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

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

Government Regulation

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

  1. 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 legacy carriers. The US government decided years ago that airlines would be the primary means of intercity transportation in the US – which is why rail travel is subsidized and small in the US. Airlines have to make enough money to be long term viable. Consumer groups will always push against the laws of business but the two have to be in equilibrium.

    Second, as you note, cross-border mergers are the ideal but most countries take a much more protective approach to their airlines than the US does. It is more likely that, given an equal playing field on foreign ownership, US carriers are more likely to buy foreign carriers and gain access to their domestic networks than the other way around. Congress needs ot make sure that nothing is given away in the US market without US carriers gaining something in return – and that includes in the largest and fastest growing global markets including China, India and the Middle East.

    Third, foreign ownership has often been tied to military readiness and foreign owners have to be willing to commit to allow their fleets to be used for military airlift as necessary just as occurs today by the global carriers.

    There will be pushback from US unions – who should fight to protect American jobs – and support from foreign carriers that want access to the enormous US markets.

    Until there is a true global potential for an increase in activity for US carriers and their employees, bills like this have to be shot down.

    1. 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).

    2. Tim – On your third point, I don’t think there’s ever been an issue of a foreign airline saying it wouldn’t allow its planes to be used for the CRAF program.I think this is just one of those familiar talking points that people love to trot out in hopes that it’ll kill everything. With this proposal, the airline would have to be based in the US and have American workers (or people with the right to work here). So I wouldn’t expect that it would be all that hard to make it work. But it’s undoubtedly something that would come up a million times.

      As for US unions, this bill in particular does require them to be American workers, so that argument would fall flat if they tried it.

      1. agree with your points but the reason why Norwegian’s “flag of convenience” model became such an issue is because it opened the possibility of using airline workers that aren’t from the country at one of the two ends of a flight, which is generally the exception in the airline industry.
        In reality, the Norwegian model has not been a threat to labor as was originally thought. Like the ME3 issue, economics ultimately will dictate the survival of each business model and there are bigger issues than the source of labor for the Norwegian model or subsidies for the ME3 model – and those will force change.

        Ultimately, people are justifiably fearful of change which could lead to something outside of the historical norm. And until those fears are proven to not be valid, people – including unions – are justified in raising them and in ensuring that appropriate safeguards are put in place until they are proven to no longer be necessary.

        As noted in the comments and in your entire article, foreign ownership is not likely to work for lots of reasons but that doesn’t mean people shouldn’t raise issues that might be of a concern.

  2. 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.

    1. 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 improved. More flights are on-time, fewer flights are cancelled than in the past, and there is Wifi and digital self-service technology. Most complaints about airline service today involve cafeteria pricing models and tighter seats in standard economy cabins. Since other countries including low cost carriers in those countries offer the same things, legislators need to make clear what they think will happen with more competition. Based on what exists elsewhere in the world, more competition just might bring more of the same.

    2. 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 fares enough to draw people to far away airports?

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

    Who will be selecting the Cabin Crew?

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

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

  4. 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.

  5. 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 deregulation.” The presentation can be found at: “https://www.brookings.edu/wp-content/uploads/2017/09/an-exploration-of-lcc-competition-in-u-s-and-europe.pdf

  6. 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!!!

    1. … 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 !

  7. 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 different-national-subsidiaries-under-the-same-branding model.

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

      It’s a fantasy.

    2. Itami – Well the way this works, it would be an American company that’s just a subsidiary of a foreign company. You could make the argument that Virgin Australia is effectively doing that today with ownership far flung between China and the UAE, among others. But it’s still an Australian company and is governed by Australian rules.

  8. 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?

    1. 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.

      1. 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.

        1. 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 terrible experience? I’m thinking something like Easyjet (although Jetblue isn’t that far from that model).

          1. 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 plans for entering the US airline industry.

            1. 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 wages). The problem is that the US airline seniority model — largely the product of a unionized system — makes it too lucrative a job to give up. There are many mid-level fa’s in the USA making almost $100K/year working only a few weeks a month. Unless this model changes (and I don’t think it will), the US mainline airline industry will generally remain a high labor cost business.

  9. 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, the U.S. might have a strong bargaining position (who doesn’t want flights to/from the U.S.?) but I wouldn’t expect that process to be an easy one.

    This is more of the same from Congress: clueless meddling in aviation issues.

  10. 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.

  11. 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!

  12. 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.

    1. Bob – The bill would allow that as is. The entities have to be separate in structure, but commercially they can operate as one.

  13. 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.

  14. 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

  15. 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 good investments, so getting local capital out of them and invested into other “better” business opportunities makes great sense for a country of our size!

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

      1. 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.

  16. 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 TIJ-SAN as a launch pad for US expansion. WestJet is pretty much out of expansion opportunities in Canada, but they’d be a great competitor in the US. I’m less convinced that the Middle East or European airlines can succeed in the domestic US market, but maybe they’ll surprise me.
    In the near term, I think the biggest impact would be to boost airline stock prices. Just a bit for the biggies, but it seems like the expanded scope of buyers would significantly lift the prices of the marginal players whose primary value might be their operating certificate (Sun Country, Great Lakes, Silver, etc.). I agree that this bill isn’t going to instantly make everything better (honestly, what bill would?), but I think it’s worth a try.

  17. 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?

      1. Well he’s definitely a candidate to keep an eye on…
        He is very politically active with ALPA.

        It’s a pretty rare sight to see a commercial pilot run for congress!

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

    1. Bick – It depends upon who is doing the buying. It could certainly be something like IAG, but that still allows massive coordination behind the scenes that you can’t really do today. They can move airplanes around between subsidiaries, share employees, and a lot more.

  19. … 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 ?

  20. 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 lobbying firm with cash that wants this filed? See what’s behind the legislation and you’ll see what the true intent and chances of success are. Overall, I’d give it 0 chance of ever passing on its face. He knows that, strictly on the merits, so what’s really going on?

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