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Airline Mismanagement

The Airline Deregulation Act in 1978 brought limited free market forces to the US aviation industry. After 25 years, it is now time to extend deregulation further by allowing foreign ownership of US based airlines.

One of the fundamental tenets of American capitalism is that competition is good for everyone, including even the competing companies.

Maybe part of the problem in the airline industry at present is due to their protected nature. Let's now fully implement the American ideal and bring full free competition to our skies, by allowing international investors and airlines open access.

 
 
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Airline Deregulation

Should we allow foreign ownership of US airlines?
 

Allowing foreign investors to buy into US airlines, or to start their own new carriers, would bring a badly needed breath of fresh air - and fresh money - to a failing industry.

 

 

The solution to the current problems in the airline industry is not to give away more billions of taxpayers money (see this article). We should keep the government - and our taxpayers dollars - out of private industry.

Why do we need government bailouts when there's a better solution at hand? International investors are keen to invest into the US air transportation market. We should encourage them, not ban them, from doing this.

Why Are There Restrictions on Airline Ownership?

The restrictions on international ownership of US airlines are a historical remnant of a different era. Their origins date back to the days of sailing ships in the 19th century. During the period of airline regulation they were of course extended, and since then these restrictions have been perpetuated primarily due to the political fact that US airlines are a very effective lobbying group, whereas international investors have virtually no lobbying clout in Washington.

There are actually two very different restrictions that prevent a full open market for airlines in the US at present. Opponents of an open market have tended to try and mix together the 'worst' of each issue as support for their opposition to the other concept. So let's clearly understand these two different concepts :

Cabotage or Eighth Freedom Rights

The so called 'Freedoms of the Air' spell out, by international treaty, how airlines based in one country can operate over and in other countries. These freedoms of the air are defined and explained here.

The US does not currently allow this Eighth Freedom to international carriers, and it hides behind the bilateral concept of 'we will only let a foreign country's carriers participate in our market if the foreign country has a similar sized market and lets our carriers participate in their market, too'.

Although we think that the US should allow cabotage, this article does not cover that topic. We are discussing only and exclusively the next point - foreign ownership of US based and US incorporated carriers.

Foreign Ownership of US based Carriers

This is totally different to cabotage. The US limits the amount of foreign ownership in its domestic airlines to a maximum of 49%, with a maximum of 25% control.

Most other countries have similar protective provisions limiting ownership of their airlines, but there are some notable exceptions - for example, the Australian government allowed Sir Richard Branson to start up an airline called Virgin Blue. In return for this permission, Sir Richard had to agree that the airline would be incorporated in Australia under Australian law, and that it would be staffed and managed by Australians, and have an Australian board of directors. The net result has been tremendously beneficial to the Australian public, while the major carrier (Qantas) does not seem to have been unduly harmed, either.

A number of myths and misunderstood half-truths have been offered as reasons to 'protect' the US carriers from fair free open-market competition. But most of these half-truths apply only to restrictions on cabotage, and have no relevance to allowing foreign ownership of domestic, US based, airlines.

None of these allegations stand up to scrutiny, so let's look at them.

Myth 1 : We Need US Carriers for National Security

As recently as 3 April 2003 (the day I'm writing this), Speaker Dennis Hastert used this argument to defend Congress' $3.2 billion airline aid plan. He said '[it is necessary that] we don't have a whole industry collapse at a time when maybe we need it most' (referring, presumably, to the Iraqi conflict).

It is true that there is a program (the CRAF - Civil Reserve Air Fleet) whereby US airlines hire planes to the military when needed, giving the military additional airlift capacity. But this program would apply equally to any US based, US incorporated airline, no matter where the shareholders were based.

A US corporation is bound by US laws, no matter who or where its shareholders are based.

Furthermore, the US airlines are generously remunerated in return for their military charters, indeed one recent study suggested it would be cheaper and better if the US government simply tendered for charters on the open market!

Myth 2 : Foreign Airlines Don't Have the Same Security Standards

Maybe foreign airlines do, maybe they don't have the same security standards as US airlines. But, who cares? This is a red herring argument, because we're not talking about foreign airlines. We're talking about a US airline, subject to all US regulations and controls.

Sure, the airline may be owned in part or by whole by off-shore investors, but it is a US airline, operated by US permanent residents and citizens, and following all US standards and procedures.

Myth 3 : Foreign Airlines Don't Have the Same Safety Standards

The answer to this myth is exactly the same as the answer to myth #2.

Myth 4 : Foreign Airlines Would Take Away Jobs from Americans

A US based carrier is subject to the same laws for who it can employ, no matter who its owners might be. All US carriers have to employ either lawfully admitted foreign nationals on special work visas, or US permanent residents, and indeed, for some jobs, they can only employ full US citizens.

There is no difference in these laws if the airline is owned by people in London or Little Rock.

Myth 5 : A Foreign Airline would replace High Paying Jobs with Low Paying Jobs

Any company is free to set whatever terms of employment it can agree upon with its workers (and possibly the unions that represent them).

And, in case anyone hasn't noticed, all those 'high paying' airline jobs are under massive threat at present as the traditional carriers lay off staff and reduce the wages (and pension plans!) of those that remain.

All new startup airlines are building their operations on lower employee costs than the traditional carriers. And their staff seem to be delighted to accept the opportunity to work with them, too. They're surely not complaining, so why should we!

Myth 6 : A Foreign Airline would 'cherry pick' only the Profitable Routes

This myth suggests that the foreign (owned) airline would only fly on the 'easy major routes that any airline can make a profit on'. By reducing the ability of the existing airlines to make profits on the major routes, the existing airlines would no longer be able to subsidize the other loss-making routes that they currently operate as a public service.

As recently as this week, a noted travel writer commented 'having a national airline protects the nation's transportation network from being at the mercy of foreign carriers to whom profits are more important than whether the country's capital has daily service from New York, Chicago, Tokyo, or Timbuktu.'

This myth is full of nonsense in several areas. Any start-up airline, no matter who or where their owners are, carefully works out a business plan that has them concentrating on some 'easy' routes that they think they can make a profit on. As the new airline grows, they build out from their core routes so as to grow their total network in an organic manner.

The second piece of nonsense is there is no such thing as an 'easy' major route that any airline can make a profit on! If there was, then all airlines would be on that route already, and more, totally US owned, airlines would be starting up to add more services to that route.

The third piece of nonsense is that none of the major airlines operate as a social charity. If they can't make money on a route, they will stop flying it. Plain and simple. All 'for profit' airlines work on the same basis, no matter where their shareholders sit.

The ownership of a new startup airline again makes no substantial difference to the external marketplace factors that influence all airlines and their present operations.

Myth 7 - Profits will be Taken Offshore

Some people have made the ridiculous suggestion that allowing foreigners to own US airlines means that they'll take all the profits offshore and somehow harm the US economy in the process.

Look around you. Exactly which US carrier is making so much profit that transferring some share of it offshore would harm the economy!?

Even in a very good year, shareholder dividends rarely exceed a very few percent of total revenue - repatriation of dividends is a negligible matter.

And such concerns haven't prevented foreign ownership of just about every other type of company (with the exception of media outlets and shipping companies). So let's allow foreign ownership of airlines, too.

The Reality

The so-called 'protection' of our domestic airline business is not helping anyone. It does not seem to be helping the airlines, who, in financial terms have never performed well - indeed, long before 9/11, the spectacularly successful investor Warren Buffett described his investment into the airline industry as 'temporary insanity' and went on to say "So I now have this 800 [telephone] number, and if I ever get the urge to buy an airline stock I dial this number. And I say my name is Warren, and I’m an 'air-o-holic', and then this guy talks me down on the other end [of the line]….".

More importantly, protection is not helping us, the traveling public, either. Service is dreadful on most major carriers and getting worse. The amazingly low air fares that we read about in Europe ($20-50 roundtrip fares for medium distance international travel) offered by profitable airlines remain an impossible dream here, because the US carriers have never had to restructure their businesses to meet modern competitors with different business models.

The ultimate display of failed protectionism happened this last week in Canada, where Air Canada, now almost the only major remaining airline in Canada, declared bankruptcy. If an airline that has almost the complete market entirely to itself can't break even, let alone make a profit, what is the point of protection? Who benefited from protectionism in Canada? Not the public. Not the airline. Not the government. Everyone lost out.

Who or what are we protecting, and against who or what?

Our entire society has been very successfully built on the premise of free enterprise, and the abolition of tariffs and trade barriers. Why should the failing airline industry be an exception to this cornerstone of capitalistic freedom?

The Good News

And now, for the surprising and good news. Some proven successful international airline operators want to set up airlines in the US. Perhaps the best chance for a revival in the US airline industry is offered by British entrepreneur and founder of Virgin Atlantic Airways, Virgin Express and Virgin Blue (as well as Virgin Trains and many other companies), Sir Richard Branson. He wants to start up a US domestic airline - he believes that he can create a profitable and well run domestic airline here, the same as he has already done in Australia.

Rather than give another $3.2 billion to our failing domestic carriers now, merely to perpetuate their bad management until the next handout request, shouldn't we instead open our skies to any and all entrepreneurs? Perhaps we should even give the $3.2 billion to Sir Richard!

If foreign entrepreneurs meet all our federal regulations for establishing a US airline, we would all be the beneficiaries of their enterprise, as this study confirms.

We stand to benefit from more competition, lower fares, better service, and no more taxpayer bailouts of old, irrelevant airlines that should be allowed to quietly expire and disappear.

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Originally published 4 April 2003, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 

 


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