Government Intervention And The Archaic Rules Of Airline Ownership

At National Journal’s Transportation Experts blog, Lisa Caruso poses the question:

Given the recession and continuing economic woes of the airline industry, is House Transportation and Infrastructure Committee Chairman James Oberstar, D-Minn., going in the wrong direction as he seeks to tighten foreign ownership limits and increase antitrust scrutiny of global airline alliances? Or can the airline industry be profitable and serve the interests of the traveling public without greater government intervention?

Despite deregulation of domestic airline activity more than 30 years ago, the U.S. government still practices a “father knows best” approach to airlines where “foreigners” are concerned. Among the most egregious protectionist practice is the severe limit imposed on non-U.S. ownership of U.S.-incorporated airlines. At a time when U.S. airlines are struggling and might benefit from new infusions of capital, these archaic rules prevent what is increasingly a global industry from taking advantage of global capital.

While Rep. Oberstar proposes to reinforce those regulations, other countries are moving in the opposite direction. Both Australia and Canada are moving to increase their limits on foreign ownership from 25% to 49%. Compared with the United States, those two countries have far fewer airlines than we do, yet their policymakers appreciate the global nature of both aviation and capital markets. Even India, where a form of airline deregulation is under way, is discussing liberalization of what is now a complete ban on foreign investment in airlines.

Code-share and alliance deals are attempts to gain some of the advantages of airline globalization despite the government’s restrictions on ownership. If those restrictions were repealed (as opposed to being strengthened), we’d likely see cross-border mergers that would lead to better-capitalized airlines, something this industry sorely needs.

As for the potential of diminished competition, the ultimate taboo in aviation has always been “cabotage”—the ability of foreign carriers to provide domestic service (i.e., between two U.S. cities). Removing the cabotage restriction would be a welcome complement to repeal of the ownership restrictions. That would lead to a whole new level of competition for domestic air service, in addition to international service.

See other responses to the question here.