[Federal Register Volume 71, Number 236 (Friday, December 8, 2006)]
[Proposed Rules]
[Pages 71106-71109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9603]


-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 399

[Docket No. OST-2003-15759]
RIN: 2105-AD25


Actual Control of U.S. Air Carriers

AGENCY: Office of the Secretary, DOT.

ACTION: Withdrawal of certain proposed amendments.

-----------------------------------------------------------------------

SUMMARY: Current law requires that U.S. citizens actually control each 
U.S. air carrier, that U.S. citizens own or control at least 75 percent 
of the shareholders' voting interest, and that the president and two-
thirds of the directors and the managing officers must be U.S. 
citizens. The Department interprets this law in conducting initial and 
continuing fitness reviews of U.S. air carriers. We are withdrawing a 
proposal to modify by regulation the standards we apply in those cases 
where ``actual control'' by U.S. citizens is at issue.
    The proposal being withdrawn would have narrowed the scope of our 
inquiry in such cases to those core matters affecting compliance with 
U.S. requirements affecting safety, security, national defense and 
corporate governance. These rationalized standards for deciding whether 
U.S. citizens maintained ``actual control'' of a carrier would have 
applied only to proposed transactions involving investors whose 
countries have an open-skies air services agreement with the United 
States and offer reciprocal investment opportunities to U.S. citizens. 
Our interpretation of other aspects of the statutory citizenship 
requirement would have been unchanged.
    Although we are withdrawing the current proposal, we will continue 
to consider other ways to rationalize and simplify our domestic 
investment regime. The need for greater certainty and transparency in 
our requirements and administrative process has become very apparent. 
Indeed, public comment in this docket has only served to confirm the 
Department's growing concern that the current regime is so unduly 
complex and burdensome that it needlessly inhibits the movement of 
capital that otherwise would flow into the U.S. airline industry and 
thus interferes with the legitimate needs of U.S. carriers to attract 
strategic investors from overseas markets. The Department notes that 
most of the American economy has progressed well beyond the antiquated 
notions that continue to apply to the airline industry because of our 
administrative interpretations of the current statute. In a modern, 
global industry such as aviation, we believe that the United States 
should not shut its doors to foreign investment by perpetuating archaic 
and time-consuming administrative practices that serve neither a 
statutory purpose nor an identifiable policy interest of the United 
States.
    The Department had also proposed amendments to 14 CFR Part 204, the 
rules governing the data used in fitness determinations, and invited 
comment on the procedures used in fitness cases. The Department will 
publish a separate decision on those matters.

FOR FURTHER INFORMATION CONTACT: William M. Bertram, Chief, Air Carrier 
Fitness Division (X-56), Office of Aviation Analysis, U.S. Department 
of Transportation, 400 7th Street, SW., Washington, DC 20590; (202) 
366-9721.

SUPPLEMENTARY INFORMATION:

Introduction

    Under Title 49 of the U.S. Code, only ``citizens'' of the United 
States may obtain certificate authority to provide air transportation 
within the United States or operate as a U.S. air carrier on 
international routes. (49 U.S.C. 41102 or 41103.) The Department 
proposed to modify its interpretation of ``actual control,'' an element 
in the statutory definition of a citizen of the United States, 49 
U.S.C. 40102(a)(15), because it believes that modernizing its policies 
so as to allow more foreign investment in U.S. carriers would better 
reflect the realities of a global aviation industry, strengthen the 
U.S. air transportation system, and encourage other countries to open 
their own air services and investment markets.
    Our proposal would not have and could not have altered the 
statutory test for citizenship nor was it an attempt to do so. We 
stated our intention to continue vigorous enforcement of the statute's 
express requirements. We did propose, however, to eliminate certain 
additional citizenship restrictions that had been established 
administratively over the course of decades in individual fitness cases 
and that in our view are anachronistic, overly complex, and unduly 
burdensome. Accordingly, the net result of our proposal would have been 
to end a long-standing, extraneous administrative prohibition against 
foreign investors having even a ``semblance'' of control over airline 
commercial decisions; the revised approach would have applied only to 
investors whose home countries had open-skies agreements with the 
United States and provided reciprocal investment opportunities for U.S. 
citizens. The proposal would have maintained the prohibition against 
foreign citizen control of decisions on corporate governance, safety, 
security, and participation in the Civil Reserve Air Fleet program and 
other national defense airlift programs (for simplicity, referred to as 
``CRAF'' hereafter). To ensure control by U.S. citizens, as an added 
measure we would have required that any delegation of authority by U.S. 
citizens to foreign investors be fully revocable by the shareholders or 
board of directors.
    We provided several opportunities for interested parties to comment 
on the proposal, including a supplemental notice of proposed rulemaking 
(SNPRM) that further clarified our proposed modified interpretation of 
``actual control.'' 71 FR 26425 (May 5, 2006). In the supplemental 
notice, we made refinements to our proposal reflecting further 
consultations with our Federal Aviation Administration (FAA), the 
Department of Homeland Security (DHS), and the Department of Defense 
(DOD). We also acknowledged requests by members of Congress, who wanted 
us to provide time for more public comment on the proposal and for 
Congressional hearings on the topic.
    The additional comments that we received in response to the SNPRM 
confirmed our earlier determination that the Department's historic 
interpretation of the actual control requirement did not serve the 
public interest well.
    During the rulemaking we also proposed several technical changes to 
the rules governing the data for fitness determinations, 14 CFR Part 
204. Those proposals were unopposed. We also requested public comment 
on the procedures used by us in resolving citizenship issues. We will 
publish our decision on those proposals in a separate rulemaking 
document.

Background

    A firm may not be certificated as an air carrier to operate within 
the United

[[Page 71107]]

States or as a U.S. carrier on international routes unless it is a 
citizen of the United States. 49 U.S.C. 40102(a). We examine carrier 
citizenship primarily in two situations. First, when a firm applies for 
authority to operate as a U.S. carrier, we conduct an initial fitness 
review, which necessarily includes a review of the carrier's 
citizenship. We conduct initial fitness reviews through adjudicatory 
proceedings for which a public record is maintained in our docket. 
Second, we conduct a continuing fitness review if a carrier undergoes a 
substantial change in ownership, operations, or management. We usually 
conduct continuing fitness investigations without a public proceeding 
and thus without a public record or an opportunity for public comment. 
In some continuing fitness cases, we may decide to use procedures that 
are more public so that there will be a public record and an 
opportunity for public comment. We may amend, modify, suspend, or 
revoke the carrier's license, or begin an enforcement action if a 
carrier no longer meets the citizenship test. See 71 FR 26426-26427. 
The statute defines the requirements for United States citizenship. 49 
U.S.C. 40102(a)(15)(C). For many years that statute required only that 
the president and at least two-thirds of the board of directors and 
other managing officers be citizens of the United States, and that at 
least 75 percent of the voting interest be owned or controlled \1\ by 
persons that are citizens of the United States. Our predecessor agency 
in administering this statute, the Civil Aeronautics Board (the Board), 
created an additional requirement not then required by the text of the 
statute: the requirement that U.S. citizens must ``actually control'' 
each U.S. carrier. Willye Peter Daetwyler, d.b.a. Interamerican Air 
Freight Co., Foreign Permit, 58 CAB 118, 120-121 (1971).
---------------------------------------------------------------------------

    \1\ We and the Board have always interpreted this part of the 
statute as ``owned and controlled.''
---------------------------------------------------------------------------

    In order to determine citizenship to verify compliance with the 
actual control requirement, both the Department and the Board have 
employed a fact-specific method of inquiry. See 71 FR 26437, citing 68 
FR 44675, 44676 (July 30, 2003). Each decision considered the 
``totality of circumstances'' of the airline's organization, including 
its capital structure, management, and contractual relationships, in 
determining whether U.S. citizens actually control a carrier. We 
developed our policies on interpreting the actual control requirement 
through our decisions in individual cases, based on the facts and 
circumstances of each case, and did not establish a specific definition 
of ``actual control'' through any rulemaking. We have continually 
modified our interpretation over time in light of changing conditions. 
See 71 FR 27437, citing Northwest Airlines Acquisition by Wings 
Holdings, Order 91-1-41 (January 23, 1991), and a more recent decision 
enabling Hawaiian Airlines to complete its reorganization with some 
foreign investment.
    Neither the Department nor the Board has administered the actual 
control requirement in a way that barred U.S. carriers from having 
substantial commercial relationships with foreign carriers and other 
foreign firms. For instance, we have held that a U.S. airline continued 
to satisfy the actual control requirement when it had an alliance 
relationship with a foreign airline that necessarily enabled the 
foreign partner airline to influence the U.S. airline's commercial 
decisions. Acquisition of Northwest Airlines by Wings Holdings, Inc., 
Order 92-11-27 (November 16, 1992), at 16-17.
    Nonetheless, the Department's and the Board's interpretations of 
``actual control,'' by effectively prohibiting foreign investors from 
enjoying any meaningful participation in the decision-making of U.S. 
airlines, has left foreign investors with a very limited ability to 
protect their interests as minority investors. We at times implemented 
the ``actual control'' requirement as barring foreign investors from 
having any ``semblance'' of control, which effectively relegated them 
to being passive investors, unable to participate in carrier commercial 
decisions that affected the value of their own investment.
    Three years ago Congress amended the citizenship definition by 
expressly adding an actual control requirement to the statute. As a 
result, the statute provides that a corporation can only be a citizen 
of the United States if it is ``under the actual control of citizens of 
the United States.'' Vision 100--Century of Aviation Reauthorization 
Act, P.L. 108-176, Sec.  807, 117 Stat. 2490 (2004). Congress chose not 
to define ``actual control.''

Notice of Proposed Rulemaking

    We proposed our modified interpretation of ``actual control'' in 
order to facilitate efforts by U.S. airlines to remain competitive in 
the global airline industry. We grounded our proposal on three 
premises: first, that in view of the changes taking place in the global 
economy, U.S. air carriers should have the broadest access to the 
global capital markets permitted by law; second, that our historical 
interpretation of the term ``actual control'' has failed to keep pace 
with the changes in the global economy; and third, that in order to 
provide U.S. carriers with more flexibility to compete in the global 
economy, we should not maintain an interpretation of ``actual control'' 
that is more restrictive than necessary to meet statutory requirements. 
71 FR 26427-26429; 70 FR 67393-67394. In sum, we acted on the policy 
that we should remove unnecessary restrictions on U.S. carriers seeking 
access to global capital markets.
    In 2003, we issued an Advance Notice of Proposed Rulemaking (ANPRM) 
that sought comment on our standards and procedures for determining 
whether U.S. citizens actually control a carrier. 68 FR 44675 (July 30, 
2003). After considering the comments, we issued a Notice of Proposed 
Rulemaking (NPRM) concerning our interpretation of ``actual control'' 
and use of informal procedures in most continuing fitness reviews. 70 
FR 67389 (November 7, 2005). The Department proposed to update our 
interpretation of ``actual control'' so as to end restrictions on 
foreign involvement that, in our view, needlessly interfere with the 
ability of U.S. carriers to access international capital markets and 
thus to compete effectively in the global marketplace. Under our 
proposal, U.S. citizens would remain in control of the carrier through 
their authority over corporate governance and those areas of airline 
operations subject to significant government regulation: Safety, 
security, and CRAF participation. This modification would apply only if 
the foreign investors' home country had an open-skies air services 
agreement with the United States and, further, provided investment 
reciprocity for U.S. citizens wishing to invest in that country's 
airlines, or where the United States' international obligations 
otherwise required the same approach.

Supplemental Notice of Proposed Rulemaking

    We issued a Supplemental Notice of Proposed Rulemaking (SNPRM) to 
address comments received on the NPRM, and to propose additional 
refinements to the proposal in order to definitively clarify that U.S. 
citizens would still retain actual control of U.S. carriers under the 
Department's proposal. 71 FR 26425 (May 5, 2006).
    The SNPRM retained our proposal to allow carriers to delegate 
decision-making responsibilities to foreign citizens (except for 
organizational documents, safety, security, and CRAF

[[Page 71108]]

participation matters). However, we added language to make clear that 
such delegations would have to be revocable by the board of directors 
or shareholders--whose votes would be controlled by U.S. citizens. The 
right to revoke delegations of management authority, we felt, was 
intrinsic to the requirement that U.S. citizens maintain actual control 
of the carrier. We further proposed in the SNPRM to broaden the scope 
of decision-making in the areas of safety, security, and CRAF 
participation that must remain under the actual control of U.S. 
citizens. The proposed revisions would unequivocally ensure that safety 
and security decisions generally, not just those related to FAA and TSA 
safety and security requirements, as well as all decisions on national 
defense airlift commitments, not just CRAF commitments, remained firmly 
under the actual control of U.S. citizens. Our refinement of our 
proposals on safety, security, and CRAF participation reflected as well 
our discussions with the FAA, DHS, TSA, and DOD.
    We determined that we have the authority to interpret the statutory 
definition of ``actual control,'' because we are responsible for 
administering it; that authority enables us to modify our 
interpretations when changing industry conditions and policies require 
doing so; and our proposed modified interpretation would be consistent 
with the language and purpose of the statute. We further stated that we 
should change our interpretation when the past interpretation has 
become inconsistent with commercial developments and the public policy 
goals set by our statute, 49 U.S.C. 40101(a). Finally, we noted that 
neither the statute nor its legislative history indicated that Congress 
had intended to freeze our earlier interpretations of ``actual 
control.'' 71 FR 26436-26439.
    After we issued the SNPRM, the Aviation Subcommittee of the Senate 
Committee on Commerce, Science, and Transportation held a hearing on 
our proposal on May 9, 2006. The Aviation Subcommittee of the House 
Transportation and Infrastructure Committee had held a hearing on our 
proposal on February 8, 2006, based on the NPRM. Jeffrey N. Shane, the 
Department's Under Secretary for Policy, testified at both hearings.
    Several members of Congress have written letters to the Secretary 
that contend that our proposal is unwise and a significant departure 
from what they perceive as existing precedent. These concerns were also 
raised at hearings and in proposed legislation.

Summary of Comments

    We invited comments on the proposal as refined by our SNPRM. We 
received 21 comments on the SNPRM from carriers, labor parties, and 
industry associations, and three comments from individuals.
    The majority of commenters supported the policy change as a way to 
strengthen the U.S. airline industry and encourage the liberalization 
of international aviation. The Department received general support for 
its proposed changes from Airports Council International-- Europe 
(ACI), Airports Council International-- North America (ACI-NA), 
Association of European Airlines (AEA), bmi, Delta Air Lines (Delta), 
DePaul University College of Law International Aviation Law Institute 
(DePaul), Federal Express (FedEx), Hawaiian Airlines (Hawaiian), 
International Air Transport Association (IATA), United Air Lines 
(United), United Parcel Service (UPS), United States Airports for 
Better International Air Service (USA-BIAS), U.S. Airways, and the 
Washington Airports Task Force (WATF).
    Other commenters--notably the Aircraft Mechanics Fraternal 
Association (AMFA), Air Line Pilots Association (ALPA), British 
Airways, Continental Airlines (Continental), Independent Pilots 
Association (IPA), Transportation Trades Department AFL-CIO (TTD), and 
Virgin Atlantic Airways (Virgin Atlantic)--opposed our proposal, 
claiming that the proposed rule would be unlawful, impracticable, 
ineffective in achieving the desired result, or harmful to the airline 
industry and its unionized employees.
    Both supporters and opponents of our proposal asserted that the 
rule, as proposed, provided inadequate guidance to carriers and 
potential foreign investors and that our final decision should provide 
examples of the kind of business relationships that would or would not 
be permitted by a final rule. See, e.g., AEA Comments at 4; British 
Airways Comments at 3-4; IATA Comments at 6; Virgin Atlantic Comments 
at 5-6; ACI Comments at 2. Other commenters asserted that it was not 
clear whether our proposed revocability requirement--the requirement 
that a U.S. carrier have the practicable ability to revoke any 
delegation of decision-making authority to a foreign investor--would be 
consistent with standard commercial practices in other industries, 
which make a firm's ability to revoke a contract with its investors 
subject to conditions limiting the ability to revoke in order to 
protect the investors' legitimate interests. See, e.g., FedEx Comments 
at 7-9; ACI-NA Comments at 4; DePaul Comments at 4; US-BIAS Comments. 
Some commenters contended that our proposals were too restrictive; 
Delta, for example, asserted that the revocation requirement was 
``flatly inconsistent'' with our goal of encouraging foreign 
investment. Delta Comments at 6-7.

Our Final Decision

    We have decided to withdraw the proposal on interpretation of 
``actual control.'' We still believe there are significant benefits to 
be realized by liberalizing and rationalizing our domestic investment 
regime for U.S. air carriers. Nonetheless, our policy could gain from 
additional public insight into the practical advantages and drawbacks 
of particular administrative reforms.
    We maintain that our past administration of the ``actual control'' 
requirement is obsolete and the notion has needlessly precluded foreign 
investment in the U.S. airline industry to its detriment. In the 
Department's view, retention of the anachronistic administrative 
standard for determining actual control serves no discernible policy 
interest of the United States. Instead, it has prevented U.S. carriers 
from entering into sound and desirable business relationships with 
foreign allies ``relationships that U.S. corporate management concluded 
would benefit their carrier, their employees and shareholders. See, 
e.g., FedEx Comments at 2; Atlas & Polar Comments on NPRM at 3; United 
Comments at 3. We continue to believe we need a way to enable strategic 
investors ``interested in long-term gain, not short-term arbitrage--to 
participate more meaningfully in the decision-making at U.S. carriers, 
as such investors would ``more likely be concerned about a U.S. 
airline's product quality, market strategy, and its capital 
reinvestment plans than short-term investors who view airlines merely 
as trading vehicles.'' 71 FR 26428. An up-to-date approach towards 
administering the ``actual control'' requirement that takes into 
account the realities of modern capital markets would permit our 
carriers to catch up with increasingly competitive and financially 
stronger foreign airlines in terms of integrating their operations and 
services with those of marketing partners. It would also enable 
investments abroad by U.S. air carriers and the formation of durable 
business relationships with foreign carriers, such as Continental, for 
example, enjoys with COPA, a leading Latin American airline. 
Continental Airlines, SEC Report on Form 10-Q (July 21, 2006) at 34. In 
our view, we

[[Page 71109]]

should encourage additional foreign investment in the U.S. airline 
industry, give U.S. carriers freedom in developing beneficial business 
relationships across borders and eliminate outdated restrictions on 
business conduct.
    Our proposal has become controversial, as to both the questions of 
whether our interpretation of ``actual control'' should be changed and 
whether our specific proposal will effectively accomplish our 
objectives. In addition, as noted, letters sent by members of Congress 
have urged the Department not to adopt the proposal without further 
discussion. In this particular instance, we have concluded that the 
expressions of concern support the concept that more public discussion 
of the underlying issues is warranted. By withdrawing the proposal, we 
will be free to engage in broad-ranging dialogue without the 
constraints of a specific rulemaking proposal.

Rulemaking Analyses and Notices

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), as amended 
by the Small Business Regulatory Enforcement Fairness Act of 1996, 
requires federal agencies, as part of each rule, to consider regulatory 
alternatives that minimize the impact on small entities while achieving 
the objectives of the rulemaking. Because we are withdrawing our 
proposal, we are not adopting any final rule requiring a regulatory 
flexibility analysis.

Trade Impact Assessments

    The Trade Agreement Act of 1979 prohibits federal agencies from 
establishing any standards or engaging in related activities that 
create unnecessary obstacles to the foreign commerce of the United 
States. Legitimate domestic objectives, such as safety, are not 
considered unnecessary obstacles. The statute also requires 
consideration of international standards and, where appropriate, that 
U.S. standards be compatible. The Department has assessed the potential 
effect of this withdrawal of the proposed rule and has determined that 
it will have no effect on any trade-sensitive activity.

International Compatibility

    In keeping with U.S. obligations under the Convention on 
International Civil Aviation, it is the Department's policy to comply 
with International Civil Aviation Organization (ICAO) Standards and 
Recommended Practices to the maximum extent practicable. The Department 
has determined that there are no ICAO Standards and Recommended 
Practices that correspond to this withdrawal notice.

Unfunded Mandates Reform Act of 1995

    The Unfunded Mandates Reform Act of 1955 (the Act) is intended, 
among other things, to curb the practice of imposing unfunded Federal 
mandates on State, local, and tribal governments. Title II of the Act 
requires each Federal agency to prepare a written statement assessing 
the effects of any Federal mandate in a proposed or final agency rule 
that may result in an expenditure of $100 million or more (adjusted 
annually for inflation) in any one year by State, local, and tribal 
governments, in the aggregate, or by the private sector; such a mandate 
is deemed to be a ``significant regulatory action.'' This withdrawal 
notice is not a final or proposed rule. The requirements of Title II of 
the Act, therefore, do not apply.

Executive Order 13132, Federalism

    This action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 13132, dated August 4, 1999 (64 
FR 43255). This withdrawal notice does not have a substantial direct 
effect on, or significant federalism implications for the States, nor 
would it limit the policymaking discretion of the States.
    It will not directly preempt any State law or regulation, or impose 
burdens on the States. This action will have not a significant effect 
on the States' ability to execute traditional State governmental 
functions. The agency has therefore determined that this withdrawal 
notice does not have sufficient federalism implications to warrant 
either the preparation of a federalism summary impact statement or 
consultations with State and local governments.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) 
requires federal agencies to obtain approval from the Office of 
Management and Budget (OMB) for each collection of information they 
conduct, sponsor, or require through regulation. Because this is a 
withdrawal notice, it will not impose any additional requirements. 
Thus, there is no change in the paperwork collection, as it currently 
exists.

    Issued in Washington, DC on December 5, 2006.
Andrew B. Steinberg,
Assistant Secretary for Aviation and International Affairs.
[FR Doc. 06-9603 Filed 12-5-06; 12:39 pm]
BILLING CODE 4910-62-P