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.