US airline ownership: no promise of change to foreign ownership laws
Foreign ownership laws in North America have undergone minor changes within the past year, including the Canadian government’s decision to increase foreign ownership limits to 49% (with no foreign entity holding more than 25% of voting shares).
Legislation introduced in the US earlier in 2018 to remove ownership restrictions on the country’s airlines has – unsurprisingly – gained little traction. But at least the proposal created an opportunity for discussing changes to US airline foreign ownership stipulations.
The needle on foreign ownership levels of US airlines is not likely to move anytime soon, and the increase in foreign ownership levels in Canada’s airlines have not resulted in drastic changes in the country’s aviation landscape. The result is the status quo will remain in place for the foreseeable future as age old protectionist policies show no signs of changing.
- Efforts to lift foreign ownership limits in US airlines during the past two decades have not been successful.
- Canada has made some progress in pushing its foreign ownership limits to 49%, but complexity in the ownership structure remains, which could deter foreign investment.
- Reciprocity is a valid argument in discussing US foreign ownership laws, but is not likely to gain much traction towards meaningful discourse about changes.
Bold legislation to remove US foreign ownership caps has gained little traction
Back in Mar-2018 US Representative Dave Brat introduced legislation to remove foreign ownership restrictions on US airlines. It was a bold move for a country that has one of the most stringent ownership limits in the world, at 25%.
Only Brazil has a more rigid limit of 20%. There have been discussions among Brazil’s legislators during the past couple of years about lifting those limits, but Brazil is experiencing a level of uncertainty in its presidential elections, and a far right candidate has a significant chance of being elected.
See related reports:
- US airline foreign ownership; time for a rethink
- Brazil-US aviation: open skies as foreign ownership laws relax
There was never a possibility that a bill to strip away the foreign ownership limits on US airlines would prevail in both chambers of Congress. But the proposal did cast a light on the outdated limits the US places on foreign ownership. Aside from Brazil, many countries across various regions have foreign ownership levels of 40% or higher.
Foreign ownership levels in selected countries worldwide
Back in 2003 the administration of then US President Bush proposed amending legislation for foreign ownership in US airlines from 25% to 49%. At that time, the Department of Transportation (DoT) suggested that implementing this amendment could provide significant benefits to US consumers and airlines, particularly by providing access to additional capital, which would help the financial health of the industry. DoT and the Department of State also maintained that these new limitations would bring the United States in line with the current foreign ownership laws of the European Union (EU).
In 2003 US airlines were reeling from the Sep-2001 terrorist attacks and, in some cases, were preparing to enter Chapter 11 restructuring. Now airlines can argue that they have had the experience of several years to profitability, and do not need foreign injections of capital.
Opposition to changes in foreign ownership rules is also an easy win for labour unions. One of their major arguments is that raising the limits could create security concerns.
Management at US airlines seems happy not pick battles with labour regarding foreign ownership, and the country’s large global network airlines have forged immunised JVs to create virtual mergers with international airlines.
Changes in Canadian ownership law have not resulted in an influx of foreign capital
Canada recently changed its foreign ownership limits for its airlines from 25% to 49%; however, no foreign entity is allowed to hold more than 25% of voting shares in a Canadian airline.
The result is that foreign investors are likely to be deterred, since complexities remain in ensuring that an airline’s governance and ownership remain ‘Canadian’.
Canada’s government relaxed foreign ownership restrictions for the country’s aspiring ULCCs in 2016, but no significant investments materialised. At one point, the ULCC specialist Indigo Partners appeared to be evaluating a potential investment in Enerjet, which was attempting to establish an ultra low cost airline dubbed FlyToo.
But in 2017 Indigo Managing Partner William Franke stated that Canada’s foreign ownership laws remained arcane. Indigo had drawn that conclusion after an 18-month study of the Canadian market.
One change to Canadian Transport Law that could benefit airlines is that Canada’s Competition Bureau now supplies a report to the country’s Transport Minister as an aid to reviewing proposed JVs and the Minister will make the final decision, without separate authority from the bureau. This could revive a proposed JV between Star partners Air Canada and United that was shelved years ago due to concerns raised by the Competition Bureau.
The reciprocity argument in the US is valid, but will likely fall on deaf ears
One valid argument for raising foreign ownership limits in the US is the concept of reciprocity. Delta Air Lines has 49% stakes in both Aeromexico and Virgin Atlantic. When Delta outlined plans to expand its stake in Aeromexico it cited an opportunity to enhance both Delta's and Aeromexico’s performance, and “bring our coordination and experience to help them [Aeromexico] improve their business model”.
It seems logical that global airlines should have the same opportunities to help US airlines improve their business strategies.
But the reciprocity argument is likely to gain little traction. Labour unions mount fierce campaigns any time there is serious discussion about foreign ownership in the US, which clouds any rational discourse about the benefits of expanding the limits.
Foes of raising foreign ownership will keep it unchanged for the foreseeable future
Foreign ownership is always a tricky item to discuss or debate, given that the phrase ignites certain long-held protectionist stances by many governments across the globe.
It is only logical to have a fresh look at foreign ownership limits as globalisation continues unabated. But the forces that have always worked to thwart those discussions show no signs of relenting in their efforts to quash any reasonable discourse about foreign ownership.