A Bill to Allow Foreign Airline Ownership in the US Won’t Do What They Think It Will

Every so often, the debate over who should be able to own an airline in the US heats up. Just a couple weeks ago, Rep Dave Brat (R-VA, better known as “that guy who beat Eric Cantor”) introduced HR 5000, also known as the Free to Fly Act. The goal is to bring in a flood of new competition to the US airline industry by removing restrictions on foreign ownership. That sounds nice and all, but it’s not going to have the desired effect.

I should start by saying that I think foreign ownership should be allowed with the proper restrictions. (You shouldn’t, for example, be able to shuttle in cheap employees from your home country to work within the US.) But the reason I support it is because then we can get rid of these silly joint ventures and instead have proper mergers across borders. To me, that’ll create a better, more consistent experience for travelers, and of course it’ll be better for airlines too. I’m sure some of you disagree. But this post isn’t about what I want. This is about what would actually happen if the shackles came off.

The bill as proposed doesn’t just open the flood gates and allow airlines to come into the US. What it does is allow full foreign ownership of a US-based airline. What they’re dreaming here is that foreign capital which may or may not come from foreign airlines would flood into the US to create more competition for existing US airlines. Let’s say, oh, Alitalia wants to participate as part of turnaround plan #3,468. It couldn’t simply fly within the US. It could, however, buy or start an airline (finally, Alitalia America can be real) that would require all employees to be eligible to work in the US, ensure the airline follows US work rules, etc.

Presumably Alitalia America could be branded just like Alitalia and could seamlessly connect with the parent company’s flights from a commercial perspective. Think of this like Air Asia, an airline with many different subsidiaries in different countries that, from the outside, look like one airline.

Rep Brat says that the point of the bill is to “stimulate competition and innovation in the airline industry and improve the overall travel experience for airline passengers.” I think they’re probably envisioning all these foreign airlines and their elevated service levels swooping into the US and starting new airlines that bring class and style back to flying. If that happens, those airlines are dumber than I thought. (Maybe Alitalia isn’t the right example….) They’ll just end up bleeding badly when they realize that the premium product isn’t going to work in this market the way they hope, especially not with formidable hub and spoke operators in the US already filling up all the big airports.

I spoke with one of Rep Brat’s legislative assistants, and he mentioned Virgin America. In fact, he said that the current ownership rule “hinders competition, consumer choice, and even forced Virgin America to shutter and merge with Alaska.”

There is a kernel of truth there. Virgin America perennially under-performed, and when its owners saw a ridiculously good deal on the table from Alaska, they would have been insane to turn that down. I know Richard Branson publicly wept about losing his little baby, but at least he could dry his eyes with wads and wads of cash. If those weren’t actually crocodile tears, and Branson, being a foreigner, had the ability to own the airline outright, maybe he wouldn’t have sold due to either pride or insanity. If that’s the hope of this bill — that we’ll have enough investors making bad decisions to keep more competition afloat — then that seems like a problematic assumption.

Instead, what is likely to happen?

Well, you could very well have cross-border mergers. Maybe IAG makes a play for American or Lufthansa Group goes for United. I can’t imagine Air France/KLM going for Delta, because, well, it’s Air France/KLM. Maybe Delta would have an interest in buying Air France/KLM, but, alas, it wouldn’t be allowed to do that. That would require the European Union allowing foreign ownership.

Those would be gigantic deals, but perhaps we could see some activity with smaller airlines like JetBlue or Alaska here. It could get interesting. The thing is, this isn’t going to improve competition. It may introduce new capital into the market, but that’s not going to go to creating new airlines. At least, it’s not going to go toward creating sustainable airlines.

I have no problem with this bill, but for those who think it’s going to bring a flood of new competition, think again.

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Tim Dunn
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Tim Dunn

These types of proposals will continue to come up because people somehow think they are paying too much for air travel and need competition. Problem is that, while US airlines are currently more profitable than airlines in other parts of the world, US airlines are not out of the world more profitable compared to other industries. Further, the legacy carriers in the US are increasing their profitability but the low cost carrier is what is facing profit pressure now – because of competition from ultra low cost carriers and increasing labor costs as well as increased network strength from the… Read more »

Gary Leff
Guest

Fares have been going down. There’s no monopoly pricing.

However more competition would still be desirable, more business models would be desirable, there’s tremendous homogeneity in the industry (some of which is driven by government regulation throughout all phases of the industry and wouldn’t be alleviated by lifting foreign ownership restrictions, which would be desirable).

Gary Leff
Guest

Regardless of whether or not Ryanair launches a US airline they still aren’t going to be able to access gates at congested airports, which incumbent carriers have locked up. And it doesn’t solve congested airspace either. This bill alone isn’t a panacea, but it does seem as though it would be a marginal improvement.

Tim Dunn
Member
Tim Dunn

exactly,… the issue with increased competition in the industry is not adding more airlines but adding the capacity for those airlines to grow. Many of the US’ busiest airports – just as is true in other parts of the world – have little additional capacity to grow. That is why the Ryanair type model of using secondary and tertirary airports makes more sense but those airports aren’t going to deliver the same types of revenue. And, to your reply above, as much as people want to complain, air fares are cheaper than they were years ago and service levels have… Read more »

Bgriff
Member

Ryanair doesn’t access gates at congested airports in Europe, either (or at least if it does, those airports are only congested because Ryanair made them that way, like Stansted). If Ryanair tried to enter the US, it would be the second coming of Skybus, serving places like Stewart, Trenton, Worcester, Ontario, Bellingham, maybe even Sacramento, etc. The real question is, given that the US incumbents are much more cost-efficient and accustomed to short-haul competition than the European incumbents were when Ryanair started their work at home, is it even physically possible for a Ryanair America to reduce costs and thus… Read more »

Ronald de Neef
Member
Ronald de Neef

ALITALIA AMERICA – Branson /Berlusconi – wow the press will have a ball!

Who will be selecting the Cabin Crew?

Chuck
Member
Chuck

Looking forward to the Bunga Bunga Frequent Flyer club.

Ronald de Neef
Member
Ronald de Neef

Absolutely not PC but a lot of fun!

Jim
Guest
Jim

Here is a “fun” one, Emirates buys Alaska and Jet Blue.

Ronald de Neef
Member
Ronald de Neef

You need a 4th one – to create an 4 Season’s Airline Suggestions – how about Aeroflot?

Fitz
Member
Fitz

… the grotesque Emirates thinks it can’t fail due to its deep state subsidies and those Airbus 380’s x 100 … but —

Bgriff
Member

If anything this would be likely to attract Ryanair and other ULCCs who want to take a shot at bringing their model to the US. Fares might go down, but service levels definitely would not go up, which is what people who propose this idea always somehow think is going to happen.

Actually, given what they’re doing in other markets, it’s almost certain that Norwegian would take a shot.

Eric Amel
Guest

There is recent research by Cliff Winston (Brookings) examining whether true cabotage would increase competition in the U.S. He states (what he calls “The Surprising Conclusion”) that “are EU LCCs likely to expand into US markets if given cabotage rights? Probably not, because there are very few profitable markets where they could avoid competing with Southwest. If there were any of those markets, why wouldn’t Southwest serve them? In a nutshell, the US domestic market appears so competitive that it is unlikely that allowing cabotage would lead to another substantial round of new entry and competition that occurred under domestic… Read more »

renatos
Member
renatos

I agree!!! I flew for the first time in my life with Alitalia from Milan, Italy to JFK Thanksgiving day 1967… I promised myself never to fly with them again…

Worst airline in the world… I can comfortably say that because, as I approach the 6 million mile marker with American Airlines, they had such a terrible service, food etc.… Never again!!! Not in the USA!!!

Fitz
Member
Fitz

… Alitalia was pretty bad – in the 90s, somewhere over the winter Med, I opened an on board lunch box and — an insect hopped out — never again !

Itami
Guest
Itami

I’m bearish on the possibility of true cross-border mergers because of all the diplomatic complexity it would entail. In a hypothetical scenario where say UA merges with the LH Group, whose air service treaty is in effect when the merged company flies to Japan? What about Brazil? What about a country that has open skies with the US but not the EU or vice versa? Would third countries even accept flights from one side of the Atlantic governed by an ASA with the other side? Tl;dr, barring some dramatic political paradigm change, the most integration we’ll see is the Avianca/LATAM-style… Read more »

renatos
Member
renatos

I categorically disagree!!!

Axelsarkiss
Member
Axelsarkiss

It’s more basic than that. The Open Skies treaties all explicitly demand domestic ownership & control of airlines.

It’s a fantasy.

John L
Guest

This is indeed a silly fantasy. We have LCCs Spirit and Allegiant which are copying the Ryanair model, point to point flights between secondary airports, super-low headline airfares which after adding all of the extras (oh, you want a seat?) are still pretty low. What would foreign airlines have to offer?

David M
Guest

The fantasy is not that we’ll get Ryanair America or EasyJet US. The fantasy is that foreign airlines with premium long haul products and inflight service will bring that product to the US domestic market. Won’t happen.

Nick
Guest
Nick

This 100%
The demand for a true Premium EK F class domestically is very small. If you have the money to buy EK F for a domestic US flight, then you’re already likely flying private. And the routes that there would be the demand on are already hyper competitive.

Airlines like EK, EY, SQ, et al, can often offer such high quality service is that they for the most part only fly long haul. And the labor laws are much more, lets be polite, and call it more favorable to the company.

iahphx
Member
iahphx

There is obviously a lot of ignorance and foolishness about the “quality” of international airlines. Like if we opened our doors to int’l airlines, we’d all get 5-star service. Anyone fly out of Singapore lately? The much-acclaimed Singapore Airlines (which struggles to make money) does most of their short and medium haul flying through their Scoot subsidiary. I’ve flown them and, frankly, I’d prefer Frontier (think terrible legroom PLUS reclining seats!). We have a pretty good mix of airlines in the USA already — I don’t see much of an unfilled need. Perhaps a low fare airline that isn’t a… Read more »

Tim Dunn
Member
Tim Dunn

correct… and the biggest issue that a lot of people fail to realize is that is a whole lot easier to keep costs down if you don’t allow large portions of your staff to stay for a career. I personally am partial to the idea that people should be able to work for an airline as long as they want rather than be told that some arbitrary life event will mean the end of their career. Having to work within US and European labor laws and industry practices might make a lot of foreign airlines have to recalculate their business… Read more »

iahphx
Member
iahphx

Jetblue founder David Neeleman (an airline executive who is better at coming up with creative ideas than executing them) has thought much the same thing about staff longevity. Particularly with regard to flight attendants. He hoped to get back to the model whereby flight attendants typically worked in their 20s and then chose to leave after a few years for a more settled lifestyle. This would probably be better for the flight attendants (the job can certainly become a grind after awhile), customers (we’ve all seen indifferent service from burnt out fa’s) and the airline (fewer employees with high seniority… Read more »

Axelsarkiss
Member
Axelsarkiss

Ownership and control rules aren’t going away any time soon. Industry and labor won’t allow it. And cabotage? Forget it. More importantly, domestic law isn’t the only constraint here. The U.S.’ ASAs all include ownership and control restrictions which are required of both sides (the exception is the US-EU agreement, which allows for “community airlines” or something along those lines). There are several countries that would love to see this go away—the EU chief among them—but the U.S. has hammered on this issue for decades. Is everyone going to buy in on a 180° shift? I don’t think so. Sure,… Read more »

Eric A.
Member

I spat my coffee out over the ALITALIA America graphic. Well played Mr. S.
Given the direction this Administration is going on trade, I don’t see this happening…at all. The only caveat would be some economic catastrophy where a Big 4 carrier fails. Even under those (unlikely) circumstances it’s a tough sell.

jaybru
Member
jaybru

Were this Free to Fly Act from someone other than Mr. Brat, or co-sponsored by even one other congressman, I might take it a little more seriously. Mr. Brat is a congressman from just down the road from me and what I regularly see from and hear of him, smart though he may be, always seems to give me pause, politically, culturally, and most every other way. Aren’t we all for “stimulating competition and innovation” and “improving the travel experience?” I just wish Congress had people who knew how to see that it, with DOT, could really do this!

Bob Schilling
Member
Bob Schilling

I wonder if the bill would allow an airline such as, say, Emirates, to buy into JetBlue or Alaska with the intention of creating a seamless global airline.  There are carriers now that reach the western Pacific Rim and the west coast of Europe.  With an American carrier, they would be a truly global network.  It seems an interesting thought.  And I agree – it won’t do as much for passengers as it will for airlines.  One wonders who’s been lobbying Rep. Brat.

southbay flier
Guest

This will solve nothing. The routes foreign airlines are most interested in are the routes that already have competition. The legacies are good at connecting small cities with their hub and spoke system. That’s why they dominate in the USA. Good luck finding a foreign airline to get you to Montana or the Dakotas.

Virgin America offered nothing that United already offered. They were just an extra competitor and one who really wasn’t very successful.

Aussieflyer
Guest
Aussieflyer

Australia and NZ allow 100% foreign owned entities to run domestic airlines. It’s truly uncontroversial here, I don’t understand why the USA aka “Home of the free markets” is so scared of it

random-aussie
Guest

It is interesting that the regulatory environment in Australia is similar to what you have suggest in your piece. Any locally register business, regardless of where its owners reside, can set up and start a “domestic only” airline here – all within the terms which you present; the aircraft fleet must be locally registered, the airline must comply with local laws and the staff must have local working rights (by citizenship or visa). In fact our second and third largest domestic airline groups are both majority foreign owned (Virgin Australia / Tigerair and REX Regional Express). Airlines generally don’t make… Read more »

Fitz
Member
Fitz

… dig what happened to rapacious, state subsidised Emirates route between NZ (sic) and Australia …

Adrian in NZ
Guest
Adrian in NZ

I live in that part of the world, and the drop in EK services between NZ and Australia is all for the benefit of Emirates.

Steve bring
Guest

This sounds good to the competition, if the LCCs Spirit and Allegiant copying the rynair concept… If think you get what you paid for.

Patrick
Guest

I agree with most of your points here, but on the idea of stimulating “competition and innovation,” I think there might potentially be more to it than a hopeless wish for the return of luxury flying in coach. Innovation is a tough concept in that the most innovative ideas are the ones that are NOT obvious to everyone ahead of time… and bringing more high-octane businesses into the marketplace might stimulate some genuinely innovative ideas that we aren’t currently foreseeing. I’d love to see VolarisUSA start up a true hub operation in San Diego, and use strong customer loyalty in… Read more »

Govt & AvGeek
Member
Govt & AvGeek

An interesting tidbit-

United Airlines pilot (and Marine pilot veteran) Dan Ward is running against Representative Brat (VA-7) this year.

Dan Ward would have a much better understanding of airline ownership and create better policy that would benefit the aviation industry AND their labor.

If Dan gets elected, I feel it would really be an amazing victory for US aviation.

@CF Did you know about Dan Ward?

Bick Rowen
Member

Would foreign ownership cause international mergers or more subsidiary portfolios. For example, IAG operates Level, BA, Iberia, and Air Lingus plus other airline subsidiaries.

Fitz
Member

… whatever about steel & aluminium, it is time Trump clipped the wings of parasitic, subsidised Emirates Airlines before more damage is done … air lines should be about factors other that open and brazenly hidden State subsidy … why does Emirates get away with it ?

DXS
Guest

My question is, why does Rep Brat care? (And no, I don’t assume he lays awake at night personally worrying about increasing competition within the airlines industry.) He’s not on any aviation-related committee I don’t think. His district is south of IAD but doesn’t cover IAD….is he perhaps sick of some constituents complaining about UA @ IAD and this is his attempt to show he tried to do something? Given his commute home, he’s probably one of the least flying members himself. Is this bill a quid-pro-quo for another member in exchange for support on something else? Is there a… Read more »