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Oberstar Wars: Airline protectionism - Will the Empire strike back?

9-Mar-2009

Last week, the US House Transportation Committee approved its Chairman's amendment to an essential FAA funding bill. The amendment has most of the ingredients of good old fashioned protectionism. Ironically, H.R. 831 is entitled: "A Bill to Ensure Adequate Airline Competition Between The United States and Europe." Its result could be quite the reverse.

The Committee's Chairman? The redoubtable Rep. James ("watch this space") Oberstar. He is throwing down the gauntlet to the EU by persisting with a course destined - or even designed - to provoke confrontation with those who would open up the skies across the Atlantic.

Apart from approving the FAA bill's main purpose of delivering funding for long overdue upgrading of the US' shambles of an air traffic control system, the Committee also accepted the Congressman's amendment, which takes a hefty whack at the international aviation structure.

The amendment begins by attacking the entire global airline alliance system; secondly, it effectively undermines any prospect of liberalising US airline ownership rules - thereby jeopardising the EU-US open skies agreement. Rep Oberstar may be a parochial coalmining town protectionist, but he is not ignorant of the implications of this amendment.

And what a dreadful message he sends to the airline world at the very time the airline system is in meltdown and needs "nuance and pragmatism rather than stridency and principle", as the Economist prescribed last month if there are to be intelligent government responses towards international trade.

The Oberstar attack on global alliances

First of all, the bill "sunsets" US approval of global alliances. Oberstar is concerned at the use of alliances which, by stealth, allow the takeover of US airlines: "I think it's a very important matter for us to determine whether we're slipping further into foreign ownership of U.S. airlines under the guise of antitrust immunity."

All existing antitrust approvals for alliances are to be withdrawn in three years. Also, following a mandated study by the Department of Transportation of the value of alliances ("to reassess the wisdom of allowing the continuation of the reduced level of competition, which results from antitrust immunity for alliances"), a stricter test of consumer benefits will be applied if approval is to be granted. Ominously he continued, "there may also be a need for further legislation."

American Airlines/British Airways alliance at risk?

And, although it is unstated, any existing application before the DoT must now be under threat. Even though the Oberstar bill still awaits House and Senate adoption, it would be a big call for the Department meanwhile to proceed with approval of the currently outstanding oneworld and Star Alliance applications before it - at least until President Obama and Congress overall offer some guidance on the direction they will pursue.

Delta/Northwest and United, the US leaders respectively of the SkyTeam and Star alliances, are already safely approved. But those most concerned will be American Airlines and British Airways, whose operating alliance is again on the table; also Continental, which is awaiting its own approval for admission to the Star Alliance.

In the current heated environment, any US airline which speaks out must do so cautiously, but Continental last week gently followed a line designed to mesh with Oberstar's protectionist approach, noting that "Any further delay in the review of the current (antitrust) applications perpetuates the competitive imbalance that now exists, and we caution against prolonging the current anticompetitive environment."

And indeed there is considerable merit in at least placing each of the alliances on the same footing in the US market (and therefore globally).

Foreign ownership of US airlines to take a backward step

Consistent with this neo-paranoid concern about foreign takeovers, the Oberstar amendment would also explicitly revisit the existing - and already highly protective - US ownership rules, by legislating now that US citizens would be required to "control all matters pertaining to the business and structure of the air carrier, including operational matters such as marketing, branding, fleet composition, route selection, pricing, and labor relations."

Rep Oberstar argues that this merely clarifies and gives certainty to the existing legislation. That may be true, but in doing so it removes a level of discretion from the DoT in approving any degree of foreign participation in a US carrier. Oberstar apparently sees the DoT as a soft liberal promoter of foreign takeovers.

It is precisely in that layer of discretion that liberalisation has been able to overcome the archaic nationalistic bilateral provisions which specify majority national ownership in designated airlines.

For example, in Asia and in South America, genuinely international routes can be flown today by airlines which are 49% foreign owned and - shock horror, Mr Oberstar - in practical terms foreign controlled. And, surprisingly, the sky is not falling.

Rep. Oberstar has previously opposed moves to relax ownership rules under the Bush Administration. In December 2006, as he was about to take on leadership of the House Committee in a newly reinforced Democratic Senate, he forced the reversal of a proposed liberalised approach to foreign airline intervention in US carriers. At that time the EU, announcing disappointment with the US about-face, noted that removing the US' foreign ownership restriction was "essential" to completing the open skies arrangement.

The EU's Transport Commissioner, Jacques Barrot, has already observed that the newly proposed change "could incorrectly be interpreted as requiring all middle and upper management to be occupied by U.S. citizens."

Hopefully this would indeed be an "incorrect" interpretation. But to all appearances the reality is that this is precisely what it means.

Full frontal attack on US-EU open skies?

As if these two measures were not significant enough in their own right, the more important impact is likely to be felt in the multilateral open skies negotiations which are due to recommence later this year.

The first stage went into effect in March 2008 and has already had a major effect in relaxing access provisions on both sides. Phase 2 of US-EU liberalisation is due to be completed by November 2010 and the next round of talks will be later this year. The EU has warned that the Oberstar amendment would "dangerously impair" progress towards this goal.

Superficially, Rep Oberstar appears genuinely concerned at the anti-competitive nature of the global alliances, quoting for example the greatly increased market share possessed by SkyTeam at Paris and Star at Frankfurt since the respective alliances were granted anti-trust immunity. He believes that "in essence, the granting of antitrust immunity is a de facto merger of these airlines over the routes involved." This in turn could give immunised US airlines an unfair advantage, by "disrupting domestic competition".

Whether or not correct in his concerns, the fact is that immunity was only granted after extensive examination by both the DoT and the Department of Justice, applying existing principles. The Oberstar amendment would back away from this.

And, more importantly, the timing of the move is, from a political perspective, obviously provocative and likely to undermine attempts to achieve a liberalised global airline system.

As the same Economist article noted, "Economic nationalism-the urge to keep jobs and capital at home-is both turning the economic crisis into a political one and threatening the world with depression. If it is not buried again forthwith, the consequences will be dire."

Where to next?

The Committee adoption of the FAA bill with its attached amendment is still only an initial move. Congressional and Administration examination and approvals are still necessary. And this is not the first time that politicians have played the amendment game with that hapless bill, with its vital aid for the US airways. Last time, the amendment led to the bill being sent back to the Committee, unpassed.

Undoubtedly there will be some serious talking to happen now, with the Europeans trying hard to achieve liberalisation without initially appearing confrontationalist. That would simply play into the hands of the nationalist/protectionist forces in the Congress.

It is possible - but it would be highly uncharacteristic - that Oberstar is merely tossing this hand grenade into the equation in order to keep the Europeans honest and to provide a negotiating weapon to concede down the track.

Will the Empire strike back?

For the time being the EU will eschew public rhetoric in favour of quiet but forceful diplomacy, seeking to inform and influence the new Administration of the likely repercussions of the Oberstar amendment, if adopted.

But the fifth column to which the EU will be looking for support is those US airlines which are already in alliances or who wish to enter. Also, they will be the ones with the most to lose if the EU spits the dummy next year and refuses to proceed with liberalisation. If agreement on Phase 2 cannot be reached and the valuable gains of the 2008 agreement are eventually rescinded - a threat that each side will use - the big losers will be no other than consumers, the world over.

The scene is now set for a long and largely unhelpful dispute across the Atlantic, all the while sending the rest of the world the most unsavoury signals about protecting airlines and reversing the modest liberalising gains of recent years.

(Note: the alliance provisions of the Oberstar legislation call upon the Government Accountability Office (GAO) to study:

"(1) The legal requirements and policies followed by the DOT in deciding whether to approve alliances and grant exemptions from the antitrust laws under 49 U.S.C. §§41308 and 41309; 


(2) Whether there should be any changes to those policies or the legislative authority under which DOT determines whether to grant antitrust immunity; and 


(3) Whether the DOT should exercise the right it has reserved to amend, modify or revoke any antitrust immunity previously granted.")


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