satisfied by a President
in name-only, with no authority over commercial decisions.
Thank you very much for this opportunity today to discuss
this very important issue.
Senator Burns. Thank you, sir.
Any questions of our distinguished members from the other
side?
[No response.]
Senator Burns. Thank you very much, gentlemen. We
appreciate that very much.
We have been joined by Senator Lott, who used to chair this
Subcommittee.
Senator Lott, do you have an opening statement, or----
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Not at this time, Mr. Chairman. I'd like to
hear what these witnesses have to say.
Senator Burns. That's fine.
Now we call to the table the Honorable Jeffrey Shane, Under
Secretary for Policy, United States Department of
Transportation, from right here in this 17 square miles of
logic-free environment.
Thank you very much. Secretary Shane, nice having you with
us today.
STATEMENT OF HON. JEFFREY N. SHANE, UNDER SECRETARY OF
TRANSPORTATION FOR POLICY, DEPARTMENT OF TRANSPORTATION
Mr. Shane. Thank you very much, Mr. Chairman, I'm delighted
to be here to represent the Department of Transportation--of
course, Secretary Mineta, who sends his regards to the panel.
I have a prepared statement, Mr. Chairman, which I'd like
to have incorporated in the record, and I'd like to sum it up,
if I may.
Senator Burns. It will be a part of the record. You may
summarize, if you so--if you choose.
Mr. Shane. Thanks.
Because we're in the middle of a rulemaking process, I
think every member of the panel knows, we've just issued a
supplemental notice of proposed rulemaking. I can't tell you
what final decisions are going to come out of the Department of
Transportation, and I literally don't know, which is why I
can't tell you, but, of course, we're all aware of the
importance of this initiative, and we recognize the Committee's
interest in it. And, for all of those reasons, we wanted to
share, to the extent possible, the Department's thinking in
proposing to refine the administrative policies that guide our
citizenship reviews.
In the initial notice that we published last November, we
proposed that under certain circumstances, the Department would
move away from more than 60 years of administrative
interpretation of the statute which allowed no semblance of
foreign control in determining whether U.S. citizens were in
control of U.S. airlines. That interpretation, which was never
required by the words of the statute, has had the effect of
relegating foreign investors to a largely passive role in any
U.S. airline unable to participate in the commercial
decisionmaking affecting the value of their own investment.
Despite occasional efforts to introduce some measure of
flexibility, that policy has remained essentially intact. The
net result of that policy has been to discourage foreign
citizens from investing even that which the statute allows. But
the Civil Aeronautics Board and the Department of
Transportation have always required--and what the statute now
says explicitly after its 2003 amendment is that U.S. airlines
must be under the actual control of U.S. citizens. What the
initial notice proposed to do was to explore whether more
foreign investment within the numerical limits always allowed
under the statute might be encouraged if, in applying the
actual control requirement, we adopted a less forbidding and
less categorical policy regarding the ability of foreign
investors to participate in the commercial decisionmaking of
U.S. airlines.
Let me emphasize that our proposal is not designed to
loosen the statutory caps or to encourage more investment than
the statute allows. It is designed not to encourage increased
investment. It is designed to encourage some investment.
I also want to emphasize that the only decisionmaking that
would be affected by the proposal is commercial decisionmaking.
As you have heard, ultimate responsibility for management
decisions relating to safety and security and U.S. airlines'
participation in Department of Defense programs including, of
course, the CRAF program, would be reserved exclusively to U.S.
citizens. We chose to issue a supplemental notice, because
we're now proposing changes to our original proposal in
response to comments, in response to concerns that have been
expressed by interested parties, including other Federal
agencies and, of course, by Members of Congress. We think these
changes will serve to clarify both our intent and the way the
proposed rule would work in practice if we finally adopt it.
We are interested in hearing people's reactions to the
changes over the course of the next 2 months. We think the
economic benefits at stake are substantial. Our proposal is
designed to enhance U.S. airline access to the global capital
marketplace, consistent with our statutory obligation to
encourage U.S. airlines in their ability to attract capital. We
think the proposal would have a long-term positive effect on
the industry by expanding the pull of investors, introducing
new competition among investors, providing U.S. airlines with
better investment terms, and enhancing strategic partnerships
between U.S. and foreign airlines. The changes could lower the
cost of capital for U.S. airlines and enhance asset values.
This proposal does not envision a one-way street for
investment. However, one of the proposal's most important
provisions is a reciprocity requirement designed to encourage
further liberalization of the market for airline capital, just
as we have liberalized the market for airline services. It will
offer U.S. citizens opportunities to invest abroad in foreign
airlines--under the proposal, only foreign investors who are
from countries that have Open Skies Agreements with the United
States--and that permit similar investment opportunities for
U.S. investors, and their airlines would be eligible for this
approach.
A proposal, therefore, would not only afford U.S. carriers
the opportunity to tap more global sources of capital, but U.S.
carriers would be able to enhance their international presence
by investing overseas in ways that they cannot do in most
places today. In other words, our proposal carries with it the
prospect of far more liberal treatment of airline investments
everywhere, resulting in more robust international alliances, a
healthier and more efficient global airlines industry, more
competition for the benefit of travelers and shippers
everywhere, and expanded job opportunities for airline
employees.
Please understand, nothing in the proposal that we have on
the street right now would allow the sale of U.S. airlines to
foreign interests. Under the proposal, U.S. citizens would
still have to own 75 percent of the voting stock of the
airline, would still make up two-thirds of the board of
directors, would still include the President and two-thirds of
the managing officers of the company, all as prescribed by
statute today. U.S. citizens would have to retain actual
control of the airline. Any delegation of commercial
decisionmaking authority to the foreign investor would have to
be revocable. Again, decisions relating to safety, security,
and national defense, and the carrier's organizational
documents, could never be delegated and would have to be
controlled exclusively by U.S. citizens.
I want to emphasize that we've proposed this interpretation
because we believe it is justified on its own merits due to the
potential benefits for the U.S. airline industry. At the same
time, the European Commission and its 25 Member States have
stated publicly that the results of this rulemaking will be a
factor in their decision whether to agree or not to a proposed
U.S.-EU Air Services Agreement.
That Agreement has the potential to fundamentally transform
the framework for transatlantic air services, dramatically
increasing the quality of competition in the market. It would
benefit U.S. airlines, consumers, and communities on both sides
of the Atlantic, transcending anything we have yet achieved
through our existing Open Skies accords.
If we do decide, therefore, to adopt a final rule along the
lines of our proposal, a transformational Open Skies Agreement
with Europe could be an important byproduct. Globalization of
the airline industry has already begun. It is time that U.S.
airlines are permitted to take advantage of the opportunities
waiting for them.
I thank you very much for the opportunity to share the
Department's transportation prospectus with you. And I, of
course, am more than happy to answer your questions.
[The prepared statement of Mr. Shane follows:]
Prepared Statement of Hon. Jeffrey N. Shane, Under Secretary of
Transportation for Policy, Department of Transportation
Thank you, Mr. Chairman, members of the Subcommittee. I am pleased
to appear before you today in response to your invitation to review the
status of DOT's rulemaking regarding ``actual control'' of U.S. air
carriers. As you know, it is unusual for DOT to appear at a hearing
concerning an ongoing rulemaking. Because we are still in the middle of
the rulemaking process, having issued a supplemental notice of proposed
rulemaking just last week, I cannot tell you what final decisions the
Department is going to make because I don't know. We are all aware of
the importance of this initiative, however, and we recognize the
Committee's interest in it. For those reasons, I wanted to share, to
the extent possible, the Department's thinking in proposing to refine
the administrative policies that guide our citizenship reviews. Because
the comment period for the SNPRM is open, I can only discuss general
themes and policies in the rulemaking. I cannot address substantive
issues or comments made to the Notice published last November or to the
Supplemental Notice. But I will say that we carefully reviewed the
comments we received, and considered them when drafting the
Supplemental Notice, as we will do with any comments we receive in the
next 2 months. Even though I must be relatively circumspect in my own
comments here today, I will do my best to be responsive to you within
those parameters.
With the publication of this Supplemental Notice, we are
encouraging a thorough and broad-based debate. We chose to issue a
Supplemental Notice because we have made substantive changes to our
original proposal in response to comments and concerns expressed by
interested parties, including other Federal agencies and Members of
Congress. We believe these changes will serve to clarify both our
intent and the way the proposed rule would work in practice if we
finally adopt it. We are interested in hearing people's reactions to
those changes.
In the initial Notice published last November, we proposed that,
under certain circumstances, DOT would move away from more than sixty
years of administrative interpretation of the statute, allowing ``no
semblance of foreign control'' in determining whether U.S. citizens
were in control of U.S. airlines. That interpretation--not required by
the words of the statute--has had the effect of relegating foreign
investors to a largely passive role in any U.S. airline, unable to
participate in the commercial decisionmaking affecting the value of
their own investment. Despite occasional efforts to introduce some
measure of flexibility, the policy has remained essentially intact.
What the Civil Aeronautics Board and DOT have always required--and
what the statute now says explicitly after its 2003 amendment--is that
U.S. airlines must be under the actual control of U.S. citizens. What
the initial Notice proposed to do was to explore whether more foreign
investment (within the numerical limits always allowed under the
statute) could be encouraged if we, in applying the ``actual control''
requirement, adopted a less forbidding, less categorical policy
regarding the ability of foreign investors to participate in the
commercial decisionmaking of U.S. airlines.
I want to emphasize that the only decisionmaking that would be
affected by the proposal is commercial decision-making. Ultimate
responsibility for management decisions relating to organizational
documents, safety, security, and U.S. airlines' participation in
Department of Defense programs--including CRAF--would be reserved to
the U.S. citizen investors only.
The economic benefits at stake are substantial. Our proposal is
primarily designed to enhance U.S. airline access to the global capital
marketplace. Our proposal would have positive and long-term effects on
the industry by expanding the pool of qualified investors, introducing
new competition among investors to provide U.S. airlines with better
terms, and enhancing strategic partnerships between U.S. and foreign
airlines. These changes could lower the cost of capital for U.S.
airlines, which would be enormously beneficial for the U.S. industry as
it restructures to meet the demands of the global marketplace.
Additional investment opportunities in the airline industry can and
will strengthen U.S. airlines.
This proposal does not envision a one-way street for investment,
however. One of the proposal's most important provisions is a
reciprocity equirement designed to encourage further liberalization of
aviation markets and offer U.S. citizens opportunities to invest abroad
in foreign airlines. Under the proposal, only foreign investors who are
from countries that have Open Skies Agreements with the United States
and that permit similar investment opportunities for U.S. investors in
their airlines would be eligible for this approach. I call this one of
the proposal's most important provisions because it has the potential
to encourage a more liberal approach to capital flows in aviation on a
global basis. It would not only afford U.S. carriers the opportunity to
tap more global sources of capital; but also under the reciprocity
requirement, U.S. carriers, either alone or as part of a larger group
of U.S. investors, would be able to enhance their international
presence by investing in foreign carriers.
Thus, our proposal carries with it the prospect of far more liberal
treatment of airline investments everywhere, resulting in more robust
international alliances, a healthier and more efficient global airline
industry, more competition for the benefit of travelers and shippers
everywhere, and expanded job opportunities for airline employees.
At a February hearing conducted by the House Subcommittee on
Aviation, opponents of the rulemaking testified that the proposal will
relegate U.S. airlines to mere ``feeder'' status, and that the
lucrative and prestigious long-haul international flights will migrate
to the foreign investor airlines. In contrast to that fearful
prediction, I have seen an investment banking report from Europe
alleging that, by leaving untouched the statutory 75-percent minimum
U.S. voting stock ownership requirement, our proposal is intentionally
designed to ensure that U.S. carriers remain dominant players in the
global airline industry.
I don't know whether U.S. carriers will dominate global aviation in
the future, but we do believe that our proposal would, in fact,
strengthen the U.S. airline industry without undermining any of our
important national interests.
What we have done in the Supplemental Notice is to build upon and
clarify the ideas we proposed in the initial Notice of Proposed
Rulemaking. In light of the comments and concerns expressed about the
NPRM, we consulted with other Executive agencies, particularly the
Departments of Homeland Security and Defense, as well as our own
Federal Aviation Administration, to refine our proposal to better
ensure not only that U.S. airlines remain under the actual control of
U.S. citizens, but also that they remain safe, secure, and available to
meet the Nation's defense needs. The areas that would continue to be
scrutinized for exclusive, non-delegable U.S. citizen control--safety,
security, and national defense--would require DOT to strictly review
the airline's structure, with particular focus on the carrier's
fundamental organizational documents, which must also remain under
exclusive U.S. citizen control.
In the Supplemental Notice, we have refined our previous proposal
in part to make it clearer to airlines that might seek to benefit from
our revised approach. Our proposal sets out two prerequisites to a
foreign investor's eligibility to take advantage of this new
interpretation: Does the foreign investor's home country have an Open
Skies Agreement with the United States? If it does, then: Does the
foreign investor's home country have a similarly open investment regime
in its airlines for U.S. investors? Only if these two questions were
answered in the affirmative would the Department commence a review of
the carrier under this new interpretation. If the answers are ``Yes,''
then the questions that would be examined are:
Do the corporate documents--the charter, the by-laws, the
basic agreements, etc.--reflect actual control by U.S. citizens
of those documents?
Is the foreign investor delegated any commercial decision-
making authority?
Is this authority ultimately revocable by the U.S. citizen
majority owners?
To ensure full control by U.S. citizens of the carrier's activities
in three key areas:
Are U.S. citizens clearly and completely in actual control
of all decisions having to do with the carrier's policies and
implementation with respect to safety?
Are U.S. citizens clearly and completely in actual control
of all decisions and activities having to do with the carrier's
policies and implementation with respect to aviation security?
Are U.S. citizens clearly and completely in actual control
of all decisions having to do with Department of Defense
programs?
And remember, the burden of proving all of these requirements would
remain with the applicant. If the applicant could not meet that burden,
it could not be licensed as a U.S. air carrier. Similarly, an already
licensed carrier that received a significant offshore investment would
be subjected to what we call a ``continuing fitness review'' including
the same requirements and the same burden of proof. Failure to meet
that burden would call into question the carrier's continuing
eligibility to hold an air carrier certificate.
While U.S. citizens will continue to exercise ``actual control'' of
every U.S. airline, the only areas that could not be delegated to
foreign investors would be these four--safety, security, national
defense, and the carrier's organizational documentation. Pursuant to
arrangements with the U.S. citizen majority owners, foreign investors
would be permitted to participate in the airline's commercial decision-
making in a more meaningful way.
I want to emphasize several points. First, the physical safety and
security of every U.S. airline would be under the close supervision and
control of the FAA, TSA, and other relevant authorities, as they have
always been. CRAF carriers would also be subject to inspection by the
military exactly as they are today. Second, the Department has a long
history of closely examining carriers' structure and operations to
ensure that actual control remains in the hands of U.S. citizens; this
function should actually be made easier by a narrower focus on the
areas of corporate documents, safety, security, and defense activities
for investments from citizens of qualified countries. Third, we think
carriers that receive foreign investments as the result of the new
rule, if we adopt it, are likely to be more careful than ever to ensure
that all CRAF-related functions remain securely in U.S. hands, to avoid
any question.
Under DOT's proposal, U.S. citizens would have to continue to be in
``actual control'' of a U.S. airline for it to be eligible to retain
its certificate. As the statute dictates--and we are in no way
proposing to alter or change the statute--U. S. citizens would have to
own 75 percent of the voting stock of the airline, would make up two-
thirds of the Board of Directors, and would include the President and
two-thirds of the managing officers of the company. U.S. citizens would
ultimately control the decisionmaking of the airline; any delegation of
decision-making authority to the foreign investor would have to be
revocable and could not be in the spheres of safety, security, national
defense, or organizational documents.
In addition, we are not proposing any change in our criteria for
ascertaining ``control'' for airlines not meeting the conditions for
using the proposed interpretation and for those areas that we examine
for airlines that do meet the conditions. The Advance Notice of
Proposed Rulemaking published seven non-exclusive criteria that DOT's
Inspector General cited in his report as being generally used by the
Department. We intend to continue to use those criteria.
The potential benefits of DOT's proposal go well beyond enhancing
the availability of capital to U.S. airlines. The international
alliances that currently exist among U.S. and foreign airlines
represent a surrogate for the kind of globalization that occurs around
the world in other networked industries through conventional mergers
and acquisitions. New opportunities for liberalized air services
agreements bring competition home in the form of competitive prices to
consumers and shippers.
I want to emphasize that we have proposed this interpretation
because we believe it is justified on its own merits due to the
potential benefits for the U.S. airline industry. However, the European
Commission and its 25 Member States have stated publicly that the
results of this rulemaking will be a factor in their decision whether
to agree or not to a proposed first-phase U.S.-EU Air Services
Agreement. Let me briefly address this Agreement, which is currently
pending before the EU Transport Ministers.
The Agreement has the potential to fundamentally transform the
framework for transatlantic air services, dramatically increasing the
quality of competition in the market. It will benefit consumers and
communities on both sides of the Atlantic, transcending anything we
have yet achieved through our existing Open Skies accords. The
Agreement will also enhance the quality of transatlantic cooperation in
the areas of safety and security, competition law and policy, and
environmental and consumer protection. Moreover, the Agreement
represents only a first stage of opening markets and enhancing
cooperation.
Completion of the U.S.-EU Agreement would not only enhance airline
competition across the Atlantic, but would also set a new standard for
liberalization around the world. This Agreement will enable U.S. and
European airlines--singly and in combination--to capitalize on the
importance of a newly unified transatlantic market and develop a truly
global presence. Success here can be expected to encourage emulation in
other regions, accelerating the attainment of more open markets for
international air services.
The globalization of the aviation industry has already begun; it's
time that U.S. airlines are permitted to take advantage of the
opportunities waiting for them.
Thank you for the opportunity to share the Department of
Transportation's perspectives with you. I would be pleased to respond
to your questions.
Senator Burns. Thank you very much, Mr. Shane.
I want to ask you one question, then I'm going to switch to
the Chairman of the full Committee. He has a statement to make,
here, in about 20 minutes, and has to get to the floor, and
then I will sacrifice my time and then go to Senator Dorgan.
I just have one question that probably could start this
debate. What would further liberalization and foreign capital
mean to rural states like Montana? Do you see any change that
would anticipate that foreign investors will care more about
routes in rural America, opposing those thoughts of holding
onto the high traffic airlines like New York, Chicago, and Los
Angeles? What do you think would happen to even our hub system
that is in place now that has been very beneficial, to be
honest with you, to areas like my state and remote areas with
low-density population?
Mr. Shane. We think the prospects for rural air services
are actually enhanced by the possibility of bringing more
capital to the airline industry. Recall the only incentives
that would be permissible in encouraging any foreign investment
would be purely commercial incentives. That is, the incentive
to make money in the airline business. To the extent that an
investment is attractive to a foreign citizen, it will be
because there is the possibility of earning a return on that
investment. It is the same motivation, Mr. Chairman, that would
motivate a U.S. citizen. So, the fact of the passport that the
investor holds is not going to have any impact on the plans
that the investor has for the airline.
Senator Burns. We'll--I was going to move to the Chairman
of the full Committee. You have no questions, then?
The Chairman. No, thank you.
Senator Burns. Senator Dorgan?
Senator Dorgan. Mr. Chairman, I come from a really small
town, so I'm having trouble understanding all of this.
It appears to me that you're suggesting, with your rule,
that a foreign entity can come in and pay a substantial amount
for a big piece of the action, but, legally, they would still
be defined as having a smaller piece of the action.
Mr. Shane. No----
Senator Dorgan. Is that what you're saying?
Mr. Shane.--Senator, they would be limited by the statute
of how much they could invest. And that----
Senator Dorgan. I understand that.
Mr. Shane.--that's 25 percent, maximum, in terms of the
voting shares. If they wanted to invest money and not get any
voting power for it, we've allowed, for Open Skies investors,
up to 49 percent, but that has no impact on governance. So,
we're really only talking about the 25 percent which is still
in place.
Senator Dorgan. So, you have decided, down at the agency,
this is something within your purview, it is not something that
is required to be done by the United States Congress?
Mr. Shane. Well, I want to emphasize, we haven't decided
anything. We have made a proposal. We believe the proposal is
within the purview of the Executive Branch. We're
reinterpreting an interpretation, if you will, that was an
administrative interpretation in the first instance. The
statute didn't say anything about what the words ``actual
control'' mean, whether it be possible for foreign citizens to
participate in commercial decisionmaking. That was a CAB
decision that said, ``No. No semblance of influence, no shadow
of influence, no semblance of foreign control.'' Those are
administrative constructs over the statute. The statute has to
be interpreted, we think, in keeping with other statutory
obligations that we have within the Federal aviation laws. And
one of those statutory obligations is to facilitate U.S.
airlines in their efforts to attract capital, facilitate U.S.
airlines in their efforts to be profitable, to facilitate new
entry into the airline industry, to foster a competitive
airline industry. The attraction of capital into the airline
industry is part and parcel, we think, of the large corpus of
obligations that the Congress has vested in the Department of
Transportation.
Senator Dorgan. Yes, the need to attract capital doesn't in
any way change the underlying law that says ``actual control.''
But let me ask another question. What if a foreign entity,
perhaps a foreign government that owned its own airline--there
are some of those, is that correct? Would they be prevented
from being involved in this play?
Mr. Shane. Yes. The reciprocal obligation that we have
insisted upon as part of the proposal would say that only if
U.S. citizens can invest in airlines of that country would we
be receptive to investments from investors in that country. And
if it's a state-owned airline, it's very unlikely that we'd
have that ability.
Senator Dorgan. But they would not be prohibited. Well, let
me----
Mr. Shane. They would----
Senator Dorgan.--let me ask it----
Mr. Shane.--prohibited.
Senator Dorgan.--a different way.
Assume a foreign carrier decides, ``We want to make a
substantial or a sizable investment in a domestic carrier here
in this country, and we've decided we want to change the type
of equipment, and we would like to essentially compete in
several large city pairs.'' That carrier happens to fly in
small communities in Alaska, North Dakota, and Montana, and has
service with DC-9s and some RJs and so on. But the foreign
carrier decides, ``I want to change the nature of this company.
I'm going to invest in it, and I'm going to run it. I'm going
to decide routes and fleets. And I've decided I'm not
interested in rural service anymore.'' What remedy do we have?
Mr. Shane. Well, you would have no remedy, any more than
you would have if U.S. investors decided to do all of that.
Again, U.S. investors and U.S. owners are in charge of this
airline. Any kind of delegation of authority that would give a
foreign investor some say over fleet selection or route
selection would have to be specifically with the agreement of
the majority owners, the people that own 75 percent of the
voting shares of the company. Those are all U.S. citizens,
under the law.
Senator Dorgan. Now I'm very confused, because my
understanding from your testimony and from what I'm told this
proposal suggests is that the foreign interest that would be
running these companies, if they made a significant purchase in
a domestic carrier, would decide schedules and decide the kind
of airplanes they would use and so on. That would be the kind
of management control they would have to run their airline.
Mr. Shane. We're talking about the full range of logical
possibilities. We don't know. It would be up to the U.S. owners
and managers of the company to decide what they felt like
agreeing with foreign investors would be OK for foreign
investors to decide. The U.S. citizens remain in control,
Senator.
Senator Dorgan. So, the foreign investors come in, and they
invest sufficient money in a domestic carrier so they can run
the carrier, presumably, without more than 25 percent control,
and they're not going to determine what routes they serve and
what kind of airplanes they use?
Mr. Shane. They would only be able to determine any of
those issues with the express agreement of the majority
shareholders, which----
Senator Dorgan. You know something? I don't think I'm
getting a straight answer from you, Mr. Shane. I don't think
that's at all in concert with what your proposal is. Now maybe
I am wrong about this, but from what I understand this proposal
is that it's completely the opposite of what you just
described.
Mr. Shane. It's exactly what I've described. Everybody is
in agreement that U.S. citizens must remain in actual control
of U.S. airlines. There is no way that anybody from the
Administration can tell you that U.S. citizens would remain in
actual control of U.S. airlines unless they are in a position
to decide whether or not foreigners will have----
Senator Dorgan. Then why do you need a proposal?
Mr. Shane. Because today under the old 66-year-old policy,
developed by the CAB in 1940 as we were preparing for war,
citizens of foreign countries can have no say whatsoever in
anything having to do with the commercial management of a U.S.
airline.
Senator Dorgan. You want to give them a say. Is that
correct?
Mr. Shane. In order for them to----
Senator Dorgan. With respect to scheduling?
Mr. Shane.--at least have some incentive to invest capital
or to compete for investments in U.S. airlines for the health
of the U.S. airline industry, yes, Senator.
Senator Dorgan. Mr. Chairman, I don't mean to belabor this
at great length, but I think the answer, based on what I know
and have looked at, the answer is that if a foreign carrier
comes in, under your proposal, and makes a significant
investment, and decides they're going to try to run this
company, which you would allow, they're going to decide what
kind of company they're going to run, what their schedule is
going to be, what kind of fleet they're going to have. That's
my understanding.
Mr. Shane. It's wrong. Senator, they----
Senator Dorgan. Well, I'm----
Mr. Shane.--can only invest 25 percent.
Senator Dorgan. I'm sorry, I can----
Mr. Shane. They can have no more than 25 percent of the
voting shares.
Senator Dorgan. I understand the investment issue. That
wasn't my question.
Mr. Shane. They cannot run the company with 25 percent,
Senator. That is the clearest----
Senator Dorgan. Well, what's your----
Mr. Shane.--possible statement I can make.
Senator Dorgan. What are you then offering a foreign
investor? You're offering----
Mr. Shane. The ability to agree with the majority
shareholders that they might want to have something to say
about the management of the company.
Senator Dorgan. And what is that they're going to have to
say?
Mr. Shane. Whatever the U.S. citizens who run the company
and own the company say that should be permissible.
Senator Dorgan. Your proposal offers them the ability to
say something. What are you going to tell us they're going to
say to the domestic company that--which they have now just
purchased, in part, and have decided to run? What are they
going to have to say in that purchase?
Mr. Shane. This would be an arm's-length commercial
decision in the best interest of the shareholders of the
company. The directors and officers of the share--of the
company have a fiduciary responsibility to shareholders. This
is purely commercial. Everybody is going to have the same
incentive, and that is to make money with this company.
Senator Dorgan. Mr. Shane, I don't mean to browbeat you,
but it appears to me this is an illusion of some type. And,
frankly, I'm very interested in aggressive, robust, good
airline service across this country, and I'm very worried about
this proposal.
I appreciate your coming, but I don't think I got a
straight answer, Mr. Shane.
Senator Burns. Senator Lautenberg?
Senator Lautenberg. Mr. Chairman, Senator Dorgan is not
wrong. The fact of the matter is that it's truly escaping
reality when we divide up the chart as we see it here, because,
though there will be an American ostensibly in charge of
security, safety, et cetera, those four categories--but is that
American executive going to say to the CEO of this company,
who's in Paris, that, ``No, no, no, you don't get it, CEO. The
fact is that I'm sticking up for the contract as it exists, and
we're going to do these things.'' That doesn't sound like a
very efficient management structure to me. And we have
something called the Essential Air Service that both our
colleagues have talked about, and a lot of American airlines
aren't crazy about that Essential Air Service. The Federal
Government now pays a fee for that. Will we continue to do
that, I don't think so. I mean, business is business, is what
we're saying here. And if there is an agreement between a
greedy American shareholder, Senator Dorgan, if--if there's a
greedy American shareholder--and there have been a couple who
ventured into the airlines business and stripped them of their
assets and didn't continue to find money for operations. If
this greedy person got an agreement with the 25 percent foreign
shareholder and said, ``Hey, you know what? Suppose we bought a
few more Airbuses or Embraers or whatever they are--airplanes
made outside the country,'' because that's a category that is
reserved for the ownership and for the management of the
company, and 25-percent block is a pretty significant block,
even though it's the voting shares. And the thing that,
frankly, I think is being missed here is, the way technology is
developed and transportation is designed is that our aviation
system is like an extension of an American highway, except it's
in the skies and, as a consequence, gets us an ability to
extend our military power when we need it. We wouldn't let a
foreign government decide which way our highways go, but, in
this position, with the investment they have, I think we'd be
in a precarious position to really exert the kind of interest
that we want upon the foreign investor, the 25 percent
investor. We've had this battle here about who does the
screening. We know that it was done very badly by private
industry, and, as a consequence, necessitated a great change
into the DHS structure. I don't think those things are
particularly clear.
Once again, I'd look to the history of the airline
industry. I mentioned before that we had put some $20 billion
in the last 5 years to keep the industry from--keep major
airlines from going bankrupt altogether. And there have been a
couple of--I'll call them robber barons who went in there and
took the assets in Texas in one place and other places around
the country, and stripped these airlines of their opportunity
to continue. And what happens if it's not an absolutely free
market and the foreign investor will have substantial voice?
They can buy all of the nonvoting shares that they'd like to
have. Is that correct?
Mr. Shane. Citizens of--Open Skies partners are allowed to
get up to 49 percent of the total equity of the company,
including nonvoting.
Senator Lautenberg. Including nonvoting.
Mr. Shane. But not more than 49.
Senator Lautenberg. So, to me, it seems like it's an asset
that we have to preserve our--all of our decisionmaking in. And
the airline business now, competitive as it is, we have to
fight like the devil to get entry into some of the better
airports, or the busier airports in the world. It's getting
better, but no one is being deprived of opportunities. So,
maybe we ought to discuss it in terms of routes instead of
ownership, instead of equity, and continue American ownership
of these essential parts of our society.
Thank you.
Senator Burns. Still no questions from this side over here?
What are you guys just taking the afternoon off over here or
something?
[Laughter.]
The Chairman. Well, I'm waiting for the panel. Mr.
Chairman----
Senator Burns. Oh, you're waiting for the panel. Well, I'll
get to it in just--I've got a couple--yes, I'm sorry.
The Chairman. I have a series of questions I'm going to ask
you to allow me to submit to the witnesses, because I have to
be to the floor, but I--we do want to listen to the panel. That
was the idea.
Senator Burns. OK, I'll--I just got a--along with the
questions that come from Senator Lautenberg and Senator Dorgan,
you state in this supplemental rule that delegation of
decisions can be revoked by company shareholders. When you
looked into this, how often did--in the real world, did
shareholders revoke or change such decisions, any actions that
they may have taken? And did you base this on previous models,
or have you discussed this with Wall Street?
Mr. Shane. We've discussed it informally, I think, over
many years with----
Senator Burns. OK.
Mr. Shane.--with Wall Street investment bankers, but this
is predicated mostly on just administrative notice of what
happens within corporations. It is certainly possible for
majority shareholders to terminate relationships with minority
shareholders where minority shareholders are exercising more
than the authority that their shares would normally accord
them. So, I don't think there is any controversy about the
ability of the majority to revoke, but we don't have to really
leave any of that to chance. The Department would be reviewing
the citizenship of every airline which had substantial foreign
investment, specifically with an eye to determining whether or
not it complied with the tests that are laid out in the
proposal, if, indeed, we adopt this proposal as a final rule.
Senator Burns. Tell me, does it concern you about the CRAF
whenever you started to make--to write this rule? Does that
concern you about our arrangement with our commercial carriers?
Mr. Shane. Absolutely. The first place we went when this
proposal was still a gleam in our eye was to the Department of
Defense to talk to them about it before it was a live proposal.
I spent, Mr. Chairman, if I can just be personal for a moment,
7 years, while in the private sector, as Chairman of the
Military Airlift Committee of the National Defense
Transportation Association. I have worked with the CRAF
probably for 15 years, and understand its equities completely.
They're our heroes in the Air Mobility Command and in
USTRANSCOM, and they're doing a marvelous job for America every
day of the week. The last thing in the world Secretary Mineta
would want, and the last thing in the world that I would want,
or anybody else at the Department, would to compromise the CRAF
program in any way, shape, or form. So, we--that is the number
one priority for us, making sure that we enhance and not
detract from the CRAF program's prospects.
Senator Burns. Well, we thank you for--does anyone else
have any questions for the witness?
Senator Pryor. Mr. Chairman, I do. I'm sorry I was late
joining the----
Senator Burns. Senator----
Senator Pryor.--hearing.
Senator Burns.--good to see you.
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you. I'll try to make it very brief.
Mr. Shane, if I may, I know that three of the things you
look at and you consider as part of this process are the
economics, the safety, and the security aspects of an airline.
Do you, or does your agency, have a clear delineation about
where one of those starts and the other one ends? Because, to
me, it seems that they're intertwined. When you talk about
economics, safety, and security, it seems that some of those
are inextricably linked, and they overlap. But I'd like to hear
your thoughts on that.
Mr. Shane. Well, let's just take safety as an example. We
absolutely think there has got to be a bright line between the
safety management of an airline and anything else that goes on
in the airline. The pilot in the cockpit is the safety officer
on that aircraft, along with the rest of the crew. And that
captain has an absolute obligation to provide safe service.
When a little light goes on in the cockpit suggesting that
there's a mechanical problem somewhere, the captain does not
call the Chief Financial Officer of the company, he doesn't
call the marketing department. He doesn't call anybody. He
makes a decision based on safety. And if the FAA, in its
regulation of safety, thought that there was any compromising
of that independence, that airline would probably be grounded.
So, there is a long history of drawing bright lines between
safety, on the one hand, and the commercial operations of an
airline, on the other.
Senator Pryor. When you talk about the commercial
operations, you mention the pilot, but what about the general
maintenance? There are a lot of economic aspects to the
maintenance of these airplanes. And, as you well know, that can
be very expensive. So, again, maybe there is a bright line, but
I'm not so sure. I'd like to know, for the Committee's
understanding, I'd like to know where those lines are drawn so
that maybe we could get comfortable with this; whereas, some of
my colleagues may not be right now. Is that fair enough? Can
you provide that to the Committee?
Mr. Shane. Yes, Senator, thank you.
Senator Pryor. Another question I have is in regards to the
ability to contract. In other words, if a foreign investor
group comes in, is there anything in your proposal, or what you
would like to see happen--is there anything that might prevent
the airline from entering into a contract that might give them
various decisionmaking authority in various areas, maybe more
than the 25 percent stake they may have, but where, in effect,
they may actually have actual control of the airline? Is there
anything that would prevent entering into such a contract?
Mr. Shane. Well, the Department would insist that the
majority shareholders and the majority of the board remain in
actual control of the airline. U.S. citizens must be in actual
control of the airline at all times. If there is to be any
delegation to the foreign investors or foreign citizens of any
aspect of the commercial operations, it has got to be pursuant
to an agreement which gives them that ability, but that
agreement is still subject, at the end of the day, to the
ultimate decisionmaking of the majority shareholders, the U.S.
citizens, who, if they don't like the outcome of that activity,
if they don't think it's delivering value to the airline or to
its shareholders, are in a position to terminate it. That's
what the Department's review would ascertain. That's the only
way we can sit here and say with a straight face that U.S.
citizens remain in actual control, notwithstanding the fact
that there are foreign citizens exercising some influence over
some commercial aspects of the company.
Senator Pryor. Well, the reason I ask that is because I can
see a circumstance in which a U.S. airline is in distress,
financial distress, and some foreign investment group comes in
and says, ``We'll buy up to 25 percent,'' and basically bail
out the airline, get you back on financial footing. They may
have, in my view, much more influence with that airline,
because, in effect, they save the airline, more so than what
the 25 percent stake may be. Twenty-five percent is a big stake
in any company, but they may have more influence than that, and
the Board may defer to them in ways that they wouldn't
otherwise. I have that question. Would you comment?
Mr. Shane. Well, I want to be clear. That is what we
contemplate. If the board--whether it was a bailout situation
or simply an arm's-length relationship with new investors, if
the board--if the majority of the board felt that having the
investor play a more substantial, meaningful role in the
commercial operation of the airline, that that would be in the
interest of shareholders, even beyond the 25 percent interest
that they own, they would be permitted to do that. That would
be the change that we are proposing. Today, under--in the
present policy, there is no possibility of attracting that
investment, because there is no possibility of giving any
foreign investor anything to say--any way of protecting his or
her investment.
Senator Pryor. Mr. Chairman, I'm out of time. Thank you.
Senator Burns. Thank you.
And thank you, Mr. Secretary. I appreciate your appearance
here today. And I'm sure there'll be further questions on this.
And if you could respond to the Committee and the individual
Senator, I'd certainly appreciate that.
Mr. Shane. We will, Mr. Chairman. Thank you very much.
Senator Burns. Thank you very much.
Now our second panel today, made up of Mr. Frederick Smith,
Chairman, FedEx Corporation, of Memphis, Tennessee; Mr. Jeffrey
Smisek, President, Continental Airlines, Houston, Texas; Mr.
Michael Whitaker, Senior Vice President--Alliances,
International and Regulatory Affairs, for United Airlines; and
Captain Duane Woerth, President, Air Line Pilots Association,
from here in Washington, D.C.
Gentlemen, we welcome you to the Committee today and look
forward to your testimony.
Captain, good to see you again.
We'll start off, today, with this panel, with Mr. Frederick
Smith, FedEx Corporation, out of Memphis.
So, Mr. Smith, thank you very much for coming today.
STATEMENT OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CEO,
FedEx CORPORATION
Mr. Smith. Thank you, Mr. Chairman. On behalf of 260,000-
plus folks that make their living with FedEx, we're pleased to
be represented at this hearing.
FedEx Express, our largest operating company, is the
largest transporter of goods by air in the world. It operates
the largest fleet of wide-body airplanes in the world, the
largest fleet of cargo wide-body airplanes of any fleet in the
world. It provides over half of the DOD Civil Reserve Air Fleet
cargo airlift. And, in fact, during the Desert Storm/Desert
Shield operations, moved over 30 percent of all the cargo that
was moved into the theater in support of U.S. operations. We
operate throughout the world, with extensive networks in
Europe, across the Atlantic, into Latin America, across the
Pacific, intra-Pacific, through our hub in Manila, the
Philippines, and between Asia and Europe. We are very familiar
with the history of the aviation bilateral system that
Congressman Oberstar did such a good job of explaining. As he
noted, the United States tried to get a multilateral regime
and--over the objections of the British and others. And, in
that last analysis, a bilateral regime was adopted. This has
resulted in some 10,000 separate aviation bilateral treaties.
And, over the years, this bilateral system has been an
effective tool for carriers and governments who want to protect
vested interest to restrain competition and progress in the
aviation markets. We, at FedEx, are the product of deregulation
and have worked hard to achieve Open Skies Agreements around
the world. And there has been a great deal of progress. We are
particularly interested in an Open Sky Agreement such as the EU
and the U.S. have tentatively agreed upon, which would allow us
to significantly expand our operations within the EU, and from
the EU to Asia.
The NPRM that the Department of Transportation has
proposed, listening to the conversation today, has been stood
on its head. In actual fact, the chart that Senator Lautenberg
put up there, with the blue and the red circles are not the
things that the carrier--the minority investor, the foreign
investor, can control; in fact, they are the things that they
cannot participate in. The facts of the matter are that 75
percent of the U.S. air carrier must be owned by American
interests and under the actual control. And that means
schedules and so forth.
The protection that's afforded by this NPRM was a direct
descendant of many of the investments made particularly by
European carriers which ended up very badly for those carriers.
You will hear from Continental Airlines today about their
opposition to this NPRM. In fact, Scandinavian Airlines System
made a significant investment in Continental in 1988 and 1990,
I think, and lost that investment when it went bankrupt. KLM
made a substantial investment in Northwest. You will hear from
Captain Woerth about that. It was not the investment in
Northwest by KLM that allowed them to coordinate their
schedules and to allow KLM to do flying which should have been
done by American interests. It was the antitrust immunity in
the alliance that was provided by the Department of
Transportation under the current bilateral system. And in
Memphis, for instance, the flight was--KLM flies our flight to
Amsterdam off the Northwest complex there as a result of that
collaboration, which, in any other industry, would be illegal.
So, we feel that this NPRM, which codifies what foreign
interests can and can't do, and gives them some protection, as
opposed to the 1940 regulations that Secretary Shane mentioned,
is a very good thing, and, if it leads to Open Skies with
Europe, that's good for American aviation interests, it's good
for American employees, it's certainly good for FedEx.
And, finally, Mr. Chairman, I would note to you that the
term ``actual control'' really comes from our industry, when
foreign interests bought into one of our competitors and we and
United Parcel Service vehemently objected to these foreign
interests exerting what we felt was de facto control, even
though there was a de jure majority American shareholder that
owned 75 percent. So, there's a long history to this bilateral
system. There's a long history to this negotiation. And we
would urge the approval of the Congress of this NPRM and the
negotiation of a new Open Skies Agreement between the United
States and the EU.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of Frederick W. Smith, Chairman, President, and CEO,
FedEx Corporation
Chairman Stevens, Ranking Member Rockefeller and members of this
Subcommittee, I appreciate the opportunity to testify today on this
important matter. Aviation liberalization has been critical to our
company, FedEx, since it was founded in 1973. Opening up the air
transport market has allowed U.S. air carriers to innovate and develop
new products such as our overnight express service. The DOT's proposed
rule will move U.S. aviation policy in a positive direction, for
shippers, passengers, and our national economy.
Today, I would like to briefly address the merits of the DOT's
proposed rule. Then, I would like to expound on the benefits to all
Americans of trade liberalization in general, and aviation
liberalization in particular.
I. Department of Transportation's Proposed Rule
The DOT has crafted a Rule with at least four salient and
attractive benefits. First, the DOT's proposal is straightforward. It
would allow foreign investors to take part in certain commercial
management tasks at a U.S. airline and thereby protect their
investment, without fear that DOT will decide that they are in ``actual
control'' of that airline. Since the existing statute limits foreigners
to a minority equity position in a U.S. airline, overall ``actual
control'' will at all times remain in the hands of U.S. citizens.
Second, the DOT's proposal is a modest one; it does not change
current law. Instead, DOT is encouraging foreign investment by adding
more certainty to what ``actual control'' means. This interpretation is
the normal exercise of discretion that administrative agencies such as
the DOT have. The NPRM provides for areas in which foreign
participation will be allowed--the commercial arena--and reserves
others for U.S. citizens--matters of safety and security. By
bifurcating the management responsibilities--a technique used in other
security-sensitive businesses--the proposal would work well for U.S.
carriers, U.S. airline employees and management, as well as the foreign
investment that it seeks to encourage, without harming U.S.
governmental interests.
Third, the DOT's proposal encourages foreign direct investment in
U.S. airlines. Direct investment benefits our economy in several ways.
By increasing the number of bidders for U.S. businesses, foreign
investment increases the prices the U.S. owners can hope to realize.
New investors often introduce efficiencies or new technologies. A
foreign investor can enhance competition, leading to better service at
lower prices. Finally, since a foreign investor will invest only if it
thinks it can make a profit, the investment should make jobs more
secure and increase tax revenues.
Finally, adoption of the Rule protects U.S. companies by assuring
``equal opportunities'' between trading partners. Only those investors
from like-minded countries can claim its benefits. By requiring
reciprocal investment opportunities, it will assure that U.S. investors
will be able to participate in other countries' air markets. This is
good news for our airlines that want to spread their business models
beyond our domestic market. Further, the rule offers a new incentive
for countries to enter into Open Skies agreements--supporting what is,
without a doubt, the most successful policy initiative of the DOT in
the last quarter century. For airlines like FedEx, which need the
foreign access provided by Open Skies to participate in new markets,
this is the best news. How these incentives work are laid out in our
DOT comments, which I ask be incorporated into the record as part of my
written testimony.
II. Benefits of Trade and Aviation Market Liberalization
While the proposed DOT rule is clearly beneficial to the United
State, I believe the central question to this debate is more
fundamental. Does removing trade barriers and liberalizing aviation
markets benefit the United States? The short answer to this question is
``yes.'' Trade liberalization is beneficial, necessary and rational -
America should be enhancing opportunities for foreign investment and
foreign commercial participation in a critical infrastructure industry
such as aviation. Several important points must be made in support of
aviation liberalization.
International air transportation is now a global industry, not
merely a bilateral one. Connecting the U.S. to foreign points is an
important function, but as services expand, carriers can make such
connections more efficient and effective if they can develop networks
that include third country market opportunities. FedEx is among the
best at building networks--our international hub and spoke air network
is without peer--but we could not have accomplished this without the
system of aviation agreements spawned by the Open Skies policy of the
DOT. Today, the DOT is trying to move beyond these bilateral agreements
to multilateral ones, which can create even more efficient networking
opportunities.
The multilateral agreement with the most immediate possibility and
enormous potential impact is the U.S.-EU agreement. Under the
provisions of this new agreement, FedEx would be able to continue
building its network with the completion of a system of intra-European
Fifth Freedom rights--the rights to operate in international markets
beyond our shores--and we very much support that proposed agreement.
With this proposed agreement, market barriers such as the antiquated
Bermuda II agreement would end. Our services would be made more
efficient and our network stronger, which would benefit both our U.S.
and our global customers. We would expand our airline's reach, creating
more jobs for our pilots on the much-desired international flying legs.
The negotiated terms of this agreement are available at this time, but
this window will not remain open indefinitely. To extend what has
already been a long and difficult negotiation puts this carefully
crafted agreement in jeopardy.
However, while FedEx is seeking access to international markets
beyond the United States, foreign airlines, competitors, and investors
are eyeing the U.S. market. Some may want to link their international
network more closely with a U.S. carrier, while others see possibility
in bringing new business models, which would add new dimensions to the
U.S. marketplace. Market liberalization will benefit the U.S. consumer.
Domestic deregulation has been, at times, difficult and controversial,
but the biggest beneficiary has been the U.S. consumer. Expanding
market participation internationally, in the measured, controlled
manner DOT has proposed, can only improve the services available to
U.S. shippers and travelers.
No discussion of trade liberalization is complete until we address
the impact that market liberalization has on American jobs. Despite
what you hear, trade liberalization benefits U.S. workers. We've heard
a lot about the risk of job migration offshore--in fact, I have no
doubt that you will hear more about it as this debate continues. But
throwing up trade barriers and stopping the internationalization of
aviation does not create jobs, it merely fences them off inefficiently.
Ultimately, healthy, competitive companies create jobs, regardless of
their homeland. We need to provide U.S. businesses with the best
possible tools to reach new markets, to obtain the best capital and
management, and thus to create the very best jobs right here in our
home market.
Some opponents have claimed that liberalizing aviation markets
would undercut the U.S. CRAF program. The DOD is not saying that. The
DOT supplemental notice reflects that the DOD has reviewed the proposal
and agrees with it. As long-time participants, we believe that the CRAF
program, an important part of U.S. defense logistics, will not be
harmed by this proposal. CRAF participation today provides profitable
government contracting incentives for U.S. companies, and we believe
that foreign investors would support pursuing those profitable
opportunities as well.
Globalization cannot be one way. If the U.S. wants to expand
opportunities for its businesses abroad, it must provide opportunities
for others here at home. America has benefited tremendously from
foreign investment. There is nothing novel or theoretical about the
proposition that greater foreign investment can benefit U.S. airlines
and their U.S. employees. It is an incontestable fact that past foreign
investment in U.S. airlines has saved and created U.S. jobs. British
Airways' investment in US Airways, Scandinavian Airlines' investment in
Continental and KLM Royal Dutch Airways' investment in Northwest all
protected U.S. jobs, and none of these investments spurred an offshore
exodus of U.S. jobs. In fact, the exact opposite was true--they
stimulated new American jobs.
At the same time, U.S. companies have become world players through
reciprocal foreign investment. FedEx has invested in major facilities
abroad to open up new markets to U.S. shippers and exporters, including
our hub in Paris and the planned hub in Guangzhou, China. With these
hubs, we are able to offer U.S. businesses more efficient worldwide
express services, creating American jobs as we grow. So, foreign
investment can be good for U.S. businesses, workers, and consumers. But
it is, and must be, a two-way street.
Congress has expressed its concern about the security aspects of
foreign investment, and I agree that is important. Clearly, we must
manage the security risks carefully, but we must be careful not to
block foreign investment altogether. For aviation, the United States
must continue to require strict compliance with U.S. aviation safety
and security regulations. The DOT's proposal as supplemented, with its
safeguards for U.S.-citizen control over functions such as safety and
security, is a wise and measured way to address that concern.
I hear some argue that this is the wrong time to be promoting trade
liberalization, and the concept of open markets is the wrong message to
send to the rest of the world. They say the United States should be
protecting, not liberalizing, access to world markets. I disagree: this
is exactly the right time and the right message for the future of our
industry. To reject this opportunity would be to send a message that
the U.S. is no longer interested in new international opportunities for
its airline industry, at a time when its future--and the future of the
jobs its supports--hinge on expanding these opportunities.
Look closely at those opponents of liberalizing aviation markets.
While they claim important government regulatory concerns motivate
their arguments, instead their primary concerns are narrow,
protectionist interests. Their interests have almost nothing to do with
concerns over ``ownership and control''; in most cases, they simply
oppose the U.S.-EU bilateral agreement, which the proposal would
advance. Some airlines want to slow down competitive forces, hoping to
retain their privileged market positions, and to benefit from the
indirect government subsidies that protectionism provides. Others have
been vitriolic, raising false concerns ranging from cockpit security to
a mass migration of jobs offshore. These arguments are not new, and
they hold little merit under close scrutiny.
III. Conclusion
The DOT proposal is another step in a long history of opening up
opportunities in aviation, in creating value and jobs for our economy,
and in expanding a dynamic, growing global marketplace. Global trade--
both in goods and in services--presents important opportunities for
U.S. business and U.S. workers. The DOT proposal encourages global
trade, starting with the creation of new opportunities for more
effective foreign participation in U.S. carriers. It opens the door for
investment by our citizens in aviation abroad. Alone, the proposal is
good for U.S. airlines, workers, and consumers. Combined with a U.S.-EU
Open Skies Agreement, it could be a tremendous boost for the U.S.
aviation industry. We at FedEx support the DOT proposal and hope that
this committee will do the same.
On behalf of the 260,000 employees and contractors of FedEx
Corporation, and especially those at FedEx Express, our express
transportation company, I want to thank you for inviting me here today.
Senator Burns. Mr. Jeffrey Smisek, of Continental Airlines?
STATEMENT OF JEFFREY SMISEK, PRESIDENT,
CONTINENTAL AIRLINES, INC.
Mr. Smisek. Thank you.
Good afternoon. My name is Jeff Smisek, and I'm the
President of Continental Airlines. On behalf of my 42,000 co-
workers, I appreciate the opportunity to express our opposition
to the Department of Transportation's supplemental notice of
proposed rulemaking on foreign ownership and control.
We, at Continental, support increasing U.S. airlines'
access to foreign capital; however, we continue to oppose the
Department's proposed rulemaking, for three reasons. First, it
is unlawful. Second, it is unworkable. And, third, it will not
result in increased access to foreign capital.
In their Alice in Wonderland world, the Department of
Transportation is trying to interpret a requirement that actual
control of U.S. carriers must be in the hands of U.S. citizens
to mean that actual control of U.S. air carriers may be in the
hands of foreign citizens. Both the original proposal and now
the supplemental proposal would allow foreign citizens to
control virtually every commercial aspect of a U.S. airline.
The DOT says it is addressing concerns raised by its initial
proposal by still allowing foreign control of U.S. airlines,
but requiring that foreign control be revocable by a majority
of the board of directors or shareholders. So, the only
significant difference between the new and the old proposals is
that the DOT asserts that it will rely on U.S. boards of
directors and shareholders to protect U.S. interests. Never
mind that these private citizens have no responsibility and no
incentive whatsoever to protect national interests rather than
shareholder interests. Never mind that boards of directors have
a fiduciary duty to protect shareholder interests, not national
interests.
Since the DOT doesn't explain how the revocation might
work, and doesn't even bother to include it in the actual
proposal itself, let's think about how it might work in a real-
world example.
Let's say Senator Inouye--think of him as a foreign
investor that DOT wants to attract--would like to invest in the
Commerce Committee, but only if he can share it. So, he offers
the Committee, through Senator Stevens, a billion dollars, as
long as Senator Inouye gets to control or chair the Committee
to make sure his investment's protected. Senator Stevens and
the other Republicans--think of them as the board of
directors--agree, because, without the billion dollar foreign
investment from Senator Inouye, the Committee will be merged
with the Governmental Affairs Committee, and everyone would
lose their seniority. Clearly not acceptable.
So, the Republicans say, ``Sure, we'll take your billion
dollars, but we must retain the right to revoke your
Chairmanship anytime we want to.'' Does Senator Inouye say,
``Fine, you can revoke my right to control the Committee and
still keep my billion dollars?'' Of course not. Senator Inouye
will say, ``OK, but if you ever revoke my control, you have to
pay me back my billion dollars, plus the amount I would have
made on it, had I invested it somewhere else.'' Let's say a
$1.2 billion, total.
Now, Senator Stevens and the Republicans have the
theoretical right to take the chair back, but only if they can
cough up $1.2 billion in cash. But if they had $1.2 billion in
cash sitting around, they wouldn't have turned over control in
the first place. So, the probability that Republicans are ever
actually going to revoke Senator Inouye's right to chair the
Commerce Committee is zero. ``But wait,'' says the DOT, ``maybe
the voters''--think of them as the Commerce Committee
shareholders--``will throw out their Republican Senator-
Directors, because they turn control over to the Democrats.''
Well, as you know, voters, like shareholders, have nothing to
do with the day-to-day operations of Senate Committees, and no
real way to change them, except to theoretically throw out all
the Senators on the Committee. But the probability that the
voters in multiple states are going to band together and
organize a recall of all the Republicans on the Commerce
Committee is zero.
Now, you may think this example is laughable, but this
absurd construct is exactly what the DOT relies on to assure
the Congress that U.S. citizens will maintain control of U.S.
airlines, as required by law.
The probability that the board of directors or shareholders
of a U.S. airline, having bargained away control to a foreign
investor in return for a substantial cash infusion, will turn
around and revoke that control, when it would be contrary to
the very shareholder interest that the board has a fiduciary
duty to protect, is precisely equal to the probability of being
eaten by a shark while being struck by lightning.
The truth of the matter is, the proposed rule doesn't offer
any protection whatsoever from foreign domination or control,
except for a limited, naive, and impractically crafted attempt
of DOT to carve out safety, security, military airlift, and
organization documents. But DOT says the EU treaty is so
important that we can't wait for Congress to change the law,
and, therefore, DOT must step in, seize power, and immediately
give foreign investors the right to control U.S. airlines. At
the same time, DOT says to Congress, ``Don't worry, foreign
investors won't really have the right to control U.S. airlines,
because the U.S. directors or shareholders will be able to
revoke that control anytime they want to.'' But the rule can't,
and doesn't, do both things.
The DOT is trying to convince both sides of the Atlantic
that everyone gets exactly what they want. DOT is promising
foreign investors that they will have control over U.S.
airlines, because, otherwise, the EU would refuse to sign the
Open Skies Agreement. And DOT is promising Congress that
foreigners won't have control of U.S. airlines. So, the
proposed rule will create years of substantial uncertainty for
both foreign and domestic investors as the legal and practical
consequences are sorted out and, I assure you, litigated.
Now, I've got a research report from JPMorgan that just
came out. JPMorgan said in this research report that, ``We
would now advise--this is based on the SNPRM--that, We would
now advise European airlines not to invest at all under
conditions of revocable authority currently proposed.'' I'd
like to submit the JPMorgan report----
Senator Burns. Without objection.
[The information previously referred to follows:]
JPMorgan--European Equity Research, May 5, 2006
Goodbye Open Skies--A U.S.-EU Aviation Deal Founders Again
The U.S. DOT has put a new rule out for comment covering foreign
ownership and control of U.S. airlines, responding to growing domestic
protectionist sentiment sparked both by the previous proposed rule and
by the Dubai/P&O transaction.
We had not expected the DOT to try to modify its contentious
proposed rule--we thought that the issue would remain parked in the
long grass in the hope that protectionism might die down.
The proposed new rule shifts the balance of the proposal back in a
U.S. direction, trying to appease the domestic opposition. The
technique added to the previous proposed rule is to permit controlling
U.S. shareholders to revoke unilaterally their delegation of authority
to a non-U.S. airline/investor.
While this may satisfy some U.S. objectors, we believe that it
fundamentally undermines the previous liberalisation proposed.
We had difficulty before in creating plausible scenarios where
European airlines might invest significant sums in U.S. airlines under
the last proposed rule.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
We would now advise European airlines not to invest at all under
the conditions of revokable authority currently proposed, since their
original basis for investment could be unilaterally withdrawn, leaving
them with a material minority investment and no control. We have been
there before with BA/USAir and KLM/Northwest.
Consequently, we fail to see how this new proposal permits European
airlines to do anything new in terms of investing in U.S. airlines, and
we would expect the EC negotiators to tell their U.S. counterparts that
this proposed rule does not conform with their previously-negotiated
tentative deal.
Open Skies between the U.S. and the EU is now, in our view, less
likely than it was earlier this year (we said ``too hard to call'' in
January). This has particular implications for London Heathrow, where
the competitive landscape will not change materially until Open Skies
arrives. We think that has reverted to ``if'', not ``when''.
The DOT's New Proposed Rule
The DOT has put a modified rule out for comment on the subject of
foreign ownership of U.S. airlines. The tentative agreement between the
U.S. and the EU last year on an Open Skies deal requires change in U.S.
rules such that EU airlines could take greater control if they invest
material sums in U.S. carriers. (EU = European Union, i.e. the block of
25 countries. EC = the Commission which is the negotiator.)
The initial proposed rule which we wrote on in January this year
came close to satisfying the EU's objective of permitting EU airlines
effective control over a U.S. airline's commercial decisions in the
event of a transaction. The DOT needed U.S. persons to control the
company's legal documents, and its relations with FAA, DHS, TSA and
CRAF (safety, security and military airlift), but a non-U.S. investor
could ``dictate'' commercial policy and decisions. All provided that
U.S. persons owned 75 percent or more of the voting stock, and 67
percent+ of the management positions.
Under the Previous Proposal, a Viable Transaction Could Be Drawn
Under that proposed rule, it was possible to envisage a transaction
which made commercial sense to contracting parties, even if there would
be vocal opposition from, for example, U.S. airline labour unions. One
could see how an EU airline might invest $1 bn-plus in a (bankrupt?)
U.S. major for a 25 percent equity stake, but accompanied by a contract
with the 75 percent U.S. owners under which the EU airline could manage
the U.S. airline (its $1 bn+ investment) in all areas except those
listed above (safety, security and military airlift). The EU airline
would be able to manage its investment's route network, commercial
strategy and labour relations under that scenario.
In January, We Put the Probability of U.S./EU Open Skies as the Best
for 20 Years
Although that rule did not attempt to change the U.S. 75 percent
voting majority ownership rule, the result of that rule was that an EU
airline could effectively buy control of most of a U.S. carrier's
business. Consequently, the rule met the spirit of the tentative open
skies deal between the U.S. and the EU, and in January 2006 (with
significant hurdles still to jump) we put the probability of an Open
Skies deal being too close to call (i.e., 50/50), the best probability
ever in our near-20 years following this specific issue.
Growing Protectionism Meant That Proposal Foundered
However, the January proposed rule coincided, unfortunately, with a
rising tide of global protectionism. In the U.S., there were two
specific currents which caused that proposed rule to lose relevance,
First, the Dubai Ports acquisition of P&O, and the consequent potential
ownership of U.S. port facilities by that acquiror, caused a
protectionist wave in the media, and this issue is not yet finished.
Second, Continental Airlines caused a backlash against the proposed
rule among politicians, and publicly said that it would take the DOT to
court for acting beyond its jurisdiction.
In the circumstances, we expected DOT to keep its head below the
parapet, and simply wait (hope?) for the protectionist wave to die down
before trying something again. The DOT has not done that--it has
reissued a new rule for comment, bending in the direction of its
domestic opponents. However, by shifting ground, we believe that the
tentative agreement with the EU will now have been lost.
We see two key changes in the new proposed rule. The first is a
relatively minor one--U.S. persons' control of matters relating to
security, safety and military airlift is widened. The second is, in our
view, a deep, deep cut into the heart of the last-proposed balance
between U.S. and EU interests in control of a U.S. airline.
The New Rule Permits Management Authority To Be Unilaterally Revoked
The DOT's new rule permits the U.S. 75 percent voting owners or the
directors (minimum 67 percent U.S. persons) to unilaterally revoke the
authority that they have given which permitted a non-U.S. person (i.e.,
an EU airline) to control the U.S. airline's commercial activities.
This is an important strengthening of the U.S. side of the balance--in
our view, too much.
Trying again to create a hypothetical transaction under this new
scenario appears to us to fail--one side's position is simply not
commercial. An EU airline, offering to put $1 bn+ equity into a
(bankrupt?) U.S. carrier, would now contract with the 75 percent U.S.
voting interests to manage the airline's commercial activities.
However, even if the contract did not say this, the U.S. shareholders
could simply revoke the contract at some future point, if, for example,
they did not like what the EU airline was proposing to do with its
quasi-acquisition. All fine from the U.S. protectionist side--$1 bn+ of
foreign equity, 75 percent U.S. voting control and a veto to reverse
the contract that was the core of the $1 bn injection in the first
place.
The U.S. Shareholders and/or Directors Would Have That Power
However, from the EU investing airline, the proposed new rule is
fundamentally different to the last because of the power of revocation
given to the U.S. 75 percent voting equity owners. What management
would invest under such circumstances? The previous rule had many
queries against it from EU airlines, with the longevity of the new rule
being a key one--what the DOT set, the DOT could take away. However,
this new rule gives the other shareholders (and/or the directors) in
the investment the veto power to unilaterally take away the power that
they gave in return for a $1bn+ investment.
We Would Not Be Happy To See an EU Airline Invest its Money on These
Terms
We would be less than happy with an EU airline who invested its
shareholders' money into such an ill-protected investment, We look back
at BA/USAir and KLM/Northwest for real examples where an initial
(welcomed) equity stake ended up in rancour/rancor and the courts. If
revocation of some authority previously granted had been available to
the U.S. shareholders in either case, it would, we believe, have been
used,
We Believe That This New Proposal Moves Us Away From Open Skies
By making the delegation of authority to manage revocable at will
on the U.S. side, we believe that this new proposed rule does not
change materially the foreign ownership and control rules for U.S.
airlines from their current state today. We cannot see how the EC
negotiators can conclude differently, and would be surprised if this
proposed rule leads now to U.S./EU open skies.
We believe that the probability of such an open skies deal has now
slumped back down to a low level as global protectionism gains ground.
Mr. Smisek. The truth of the matter is that the DOT has
developed this tortured and poorly constructed rule as part of
their blind pursuit of a so-called Open Skies Agreement with
the EU which is anything but open. The Agreement that U.S. has
negotiated gives the U.S. combination airlines, like
Continental, little except the meaningless right to fly to
London Heathrow Airport without being permitted to land there.
If we started doing that, we'd run out of airplanes pretty
fast, because we'd send them over, and they wouldn't come back.
Commercially-competitive slots and facilities are simply not
available at London Heathrow, which is the most important
business market in Europe.
We, at Continental, believe that the DOT should go back to
the drawing board on its proposed rule and on the EU treaty. As
to foreign ownership, DOT should stop trying to take the law
into its own hands and should instead persuade the Congress to
change the law in a way that opens additional access to capital
markets while meeting the national needs. As to the EU deal,
they should go back to the bargaining table and insist on fair
access to slots and facilities so U.S. carriers, like
Continental, will be able to compete, from day one, on a level
playing field.
I want to thank you for this opportunity to speak before
you, and I'd be happy to answer your questions.
[The prepared statement of Mr. Smisek follows:]
Prepared Statement of Jeffery Smisek, President, Continental Airlines,
Inc.
Good afternoon. My name is Jeff Smisek, and I am the President of
Continental Airlines. On behalf of my 42,000 co-workers, I appreciate
the opportunity to express our opposition to the Department of
Transportation's supplemental notice of proposed rulemaking on foreign
control.
Continental supports increasing U.S. airlines' access to foreign
capital, and Continental supported legislation sent to Congress by this
Administration to nearly double the level of permissible foreign
investment in U.S. airlines. If Congress takes the leadership, access
to foreign capital for U.S. airlines can be enhanced lawfully in
accordance with clear and practical standards. In sharp contrast, the
Department of Transportation's Supplemental Notice of Proposed
Rulemaking and the original Notice of Proposed Rulemaking before it are
unlawful under current statutory standards, totally unworkable in the
real world of airline operations and likely to inhibit access to
foreign capital by U.S. airlines. Although the Supplemental Notice of
Proposed Rulemaking makes some changes in the Department of
Transportation's description of what it intends to do, the proposed
policy itself is virtually unchanged and is no more legal, workable or
likely to encourage investment than the original proposal was. I have
attached for your consideration the Continental press releases
responding to issuance of these proposals.
As Continental's comments on the Department of Transportation's
Notice of Proposed Rulemaking (copy attached) * amply demonstrated, the
Department's decision that ``actual control'' by U.S. citizens permits
``actual control'' by foreign citizens over all commercial aspects of a
U.S. airline is unlawful. Although the Supplemental Notice of Proposed
Rulemaking relies on the Department of Transportation's discretion to
interpret the aviation statutes, in an analogous situation the D.C.
Circuit said this in reversing a decision of the Securities and
Exchange Commission interpreting the Public Utility Holding Company Act
(PUHCA):
---------------------------------------------------------------------------
* The information referred to has been retained in Committee files.
The Commission may well be right that PUHCA's region
requirement is outdated. . . . In view of the statute's plain
language, however, only Congress can make that decision. . . .
In the meantime, the Commission may not interpret the phrase
``single area or region'' so flexibly as to read it out of the
---------------------------------------------------------------------------
Act.
National Rural Elec. Co-op. Ass'n v. S.E.C., 276 F.3d 609, 618 (D.C.
Cir. 2002)
Clearly, ``actual control'' by U.S. citizens means precisely what
it says: actual control of an entire airline all the time. The
statutory definition does not say ``actual control sometimes,'' or
``actual control of parts of an airline's operations,'' or ``actual
control only of areas already regulated by the government'' or ``actual
control when foreign owners are citizens of some countries but not
others.'' Neither the Notice of Proposed Rulemaking nor the
Supplemental Notice of Proposed Rulemaking provides a shred of
statutory analysis to suggest that the phrase ``actual control'' of
U.S. airlines by U.S. citizens was intended to mean control of only
certain aspects of an airline's operations, control only at certain
times or control delegated but subject to revocation. Moreover,
requiring that 75 percent of shareholders, the President and two-thirds
of Board members and managing officers be U.S. citizens does not
necessarily mean that U.S. citizens control an airline. If these
requirements alone always satisfied the control test, there would have
been no need to impose the additional requirement that the airline be
under the ``actual control'' of U.S. citizens.
Congress expressed its view that U.S. airlines must be entirely
controlled by U.S. citizens when it added the ``actual control''
requirement to the aviation statutes in 2003, and over the last 6
months it has again expressed its view that ``actual control'' of U.S.
airlines must be vested in U.S. citizens at all times. Beginning with a
November 18 letter signed by 85 Congressional Representatives saying
that the Department's proposal is ``contrary to recent Congressional
mandates,'' including the requirement that U.S. interests ``control
economic and competitive decisions of the airlines, as well as safety
and security decisions'' and that the ``Department has overstepped its
authority in this proposal with its revised interpretation of `actual
control,' '' Congress has repeatedly expressed serious concerns about
the Department's unlawful proposal. With nearly 190 co-sponsors, H.R.
4542 reflects these Congressional concerns, notes that the Department's
proposal is ``contrary to the plain language'' of the aviation
statutes, prohibits the Department from issuing its decision for a
period of 1 year and requires a report from the Department regarding
the impact of its proposal on U.S. airlines and the aviation industry
and how the Department would implement its proposed policy. Similarly,
the House Appropriations Committee unanimously adopted report language
saying ``the Committee believes that the U.S. aviation industry is part
of our critical infrastructure as are the ports,'' and ``it is critical
that any final rule regarding foreign control of U.S. airlines not only
comply with current laws regarding foreign ownership, but also comply
with statutes recently passed by the Congress which require that all
U.S. airlines be under the `actual control' of U.S. citizens'' and
therefore ``directs the Secretary of Transportation to refrain from
issuing a final rule for 120 days'' because the ``Committee is
seriously concerned about the promulgation of any rule which would
allow any minority foreign investor to exercise control or
decisionmaking authority over any aspect of a U.S. carrier operation.''
More recently, the Senate Appropriations Subcommittee on
Transportation, Housing and Urban Development and Related Agencies
adopted legislation that would prohibit the Department from using any
of its funds to issue or implement a decision in this proceeding or to
make any fitness determinations based on new standards.
Other U.S. and foreign airlines also recognize the uncertainty
resulting from the Department's proposal and the need for Congressional
action. As US Airways said, the Department's proposal ``could cause
uncertainty and possible harm to the U.S. airline industry'' (US
Airways comments at 1), and Delta said, ``Investor concerns about . . .
the extent to which a statutory amendment may be required to provide
legal certainty'' and the ``scant guidance'' in the Department's
proposal on implementation of the control provisions separating
``commercial'' operations from security and safety areas with which
they are inextricably intertwined would undermine the Department's
objectives. (Delta Comments at 8, 11) Alaska also said that Congress,
not the Department, should address any changes to the control
standards. (Alaska Comments at 1-2) As Virgin Atlantic put it, ``the
NPRM raises as many questions as it answers, creating an unacceptably
high level of uncertainty for would-be investors'' (Virgin Atlantic
Comments at 1) Similarly, British Airways said the Department's
``objectives would best be achieved through amendment or elimination of
the existing statutory restrictions'' and recognized that the
Department's proposal would be ``subject to potential reversal or
modification by Congress, the Federal Courts or the Department
itself.'' (British Airways comments at 1)
In the wake of these extraordinary public and Congressional
concerns about the control of critical transportation facilities by
foreign nationals and pending legislation, the Department should
suspend its pending rulemaking proposal and instead seek legislation to
make any potential changes to the definition of ``actual control'' in
the aviation statutes.
Indeed, the very proceeding in which the Department now plans to
abandon the unequivocal decades-long interpretation of the actual
control requirements was begun because of Congressional concern about
the lack of clear, published standards for determining that actual
control of airlines was held by U.S. citizens and the lack of
transparency in the Department of Transportation's procedures for
reviewing citizenship determinations. Congress had even been forced to
pass legislation requiring the Department of Transportation to
institute a formal proceeding to investigate the citizenship of a cargo
airline after years of complaints by Federal Express and United Parcel
Service that the cargo airline was controlled by foreign interests.
Despite these repeated Congressional criticisms, however, the
Department of Transportation is proposing to publish only the most
skeletal policy statement and to continue making its foreign control
determinations behind closed doors in negotiations with foreign
investors and the airlines they seek to control.
Although the Department of Transportation has described its
original and supplemental proposals as a ``clarification'' of its
interpretation in the U.S., it has told foreigners that the proposals
represent a ``profound change'' to the actual control standards. The
proposals clearly represent a profound change since they are
diametrically opposed to the standards historically applied and the
actual words of the statute. They are anything but a ``clarification.''
They would be better described as a ``reversal'' and an ``obfuscation''
than a ``clarification.''
The entire text of the proposed Department of Transportation policy
is:
(b) Policy. In cases where there is significant involvement in
investment by non-U.S. citizens and either where their home
country does not deny citizens of the United States reciprocal
access to investment in that country's carriers and does not
deny U.S. air carriers full and fair access to its air services
market, as evidenced by an Open Skies Agreement, or where it is
otherwise appropriate to ensure consistency with U.S.
international legal obligations, the Department will consider
the following when determining whether U.S. citizens are in
``actual control'' of the air carrier:
(1) All organizational documentation, including such
documents as charter of incorporation, certificate of
incorporation, by-laws, membership agreements, stockholder
agreements, and other documents of similar nature. The
documents will be reviewed to determine whether U.S. citizens
have and will in fact retain actual control of the air carrier
through such documents.
(2) The air carrier's operational plans or actual operations
to determine whether U.S. citizens have actual control with
respect to:
(i) Decisions whether to make and/or continue Civil
Reserve Air Fleet (CRAF) or other national defense airlift
commitments, and, once made, the implementation of such
commitments with the Department of Defense;
(ii) Air carrier policies and implementation with respect
to aviation security, including the transportation security
requirements specified by the Transportation Security
Administration; and
(iii) Air carrier policies and implementation with respect
to aviation safety, including the requirements specified by the
Federal Aviation Administration.
Clearly, these skeletal provisions raise more questions than
answers, and not one of the ``safeguards,'' such as revocability, cited
by the supplemental notice's rationale is even mentioned in the policy
itself. What is ``significant involvement in investment'' by non-U.S.
citizens? What does ``reciprocal access to investment'' mean? In what
situations would it be ``otherwise appropriate to ensure consistency
with U.S. international legal obligations'' to permit foreign control
by citizens of a country which neither permits reciprocal investment
nor has an open-skies agreement with the U.S.? Although the proposed
policy says the carrier's ``organizational documentation'' will be
reviewed ``to determine whether U.S. citizens have and will in fact
retain actual control of the air carrier through such documents,'' the
Department's own statements make perfectly clear that the Department
has no intention whatever of insuring that the air carrier is actually
controlled by U.S. citizens. How could the Department of Transportation
actually ``consider'' an ``air carrier's operational plans or actual
operations'' to determine whether U.S. citizens have actual control
with respect to decisions on CRAF or other national defense commitments
and implementation of those commitments, policies and implementation
``with respect to aviation security'' and ``aviation safety?'' The
standards that would apply to any of these decisions are totally absent
from the proposed policy.
Just as importantly, no one will ever know what standards are being
applied, or have been applied, to citizenship determinations since the
decisions will be reached behind closed doors in negotiations between
foreign investors, the airlines they are investing in and Department of
Transportation officials who are not experts in corporate governance or
airline operations.
Although the Supplemental Notice of Proposed Rulemaking purports to
broaden the scope of U.S.-citizen control required for safety, security
and national defense decisions, it fails to recognize the fundamental
fact that corporate control of such decisions cannot be bifurcated.
Clearly, every decision that affects budgets, personnel, promotions,
wage rates, financing and investment affects safety, security and
national defense. If indeed ``all critical elements of a carrier's
decision-making that could impact safety, security and national defense
airlift'' must be made by U.S. citizens who are not beholden to foreign
investors, then foreign citizens may not control aircraft acquisition,
routes, financing, budgets, personnel or any other significant aspect
of the U.S. airline's management or operations. That may be what the
Department of Transportation is telling its U.S. audience, but you can
bet assurances will be given Europeans that such constraints will not
be applied.
Although the Department of Transportation's witness in House
hearings testified that foreign citizens could contract with U.S.
airlines to transfer control for all commercial aspects of an airline's
operation to foreign citizens, the Supplemental Notice of Proposed
Rulemaking raises even more questions about how control would be
monitored and distributed. Although the supplemental proposal would
require U.S. citizens to ``control the carrier's organizational
documents,'' it would not prevent those citizens from amending those
organizational documents to turn control over to foreign citizens to
facilitate the ``greater alliance integration'' and consolidation in
the airline industry that the Department of Transportation supports.
Although super-majority, ``golden share'' and other control
provisions are normally bargained for and exchanged for significant
financial benefits, the Supplemental Notice of Proposed Rulemaking says
that the Board or voting shareholders must retain the power to revoke
delegations of managerial responsibilities to foreign investors and
that the ability to revoke the delegation could not be conditioned on
terms that would make revocation ``impracticable.'' This requirement
appears nowhere in the proposed policy, and constant monitoring by the
Department of Transportation to ensure that agreements between the
parties have not made revocation ``impracticable'' would require hiring
airline, financial, legal and corporate governance experts. Would
revocation be ``impracticable'' if the result would be termination of a
codeshare or alliance with a foreign airline partner? Would refusing to
make further foreign investments needed by the U.S. airline in the
event of revocation render revocation ``impracticable?'' Would a
mandatory redemption of equity securities or repayment of indebtedness
render revocation ``impracticable?'' Once a U.S. airline had terminated
its transatlantic flights in favor of its foreign partner's flights,
would revocation be ``impracticable'' because the U.S. airline would
lose access to transatlantic traffic?
The Department's proposal to bifurcate a carrier's management and
operations into foreign-controlled and U.S.-controlled segments is both
naive and totally unworkable. As Continental and other airlines have
explained, safety, security and defense commitments are integral to an
airline's entire operations and cannot be separated from ``commercial''
decisions. If, as the supplemental notice of proposed rulemaking
indicates, foreign investors could not hire and fire corporate
officers; all managing officers responsible for safety, security and
national defense must have only U.S.-citizen supervision; and budgets
and compensation for these areas must be determined only by U.S.
citizens who may not be appointed by or otherwise beholden to'' foreign
interests, then the scope of delegable foreign control would be
extremely narrow since any significant financial, fleet, resource
allocation or integrated budget could not be subject to foreign
influence. Given the Department of Transportation's objective of
offering foreign investors effective control to cement their alliances
with U.S. airlines and protect their investments, however, it seems
unlikely that the Department of Transportation would take the steps
necessary to prevent foreign influence over these significant resource
allocation decisions.
Beyond super-majority provisions that require concurrence for
bankruptcy or dissolution, the Department says it cannot define what
kind of super-majority provisions would violate the requirement that
``actual control'' remain with U.S. citizens, providing no discernible
standards by which to test proposed transactions and leaving all such
decisions to the obscurity of private, closed door meetings between the
Department of Transportation and foreign investors. Although the
Department of Transportation says it would approve of ``standard
provisions obtained by minority shareholders,'' it is unable to name
any such provisions except for those related to bankruptcy or
dissolution.
Although the Department's original proposal indicated that foreign
investors could control fleet decisions, the Supplemental Notice of
Proposed Rulemaking says that a ``carrier could not allow foreign
investors to make decisions that would make participation in or other
national defense airlift operations impossible as a practical matter,''
in direct contradiction of advice given to European negotiators by the
Department of Transportation's Under Secretary that foreign investors
could control the ``commercial decision'' whether to participate in
CRAF or not as well as fleet decisions that would eliminate all CRAF-
eligible aircraft from the U.S. airline's fleet. Now, the Supplemental
Notice of Proposed Rulemaking says that it ``would likely investigate''
if a U.S. carrier's ability to contribute to CRAF or other national
defense airlift operations were precluded by ``decisions made or
significantly influenced by foreign investors.'' Apparently this
``investigation'' would occur after a U.S. carrier had already become
unable to contribute to the U.S. airlift. But how would that preserve
the ability of our Department of Defense to move the troops? Could the
deed be ``undone?'' Would the Department of Transportation require that
planes that have been sold, transferred or otherwise disposed of be
brought back to the U.S. carrier's fleet? Even if the Department of
Transportation could unwind any transaction or series of transactions
that created the problems for the Department of Defense as to military
aircraft--could it possibly be done in the real time that the
Department of Defense might need to move troops to a conflict in a
timely manner? Of course not. Even worse, what is the likelihood that a
U.S. airline controlled by a foreign government or an airline owned by
a foreign government would volunteer for national defense missions
enforcing U.S. policies the foreign government opposes?
Both the original proposal and the supplemental proposal assume
that corporate decisions can be separated into distinct compartments
and that boards and shareholders can and will undertake the
Department's responsibility to ensure that U.S. citizens actually
control the airline regardless of the economic interests of the
directors and shareholders themselves. As the supplemental notice
itself points out, ``strategic investors'' in U.S. airlines do not
invest to maximize shareholder value per se but to maximize integration
between the strategic investor and the airline being invested in. That
integration may well enhance shareholder value, but it could do so at
the expense of airline employees and other vital interests of the U.S.
airline and its stakeholders. Formation of a new U.S. airline to feed
traffic between major U.S. cities and a foreign investor airline's U.S.
gateways may well enhance the foreign investor's interests and the U.S.
airline's profitability while draining traffic and revenue from U.S.
airlines that today provide comprehensive network service including
small cities throughout rural America as well as the major cities
served by the foreign-controlled airline. The network airline may be
forced to terminate services at smaller cities to survive the onslaught
of new foreign-controlled airlines on major U.S. routes feeding traffic
to international foreign-airline competitors. And a nominally U.S.
airline owned or subsidized by a foreign government would create an
even greater threat to U.S. owned, operated and controlled airlines.
The ultimate responsibility for directing the affairs of any
corporation resides with the board of directors, where one-third of the
members could be appointed by the foreign investor. Although the boards
meet only four to eight times a year and do not manage day-to-day
affairs of a company, they appoint a company's executive officers and
exercise their authority by hiring, firing, demoting or promoting
senior corporate officers, setting overall corporate policy and
monitoring corporate results. Lacking sufficient time, power or
information to manage a company, corporate boards rely on a
corporation's management for information about what and how a company
is doing, and management ties to a foreign investor who may well be the
largest single shareholder in the company will clearly influence what
management does and what it reports to the board. Under standards
recognized by virtually every government agency that has considered
``control,'' it is clear that an investor holding a significant share
of voting stock exceeding 10 percent of the total voting shares can
possess control: ``the power to direct or cause the direction of the
management and policies of'' a company ``whether through the ownership
of voting securities, by contract, or otherwise.''
The likelihood that individual, disparate smaller shareholders who
collectively own a majority of the voting stock would be able to
counteract the power of a large, focused minority investor and the
company's management would be exceedingly slim. Although shareholders,
like creditors and minority investors, may have specific rights to vote
on extraordinary matters such as mergers, bankruptcy or dissolution and
recapitalizations, their only recourse otherwise is engaging in an
extremely difficult, expensive and rarely successful proxy fight to
nominate their own slate of directors. Other than the replacement of
directors, shareholders have no practical way to affect directly how a
corporation operates or to have a voice in a corporation's management.
As a practical matter, shareholders have about as much practical
ability to affect corporate policies by vote as the U.S. public has to
repeal Acts of Congress by amending the Constitution. And those actions
happen with about the same frequency--practically never.
As the DOT neither explains how revocation might work nor includes
it in the actual proposed rule, let's think about how it might work in
a ``real world'' example. Let's say Senator Inouye would like to invest
in the Commerce Committee but only if he can chair it. So, he offers
the Committee, through Senator Stevens, $1 billion as long as Senator
Inouye gets to ``control'' or chair the Committee to make sure his
investment is protected. Senator Stevens and enough of the Republicans
agree, because without the $1 billion investment, the Committee will be
merged with the Government Affairs Committee and everyone would lose
their seniority--clearly not acceptable! So, the Republicans say,
``we'll take your $1 billion but we need to retain the right to revoke
your Chairmanship at any time we want to do so!''
Does Senator Inouye say--fine--the Republicans can revoke my right
to chair and still keep the $1 billion? No, of course not! Senator
Inouye may say OK--but if you ever revoke my control you have to give
me back my $1 billion plus the amount I would have made on it had I
invested the money elsewhere--say $1.2 billion total.
Now, Senator Stevens and the Republicans (think of them as the
Board of Directors) have the theoretical right to take the Chair back--
but only if they can cough up $1.2 billion in cash. But, if they had
$1.2 billion sitting around in cash they wouldn't have turned over the
Chair in the first place! So the likelihood that the Republicans are
actually ever going to be able to revoke Senator Inouye's right to
chair the Commerce Committee is zero.
But wait, maybe the voters (the Commerce Committee Shareholders)
will throw out their Republican Senator/Directors because they turned
over control to the Democrats? Well, as Senators know, voters (like
shareholders) have nothing to do with the day to day operations of
Senate Committees and no real way to change them except to throw out
the Senators on the Committee. So, the likelihood that the voters in
multiple states are going to get together and organize a recall is
zero.
Senators may think this example is laughable, but this absurd
construct is exactly what the DOT relies on to assure the Congress that
U.S. citizens will maintain control of U.S. airlines as required by
law.
The Department of Transportation claims that control of
fundamental, pervasive, interrelated fleet, pricing, marketing,
financing, ``commercial'' and safety, security and defense management
and operating decisions can be separated because antitrust-immunized
airlines have apparently been able to avoid colluding on specific full
fares on a few specific international routes. While extremely-limited
carve-outs may be possible for a few airline fares on a few routes or
for such one-time major issues as mergers, bankruptcy/dissolution and
recapitalization, separating control of some pervasive operating issues
from other pervasive operating issues is no more possible than
unscrambling eggs. Since all of an airline's decisions are
``commercial'' and have effects throughout the organization, separation
of control of specific items is impossible. Moreover, this is nowhere
more true than in the area of legal and regulatory compliance. Everyone
may be in favor of safety and security compliance, but the real issue
is what resources, both financial and human, will be devoted to those
areas rather than to more commercially-beneficial areas. Time and
again, the root cause of a compliance failure is unwillingness to spend
the money necessary to create and maintain an effective compliance
infrastructure. Although U.S. citizens controlling U.S. airlines are
aware of the extraordinary importance of optimizing safety and
security, foreign investors may not be. Compliance generates costs, not
sales, and a company facing criticism from analysts and falling stock
prices as well as marketing or customer service issues may well find
that its foreign investors insist on allocating resources to priorities
other than safety and security.
Because ``control'' is a practical test which cannot be measured by
share ownership and management numbers, the Civil Aeronautics Board,
the Department of Transportation and Congress have all recognized that
``actual control'' by U.S. citizens must be maintained in addition to
the numerical standards in the aviation statutes. In addition to super-
majority voting requirements, classes of shares with different voting
rights, contractual arrangements in debt, equity or management
agreements, voting agreements among shareholders, agreements as to
composition of key Board committees and the practical effects of a
concentrated holding of up to 25 percent with a widely-dispersed
holding of up to 75 percent can readily and effectively hand control of
a U.S. airline over to foreign interests.
The current proceedings before the Department of Transportation to
reconsider foreign control standards began as an effort to strengthen
the standards to ensure U.S. control of U.S. airlines and to make the
process more public and transparent. Only when the prospect of a U.S.-
EU deal entered the picture did the proposal make a 180 degree turn and
become a proposal to permit near total foreign domination and control
of U.S. airlines and retain the clandestine procedures previously
followed. Disclaimers to the contrary notwithstanding, it is perfectly
clear that the Department of Transportation is pursuing its effort to
allow foreign control of U.S. airlines to secure a multilateral ``open
skies'' agreement with the European Union. The U.S. already has Open
Skies Agreements with The Netherlands, Belgium, Finland, Denmark,
Norway, Sweden, Luxembourg, Austria, Switzerland, the Czech Republic,
Germany, Romania, Italy, Portugal, Poland, France, Albania, and Bosnia
and Herzegovina, and those Agreements permit airlines of those
countries to offer service between any point in Europe (or the world)
and any point in the U.S. as well as permitting all U.S. airlines to
offer service between any point in the U.S. and any points in one or
more of those countries. Moreover, in other European countries that
have not yet signed Open Skies Agreements, U.S. airlines are already
offering substantial amounts of services and have been freely able to
expand, with one primary exception: access to London Heathrow.
Since most European countries already have open skies agreements
with the U.S., there are very few limitations on the rights of U.S.
airlines to serve points throughout Europe. London Heathrow, Europe's
largest and most significant airport for U.S.-Europe travel, is closed
to entry by additional U.S. airlines by the U.S.-U.K. bilateral air
transport agreement, and it would remain effectively closed to
additional U.S. airlines even if the U.S.-Europe multilateral open
skies agreement were signed because competitive slots and facilities
will not be available at London Heathrow to remedy the effects of years
of discrimination against Continental and other U.S. airlines denied
entry at London Heathrow. (See the attached report by the London
Heathrow slot coordinator.) Absent the provision of competitive,
economically-viable slots and facilities to Continental and other U.S.
airlines historically excluded from London Heathrow, the greatest
single impediment to free and fair U.S.-Europe competition will remain
in place with or without a U.S.-EU multilateral agreement. The right to
fly is meaningless without the right to land.
Usurping Congress's role in determining the scope of permitted
foreign control over U.S. airlines for the purpose of securing an
agreement with the European Union for the meager benefits to
combination carriers and the passengers they serve that might result
from such an agreement would be a poor trade at best. Without
competitive, economically-viable slots and facilities at London
Heathrow--the primary bottleneck for effective U.S.-Europe
competition--available to independent U.S. airlines such as
Continental, reaching an agreement by standing the ``actual control''
standard on its head would be a travesty.
We believe the Department of Transportation should go back to the
drawing board on its proposed rule and on the EU treaty. As to foreign
ownership, the Department of Transportation should stop trying to take
the law into its own hands and should instead persuade the Congress to
change the law in a way that opens additional access to capital markets
while meeting the national needs. As to the EU deal, the U.S. should go
back to the bargaining table and insist on fair access to slots and
facilities at London Heathrow so U.S. carriers like Continental will be
able to compete, from day one, on a level playing field.
Thank you for this opportunity. I am happy to answer the
Committee's questions.
______
Airport Coordination Limited
6 February 2006
Briefing Note: EU-U.S. Open Skies and Access to Heathrow Airport
The EU-U.S. ``Open Skies'' Air Transport Agreement of 18 November
2005, if approved, would authorise every EU and U.S. carrier to fly
between any EU and U.S. city pair. The current Bermuda II limitations
on transatlantic operations at Heathrow Airport would be removed.
ACL is the independent coordinator, appointed in accordance with
the EU Slot Regulation, with sole responsibility for the allocation of
Heathrow slots. We have received a number of inquiries about the
availability of Heathrow slots and the process of slot allocation. We
are issuing this briefing note in the interests of openness and
transparency and to provide all interested parties with a common set of
information and advice.
Slot Availability
Heathrow is the world's busiest international airport, with 68
million passengers and 472,000 air transport movements in 2005. Its
facilities are also very constrained. There are physical constraints on
runway, terminal, and apron capacities, and environmental limits on the
number of night flights and air transport movements.
Heathrow slots are highly scarce and demand far outstrips supply.
Incumbent carriers have grandfather rights to about 97 percent of the
airport's capacity. Grandfather rights are subject to a use-it-or-lose-
it rule, but the failure rate is less than 0.5 percent each season.
There has been little increase in runway capacity since 2002, after
a decade of steady improvement. Slots are particularly scarce during
the morning period. Capacity is reviewed in advance of each season, but
no new landing slots have been added between 0600--1259 (local time)
since 1998.
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The U.K. Government places strict limits on flights during the
night quota period (2330-0600 local time). Heathrow's quota equates to
about 15 flights per night and is fully allocated to established air
services.
The U.K. Government also introduced a limit on the annual number of
air transport movements as a condition of approval to build Terminal 5.
The limit is fixed at 480,000 annual ATMs, which is only 1.7 percent
higher than current traffic levels. The ATM Cap will become the
dominant scheduling constraint within the next 18 to 24 months.
Future Capacity
Terminal 5, due to open in Spring 2008, provides the terminal and
apron capacity necessary for Heathrow to grow to over 80 million
passengers per annum. It does not address the shortage of runway
capacity, however, and brings with it the ATM Cap condition.
The U.K. Department for Transport plans to consult this year on the
possibility of mixed mode operations at Heathrow. Currently the two
runways at Heathrow are operated in segregated mode: one runway is used
for takeoff and one for landing, and the runway use is alternated each
afternoon to provide noise relief for the local community. Operating in
mixed mode (using both runways for takeoff and landing at the same
time) would provide additional runway capacity but, if approved, is
unlikely to be available before 2010. Government permission to lift the
ATM Cap is also necessary if the new capacity is to be used for growth.
The U.K. Government's Future of Air Transport White Paper,
published in December 2003, supported the development of a 3rd runway
at Heathrow, but not before 2015 and only if stringent environmental
limits can be met.
Allocation Priority
The liberalisation of a bilateral agreement does not make airport
slots available or confer any special allocation priority. Some
carriers, such as the U.S. carriers currently restricted to Gatwick
under Bermuda II, will qualify as ``new entrants'' to Heathrow. This
gives them priority in the allocation of 50 percent of pool slots.
However, the lack of pool slots at viable times for transatlantic
services means that new entrant status is of little practical value.
Slot Mobility
Slots are not route specific, so incumbent operators could add new
transatlantic services using their existing slots. British Airways and
Virgin Atlantic could add transatlantic frequencies; American Airlines
and United Airlines could operate to new U.S. gateways; and other EU
carriers such as BMI, Lufthansa or Air France could enter the Heathrow-
U.S. market.
Slots may be exchanged, one for one, between air carriers. Slots
may also be transferred between air carriers by way of a slot exchange.
Carriers like Continental, Delta, Northwest and U.S. Airways could use
this mechanism to acquire Heathrow slots from alliance partners or from
the secondary market more generally.
All transfers and exchanges are subject to confirmation of
feasibility by the coordinator, in particular that the change of use
does not cause prejudice to airport operations. For example, there may
be insufficient terminal or apron capacity to accommodate a change from
shorthaul to transatlantic operations using a larger aircraft.
Prior to the opening of Terminal 5 in 2008, shortages of terminal
and apron capacity will limit the number of new transatlantic services
that can be accommodated. The number of feasible new services will
depend critically on the exact slot times, aircraft size, and terminal
of operation. It will also depend on how rapidly new services are
introduced and how flexible carriers can be to fit within the airport's
constraints.
Winter 2006/07 Coordination
The EU-U.S. Air Transport Agreement will require approval by the EU
Transport Council of Ministers, which meets on 8-9 June 2006. The
agreement could be applied from the start of the Winter 2006/07 season.
However, carriers must submit their winter slot requests by 11 May 2006
and the initial allocation of slots must be complete by 1 June 2006.
ACL will accept slot requests for new transatlantic services in
advance of approval of the agreement. Given the lack of suitable slots
at Heathrow, we do not expect to be able to make any slot offers from
the pool. Any new transatlantic services are likely to be sourced from
carriers' existing slot portfolios and the secondary market.
James Cole,
Director of Coordination.
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Senator Burns. Thank you very much.
Now we'll hear from Mr. Michael Whitaker, Senior Vice
President of United Airlines. Thank you for coming, sir.
STATEMENT OF MICHAEL G. WHITAKER, SENIOR VICE
PRESIDENT--ALLIANCES, INTERNATIONAL AND
REGULATORY AFFAIRS, UNITED AIRLINES
Mr. Whitaker. Thank you, Mr. Chairman. I'm afraid I don't
have an interesting parable about Senator Inouye taking over
the Commerce Committee, but I do want to talk about the long-
term health of the industry.
U.S. passenger airlines have lost their position of
leadership in global aviation. United, American, and Delta are
no longer the big three. Air France, Lufthansa, and Japan
Airlines now hold those spots.
This committee is very familiar with the decline of the
U.S. airline industry over the last 5 years. Network carriers
have lost over $40 billion--billion with a ``b''--since 9/11,
and over 100,000 airline jobs have been eliminated. And though
many airlines have dramatically improved cost efficiencies in
recent years, at $75 a barrel for oil, even the most efficient
of the U.S. carriers struggles to reach profitability.
What you may be less familiar with is the fact that our
international competitors have fared much better, even in the
face of $75 oil. While the U.S. industry lost $10 billion last
year, our competitors in Asia and Europe enjoyed profits of
nearly $5 billion. These airlines are growing, investing in
their products, and buying new airplanes.
The poor results in the U.S. have a real impact on our
economy, on jobs, and on other U.S. businesses. As an example,
Boeing's latest aircraft, the 787, has attracted 350 orders in
the short time it's been on the market. Only 25 of those
orders, a mere 7 percent, are from U.S. passenger airlines.
One reason the U.S. airlines suffer so much is that, unlike
other industries, we have been prohibited from taking full
advantage of international opportunities to spread our business
risk. During our prosperous years, we were prohibited by law
from investing in operations outside the United States or from
building foreign hubs that would have diversified our exposure
to economic downturns. These restrictions have limited our
access to the most vibrant growth markets in the world,
including China and India. And because we've been unable to
spread our business risks geographically, we are unable to
flatten the drastic peaks and valleys of the airline business
cycle.
In most sectors of the U.S. economy, companies have the
right to invest abroad, and their foreign competitors have the
right to invest in the United States. This is true for the
automotive sector, oil and gas, telecommunications, insurance,
financial services, and virtually all manufacturing businesses.
Foreign investment in these areas has not led to a decline in
safety or security in the United States, as some opponents of
the NPRM suggest, nor has it harmed our economy. In fact, the
opposite is true. By all accounts, the U.S. has been a net
beneficiary of globalization, and our economy has been strong
for decades.
U.S. airlines cannot gain the right to invest abroad unless
a reciprocal right exists in the United States. And while DOT's
rulemaking proposal does not eliminate the legal restrictions
on foreign investment, it is an important step in the right
direction. It is the right policy direction to enable the U.S.
airline industry to begin to regain its position of leadership.
Much of the debate around the NPRM has focused on the CRAF
program and service to small communities. In truth, these
issues are no more than red herrings raised by parties with
other agendas. U.S. carriers participate in CRAF and serve
small communities because it makes business sense to do so. As
Senator Lautenberg said, ``Business is business.'' We serve
small communities either because we are paid to do so under the
Essential Air Service program or because those services add
economic value to our networks. Likewise, there are economic
incentives to participate in CRAF. We participate in that
voluntary program, because we gain the right to bid on valuable
government traffic.
These economic principles and incentives operate in any
language and are understood by airline managers of whatever
nationality. The government should not allow one company's
short-term commercial interests, however disguised, to
interfere with completing the work of deregulation. What this
debate should be about is how to remove the remaining
regulatory limits that keep our network carriers from
prospering. The NPRM is one important step toward eliminating
the outdated restrictions on foreign investment that apply
stubbornly and uniquely to the airline industry. Allowing the
NPRM to proceed will also facilitate the conclusion of the
U.S.-EU Agreement, another important step in completing the
deregulation of direct access to foreign markets.
Together, these initiatives will allow this industry to
participate more fully in the global marketplace and regain its
leadership position. Now is precisely the time to remove these
protections. The restructuring this industry has undergone in
recent years has strengthened our ability to compete
effectively in any international arena. We are looking for
opportunities to compete more effectively in the world market,
not for regulatory protection against foreign competition or
foreign investment.
Thank you, again, for the opportunity to testify, and I'm
pleased to answer any questions.
[The prepared statement of Mr. Whitaker follows:]
Prepared Statement of Michael G. Whitaker, Senior Vice President--
Alliances, International and Regulatory Affairs, United Airlines
Mr. Chairman, members of the Committee, thank you for the
opportunity to present the views of United Airlines on the Department
of Transportation's (DOT) proposal to reduce regulatory barriers and
expand investment opportunities for U.S. and foreign carriers in the
global aviation market. As the Nation's largest international airline,
we strongly support the elimination of outmoded restrictions that
discourage cross-border investment in the airline industry. Excessive
restrictions on the ability of foreign investors to participate in the
commercial management of U.S. airlines--and reciprocal restrictions
that other countries impose on U.S. investors in foreign airlines--
constrain our ability to tap global capital markets and to compete most
effectively in the international marketplace.
The DOT last week published a 74-page supplemental rulemaking
proposal (SNPRM) that refines the proposal on which today's hearing
focuses. While we are closely reviewing that document, and expect to
submit detailed comments on it, United wishes to make clear that it
supports the overall direction DOT is taking, and fully endorses the
process in which the Department is engaged.
Facilitating a more market-oriented environment for cross-border
investment is a natural, logical, and necessary extension of
longstanding U.S. open skies policy for aviation. With the strong
support of several Administrations, Republican and Democratic, that
policy has already done much to transform international aviation from a
highly-regulated, government-directed sector to a robustly-competitive
worldwide enterprise at least partly guided by free market forces. In
just 15 years, the U.S.-led open skies campaign has afforded U.S. and
foreign airlines much greater freedom to traverse the globe without
artificial limits on where, when, and how often they can fly, what they
can charge, or how they can market their international services.
The DOT proposal to facilitate cross-border investment by enabling
meaningful foreign investor participation in the commercial management
of the airlines in which they invest represents another significant and
positive step along this same market-opening path--a path that started
with the 1978 deregulation of the domestic airline industry. We would
prefer that DOT go further and eliminate, reciprocally, all limits on
foreign ownership and control, except as they relate to national
security oversight. But we welcome this progress toward the ultimate
goal of allowing the airline sector to operate with the same freedom
and flexibility as any other global U.S. industry--like financial
services, energy, and telecommunications.
That is the only goal that makes sense in today's global economy--
one in which our international passengers can readily access their
multinational bank accounts, stay in international hotel chains, and
connect with worldwide communications networks on a global basis. In
today's business world, it is profoundly ironic that U.S. international
airlines--the quintessential infrastructure of the global marketplace--
remain bound by regulatory restrictions of a bygone era.
The DOT proposals to encourage cross-border airline investment come
at an important moment, and should not be unnecessarily delayed or
unduly limited in scope. The benefits are very clear--not only for the
financially-challenged U.S. airline industry, but also for consumers
and communities, and for U.S. international competitiveness.
U.S. airlines have undergone tremendous financial stress over the
last 5 years, and today face escalating fuel and other costs that
threaten the balance sheets of every major airline. We at United have
come through a difficult and extended bankruptcy--one of the largest
ever in the U.S.--in a process that required sacrifice and painful
adjustment for thousands of employees and businesses across the
country. We have emerged with a much more stable financial base--unit
costs down 20 percent (excluding fuel), anticipated annual average cost
savings of $7 billion through 2010, and productivity up by 27 percent.
Despite these hard-won gains, we must further build our financial
strength to respond to tough competition and extraordinary fuel prices.
We and virtually all of our U.S. competitors must be able to continue
to attract new capital investment in response to market forces and
incentives, without undue regulatory impediments.
Enhancing opportunities for investment is also plainly in the
interest of not only U.S. airlines, but also of the many communities
that depend on financially-stable and successful U.S. airlines for
their economic well-being, jobs, and needed air services. Ironically,
some have suggested that allowing more foreign participation in the
management of U.S. airlines would somehow undermine U.S. carrier
service to smaller markets. Except for certain markets within the
Essential Air Service (EAS) program, in which service is legally
guaranteed, domestic markets are served because they generate adequate
revenues for the airlines. There is no basis to assume that foreign
managers would have less of a profit motive than U.S. citizen managers,
and would drop profitable services to communities now being served.
The DOT proposal is far more than a matter of attracting foreign
capital to U.S. airlines, though. We at United also look at it from the
standpoint of potential U.S. investment in, and partnership with,
foreign airlines (DOT properly proposes to offer the benefits of its
proposal only to investors of those foreign countries that afford U.S.
airlines reciprocal investment freedoms). We hope that the proposal,
when finalized, will remain sufficiently broad to meaningfully
facilitate U.S. carrier investment in, and integration with, foreign
carriers in key markets. In the long run, the enduring path to aviation
industry success is to become more competitive, embracing opportunities
for international growth, integration, and inter-carrier cooperation
and consolidation, including through strategic cross-border
investments.
Significantly, the DOT proposals afford particular impetus to
longer-term, strategic investment in U.S. airlines--investment by those
interested in building and maintaining airline businesses, not just
venture capital or hedge funds seeking transitory investment gains.
Short-term, speculative investors are unlikely to be concerned about
participating in the commercial management of their investment targets.
In contrast, the DOT proposal will encourage the kind of longer-term
strategic industry investment--whether by foreign investors in the U.S.
or by U.S. airlines in foreign carriers--that can play an important
role in stabilizing the volatile airline sector.
Expanded foreign investment opportunities would enhance the scope
and level of inter-carrier integration that has been shown to benefit
consumers. Specifically, it would enable airlines to take today's
alliance-based airline cooperation to the next level by facilitating
cross-carrier equity investment and participation in business decision-
making. Such investment and financial commitments would cement and
strengthen the inter-carrier relationships that today rest solely on
contractual agreements, albeit in some cases enhanced by DOT-granted
antitrust immunity.
From a broader policy perspective, strategic cross-border airline
investment may be the surest way to enlist market forces to help
stabilize a global industry--a sector that is notoriously sensitive to
world economic shifts and regional booms and busts, and vulnerable to
unpredictable geopolitical events. Such global diversification among
international airlines enables carriers in one region to broaden their
financial exposure to other regions where growth and demand may be
relatively strong, and so help flatten the often drastic and cyclical
peaks and valleys of airline operations and profitability. Conversely,
global equity-based financial exposure can help spread risk--and so
avoid the potential catastrophic impact of what has become for aviation
the expectation of the unexpected--from SARS to terrorism to the
potential for avian flu. Strategic cross-border investment can also
help normalize airline industry structure, eliminating some of the
inefficient and destructive fragmentation of the international airline
market.
Opponents of the DOT proposal have predictably failed to focus on
its benefits for U.S. aviation competitiveness in the global economy.
Instead, they have sought to stoke overblown fears that allowing
minority foreign investors to participate in certain commercial
management decisions of U.S. airlines will somehow subvert the safety
and security of U.S. aviation. Such misplaced efforts to protect U.S.
aviation from foreign competitors obscure the opportunities for U.S.
airlines to regain their historic primacy in the global marketplace.
Historic U.S. leadership of global aviation--and scores of other
global industries--has long been built on forward-looking, risk-taking
competitive zeal, not on protecting U.S. flag companies from foreign
competition or foreign investment. Reducing some constraints on the
regulatory conditions now imposed on cross-border investment can help
bolster U.S. competitive strengths and entrepreneurial resilience in an
international marketplace where the opportunities are manifest. While
North America's share of world air traffic is projected by Boeing to
shrink from 25 percent to 20 percent over the next two decades, for
example, the share of all intra-Asia markets will grow from 16 percent
to 20 percent. And while domestic air traffic grows only 3.5 percent
annually during that period, transatlantic traffic is projected to grow
by 4.6 percent annually, at the same time traffic to Southeast Asia and
China jumps every year by 7.3 percent and 8.0 percent respectively--
more than double the rate of North American growth.
With improved cost efficiencies and renewed competitive strength in
important international markets, we at United are eager to pursue these
global service opportunities, including through partnerships with
foreign airlines. Over the last 3 years, we began service to 12 new
foreign cities, increased the number of foreign routes we serve by 44
percent, and grown our overall international departures by 31 percent.
In the end, efforts to protect U.S. airlines by restricting cross-
border investment, or by other means, just do not work. To the
contrary, since European regulators facilitated and encouraged open
cross-border investment within the European Union, international
aviation leadership has been shifting from U.S. carriers to such
combinations as Air France/KLM--now the world's largest airline by
revenues. And U.S. carriers now lag far behind their Asian and European
competitors in the acquisition of new long-haul jet aircraft--with no
U.S. passenger orders for the super-jumbo Airbus 380, and only a
relative few for the high-efficiency Boeing 787 or Airbus 350 aircraft.
Mr. Chairman, while the DOT airline investment initiative has real
merit on its own, it is also a fact that the pending agreement to
create a full open skies aviation market between the U.S. and Europe
will not occur without significant progress on this issue, as the
Europeans have made abundantly clear. We would not support a bad DOT
policy simply to gain European approval of the pending agreement, nor
do we see any reason to believe the U.S. Government would do so, but it
is essential to understand the importance of the U.S.-EU agreement that
may hang in the balance here. We fully support the U.S.-EU agreement,
in light of the open skies and operational flexibility benefits it
offers us and other U.S. airlines. And we do so even though it will
expose United to significant new competition from major European
airlines, as well as from U.S. competitors on certain key routes.
The proposed U.S.-EU agreement would enable any European airline,
regardless of its nationality, to fly to anywhere in the U.S. from any
city in Europe, not just from the airline's homeland. Together with the
proposed new investment policy, the agreement would mean more
competition for United--including from foreign airlines serving key
U.S. markets from London's Heathrow airport, where we are now one of
only four U.S. and European airlines authorized to serve that airport.
In addition, a new transatlantic open market agreement would open
Heathrow service to other U.S. airlines as a matter of law. United
recognizes this competitive reality, and is prepared to accept this
commercial challenge. We are willing to pay this competitive price
because, in the long run, we will only succeed if we can prevail in a
truly open global market. United and other U.S. airlines can do so, and
can reassert U.S. aviation leadership, but only if they are prepared to
compete efficiently and effectively as normal businesses on a global
playing field.
Not every U.S. carrier has taken this long-term view. Indeed, even
some who actually stand to gain in the short-term--like Continental
Airlines, which would obtain legal access to Heathrow Airport under a
U.S.-EU agreement--have loudly and extravagantly protested. To be
frank, Mr. Chairman, we are surprised at the degree of rancor that this
relatively modest DOT proposal appears to have generated, albeit by a
small minority of U.S. airlines. Looked at fairly, the DOT proposal is
essentially an incremental step--albeit an important one--along an
extended path to a fully-deregulated, market-based, global industry.
The proposal does nothing to affect the actual foreign ownership
statutory requirements--that U.S. citizens own 75 percent of voting
stock and serve as President and two-thirds of every U.S. airline's
Board; rather, it would relax only the regulatory interpretation of the
regulatory control requirement.
The SNPRM issued last week makes even clearer that DOT's proposal
would not infringe on U.S. citizen control of U.S. airlines. Aside from
even more specifically ensuring U.S. citizen control over issues
relating to safety, security, and Defense Department obligations of
U.S. airlines, the SNPRM makes explicit that the U.S. citizen-dominated
Board of a U.S. airline maintains actual control of the airline.
Particularly with this clarification, it is difficult to see any
remaining basis for legitimate concerns about U.S. control. To the
contrary, it will be important to ensure that DOT's effort to clarify
this issue in its SNPRM does not provide fodder for opponents of the
proposal--here and abroad--to argue that it now does not go far enough
to encourage foreign investment.
The other significant source of concern about the DOT proposal,
voiced by part of the organized labor community, is that the proposal
could lead to fewer or less desirable jobs for U.S. airline workers.
The fact is that U.S. airline labor has borne much of the burden as
airlines have struggled to cut costs, increase efficiency, and compete
effectively in an extraordinarily competitive environment. But it is
impossible to see how the proposal to encourage more investment in
their U.S. carrier employers can realistically make matters any worse
for U.S. labor. Nor is it clear why foreign participation in a U.S.
airline's managerial decisions would increase outsourcing of that
airline's operations, including maintenance or long-haul operations,
where the economics did not dictate such a shift. To the contrary, U.S.
workers could only benefit from a more robust and competitive U.S.
airline industry.
Given the circumscribed nature of the regulatory step at issue
here, it is clear that much of the high-pitched opposition to it is
generated by those pursuing other individual agendas. DOT's critics
raise exaggerated fears of minority foreign investment in U.S.
companies, and of appeasement of European interests, while virtually
ignoring the numerous direct benefits of U.S. investment in foreign
airlines, and the broader importance of maintaining global momentum for
open aviation markets, free trade, and investment freedom. Regrettably,
such objections are not entirely unexpected. Virtually every
significant step toward aviation liberalization has met unwarranted
opposition--from the 1978 deregulation of the U.S. domestic industry,
to the pursuit of global open skies policy more than a decade later, to
the current DOT proposal on foreign investment.
Mr. Chairman, DOT's proposal to facilitate cross-border airline
investment, together with the transatlantic open market agreement we
hope it will encourage, represents an important step for U.S. and
international aviation--one that works to the benefit of a resilient
U.S. airline industry and to consumers. Especially as the proposal
moves toward freeing airlines from anachronistic marketplace
distortions, and in the direction of enabling U.S. airlines to compete
like other global businesses, it can help bring about a more fully
deregulated environment in which U.S. carriers can regain their
historic global aviation leadership.
We urge the Committee to support this modest effort, and we also
take the opportunity to encourage DOT to maintain its focus on
achieving the many, critical deregulation goals that remain. In today's
competitive international airline industry, the only path that makes
sense is the one that leads toward full deregulation, and the
elimination of restrictions that continue to hold back U.S. carriers.
Thank you again for the opportunity to appear and present the views
of United Airlines. I would be pleased to respond to any questions of
the Committee.
Senator Burns. Thank you, Mr. Whitaker. We appreciate that.
Now we'll hear from Captain Duane Woerth, President, Air
Line Pilots Association. Welcome, and thank you for coming.
STATEMENT OF CAPTAIN DUANE WOERTH, PRESIDENT,
AIR LINE PILOTS ASSOCIATION (ALPA)
Mr. Woerth. Thank you, Mr. Chairman. I'd like my statement
be entered into the record, my full statement, please. And I--
--
Senator Burns. Your full statement will be a part of the
record.
Mr. Woerth. I represent, as you know, 62,000 pilots, United
States and Canada, from 39 airlines. And we believe the
original NPRM, and the supplemental, are flawed public policy,
for a number of reasons.
First, the NPRM is the wrong process. Only Congress should
amend foreign ownership laws which prohibit actual foreign
control. Let's have a real debate, starting with S. 2135, which
ALPA supports. The NPRM does not distinguish adequately between
types of foreign investors. Private citizens, mutual funds,
foreign airlines, and even government-owned airlines are all
essentially the same. I do not accept that the reciprocity
requirement is adequate to defend against this. Some states
have a state-owned or a ``golden share'' airline, but they also
have other airlines, so it would be permissible to buy a small
airline, while somebody buys United. I think the reciprocity
piece is simply not good enough.
The NPRM also has faulty assumptions about American
corporate governance. As was stated before, safety and security
simply cannot be carved out separately. I also do not agree
that a major shareholder with 25 percent cannot control a U.S.
corporation. It happens every day. It's happening all over the
Fortune 100. The rest of the diversified investors do not
operate as one, and a majority investor can soon get control of
the board.
The supplemental assumes a rebelling in the ranks in the
board that would somehow revoke the decisions made by majority,
and I must say, frankly, this does not pass the laugh test of
the corporate board I served on, which was Northwest Airlines.
In the real world, Board members are recruited. They're not
come out of the--they're not elected. They are recruited,
usually by the Chairman and the CEO. And after a couple of
years, the largest investor will successfully nominate a slated
Director who's satisfactory to the majority investor. And that
includes independent directors who know how they got on the
board in the first place.
And, incidentally, the supplemental rule is only one page
long. Just one page. But the DOT has added 74 pages of
explanations and assurances about how the threats to foreign
control could be mitigated. Unfortunately, none of these ideas
actually are in the rule itself, and are unenforceable by any
realistic standards. In other words, where I come from, the
supplemental appears to be all hole and no donut.
The NPRM assumes U.S. airlines are clamoring for foreign
airline capital. The truth is the NPRM represents the wish
list, and now the demand, of EU airlines, not U.S. airlines,
and certainly not U.S. airline employees. As you all--you all
know the executives of our airline industry; they're not
bashful about asking Congress for something, but they're not
lined up outside your doors asking to get this NPRM through.
They're not doing it. I don't see where the push is in U.S.
interests.
Congress should not be stampeded into a rushed blessing of
a deeply flawed NPRM simply to satisfy the arbitrary and
artificial deadlines represented by scheduled meetings of EU
ministers. And, incidentally, the EU ministers, which, by the
way, failed to ratify our first EU-U.S. Open Skies, that
agreement, they could have already had, but they shot it down.
We negotiated, in good faith. They shot it down.
Now, ALPA, I want to make clear, does support the EU Open
Skies Agreement. We wish it was already in effect, and we hope
the new agreement would be voted on by the European Union. I
think I need to say that I find very objectionable
preconditions or side deals to good-faith negotiations between
the United States and the European Union or anybody else, for
that matter. I think Chairman Mica might have stated, if I
heard him correctly, that our negotiating credibility was at
risk. I think it's just the opposite. We negotiated in good
faith twice. They shot down the first deal, they're threatening
to shoot down this deal. Our negotiating credibility isn't at
risk; it's the European Union's credibility which is at risk.
Now, the NPRM simply ignores the real-world history of
foreign airline investments in the United States, which ended
up in significant boardroom conflicts of interest, which
ultimately forced the divestiture of British Airways investment
in US Airways, at a substantial profit, and of KLM's investment
in Northwest, also at a substantial profit. I was on that board
when the conflict occurred--lawsuits, huge conflict. It was
finally resolved once the stock was gone. Now they've got a
great joint venture. But while a foreign airline was in the
Northwest Board, conflict was aplenty.
The US Airways pilots and flight attendants were replaced
by British crews almost immediately after the investment in
British Airways in US Airways. That--the routes to London were
just gone, and it was taken over by the British. That is the
one thing that our U.S. airline crews from United and Delta and
Northwest and Continental across this country are aware of.
They saw what happened there, and they're quite afraid that
they're going to be replaced over time by their foreign
counterparts.
And I might add, Mr. Chairman, that many of my pilots,
almost 30,000 of them, serve Mississippi, and they serve
Bozeman, Montana, and Billings. They serve North Dakota and
Arkansas. And our regional pilots really wonder what's really
going to happen. They know most of the passengers they fly are
in domestic service. There's some traffic that flows across to
Amsterdam and Paris and London and Frankfurt, but they're
wondering what's going to happen to them if this NPRM would
take effect.
So, bottom line, we support U.S.-EU Open Skies. We want it
to occur. We don't think this should be a precondition. And we
certainly hope that Congress would exert its efforts to control
this process, and a little more lengthy debate on its vital
interest would be worthwhile. We think we can amend foreign
investment laws sensibly, but I'm sorry to say I don't think
the NPRM is the way to go.
I'll answer any questions you have, Mr. Chairman.
[The prepared statement of Mr. Woerth follows:]
Prepared Statement of Captain Duane Woerth, President,
Air Line Pilots Association (ALPA)
Good afternoon. I am Duane Woerth, the President of the Air Line
Pilots Association. ALPA represents over 62,000 pilots at 39 airlines
in the United States and Canada. We appreciate the opportunity to
appear before this subcommittee today to present our views on the U.S.
Department of Transportation's proposed policy on foreign control of
U.S. airlines. While DOT has recently modified that proposal, we
continue to have deep reservations about several of its substantive
provisions and believe that Congress, rather than the Department,
should determine the rules that apply to the ownership and control of
U.S. airlines. We fully support S. 2135, which is designed to ensure
that Congress has an opportunity for meaningful review of DOT's
proposal and its implications, as well as Senators Inouye and Stevens'
proposed amendment to the supplemental appropriations bill that would
prohibit the issuance and implementation of DOT's proposed rule through
the end of Fiscal Year 2006.
Background--The Proposed U.S.-EU Text
DOT's proposal is closely tied to the text of a possible air
services agreement that was initialed by the U.S. and the European
Union last year. In fact, the EU has expressly linked the outcome of
DOT's rulemaking process to the EU's decision to finally accept or
reject that initialed text. Accordingly, as a preliminary matter it is
important to assess the contents of that text.
ALPA believes that the initialed text offers little to U.S.
airlines, but much to their EU counterparts. That text would allow any
European airline to fly from any point in Europe to any point in the
U.S. and beyond. For example, Lufthansa could fly from Paris to
Atlanta; Air France could fly from Munich to Chicago. Thus, the
initialed text would solve the problems raised for the Member States of
the European Union by the December 2002 European Court of Justice
decision that found that the ownership and control clauses in the
bilateral agreements between the United States and individual European
Member States were illegal because they violated the right of
establishment provisions of the EU's organizational statutes. The text
would also facilitate the consolidation of European airlines,
potentially allowing them to be more efficient and effective
competitors vis a vis U.S. carriers. In addition, under the initialed
text EU carriers would receive the right to provide aircraft and crew
to U.S. airlines on international routes, a right they have long
sought, but which appears to be in square violation of the Federal
Aviation Regulations and directly threatens the jobs of U.S. airline
pilots. Clearly the initialed text provides substantial benefits to EU
carriers.
What would U.S. carriers get if the initialed text were to go into
effect? Apart from some additional routes beyond European gateway
points that our cargo carriers might use, not much. In June 2004, the
U.S. Government Accountability Office issued a report titled
``Transatlantic Aviation: Effects of Easing Restrictions on U.S.-
European Markets.'' That report contained an assessment of what U.S.
carriers and consumers stood to gain if the U.S. entered into an ``open
skies'' agreement with the EU that eliminated, as does the initialed
text, the nationality restrictions on EU carriers. The GAO concluded
that whatever benefit U.S. carriers and consumers would eventually gain
from such an agreement would not be realized for several years. This,
according to the GAO, is because the U.S. already has open access to
the vast majority of European traffic and the only significant
restricted market--London--is subject to significant airport capacity
constraints that would not be eliminated by a liberalized agreement. In
other words, in the GAO's view, U.S. carriers were not likely to
benefit in the short term--and possibly only to a small extent even in
the longer term--by a U.S.-EU ``open skies'' agreement similar to the
initialed text.
But as favorable as the initialed text is for European carriers,
they want more. Throughout the negotiations the European carriers
sought the inclusion in any new agreement of the right for them to own
and control U.S. airlines. DOT's proposal is the Department's effort to
satisfy this EU objective.
The Foreign Control Rulemaking
So let me turn to that rulemaking process and DOT's proposed policy
change.
The Department's proposal was first issued on the eve of the round
of negotiations that resulted in the initialed text. After reviewing
the comments that were submitted on the proposal, DOT issued a
supplemental proposal last week. That revised proposal would permit
foreign interests to exercise actual control over all the commercial
elements of a U.S. air carrier's business, including, apparently, such
fundamental matters as the ``definition of and quality of product,
branding, fleet mix, origins and destinations, [and] network issues
defining the business of the company.'' Under the proposal U.S.
citizens would have to maintain actual control of only four areas:
1. The carrier's ``organizational documentation, including such
documents as charter of incorporation, certificate of
incorporation, by-laws, membership agreements, stockholder
agreements, and other documents of similar nature'';
2. The carrier's ``[d]ecisions whether to make or continue
Civil Reserve Air Fleet (CRAF) or other national defense
airlift commitments, and, once made, the implementation of such
commitments with the Department of Defense'';
3. The carrier's ``policies and implementation with respect to
aviation security, including transportation security
requirements specified by the Transportation Security
Administration''; and
4. The carrier's ``policies and implementation with respect to
aviation safety, including requirements specified by the
Federal Aviation Administration.''
As long as these four areas remain under U.S. control--and the
other requirements of the statute relating to place of incorporation,
ownership of voting stock, and the citizenship of managers and
directors, are met--the Department would permit foreign citizens to
control all other commercial elements of the carrier's business and
operations. As United Airlines CEO Glenn Tilton put it in a recent
speech the proposal ``would allow foreign investors in U.S. airlines to
effectively control the bulk of the airline's commercial operations.''
We do appreciate DOT's consideration of the comments that were
filed on the initial proposal and the Department's efforts to be
responsive to some of the expressed concerns. We intend to examine the
supplemental proposal closely and file our comments at the appropriate
time. But even on a first reading, we believe there continue to be a
number of flaws in the Department's proposal.
The Statutory Issue
First, even as revised, DOT's proposal is simply at odds with
Congress's determination that actual control of a U.S. air carrier must
be in the hands of U.S. citizens. While the four areas over which the
Department would continue to require U.S. citizen control may have
their importance, they are ultimately peripheral to an airline's core
business operations and strategy. Control over the four narrowly
defined areas simply does not add up to the ``actual control'' of the
entire air carrier as required by Congress. The most critical issues
that managers of a U.S. airline must address are such matters as the
markets to be served, the type of aircraft to be flown, the alliances
to participate in, the extent to which the carrier out-sources
maintenance and other services, the carrier's schedules, fares, etc.
These are the fundamental economic decisions that determine the very
nature of an airline's operations, and its role in the air
transportation system. In fact, DOT's application of the ``actual
control'' test historically has been focused on the ability of foreign
entities to control the economic and operational aspects of U.S.
airlines. To permit these matters to be controlled by foreign citizens,
as the Department proposes to do, simply cannot be reconciled with the
statutory requirement that U.S. citizens retain ``actual control'' of
the airline.
DOT's NPRM acknowledges that, unless Congress changes them, the
Department cannot alter the statutory standards that define a carrier's
U.S. citizenship--i.e., the requirements relating to place of
incorporation, ownership of the voting stock, and the citizenship of
managing officers and directors--because they are mandated by law. The
same is true of the ``actual control'' requirement. Indeed, the
underlying purpose of all the statutory requirements is to ensure that
U.S. citizens retain actual control of a U.S. airline. Without ``actual
control,'' the other statutory requirements are meaningless.
DOT's supplemental notice requires that ``all delegations [of
control] to foreign interests ultimately be revocable by the board of
directors or shareholders.'' But this proposed ``fix'' does not address
the fundamental problem--that foreign entities will be permitted to be
in actual control of key economic and operational aspects of U.S.
airlines. The U.S. aviation statutes simply do not allow the dissection
of airlines into components that can be under foreign control and those
that cannot: the entire airline must be under U.S. citizen control.
Application of the ``actual control'' standard does require
analysis of the specific facts and circumstances of each particular
case and thus the Department does have some discretion to define the
criteria for determining whether U.S. citizens have ``actual control''
of a carrier. That discretion, however, does not give the Department
authority to change the plain meaning of the term ``actual control''
itself, so that control over such basic matters as a carrier's route
selection, fare structure, or choice of aircraft is simply excluded
from the definition of ``actual control.'' This is not interpretation
but legislation, and it is the province of Congress, not the
Department.
Apart from the legal issues there are a number of policy issues
raised by the Department's proposal.
The Impact on U.S. Airlines and Jobs
A key policy issue, in our view, is whether foreign air carriers
should be permitted to acquire or exercise the kind of control over the
basic business decisions and strategy of U.S. air carriers that the
proposed rule change would permit.
The distinction is of crucial importance.
When one air carrier seeks to acquire control of another, the goal
of the acquisition is almost always to combine the operations of the
two carriers so as to create an integrated network. Since foreign
carriers cannot operate domestically, the reason a foreign carrier
would seek control of a U.S. carrier would normally be to combine the
U.S. carrier's domestic services with the foreign carrier's
international services. While this also occurs when U.S. and foreign
carriers form alliances, an acquisition of control is very different
from an alliance. In an alliance each carrier remains autonomous and
able to protect its own economic interests. A very different situation
would be created if a foreign carrier is permitted to acquire control
of the key economic elements of a U.S. carrier's business strategy--
such as route structure, schedules, fleet type, and the like. In such a
situation, it is inevitable that the foreign carrier would exercise its
control to maximize its own interests, not those of the U.S. carrier.
What would likely happen when a foreign carrier acquires control of
a U.S. carrier is that the foreign carrier might well use the U.S.
carrier to create a domestic network that would support and feed
traffic to the foreign carrier's international operations. As a result,
any pre-existing international operations of the U.S. carrier could
diminish or disappear, while those of the international carrier would
be expanded.
Such a result is fundamentally inconsistent with 49 U.S.C.
Sec. 40101(a)(15), which sets forth as a U.S. policy goal:
strengthening the competitive position of [U.S.] air carriers
to at least ensure equality with foreign air carriers,
including the attainment of the opportunity for [U.S.] air
carriers to maintain and increase their profitability in
foreign air transportation. [Emphasis added.]
This goal simply could not be accomplished if foreign carriers are
permitted to control the basic operations and business strategy of U.S.
carriers.
The decline in international operations by U.S. carriers that would
result from foreign control would also undermine the CRAF program,
because it would necessarily cause a reduction in the number of long-
range wide-bodied aircraft in the U.S. carrier's fleet. Although the
Department's proposed rule attempts to protect the CRAF program by
ensuring that U.S. citizens retain control of a carrier's CRAF
commitments, the fact is that a foreign carrier that has economic
control of a U.S. carrier would be able to determine how many CRAF-
eligible aircraft the U.S. carrier has in its fleet. And it is
predictable, for the reasons stated, that the foreign carrier's
business strategy would cause that number to diminish over time.
The decline in international operations by U.S. carriers would also
be injurious to U.S. airline workers, including in particular the
pilots. International flying of wide-bodied aircraft is the most
remunerative, and therefore the most desired, flying performed by
pilots; pilots spend their entire careers accumulating the seniority
required to gain access to such flying opportunities. In an era when
the career expectations of pilots and other airline workers have
already been repeatedly frustrated by airline bankruptcies, furloughs,
wage concessions, pension plan terminations, and the like, it would be
a crowning blow for the U.S. Government now to adopt a policy that
would tend to eliminate international flying by U.S. carriers.
U.S. workers would also suffer injury because U.S. labor laws do
not apply to foreign air carriers. When two or more U.S. carriers are
commonly controlled, the employees of all of them are subject to the
Railway Labor Act and therefore have the same collective bargaining
rights and opportunities. This allows the employees on all the
affiliated carriers to try to equalize their wages and working
conditions, thereby preventing the carriers from playing one employee
group against another. When one of the affiliated carriers is foreign
and therefore not subject to the same labor law, the employees of all
the affiliates are placed at a severe disadvantage and face the
prospect of being bid against each other without effective recourse
against the entity (perhaps a foreign holding company) that is
allocating the work. These are not hypothetical concerns. In the early
1990's when British Airways bought into US Airways, and KLM bought into
Northwest, flight crew jobs were either moved to or grew
disproportionately at the foreign partner.
The validity of these concerns was recognized recently by a Working
Group appointed by the American Bar Association's Air and Space Forum
to study the issue of whether the statutory restriction on ownership
and control of U.S. airlines. The Working Group issued a Proposed
Position Statement (attached hereto) which, despite being favorably
disposed to lifting the restrictions on foreign ownership and control
of U.S. carriers, clearly recognized that ownership or control by
foreign airlines should not be permitted until and unless special
safeguards are enacted. The Working Group therefore recommended
adoption of two important restrictions on foreign air-carrier control
of a U.S. carrier. The first of these restrictions would require any
foreign carrier that acquired control of a U.S. carrier to:
ensure that the U.S. airline maintains at least the percentage
of the combined total ASMs operated by both the U.S. airline
and the foreign affiliates between the United States and any
country or region that it had as of a date 6 months prior to
the announcement of the acquisition. This condition ensures
that the CRAF program has access both to a sufficient number of
the appropriate (i.e., long-haul wide-body) aircraft and to the
crew necessary to fly them in a military emergency. It
simultaneously ensures that U.S. jobs are not transferred to
foreign entities.
The second restriction proposed by the ABA Working Group would
require that ``[t]he U.S. Government and the appropriate foreign
government(s) . . . establish in advance a legal framework containing
fair procedures to regulate labor representation and collective
bargaining on such multinational airline systems.'' The purpose of this
recommendation, of course, is to eliminate the unfair advantage that
would otherwise result if the U.S. carrier and the foreign carrier were
subject to different rules relating to labor representation and
collective bargaining.
While ALPA does not endorse the Proposed Position Statement of the
ABA Working Group, we do believe the statement has at least identified
the basic concerns that must be addressed if any change is to be made
in existing rules relating to foreign ownership or control of U.S. air
carriers.
In its supplemental notice DOT attempts to address some of these
concerns. We will examine and respond fully to DOT's suggestions in our
comments on the supplemental notice. However, we would make some
preliminary observations.
First, DOT states that even if foreign entities control the
operations of a U.S. airline that airline would still be subject to the
Railway Labor Act and thus ``all employees at any U.S. carrier would
retain all the protections created by United States' labor laws.'' But
that truism has never been at issue. The concern, as stated above, is
that U.S. labor laws may be inadequate to deal with the job allocation
issues that may arise if two airlines subject to two separate sets of
labor laws are under common ownership.
Second, DOT concludes that if a foreign investor who had been
delegated authority to control of a U.S. airline were to shift long-
haul flying to a foreign carrier U.S. investors would withdraw the
delegation of authority if the transfer was contrary to the interest of
the U.S. carrier and the U.S. citizen investors. The conclusion simply
does not square with the reality of how board rooms work, especially in
publicly-held companies where the foreign investors may be far and away
the largest and most dominant shareholders. Moreover, while DOT
discusses at length the right of U.S. shareholders or board members to
revoke authority from foreign investors, the Department's actual policy
(which is only a page long) says nothing about this right. Exactly, how
the right would be enforced is obscure.
Third, DOT proposes to revise its initial proposal to require that
U.S. citizens must control a U.S. carrier's commitments with respect to
all national defense airlift operations. But the Department's
supplemental rule still does not address the fact that foreign
investors would be able to make fleet decisions that could eliminate
all the aircraft suitable for CRAF operations. In other words, while
U.S. citizens may have to have control over honoring CRAF and other
national defense airlift commitments once made, foreign managers could
make fleet decisions that leave no aircraft available for the
commitment in the first place.
The Impact on Safety
DOT's supplemental proposal discusses a number of safety concerns
raised by ALPA and other commentators and proposes to broaden the
language of the initial rule to clarify that ``U.S. citizens must
control the carrier's overall safety and security programs and
policies, not just the carrier's compliance with the requirements of
the FAA and TSA.'' ALPA will review DOT's assessment and file comments
on the revised proposal. However, ALPA notes that safety and security
issues are completely intertwined with operational and economic
decisions and that whoever actually controls the operations of the
airline is likely to ultimately control safety policies and
implementation.
The Lack of Supporting Data
Finally, the Department has presented no data either to support its
claim that the U.S. airline industry is in need of more foreign
investment, or its claim that such investment is not available absent a
change in the foreign control rules. We believe that the fundamental
premise on which the supplemental NPRM appears to be based--that the
U.S. airline industry is in need of enhanced access to worldwide
financial resources, and that such access to foreign capital cannot be
achieved without granting foreign investors substantial control of U.S.
carriers--is erroneous. Certainly, the proposal contains no hard data
to substantiate these propositions, and we are not aware that any such
data are available.
In fact, there is evidence that when a U.S. airline shows some
significant promise of profitability, it is able to find the capital it
needs. For example, United Airlines, after engaging in extensive
restructuring, cost-cutting and changes in operations and services
while in Chapter 11, was able to obtain $3 billion in debt exit
financing on terms that pleased United's management. The airline's own
press release stated that it had received offers of subscription for
more than twice the capital necessary to support the financing it
sought and that the money was provided at rates better than it had
expected to receive. Similarly, US Airways, after going through its own
Chapter 11 restructuring and merging with America West, obtained $1.5
billion in exit financing, of which $350 million was in the form of
equity commitments. Moreover, $75 million of the equity was foreign
investment provided by ACE Aviation Holdings, the parent of Air Canada.
These major financings strongly indicate that both foreign and domestic
capital is available to U.S. airlines if they appear to offer a
reasonable return to the investor.
If there is hard evidence that the U.S. airline industry is
seriously suffering from a dearth of capital, and that the existing
rules relating to foreign control are somehow responsible for the
problem, that evidence has yet to be produced. Before lack of capital
is used as a rationale for considering dramatic changes in the foreign
control rules, there should be a thorough and systematic study to
determine whether the problem it is attempting to cure actually exists.
Conclusion
DOT's proposal is based on two premises, both of which are
erroneous. The first is that airlines need enhanced access to foreign
capital to be competitive. But as we have shown above, U.S. airlines
with sound business plans have been able to find ample capital on
reasonable terms. The second is that Congress has decided ``the airline
industry should be largely deregulated (except of course, for safety
and security regulation).'' But the airline industry remains regulated
in myriad ways, and just as safety and security have not been
deregulated Congress has not deregulated airline citizenship; if
anything, Congress has recently tightened the citizenship rules. DOT's
proposal would essentially rewrite these rules. The Department's
proposal could have broad, potentially negative effects on the
competitive posture of U.S. airlines and their employees and raises a
number of key public-policy issues that have not been adequately
addressed by the Department. Consideration of changes of this magnitude
should be undertaken not by an administering agency but by Congress. S.
2135 is thoughtfully designed both to afford time for Congress to
consider whether a change to the control rules is appropriate and to
help develop a record on which that consideration can be based and
Senators Inouye and Steven's amendment to the supplemental
appropriations bill would freeze further action by DOT while that bill
moves forward. We urge this committee to support these measures and to
ensure that the DOT does not unilaterally impose changes to the
longstanding rules on ``actual control'' of U.S. airlines.
______
Air and Space Lawyer--Winter, 2005
Working Group Position Statement On Relaxing
Airline Foreign Ownership Restrictions
by American Bar Association
The Position Statement presented herein is a composition of the
various forces that must be addressed if meaningful change is going to
be made to foreign ownership of U.S. airlines. This proposal, which
contains suggested changes to the law on foreign ownership and control,
grew out of the efforts of the individuals whose names appear below the
statement. The group met as part of and in preparation for a
presentation to the Forum on Air & Space Law's Fall Meeting in Santa
Monica, California, on October 28, 2004. The ex officio members
participated in the deliberations leading up to the final draft but did
not vote on approval of the final draft. Each participant may have
personal views that vary from the consensus statement, but all were
able to agree on the statement to reach a consensus. The consensus
views do not necessarily reflect the views of any individual
participants or their employers and/or clients.
Nor does the statement represent the views of the ABA or the Forum.
The value of the proposal is less in its details (all of which are
worthy of serious consideration) than in demonstrating the methodology/
process by which competing interests may need to be accommodated. The
Position Statement reflects the summation of research papers on various
related subjects, including legislative history, *20 maritime law as it
applies to foreign ownership of U.S. shipping interests, the Omnibus
Trade and Competitiveness Act of 1988 (Exon-Florio) legislation and the
operation of the Committee on Foreign Investments in the United States
(CFIUS), Civil Reserve Air Fleet (CRAF) issues, and labor-related
issues.
A principal objective of the deliberations was to critically
examine the original justifications for the restrictions on foreign
ownership and control and to determine what, if anything, about the
airline industry might require the continuation of special rules that
apply to almost no other industry.
Only one of the original justifications, as reflected in the
legislative history, held validity--the national security concern.
Specifically, how can we ensure that the Department of Defense (DOD)
has access to sufficient lift with crews in times of national
emergency? A second area of concern identified was that a change in the
ownership and control rules could give rise to labor-management issues
not adequately addressed by the current laws of the United States and
other countries.
The Position Statement appears below:
Proposed Position Statement for Consideration
by the ABA Air and Space Law Forum\1\
---------------------------------------------------------------------------
\1\ The Proposed Position Statement reflects the consensus views of
the individuals whose names appear below the statement. The ex officio
members participated in the deliberations leading up to the final
draft, but did not vote on approval of the final draft. The views
expressed in the Position Statement reflect the consensus views of
those who fully participated and do not necessarily reflect the views
of any individual participants or of their employers and/or clients.
---------------------------------------------------------------------------
It is the recommendation of this Working Group that Congress amend
the statutory restriction on foreign ownership and control of U.S.
airlines, subject to the conditions set out below. Congress first
restricted foreign ownership of U.S. airlines in the 1920s. The Civil
Aeronautics Act of 1938 and its successor, the Federal Aviation Act of
1958, incorporated the current prohibition on substantial foreign
ownership or control, to protect the heavily subsidized, fledgling
airline industry and to provide for the national defense. That
prohibition, embellished by years of regulatory interpretation by the
Civil Aeronautics Board and the Department of Transportation (DOT), has
served to strictly limit foreign ownership and control, and largely
exclude foreign equity capital. It is the Working Group's judgment
that, if certain safeguards are put in place, the statutory prohibition
is no longer needed to protect our aviation industry or provide for the
national defense.
Under our proposal, there would be no restriction on the ability of
a foreign entity that is not an airline or an airline affiliate to
invest in a U.S. air carrier, except for the following statutory
safeguard to protect national defense:
1. Congress should amend the Transportation Code (49 U.S.C.) to
require a foreign-owned U.S. air carrier to enter into a binding
contract with the DOD that provides for participation in CRAF. To
ensure compliance, a carrier must waive any objection to the DOD's
obtaining a Federal Court injunction (including an injunction to allow
seizure of any aircraft that the carrier has pledged to CRAF). If,
following DOD activation of CRAF, a foreign-owned U.S. air carrier
fails to make available the aircraft and crews it has pledged, the DOT
will automatically revoke the carrier's certificate of public
convenience and necessity upon notification of such failure by the
DOD.\2\
---------------------------------------------------------------------------
\2\ Consideration was given to amending the so-called Exon-Florio
provision of the Defense Production Act to require notification of the
Committee on Foreign Investments in the United States (CFIUS) if a
foreign entity seeks to own more than 25 percent of the voting equity
in a U.S. air carrier that operates long-haul wide-body aircraft
suitable for the Civil Reserve Air Fleet (CRAF). This change (CFIUS
notification is now voluntary in most cases) would ensure that the
Department of Defense (DOD) and other U.S. Government agencies have the
opportunity to block or condition a proposed airline acquisition on
national security grounds, if appropriate. Because we are unaware of
any instance where failure to notify has had a demonstrated detrimental
impact on national security, we have determined not to recommend any
changes in this area.
Moreover, a foreign airline or its affiliate would have the same
opportunity to invest in a U.S. carrier subject to two additional
---------------------------------------------------------------------------
conditions:
2. 50 percent of any incremental flying to and from the United
States must be flown by the U.S. carrier, as measured by available seat
miles (ASMs).\3\ In addition, the U.S. carrier must maintain a
sufficient level of capacity on any major long-haul U.S. international
routes (e.g., the transatlantic or the U.S.-Asia/Pacific).
Specifically, the foreign-owned airline(s) controlling the U.S. airline
shall ensure that the U.S. airline maintains at least the percentage of
the combined total ASMs operated by both the U.S. airline and the
foreign affiliates between the United States and any country or region
that it had as of a date 6 months prior to the announcement of the
acquisition. This condition ensures that the CRAF program has access
both to a sufficient number of the appropriate (i.e., long-haul wide-
body) aircraft and to the crew necessary to fly them in a military
emergency. It simultaneously ensures that U.S. jobs are not transferred
to foreign entities.
---------------------------------------------------------------------------
\3\ That is, the foreign airline owner may operate, with its own
aircraft and crews, no more than 50 percent of any incremental flying
by the combined entity on U.S. international routes, as measured by
ASMs. If the foreign airline owner reduces the amount of flying by the
U.S.-based carrier on U.S. international routes, it must reduce its own
flying on U.S. international routes by the same amount, as measured by
percent of ASMs.
3. The U.S. Government and the appropriate foreign government(s)
would have to establish in advance a legal framework containing fair
procedures to regulate labor representation and collective bargaining
---------------------------------------------------------------------------
on such multinational airline systems.
Whether or not the foreign owner is an airline, a U.S. carrier that
has foreign ownership or control, as a ``U.S. air carrier,'' will be
organized under U.S. law and operated subject to all U.S. laws and
regulations (e.g., safety, security, labor relations, environment,
etc.) just as if it were fully owned by U.S. citizens. The current
provisions of the statute with respect to the citizenship of U.S.
airline officers and directors would remain in place. The current
control and voting tests would be modified as set forth herein.
Any foreign entity seeking to control a U.S. air carrier (like any
prospective U.S. air service provider) would have to apply to the DOT
for a certificate of public convenience and necessity. If the (DOT-
approved) foreign owner is an airline or its affiliate, conditions 1
and 2 would be incorporated into the certificates of both the foreign
airline owner and the U.S. air carrier. (The DOD should participate in
the DOT certificate-approval process to ensure that national defense is
adequately considered.) If the applicant is a foreign airline that is
owned in whole or in part by a foreign government, DOT would need to
make a finding on the record that such investment by a government-owned
entity would not harm competition or otherwise be contrary to the
public interest.
Lastly, the rights provided for in our proposal extend only to
nationals of those countries or regional entities that provide U.S.
citizens with investment rights of comparable value.
Jonathan B. Hill, Chairman
Russell Bailey
Jonathan Blank
Richard Magurno
Jeffrey Manley
Dorothy Robyn
Mark Dayton, ex officio
Dwight Moore, ex officio
Senator Burns. Thank you, Captain Woerth. I appreciate that
very much.
Now, when we're talking about this today, we're mostly
talking about passenger. Is--does--Secretary Shane, you're
right behind--does this also pertain to cargo?
Mr. Shane. Yes, sir.
Senator Burns. It does. Cargo and the whole works. I was
wondering about that. And does it concern any of you that it
may be a state-owned airline that would be doing the investing
in our domestic airlines here?
Yes?
Mr. Smith. Well, as I mentioned briefly, the DOT approved
the German government buying one of our competitors. The
airline was separated to meet U.S. ownership laws, but we made
the case, as did UPS, that the foreign entity was exercising de
facto control, but not de jure control. And there must have
been something to it, even though the DOT approved it, because
it was restructured to have bona fide U.S. interests after
that.
So, our point is, we don't care whether it's governments.
We don't care who is involved, as long as we have the same
opportunity to compete around the world. And that's a--that's
embedded in this NPRM, this reciprocity, which was our point of
opposing the DOT's approval of DHL. So, if you want a real-life
example of this, all these hypotheses of the takeover of the
Commerce Committee and one thing or another, just go in our
industry. You see it right now. There are foreign interests
that own them, 25 percent. They don't tell them, you know, what
to do, other than they can be involved in coordinating
schedules and so forth. It's a much better regime than this
alliance situation, which gives, to foreign and U.S. carriers,
immunity, which, in any other industry, Mr. Chairman, would be
illegal. It would be a criminally sanctioned event. They can
coordinate schedules. They can coordinate rates and so forth.
And, finally, the elephant in this room--you heard it twice
here--was--is Heathrow. Heathrow means nothing to the cargo
folks. What Continental, quite rightly, wants is access to
Heathrow, because it's very important. The reason British
Airways took over the flying when they invested in US Air
wasn't because there was some conspiracy to do away with
American pilots. It was because US Airways doesn't have any
gates--authorities or slots into Heathrow, and British Airways
did. And that was a very lucrative transaction.
So, this is not a simple issue here. And there are many
competing interests. And that's one of the things that is very
disheartening to FedEx and the other cargo interests who employ
more people than the airlines put together, because the cargo
interests have repeatedly been put behind Heathrow, DOT's
interest in doing another deal, and so forth. I mean, it's very
important to the United States. As I mentioned in my opening
remarks, we provide, alone, half of the cargo airlift for the
Civil Reserve Air Fleet. But our interests are always sort of
over here, and Heathrow and these alliances and all are over on
the other side.
So, we strongly support anything that will move European
Open Skies, and do not think that all of these hypotheticals
are real risks. And I, by the way, have served on six New York
Stock Exchange boards. I know very well how boards are
selected. And I can tell you, I have never seen a board of
directors that can exercise their fiduciary duty to the
shareholders, of making money, and accede to some noneconomic
interest of a 25-percent shareholder. That's ridiculous.
Mr. Smisek. Mr. Chairman, could I add to that?
Senator Burns. Yes.
Mr. Smisek. Fred has been--as he's admitted--been very
eloquent on both sides of this issue. But your question about,
Would we be concerned about a foreign government investing in a
U.S. airline and controlling it? We would, for a number of
reasons, not the least of which would be, that would--they can
just turn on the tap in the treasury. That would be grossly
unfair competition against U.S. airlines, because we have to go
out and compete for--compete every day in the market. We have
to go out and compete for capital. A foreign government owning
a U.S. airline would have an--infinite resources, because all
they--they can print the money on the other end. So, we'd be
quite concerned about that.
Mr. Smith. We have that situation, Mr. Chairman. We do
compete with the Government of Germany. They own 60 percent of
one of our two largest competitors. Every day, we compete with
them. And the fact that they have unlimited funds doesn't
necessarily mean they're going to be successful in the
marketplace. But there's nothing in this NPRM that says that
the foreign government can do anything other than own 25
percent of the shares and participate in those blue dots that
Senator Lautenberg had, but not the red dots. Any of that was
prohibited under the 1940 regulation that Secretary Shane
mentioned.
Mr. Smisek. Yes, I think----
Mr. Smith. And that's what the quid pro quo is with the
Europeans.
Mr. Smisek. I think Mr. Shane's previous testimony made it
very clear that foreign carriers could dominate and control
every commercial aspect of a U.S. airline other than safety,
security, CRAF, and the organizational documents. Now, they've
add--that was in the original proposal--now they've added this
concept of revocability, which is completely illusory, because
if truly those matters were revocable, then the foreign
investor would never make the investment. JPMorgan makes that
point. And if it's nonrevocable, that means basically that the
foreign investor will be in total domination and control of a
U.S. airline.
Senator Burns. You bet, you're in.
Senator Lott. Thank you very much.
I'm flabbergasted to hear--let me make sure you hear this--
I'm flabbergasted to hear what you just said. I don't believe
he indicated anything of that kind.
My question to you, Mr. Smith, was--I'm a little shocked at
what I've been hearing from a lot of the discussion today. Is
the sky falling? I mean, is this going to cause, you know,
aviation to collapse? What is going on here? I cannot believe--
look, I've got a huge populist streak in me, but I just--I find
it unfathomable that, if you might have 25 percent investment
from foreign interests, that you're going to control a company.
Where did that come from? Am I missing something here?
Mr. Smith. Well, as I said a moment ago, Senator Lott, in
my experience on six major New York Stock Exchange boards, I
have never seen a case where 25 percent can outvote the 75
percent if the majority directors are acting as fiduciaries in
pursuing the shareowners' best interests. Now, if there are de
facto agreements on the side, which is exactly the situation
that we felt was the case when DHL was permitted to de facto on
a U.S. air carrier, that's a different matter. And, to some
degree, the DOT is being accused of doing something that
they're actually trying to protect against. And that was the
point about Senator Lautenberg's chart. It wasn't that--the red
dots are the important things, that they cannot be involved in
that, and they can only be involved in the blue dots, to the
extent that the 75 percent of the shares and the board of
directors wants to permit them to do that.
Senator Lott. Let me flip the question on you, then. Tell
me why, succinctly, this is--it's in the best interest that we
do this.
Mr. Smith. Well, it's in the best interest for us to do it,
Senator, because the history of American aviation shows that as
markets liberalize around the world, American aviation
interests prosper. And I think you had Mr. Whitaker give a very
good case of that. If Bermuda II had not been in place, and
American aviation interests had not seen our beyond rights
negotiated away in 1978 under Bermuda II, you would have seen
perhaps Continental, Northwest, United setting up a hub in
Luten or Stanstead. Couldn't have done it in Heathrow, no
question. But you--then you would have had a competing hub and
a diversification of interests.
Now, if you think that's farfetched, just go read the case
history of FedEx. We have a hub in Paris. We fly beyond,
everyplace we're permitted. We're not permitted to fly into the
U.K. We actually withdrew from Heathrow. We have a hub in the
Philippines.
Senator Lott. But under this NPRM, you would be able to do
that, then, right?
Mr. Smith. Well, if this NPRM passes, and the United States
and the EU put an Open Skies Agreement, FedEx would be able to
add significant additional operations from European points to
Asian points and connect to other parts of our network, with
substantial increase in employment of our pilots and inuring to
the best interests of our shareholders.
Senator Lott. Well, that was going to be my next question.
I'm under the impression that this agreement would lead to
significant impact in future agreements in China and Asia,
which is where there's going to be a huge movement----
Mr. Smith. Well, and that's the case, Senator, because this
thing transcends and is much greater than just the EU
agreement. If the United States demonstrates that we're unable
to make this tiny step forward to further liberalize our
agreement in Europe, I can assure you, there are protectionist
forces in China and Asia and India and elsewhere that would use
that as a signal to keep those aviation markets restricted. And
we're on the cusp, I believe, in China, at least in all-cargo,
of getting an Open Skies Agreement.
Senator Lott. Captain--well, first of all, thanks to all of
you for being here--Captain, it's good to see you again.
Mr. Woerth. Thank you, sir.
Senator Lott. I always enjoy hearing from you, and meeting
with you, and hearing your testimony. In this case, it looks to
me like this agreement could lead to more cargo being moved,
more pilots being needed. So, why wouldn't you be for it? I
mean, you--because it would be more opportunities for more
pilots.
Mr. Woerth. We are for the Open Skies. We advocate Open
Skies. We do believe we participate fairly in Open Skies when
we have our carriers under U.S. control. Even if the Europeans
or somebody may get more, we gain some that I'm not going to
hold back just so somebody might gain more than me.
Senator what I'm afraid of--we probably watched Air
France--well, we're--the French community has a different
social contract with its citizens, apparently, with all the
riots----
Senator Lott. Sure.
Mr. Woerth.--that we witnessed on television. I'm worried,
if Air France, which has a government stake in the airline, and
KLM, which has a golden share, but it's under one bottom line--
I'm worried, if they buy Delta or Northwest now, at fire-sale
prices, that we start getting replaced across the North
Atlantic. I mean, even if it was just a redundancy and we had a
recession and wanted to lay off somebody, it's not going to be
financially feasible to lay off a French person, let alone
politically. It's four times more expensive. They're
unemployment laws and their laws just don't prohibit it. So, a
board--a fiduciary board acting in a fiduciary sense of the
U.S. shareholders, would say, ``We're laying off Americans. We
can't afford to lay off the French, and we can't afford to lay
off the Dutch or the Germans.'' So, I think--to the question
from the Chairman, as well, I think they're kind of related
here.
My concerns are that a lot of these airline interests
around the world, whether it be Deutsche Post into DHL, which I
know that Mr. Smith is worried about, but all the foreign
airlines, they're still kind of a government entity in this
regard. They're seen as an instrument of foreign policy and
national pride. They're not just consumer items, like we have
in this country. And I think if the Senate would take up S.
6135 and, you know, get all these issues on the table and see
what we can do, I'm interested in more foreign investment, and
I'm certainly interested in more opportunity. I just think this
particular process, Senator Lott, falls a little short of what
American workers would probably want out of this deal.
Senator Lott. Well, that's why we have hearings like this,
is to make sure we've thought through all the angles and hear
differing points of view. I certainly don't want us to have to
fly with French pilots. What a horrible thought that is.
[Laughter.]
Senator Lott. But I still don't see how this level of
investment is going to lead to French pilots. So, I just--I
want to talk with you further about it. You know, I'm disposed
to be supportive of this agreement and what we're--the
Administration is trying to do. But I do appreciate your
different points of view.
Thank you, Mr. Chairman.
Senator Burns. Thank you, Senator Lott.
I've got about two or three--I'm really running up against
the fire here a little bit, and I've got about two or three
more questions. I'm going to address those questions to you and
let you respond.
Thank you very much for your testimony here today. And as
we move forward, I can't--personally right now, I can't see
where 25 percent of a company you're going to be able to
dictate the domestic policy that we have in this country, or
our laws. We--I'm leaning that way, too. But I think there has
to be some questions, and we haven't answered enough of those
concerns right now to really make a decision right now.
So, I thank you for your testimony today, and I appreciate
you coming today. You've opened up some areas where I had
questions, and I think you've kind of laid those questions
aside.
So, thank you for coming. And any other comments that you
would like to make at this time with regard to this, we'll be
in negotiations or in conversation with my friend from Hawaii
and the rest on this committee before we do a final thing on
the supplemental.
Thank you. This hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. John Ensign, U.S. Senator from Nevada
Thank you Mr. Chairman. The deregulation and liberalization of the
aviation industry has proven to be successful at lowering the cost of
air travel, improving the quality of service, and increasing the number
of travel options available to consumers. In an increasingly global
world, it is Congress' duty to ensure that the laws that govern
aviation are keeping pace with the ever-changing realities of the
aviation industry. I look forward to reviewing the testimony of the
esteemed witnesses that the Chairman has arranged for today's hearing.
The Department of Transportation (DOT) has issued a Notice of
Proposed Rulemaking and a Supplemental Notice of Proposed Rulemaking
that seek to clarify the rules regarding foreign investment in U.S. air
carriers. Some of these rules date back to 1938 when both aviation and
the world looked very different. The DOT's proposed Rule does not
change the law, a power which lies solely with Congress. Rather, the
proposed Rule seeks to only change the manner in which the existing law
is exercised. It is wholly appropriate that the DOT now undertakes a
review of how it interprets current statutes regarding foreign
investment.
Increasing domestic air carriers' access to foreign investment is a
worthy goal that I support. With many of our U.S. air carriers
struggling financially, it is in the best interests of the country that
they have as much flexibility as possible to attract capital
investment. In addition, liberalizing the criteria that determine
whether an air carrier is a U.S. citizen could pave the way for the
signing of a U.S.-European Union Open Skies agreement. Such a free-
market agreement would benefit American air travelers through increased
competition while opening up vast new markets for U.S. airlines in
which to compete.
However, the security and safety of the United States must be the
foremost consideration in any attempt to reinterpret the foreign
investment rules. Because of security concerns in a post-9/11 world,
the importance of protecting the Civil Reserve Air Fleet program, and
the indispensable nature of aviation in our Nation's economy, U.S.
airlines must remain under the control of U.S. citizens.
As aviation enters its second century, the United States must work
toward modernizing its aviation laws and regulations so they accurately
reflect that the world has become a global marketplace. As the Congress
and this Subcommittee prepare to take up FAA reauthorization next year,
today's hearing is an important part of this ongoing effort. Thank you.
______
Prepared Statement of Earl B. Boyanton, Jr., Assistant Deputy Under
Secretary of Defense (Transportation Policy)
Proposed Changes to Department of Transportation Evaluation of U.S. Air
Carrier Actual Control by U.S. Citizens During Initial and Continuing
Fitness Reviews
Chairman Burns, Senator Rockefeller, and other distinguished
members of the Committee:
Thank you for the opportunity to provide information relative to
the Department of Transportation (DOT) proposed rulemaking to clarify
policies that DOT may use to evaluate air carriers' citizenship during
initial and continuing fitness reviews. As the Assistant Deputy Under
Secretary of Defense for Transportation Policy, I am responsible, in
part, for developing policy supporting the Civil Reserve Air Fleet
(CRAF) program. The U.S. Transportation Command (USTRANSCOM) and its
Air Force component Air Mobility Command (AMC), are charged with
implementing and executing CRAF policy. As requested by the
Subcommittee's staff, this testimony addresses four points: (1)
Department of Defense (DOD) coordination with DOT regarding the
proposed rulemaking; (2) CRAF information; (3) DOD's thoughts on the
impact to CRAF of a new rule; and (4) DOD concerns about a new rule.
DOD Coordination With DOT
DOT has actively coordinated with and provided information to DOD
relative to the Notice of Proposed Rule Making (NPRM) and,
subsequently, the Supplemental NPRM. In September 2005, DOT initiated
discussions with DOD prior to issuing the NPRM. Since that time DOT has
continuously kept DOD informed through meetings, telephone and video
conferences, and e-mail. Likewise, the Office of the Secretary of
Defense, of which my office is a part, and the USTRANSCOM staff have
communicated with the DOT staff about the proposed rule.
Civil Reserve Air Fleet (CRAF) Program
CRAF History and Background
Instituted in 1952, CRAF is a voluntary, contractual arrangement
between DOD and U.S.-owned air carriers to transport passengers and
cargo in both peacetime and crisis. Air carriers contractually commit
to provide aircraft and crews to augment DOD airlift during
contingencies/emergencies when requirements exceed the capability of
organic military aircraft. In exchange for that commitment, both as an
incentive for participating and as compensation for the business risk
that DOD might execute its contractual claim on the airline, DOD offers
CRAF member carriers peacetime airlift business proportional to their
respective contributions to the CRAF. The Fly CRAF Act (Title 49,
United States Code, Section 41106) requires that DOD contracts for
airlift be awarded to CRAF carriers, if available, in order to support
CRAF participants.
Other than our commitment to offer peacetime airlift business
proportionate to a carrier's commitment to the CRAF, no extra
incentives or subsidies have been provided in the 50-plus years of
CRAF's existence. However, DOD submitted enabling language, currently
embodied in Section 802 of the draft conference report of the Fiscal
Year 2007 National Defense Authorization Act bill, to provide DOD with
legislative authority to contractually commit to an annual amount of
business with CRAF carriers and to pay the commitment even if business
does not materialize. This requirement recognizes that, in the late
1990s and 2000-2001 prior to hostilities, DOD peacetime sustainment
movement of passengers and cargo diminished to the point that our
business available to CRAF carriers dropped substantially. When the
current operations tempo associated with Operation Iraqi Freedom and
Operation Enduring Freedom diminishes, and planned realignments of U.S.
forces based overseas is complete, we expect again that DOD peacetime
international traffic will diminish significantly. A guaranteed line of
business is the only incentive that will assure that air carriers
maintain types and quantities of aircraft needed to augment DOD in the
event of crisis.
CRAF provides over 90 percent of DOD's troop movement capacity and
over 35 percent of cargo capacity. This longstanding government-
private-sector partnership significantly enhances the United States'
ability to undertake unilateral action without having to rely on
foreign sources for airlift capacity or to ask the American taxpayer to
fund additional quantities of air transport aircraft to be owned and
operated by DOD.
CRAF Capability and Participants
CRAF is structured in three levels of effort, or stages:
Stage I is the smallest and is designed to support a minor
regional crisis.
Stage II is designed to meet the needs of a major theater
war.
Stage III is designed to meet the needs of full national
mobilization.
In addition to these stages, CRAF is composed of three segments
representing specialized roles. Each segment reflects the range and
authorized areas of operation for the aircraft in the segment:
International Segment: Long- and short-range passenger and
cargo capability. A significant number of aircraft in CRAF
today are in the short-range international segment (less than
1,500 nautical miles).
Aeromedical Evacuation Segment: Specialized medical airlift
capability. When aircraft committed to this segment are used,
the seats are removed and specialized aeromedical kits,
litters, and other equipment are installed.
National Segment: Domestic and Alaskan passenger and cargo
capability. (Hawaii is in the International Segment).
If one compares the number of aircraft committed to the CRAF
program in the three stages and the various segments to a typical 16-
aircraft Air Mobility Command (AMC) Airlift Squadron, it is clear that
CRAF can rapidly ``super size'' AMC's airlift capability (the following
equivalents are cumulative):
CRAF Stage I adds over 6 Squadron equivalents.
CRAF Stage II adds over 16 Squadron equivalents.
CRAF Stage III adds nearly 54 Squadron equivalents.
Depending on the CRAF stage and segment, civil carriers
participating in CRAF must provide aircraft and crews within 24 or 48
hours of notification. At CRAF activation (discussed below), all CRAF
crews are provided security clearances by AMC. For this reason, all
crews must be U.S. citizens and airlines must ensure background checks
are completed. The airline pilots and other crew members committed to
operate CRAF flights for DOD are over and above any airline employees
who are subject to call-up as members of the National Guard or
Reserves.
Since inception of CRAF, the member air carriers have participated
in every military contingency involving the United States, either as
volunteers or under CRAF activation. CRAF provides immediate access to
airlift assets valued at over $45 billion with trained U.S. crews and
maintenance capabilities without extra cost to American taxpayers. In
1996, the Government Accountability Office calculated savings to the
U.S. of $50 billion to $90 billion over the life of the CRAF program
when compared to the cost of having the same capability in DOD's fleet
of military aircraft. An update to 2006 would, in our estimation, show
a savings range from $60 billion to $120 billion.
CRAF Activation Authority
Throughout the half-century of CRAF existence, the member air
carriers have staunchly supported DOD requirements, most of which have
been met through the carriers' voluntary participation. For example,
the full duration of the Vietnam conflict was supported in this manner.
However, if DOD's requirements exceed the carriers' voluntary offers,
we can invoke the airlines' contractual CRAF commitment. This step is
called activation, and is executed in the previously-described stages
and segments. (For example, Stage I long-range international passenger
capability might be activated.)
The Commander, USTRANSCOM, with Secretary of Defense approval, is
the CRAF activation authority. When activated, in accordance with Title
I of the Defense Product Act (DPA) (50 U.S.C. App 2071) CRAF carriers
must give priority to DOD orders for service. In return, the DPA
protects carriers from breach-of-contract lawsuits for abandoning their
peacetime commercial contracts to respond to DOD CRAF activation.
The CRAF was activated (Stage II long-range international passenger
and cargo) for the first time in its history to support Operations
Desert Shield and Desert Storm in 1991. Over 5,500 airlift missions (20
percent of the total) were flown by U.S. CRAF member carriers, who were
paid $1.35 billion by DOD for this service during activation and
voluntary periods. In this instance, CRAF carriers transported to the
Gulf 62 percent of the passengers moved and 27 percent of air cargo,
and redeployed to the U.S. 84 percent of passengers and 40 percent of
air cargo.
CRAF was activated for the second time (Stage I long-range
international passenger) in 2003 in support of Operation Iraqi Freedom
deployment: 399,212 passengers (93 percent of total). During the same
period a total of 9,004 tons of cargo were transported by CRAF
volunteers. Each of the activations were limited in duration, with
subsequent support provided on a voluntary basis by the industry.
DOD's Thoughts on the Impact of a New Rule on CRAF; DOD Concerns About
a New Rule
The viability of the CRAF program is extremely important to DOD.
Any change to U.S. control of U.S. airlines must address its effect on
our partnership with CRAF carriers. The ultimate authority of
USTRANSCOM to effectively activate parts or all of the CRAF fleet must
not be compromised. DOD has had a number of productive meetings and
phone conversations with DOT in order to better understand the rule,
and its prospective application in practice, to assess whether there is
a potential impact to the CRAF program. We would expect to have
concerns if impacts are identified and not mitigated or if, after
assessment, uncertainty remains. However, at this time we have not
reached a conclusion on impacts.
Based on our ongoing consultations, it is clear that DOT intends
for the proposed rule to ensure the availability of commercial aircraft
for national defense purposes, including CRAF commitments. We will
continue to work with DOT to ensure that the rule achieves this end,
and will advise the Subcommittee of our conclusions.
Conclusion
The CRAF program relies heavily on voluntary participation from
civil air carriers. Civil airlift is a more critical element than ever
before in support of the National Defense Strategy. Except for the
requisitioning of ocean vessels, no authority exists to nationalize or
seize any transportation asset, even when war has been declared. Having
mentioned ocean vessels, it should be noted that approximately half of
the Maritime Security Fleet (MSF) vessel companies are ultimately owned
by foreign interests. Nevertheless, they meet the MSF statutory
requirements to participate in the Voluntary Intermodal Sealift
Agreement (VISA), which is the sealift equivalent to CRAF as a national
emergency mobilization program. These ocean carriers have thoroughly
proven their willingness and ability, notwithstanding ownership, to
quite satisfactorily support Operations Iraqi Freedom and Enduring
Freedom.
The decreasing numbers of military airlifters has resulted in a
greater reliance on civil aircraft to meet airlift requirements in
peacetime and contingency situations. Volunteer programs such as CRAF
are essential to meet our national defense needs. CRAF embodies a
significant capability to support the Combatant Commanders and the
Soldiers, Sailors, Airmen, Marines, and Coast Guardsmen who execute the
orders of the Commander-in-Chief.
In closing Mr. Chairman, thank you for the opportunity to provide
this written testimony before the Committee about DOT's proposal to
clarify policies that DOT may use to evaluate air carrier actual
control by U.S. citizens during initial and continuing fitness reviews
and the potential impact on CRAF.
______
Response to Written Questions Submitted by Hon. Ted Stevens to
Hon. Jeffrey N. Shane
Question 1. Under Secretary Shane--It's been documented that the
U.S. and EU Open Skies Agreement may hang in the balance of Congress'
decision on your rulemaking. What does that Open Skies agreement mean
to the American consumer and traveler?
Answer. The Agreement will enable U.S. consumers to obtain lower
fares and a greater variety of airline services in transatlantic
markets. The Agreement could have a profound impact in reshaping the
route maps for transatlantic aviation. Business travelers, tourists and
shippers will be able to choose from the whole panoply of U.S. and
European airlines, because the Agreement will authorize every EU and
every U.S. airline:
to fly between every city in the EU and every city in the
United States, including opening up operations between the
United States and the United Kingdom;
to operate without restrictions on routes or capacity,
including unlimited rights to fly beyond the EU and U.S. to
points in third countries;
to set fares freely in accordance with market demand; and
to enter into cooperative arrangements with other airlines,
including code-sharing and leasing.
This Agreement has the potential to dramatically increase the
quality of competition in the market and benefit consumers and
communities on both sides of the Atlantic, in ways that transcend
anything achieved through our existing open-skies accords.
Completion of the U.S.-EU Agreement would not only enhance the
quality of airline competition across the Atlantic, it would set a new
standard for liberalization around the world. By enhancing the
competitiveness of U.S. airlines, the Agreement would create a center
of gravity and a tool that could loosen the grip of protectionism in
other markets.
Question 2. Under Secretary Shane--The Department of Defense CRAF
program relies on appropriate fleet composition. CRAF needs large
international-range aircraft. Some opponents of your rule have
suggested a foreign entity could essentially move all wide-body large
aircraft to their overseas routes, leaving only small non-CRAF usable
aircraft in the U.S. Should Congress be concerned about unintended
impacts on the CRAF program fleet?
Answer. No. Congress should not be concerned about unintended
impacts on the CRAF program fleet as a consequence of our proposed
rule. The Department strongly believes that our proposed rule will not
have any negative effect on DOD programs. Because our proposed rule
requires that U.S. citizens control all decision-making involving CRAF
and other national defense programs, the air carrier could not allow
foreign investors to make decisions that would make participation in
CRAF or other national defense airlift operations impossible as a
practical matter.
Were a U.S. airline to decide to withdraw its participation in the
CRAF program or to sell off its fleet of intercontinental aircraft, or
to implement any other decision damaging to our national defense
airlift needs, we would expect the Department of Defense to advise us
of the situation and its impact on its programs, just as we would
expect to hear about safety or security problems from FAA or TSA. In
such circumstances, the Department would undertake an immediate
investigation to determine whether the air carrier was conforming to
its obligations under our proposed rule to ensure that U.S. citizens
wholly controlled decisions relating to DOD programs. Importantly, a
failure to comply with that obligation would call into question the air
carrier's eligibility to retain its operating certificate. Therefore,
airline management can be expected to take those obligations very
seriously.
Question 3. Under Secretary Shane--During the last FAA
reauthorization debate, Congress essentially codified the citizenship
standards to include ``actual control.'' Under what authority do you
believe these requirements can be changed by DOT and not Congress?
Answer. The Department has not proposed to change (and could not
change) the requirement that U.S. citizens must actually control each
U.S. carrier. The Department will continue to ensure that U.S. citizens
actually control each U.S. carrier.
The statute, however, does not define ``actual control,'' and the
Department never established a fixed definition of ``actual control''
before or after Congress added the requirement to the statute. Because
Congress gave the Department the responsibility for enforcing the
requirement, the Department necessarily has some discretion to define
``actual control'' and to modify that interpretation when changing
industry circumstances make doing so appropriate. In fact, the
Department over the years has changed its interpretation of ``actual
control.''
The Department's SNPRM contains a detailed discussion of the
Department's tentative conclusions on its authority to modify its
interpretation of ``actual control.'' 71 Fed. Reg. at 26436-26438. The
parties may address this issue in their comments on the SNPRM, and the
Department will carefully consider those comments in making its final
decision on whether it may or should adopt its proposal.
Question 4. Under Secretary Shane--Can you discuss the situation
regarding Heathrow Airport in London? Some of the challenges to the
Open Skies agreement revolve around access to Heathrow. If an Open
Skies agreement and the rulemaking went forward, do you anticipate
domestic winners and losers in gaining access to Heathrow, and why
wasn't Heathrow access part of the Open Skies discussion?
Answer. The current agreement between the United States and United
Kingdom allows only two U.S. and two U.K. airlines to serve Heathrow.
The Open-Skies agreement will give every U.S. air carrier the
opportunity to serve that airport, subject to the availability of
slots.
There is a well-established market for slots at Heathrow. The U.K.
courts have upheld the longtime practice of trading slots with
additional compensation going from one airline to the other. Thus,
contrary to assertions by some, slots are traded actively and can be
obtained at Heathrow. They may not be immediately available at the very
best times, and they will not be free. But U.S., British, and third-
country carriers have for years traded and, in effect, purchased slots
at the airport. I cannot predict the results for individual U.S.
carriers that would be newly eligible to serve Heathrow under a U.S.-EU
agreement. However, I am certain that the longer we wait to make all of
our carriers eligible to fly to Heathrow, the harder it will be for
them to get acceptable slots as congestion continues to grow.
During the negotiations, the concerns of some U.S. carriers about
slot limitations at European airports, in particular Heathrow, were
raised. The U.S. negotiators sought and obtained language in the
agreement that allows us to address slot and other infrastructure
problems in the Joint Committee. The U.S. side did not, however, pursue
special infrastructure advantages solely for American carriers, such as
designated slots, gates, and counters at London's Heathrow Airport.
Such a provision would be inconsistent with EU slot regulations and
with established nondiscriminatory international norms for slot
allocation--norms that we insist on for U.S. carriers with other
countries.
Question 5. Under Secretary Shane--If Congress eliminated the
language currently in the Supplemental Appropriations bill and allowed
the rulemaking to move forward, what is the timeline on a new rule, and
when do you expect the European Commission to decide on the Open Skies
agreement?
Answer. Comments on the Supplemental Notice of Proposed Rulemaking
are due on July 5. The Department intends to consider carefully the
comments received. If, following our review, we decide to finalize the
rule, we hope to do so in time for the European Commission and its 25
Member States to decide on the proposed U.S.-EU Air Transport Agreement
at the October 12 EU Transport Council meeting.
Question 6. Under Secretary Shane--Opponents have stated foreign
investors could essentially gain ``super majority'' control over U.S.
airlines through your rulemaking. Could you describe what is meant by
``super majority'' and how the rulemaking would address that scenario?
Answer. A ``super-majority'' voting clause in a corporation's
articles of incorporation (or charter) or by-laws requires specified
types of decisions to be approved by more than a bare majority of the
directors or shareholders (a clause might, for example, require
approval by two-thirds of the directors or voting shares). Minority
investors in U.S. corporations often obtain super-majority clauses of
this kind in order to protect their legitimate interests as investors.
A super-majority clause does not give the investor any ability
affirmatively to require a corporation to take any action.
The Department stated that its proposal could allow qualified
foreign investors to hold some super-majority rights essential to
protect their interests, but that the Department could not now define
which kinds of super-majority voting clauses it would permit under the
actual control requirement. The Department tentatively concluded that
the appropriateness of any specific super-majority voting requirement
would depend on the precise nature of the clause and the nature of the
foreign investors' involvement in the carrier. If the proposal is
finalized, foreign investors could not use super-majority voting rights
to control a carrier's organizational documents, safety and security
matters, or its participation in national defense airlift operations,
including CRAF, because those matters would remain under the present
regulatory regime in which no substantial foreign influence is
permitted. The SNPRM gives the parties in the rulemaking the
opportunity to comment on this issue, and the Department expects to
receive a number of comments on super-majority voting clauses.
Question 7. How many European air carriers are state-owned or
partially state-owned?
Answer. Although the Department does not systematically monitor
ownership of foreign airlines, in an effort to be responsive, we
undertook a limited ownership review of European air carriers using
various public data-sources that were available to the Department. We
sampled 31 foreign air carriers whose homelands are members of the
European Union (we sampled all European Union countries) and who now
provide U.S.-Europe scheduled combination air service (persons,
property, and mail), all-cargo service, and charter services. Our
evaluation of this category of companies indicated that five air
carriers are wholly owned by their governments (three are from Eastern
European countries), and seven air carriers are partially state-owned.
Importantly, while the Department does not maintain current ownership
information on foreign airlines, we note that all prospective foreign
investors in a U.S. air carrier wanting to take advantage of our
liberalized control policies would be required to fully satisfy the
Department that the requisite reciprocity of investment opportunity
exists.
Question 8. Under Secretary Shane--Under the rulemaking, the
investment situation with another country must be reciprocal. What do
you envision would happen if a U.S. carrier wanted to invest in a
foreign, state-owned or partially state-owned airline?
Answer. If a foreign country effectively bars U.S. citizens
reciprocal investment and commercial decision-making opportunities in
that country's airlines because those airlines must remain wholly
state-owned, reciprocity would be lacking and, unless otherwise
required under U.S. international obligations, investors from that
country would not be able to take advantage of our proposed rule, if we
make it final. With respect to partially state-owned airlines, we are
not aware of any reason that the reciprocity requirement could not be
met, as long as U.S. citizens could invest in the same amount of voting
stock as allowed under U.S. law and have the same commercial decision-
making opportunities as we are proposing for foreign citizens.
Question 9. Under Secretary Shane--Would this rulemaking lead the
European States to invest in their airlines in order to block U.S.
investment?
Answer. One trend in Europe, reinforced by aggressive European
Commission action against state aid, has been a decline in state-
ownership interests, and another has been a rise in both multinational
European airlines and privately-owned low-fare carriers. We expect
those trends, based on their own commercial imperatives, to continue.
Moreover, the Europeans recognize that an important element of our
rulemaking proposal is the reciprocity condition. If reciprocity cannot
be established, investment opportunities in the United States will not
be available.
Question 10. Under Secretary Shane--Since no U.S. airlines are
state-owned, would there be disproportionate opportunities available to
European investors versus U.S. carriers?
Answer. No. Under current U.S. law, qualified foreign investors can
hold up to 25 percent of the voting stock of a U.S. airline. Our
proposed rule does not alter that foreign investment limit. If made
final, however, our proposal would permit foreign investors to take
advantage of our more liberal commercial decision-making opportunity
standards, only if the foreign investors come from countries that have
signed an open-skies agreement with the U.S. and provide to U.S.
investors reciprocal investment opportunities in their airlines.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Hon. Jeffrey N. Shane
Question 1. Under your proposal, you allow a foreign investor to
control key economic decisions of a U.S. air carrier. The foreign
investor, for example, would have the authority to change the fleet mix
of that airline's domestic operations, including reducing aircraft that
are used by the Department of Defense (DOD) in a crisis, under the
Civil Reserve Fleet Program (CRAF). What role will the DOD have in
reviewing a decision by a foreign entity to sell off key assets?
Answer. The Department strongly believes that our proposed rule
will not have any negative effect on DOD programs. First, we would
expect each air carrier to continue to make its fleet decisions based
on its perceptions of the fleet mix best suited to a successful
commercial operation. The Department expects that foreign investor
interests will be the same as U.S. investors', when permitted by the
airline's U.S. citizen majority owners to affect fleet decisions.
Additionally, to remain compliant with our proposal, the U.S. citizen
owners would have to retain the right to revoke any delegation of
decision-making to the foreign investors.
Were a U.S. airline to decide to withdraw its participation in the
CRAF program or to sell off its intercontinental aircraft, or to
implement any other decision damaging to our national defense airlift
needs, we would expect the Department of Defense to advise us of the
situation and its impact on its programs, just as we would expect to
hear about safety or security problems from FAA or TSA. In such
circumstances, the Department would undertake an immediate
investigation to determine if foreign investors had made or unduly
influenced the U.S. air carrier's ability to contribute to DOD programs
and whether the air carrier was conforming to its obligations under our
proposed rule to ensure that U.S. citizens wholly controlled decisions
relating to DOD programs. Importantly, a failure to comply with that
obligation would call into question the air carrier's eligibility to
retain its operating certificate. Therefore, airline management can be
expected to take those obligations very seriously.
Question 2. As the Department of Defense (DOD) notes, the Civil
Reserve Air Fleet (CRAF) program relies heavily on voluntary
participation, and with the exception of requisitioning ocean vessels,
no authority exists to nationalize or seize any transportation asset,
even when war has been declared. The DOD has not reached a conclusion
on the impact of your proposal, but believes they would expect to have
concerns if uncertainty remains following their assessment. Why are you
certain that the CRAF will not be affected by the Supplemental Notice
of Proposed Rule Making (SNPRM) prior to implementation of a final rule
when the DOD is not similarly convinced?
Answer. The CRAF program is a voluntary, quid pro quo arrangement
by which airlines agree to commit aircraft for military airlift, and in
return, gain access to U.S. Government business. Because each carrier's
participation in CRAF and other national defense airlift operations is
voluntary, the Department crafted its proposed rule to ensure that U.S.
citizens control each U.S. air carrier's decision on whether to
participate in the program. In formulating this position of protecting
the CRAF program, we consulted with DOD and we will continue to work
with the officials at the Department of Defense toward this objective.
As our proposed rule states, its provisions would not permit
foreign investors to control U.S. air carrier decisions on CRAF or
other national defense airlift participation, even if the foreign
investors became more involved in other areas of the air carrier's
operations. The Department would require such decisions to be clearly
and demonstrably subject to actual control by U.S. citizens. This would
mean that the air carrier could not allow foreign investors to make
decisions that would make participation in CRAF or other national
defense airlift operations impossible as a practical matter. As the DOD
notes, participation in CRAF has been and will continue to be
voluntary, therefore, just as today, each air carrier will continue to
choose whether it will participate in CRAF or other national defense
airlift operations. We do not believe that anything in our proposed
rule would negatively affect such a choice.
Question 3. When is the DOD assessment of your proposal expected to
be completed?
Answer. The Department of Defense has already indicated that it
does not object to the adoption of a rule along the lines currently
proposed. DOD and DOT are working together to establish new inter-
departmental procedures ensuring that DOD concerns regarding CRAF
carriers are fully addressed. Similarly, the Department of Homeland
Security, after reviewing the proposal with great care, has indicated
that they also do not object to our adoption of the proposed rule.
Question 4. The Committee on Foreign Investment in the United
States (CFIUS) reviews are necessitated when a foreign entity acquires
control through an acquisition, merger, or takeover of a U.S. company.
Will the expanded foreign investment into U.S. air carriers, allowed
for by the Department of Transportation's (DOT) Supplemental Notice of
Proposed Rule Making (SNPRM), require a CFIUS review?
Answer. No. CFIUS applies only to acquisitions, mergers, and
takeovers, none of which would be permitted under this rule. Whether or
not the proposal is finalized, foreign investors' stock ownership is
now and would continue to be limited by the statute to no more than 25
percent of the voting stock of an air carrier. A CFIUS review would not
be required or necessary because the air carrier would remain majority-
owned and controlled by U.S. citizens.
Question 4a. If so, why would that be necessary if the DOT is
confident that ``actual control'' of domestic air carriers will remain
in the hand of U.S. citizens?
Answer. As stated in the previous question, we do not believe that
implementation of our proposed rule would require a CFIUS review.
Question 5. You have long supported a change in U.S. foreign
investment laws in domestic air carriers. Why did the Department of
Transportation (DOT) not come to the Congress to ask for a change in
the law, so that a deal with the European Union (EU) could be
negotiated?
Answer. The Department has not sought legislation for its proposed
modification of its past interpretation of the actual control
requirement, because the Department believed that no legislation was
necessary. The Department is proposing only to modify its own
interpretation of ``actual control,'' not to modify any requirement
imposed by Congress. Because Congress did not enact a definition of
``actual control,'' the past interpretations of ``actual control'' were
created by Department decisions in initial certification proceedings
and continuing fitness reviews. The Department will continue to enforce
all of the statutory citizenship requirements for U.S. carriers,
including the requirement that U.S. citizens must actually control each
U.S. carrier.
Additionally, I wish to emphasize that this rulemaking has been
initiated and pursued based on its own merits and not for purposes of
achieving any agreement with the European Union.
Question 6. Did you believe that allowing greater foreign
investment by increasing the 25 percent threshold to 33 percent or even
49 percent would not be sufficient to spur investment? So, without
changing even the percentage threshold, how does your proposal equate
to greater foreign investment?
Answer. Foreign citizens would be more likely to make investments
in a U.S. carrier if they could obtain some ability to protect their
investment and influence the carrier's use of the funds provided by
them, even if they may not own more than 25 percent of the
shareholders' voting interest. Minority investors in any U.S. company
typically wish to obtain some protection for their investment, such as
agreements requiring their consent before the company may implement
certain types of major corporate transactions, and some ability to
influence the company's use of their investment. The Department's
traditional implementation of the actual control requirement barred
foreign investors in U.S. carriers from obtaining either such
protection or any significant ability to participate in managing the
carrier's use of their investment. The Department's proposed policy, if
adopted, would allow foreign investors to obtain some protection for
their interests and some ability to influence the carrier's operations.
As a result, it would encourage foreign citizens, especially strategic
investors, to make minority investments in U.S. carriers that they
would not be willing to make under the current interpretations.
Question 7. If the Department of Transportation (DOT) does complete
a final rule based on the SNPRM, will it guarantee ratification of an
Open Skies agreement with the EU?
Answer. I cannot guarantee what the European Commission and its 25
Member States will do. All indications are that the Europeans are
satisfied with the proposed Agreement reached in November. Therefore, I
am optimistic that it can be approved. However, I am convinced that the
Agreement will not move forward without DOT's issuing a final rule.
Question 8. Under your proposal, could Air France merge with a U.S.
carrier, assuming it already has antitrust immunity for its dealings
with a carrier?
Answer. As a practical matter, I believe that Air France would
never merge with a U.S. carrier due to the requirements imposed by
existing Federal statutes even if the Department adopts its proposed
modified interpretation of ``actual control.'' The statute states that
a carrier cannot be a U.S. air carrier unless U.S. citizens hold at
least 75 percent of the shareholders' voting interest and the carrier
is a corporation organized under the laws of the United States, one of
the states, the District of Columbia, or a territory or possession of
the United States. As a result, a merger between Air France and any
U.S. air carrier would only be possible under U.S. law if the surviving
corporation were the U.S. carrier and the foreign investors were
willing to hold no more than 25 percent of the voting interest in that
corporation. If Air France acquired a U.S. carrier without complying
with these requirements, the U.S. air carrier would lose its operating
authority as a U.S. carrier. On the other hand, if the surviving
corporation were a U.S. carrier, it presumably would not be deemed a
French carrier by the United States or foreign governments under
applicable air services agreements and so would likely lose any route
rights created by such agreements for the benefit of French carriers.
Question 9. Under what section of law is this type of merger
permissible?
Answer. If a foreign carrier wished to merge with a U.S. carrier,
the surviving carrier would be a U.S. carrier only if it continued to
comply with the statutory definition of a U.S. citizen, 49 U.S.C.
40102(a)(15). The merger would also be subject to the antitrust laws
enforced by the Justice Department, including the Hart-Scott-Rodino
Act, which proscribe foreign acquisitions of U.S. firms only when they
would be anticompetitive.
Question 10. The proposed rule indicates that you will leave
control of key areas, such as safety, security, and Civil Reserve Air
Fleet (CRAF), in the hands of U.S. citizens. However, the process that
determines whether or not U.S. citizens maintain control will be
confidential. How can the Senate judge the impact of this rule without
specific details regarding enforcement or oversight?
Answer. Initial applications for air carrier certificates are
docketed public proceedings. Moreover, any significant investment in a
publicly-held U.S. air carrier must, by law, be disclosed in the
company's SEC filings. Further, the Department has the discretion to
make public continuing fitness reviews when the Department believes
that it would be in the public interest to do so. For example, we
recently released a letter to Hawaiian Airlines that set a useful
precedent that we felt the public should be aware of so that others
could take advantage of it. We have also docketed continuing fitness
reviews in the past--up to and including oral evidentiary hearings
before an Administrative Law Judge.
Question 11. Safety impacts almost everything an airline does. Can
you be more specific about the sort of decisions reserved for U.S.
citizens in the areas of safety, security, government procurement, and
organizational documents?
Answer. With any air carrier, there are officials whose
responsibilities involve primarily safety and security matters, such as
the Directors of Safety, Operations, and Maintenance, the Chief Pilot,
the Chief Inspector, the Aircraft Operator Security Coordinator, and
the Ground Security Coordinator. Those officials, as well as others
whose primary concerns are safety, security, and national defense
airlift participation would have to report to U.S. citizens, up to and
including the President and CEO of the company, who must be U.S.
citizens. The carrier will have to designate the individuals
responsible for these core decisions, including the officials who are
charged with the decision-making duties for national security
commitments, who they report to, and who sets their budgets and
compensation.
As to the organizational documents, the U.S. citizens would have to
set up a structure consistent with the parameters set out in the
rulemaking, and the foreign minority investor would not be permitted to
alter those documents or structure. These organizational documents
additionally could be the means by which any delegation of authority to
the foreign investor would occur, and, similarly, where provisions for
revocability of that delegation would exist.
While there could be a disagreement between those officials
responsibility for safety, security, or national defense commitments,
and a foreign official with delegated authority to make some commercial
decisions, that conflict would--as with all large organizations--rise
to the levels of the senior executives or Board of Directors for
resolution. As a majority of those officials and directors must, by
statute, be U.S. citizens, U.S. citizens necessarily would determine
the outcome of those disagreements.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Hon. Jeffrey N. Shane
Question 1. Do you feel the Federal Government has performed
adequate safety and security oversight over airline maintenance
operations, including maintenance performed at foreign facilities?
Answer. Yes. Over the last several years, the Federal Aviation
Administration (FAA) has changed the way it oversees aircraft
maintenance. In the past, FAA's inspectors were required to complete a
prescribed number of oversight activities focused on compliance with
FAA regulations. In 1998, FAA began overseeing the ten largest airlines
using the Air Transportation Oversight System (ATOS) model which goes
beyond simply ensuring regulatory compliance. The goal of the oversight
model is to foster a higher level of air carrier safety using a
systematic, risk-management-based process to identify safety trends and
prevent accidents. ATOS has improved safety because it identifies and
helps manage risks before they cause problems by ensuring that carriers
have safety standards built into their operating systems.
Oversight of repair stations is a good example of why our current
focus on risk management is preferable to compliance based oversight.
We know that, if some maintenance component is identified as a risk,
our oversight focus would be triggered, regardless of who or where the
maintenance is performed.
I am confident that the changes we have made in our oversight
philosophy and the work we continue to do with input and assistance
from the aviation community, Congress, and the international community
has contributed to this historically safe period of commercial aviation
safety. Our safety oversight must keep pace with the industry as it
changes and I think we are well positioned to accept that challenge.
The FAA is currently assisting the Transportation Security
Administration (TSA), DHS, in drafting a notice of proposed rulemaking
to address security requirements and to conduct security audits of FAA
Part 145 certificated repair stations. TSA will also use a risk
management-based approach in developing assessment criteria, assessment
schedules, and decisionmaking matrices to address repair station
findings. A required self-assessment tool and on-site inspections will
begin after the publication of a final rule. As the program matures TSA
will refine its risk management process. TSA has requested and received
FAA assistance in the development of repair station training materials.
Additionally, the FAA has agreed to assist in delivery of repair
station training.
Question 2. Do you feel the Federal Government has sufficient
resources to adequately perform safety and security oversight over
airline maintenance operations, including maintenance performed at
foreign facilities?
Answer. Yes. Funding provided in FY 2006 has enabled FAA to address
critical safety and security oversight requirements. In addition, FAA
has reprogrammed some funds and has requested that Congress approve the
use of funds consistent with Section 511 of last year's appropriation
bill. With these additional funds, Flight Standards (AFS) will be able
to hire 139 safety-critical staff in FY 2006--55 with funds already
appropriated by Congress and 84 with funds from the Section 511 request
and internal reprogramming. Most of this additional safety-critical
staff--80 new staff--will strengthen our safety oversight of repair
stations, including foreign facilities. This includes implementing the
Enhanced Repair Station Oversight Program at all 5,018 repair stations.
This oversight program will:
Establish a risk-based surveillance system to identify and
target inspector resources as required.
Enhance the surveillance process by expanding on the current
facility inspection program.
Capture data for risk mitigation.
Establish a repair station assessment program comprised of
focused inspections.
Establish oversight programs that utilize resources more
effectively for large and complex repair stations performing
maintenance on air carriers (e.g., certificate management
teams).
The balance of 59 new staff will provide needed increases in other
areas of safety oversight, including financially distressed carriers,
fractional ownership, and emergency medical services.
Question 3. The Department's proposal would make any delegation of
authority to foreign citizens ``revocable.'' What evidence does the
Administration rely on to show that this contract/model could work or
has worked in the context of a complex entity like an airline
operation?
Answer. It has been the Department's practice to prevent foreign
investors in any U.S. air carrier from exerting control or undue
influence over any aspect of an air carrier's operations, regardless of
the amount of foreign investment made and/or percentage of equity held
by the foreign interests. In most cases, U.S. air carriers include
numerous provisions in their organizational documents (i.e., charter
agreements, bylaws, etc.) to prevent foreign control over the company
and to maintain its strict adherence to the Department's U.S.
citizenship requirements. In reviewing an air carrier's ownership
structure in initial and continuing fitness review cases, we have found
that air carriers are fully aware of the Department's scrutiny when
foreign investors are involved and that these air carriers take the
necessary steps to remain under the actual control of U.S. citizens.
The Department's current practices have proven very effective in these
matters, and we are confident that they will continue to serve the
public interest well.
Question 4. Will foreign investors truly be able to control and
protect their investment, if control is subject to revocation at any
time? And if they don't have this control, why would they invest in the
first place?
Answer. The Department's proposal would allow foreign investors to
have greater involvement in the commercial decisions of the airlines in
which they have invested, giving the investors some protection over
their investments. As a practical matter, in most cases, the U.S.
citizens in control of the airline would revoke delegated authority
only in the event that the foreign investor attempts to make decisions
that are contrary to the airline's best interests, therefore contrary
to the interests of the majority U.S. stakeholders. For our part, the
Department believes that foreign investor motivations would usually
complement U.S. investor motivations in these matters. Even with the
revocability provisions, the proposal is attractive to foreign
investors because, again, it would allow them to participate more
actively in the air carrier's commercial decisions, whereas under
existing policy, foreign investor involvement is virtually nonexistent.
Question 5. Do you believe that U.S. commercial pilots should be
certificated by the USDOT beyond age 60? What is the basis of your
decision?
Answer. Certificating U.S. pilots in part 121 operations beyond age
60 would require rulemaking to demonstrate to the public how such a
modification would maintain safety. The consistency of findings across
both FAA and non-FAA studies have shown aging to be a factor in
commercial piloting. The findings of these empirical studies, using
various analytic methodologies, do not support a rule change.
The Air Line Pilots Association and the International Federation of
Airline Pilots' Associations currently support an age 60 limit. In
September 2002, we received nearly 7,000 comments in response to a
petition for an exemption to the age 60 rule, the majority of which
favored retaining the age 60 limit. Commenters cited safety and medical
issues most often in their reasoning.
For these reasons, we are unable to justify a rule change at this
time.
______
Response to Written Question Submitted by Hon. Ted Stevens to
Jeffery Smisek
Question. Continental is a member of the SkyTeam alliance, along
with 9 other major international airlines. Of those airlines, none have
rights to serve London's Heathrow Airport from the U.S. Does
Continental object to the Open Skies framework under negotiation
between the U.S. and EU? Is your opposition to the rulemaking a
reflection of your concerns about a new U.S.-EU agreement?
Answer. Continental is the only U.S. Member of SkyTeam that does
not hold antitrust immunity with any other SkyTeam Member. Of the ten
carriers in SkyTeam, * four (Air France, KLM, Alitalia, and CSA Czech)
are from the EU, and each has access to (and currently serves) Heathrow
and would, even under their current bilateral Open Skies Agreements
with the U.S., have the right to fly between their home countries and
the United States through London's Heathrow Airport. Even Korean Air
lines (also a Member of SkyTeam) could fly from Korea through London's
Heathrow Airport to the United States under the current U.S.-Korea Open
Skies agreement. Therefore, it is not correct that ``none have rights
to serve London's Heathrow Airport from the U.S.'' Although all of the
foreign SkyTeam carriers (with the exception of Aeromexico and
Aeroflot) may serve the U.S. through London's Heathrow Airport, not one
of the U.S. carriers in SkyTeam has that right. While the EU Open Skies
agreement would technically allow the U.S. carriers to serve Heathrow
Airport, it has been well documented that there are no competitive
slots and facilities available. Therefore, Continental would not gain
competitive access to Heathrow.
---------------------------------------------------------------------------
* SkyTeam carriers: Aeroflot, Aeromexico, Air France, Alitalia,
Continental, CSA Czech, Delta, KLM, Korean Airlines, Northwest.
---------------------------------------------------------------------------
Continental is uniquely disadvantaged by the U.S. failure to gain
slots and facilities at Heathrow, as part of the EU Open Skies
Agreement. Unlike Delta and Northwest, we do not have antitrust
immunity with any of the EU carriers (or any other SkyTeam carrier), so
there is no reason that other SkyTeam members would consider
transferring slots to Continental. While Delta and Northwest have
limited service to the U.K., Continental has developed an extensive
U.S.-U.K. network, serving 7 U.K. cities from the U.S. and, therefore,
is currently the strongest U.S.-U.K. competitor to British Airways and
Virgin Atlantic in U.K. markets where we are allowed to compete
unconstrained. If the so-called EU ``open skies'' agreement were to be
ratified, the U.K. carriers, who hold the vast majority of all slots at
prime times for transatlantic service, would expand their Heathrow-U.S.
services without any constraints. Without competitive access to
Heathrow, Continental's entire U.K. network would inevitably be
weakened, strengthening the power and market share of the U.K. carriers
and their partners.
This is exactly why Continental finds it frustrating that the U.S.
DOT has been willing to ignore U.S. law in order to provide European
carriers immediate and unfettered access to U.S. markets, while
refusing to even negotiate for a process whereby U.S. carriers could be
assured of the commercially viable slots and facilities necessary for
competitive access to the most important airport in the EU as soon as a
U.S.-EU agreement is signed.
Additionally, we object to the rulemaking because it is blatantly
unlawful and, as a result, ineffective in encouraging any new foreign
investment. In fact, JPMorgan, one of the most sophisticated investment
banks in the world, has recently indicated that it could not recommend
foreign investment in U.S. airlines based on the Department's
proposals.
______
Response to Written Question Submitted by Hon. Ted Stevens to
Michael G. Whitaker
Question 1. United is one of the major members of the Star
Alliance. Star now has 18 members. How do you expect U.S. carrier's
financial health or viability to change as a result of this rulemaking?
Answer. U.S. airlines have weathered enormous financial challenges
in recent years. Foreign competitors, including members of the Star
Alliance, have fared much better. The current international regulatory
environment contributes to our financial weaknesses by limiting
markets, discouraging investment and inhibiting international
expansion.
The NPRM, the pending air services agreement between the United
States and the European Union, and other actions to remove outdated
regulatory barriers on international aviation are very important for
U.S. carriers to regain long-term financial stability. U.S. airlines
need greater access to growing markets around the world, the ability to
invest in operations outside the United States, and more opportunity
for cooperation with our international partners. Such improvements
would allow airlines to spread business risk geographically and better
withstand economic peaks and valleys inherent in the airline industry.
Question 2. What sorts of daily operational decisions could be
affected by foreign strategic investors in United, if possible?
Answer. The Department of Transportation's proposal regarding
foreign control of U.S. airlines is intended to provide greater
flexibility to U.S. carriers seeking to attract foreign investment. Our
understanding is that U.S. carriers would have the option to offer
foreign investors a greater degree of involvement in the commercial
decision-making and management of U.S. carriers than is currently
permitted by DOT case law precedent. The precise nature and degree of
such involvement (within the limits prescribed by the proposal) would
be established on a case-by-case basis between the U.S. carrier
majority owners and the foreign investors. In general, the DOT proposal
would permit the U.S. carrier majority owners and the foreign investors
broad authority to allocate commercial decision-making and management
responsibility between them, so long as U.S. citizens retain actual
control (including control over organizational documents, safety,
security and the Civil Reserve Air Fleet program) of the U.S. carrier.
______
Response to Written Questions Submitted by Hon. Ted Stevens to
Captain Duane Woerth
Question. It has been suggested that allowing increased foreign
investment in U.S. airlines will better position our carriers for
financial health and internal growth. Lacking additional financial
opportunities exposes the industry to more hardship during the next
downturn. What is ALPA's view of projected growth in the domestic
industry, particularly as it applies to hiring new pilots to meet
increasing demand? Would changing the limits on foreign ownership
contribute to the certainty of future growth?
Answer. Per your inquiry, we would point out at the outset that
DOT's proposal does not change the existing limits on foreign
investments in U.S. airlines. The limit would remain at 25 percent of
the voting shares. Rather, what DOT is proposing to change is the
prohibition against foreign control of U.S. airlines, in the hope that
this change would attract more foreign investment (up to the existing
limit).
DOT has presented no hard data to show that such radical change in
the foreign control rules is necessary to ensure that the U.S. airline
industry has adequate access to capital investment. If some U.S.
carriers are currently having difficulty finding capital, we believe it
is because of the precarious financial condition of the industry rather
than any regulatory restrictions on foreign investment.
In fact, there is evidence that when a U.S. airline shows some
significant promise of profitability, it is able to find the capital it
needs. For example, United Airlines, after engaging in extensive
restructuring, cost-cutting and changes in operations and services
while in Chapter 11, was able to obtain $3 billion in debt exit
financing, on terms that CEO Tilton described as ``good even for my old
business.'' Similarly, US Airways, after going through its own Chapter
11 restructuring and merging with America West, obtained $1.5 billion
in exit financing, of which $350 million was in the form of equity
commitments. Moreover, $75 million of the equity was foreign investment
provided by ACE Aviation Holdings, the parent of Air Canada. These
major financings strongly indicate that both foreign and domestic
capital is available to U.S. airlines if they appear to offer a
reasonable return to the investor.
DOT asserted in its NPRM that the carriers currently in Chapter 11
have ``struggled to find the capital necessary to enable them to exit
Chapter 11 protection.'' 70 Fed. Reg. 67393. It is not surprising that
the search for capital for an enterprise--any enterprise--that has had
to seek Chapter 11 protection will be something of a ``struggle.'' What
is more significant is that two major airlines, United and US Airways,
successfully found such financing once they had restructured and put
together a promising business plan, despite their long histories of
financial difficulty. And in the case of US Airways, such financing
included a substantial contribution by a foreign investor, ACE, which
will also have a seat on the airlines Board of Directors. While there
are several other airlines currently in Chapter 11 that have not yet
obtained exit financing, those airlines have also not yet completed
their restructuring. If they are able to restructure and produce a
viable business plan as United and US Airways have done, there is no
reason to believe they will not also find whatever financing they
require. Indeed, a Dow Jones Newswire reported in December that
Northwest Airlines has already reached a new financing agreement with
Airbus, pursuant to which ``Airbus affiliate AVSA [will] provide or
procure financing for 85 percent of an undisclosed number of Airbus
A319 aircraft scheduled for delivery this year,'' and ``for 85 percent
of up to 10 A330 aircraft to be delivered in 2006 and 2007.''
In short, ALPA believes that there is no need to change the foreign
control rules to ensure that the airline industry has adequate access
to capital investment. Rather, what is needed are measures to promote
the economic health of the industry, such as relief from discriminatory
and burdensome taxes.