Why Arguments Against Airline Foreign Ownership Are Bogus

Last Updated Oct 11, 2010 7:43 PM EDT

Last week, I wrote about how foreign ownership rules are the reason we see so many of these joint ventures with antitrust immunity in the airline industry, but why exactly do we have foreign ownership rules at all? There are plenty of excuses, but none of them seem like good ones to me.

The current rules in the U.S. state that airlines must be majority-owned by Americans (50 percent plus one). In addition, Americans must own 75 percent of the voting shares in the company. But what does it matter if an airline is U.S.-owned or not? Well, no foreign-owned airline is allowed to carry local passengers between two points in the U.S. (called cabotage) so it matters a great deal. There are also limits on what international routes each airline can fly from the U.S. if it isn't U.S.-based. These rules are meant to make sure that foreigners don't get any real control over a U.S. airline, but does that matter?

If these rules were to disappear tomorrow, there are three ways that foreign airlines could try to compete in the U.S.

  1. If cabotage for foreign airlines was permitted, then foreign airlines could immediately start competing domestically on their own.
  2. If cabotage isn't permitted but the ownership rules were lifted, that would be dumb. But it would mean that foreign airlines would have to start new subsidiaries in the U.S.
  3. Foreign airlines could also look to acquire U.S. airlines to gain a foothold in the market.
Now, let's go and shoot down the reasons why people think this is a bad idea.
If foreigners buy our airlines, then we won't have those airplanes available in a time of war.
Yes, it's true that we use civilian airplanes during war a lot. See the CRAF program for more. We use them all the time for transporting troops, etc. So do we really think that if foreigners own our airlines, they will all sneak in at once and take all the airplanes out of the country, crippling our military? Yeah, right.

Legislation can be written that requires foreign airlines that buy U.S. airlines to make the U.S.-based fleet available for CRAF. I can also think of no situation where the foreign airlines would come in and take their entire fleet out of the country under cover of darkness unless it's a very small fleet. In that case, it doesn't matter.

If foreigners own our airlines, they'll fire all the Americans and replace them with cheap labor from [insert third world country here].
Again, I find this excuse to be alarmist. This is also a place where legislation could require that flights flown within the U.S. be flown by U.S.-based labor. It could also require some percentage of international flights to be flown by U.S.-based labor as well based on some formula. Right now, foreign airlines compete head-to-head with domestic airlines on a variety of international routes with their foreign-based crews. If airlines decided to come into the U.S. market, we could require some of those crews to be U.S.-based on international routes as well, actually protecting more U.S. jobs.
If foreigners are allowed to start airlines in the U.S., then our airlines won't be able to compete and will go under, taking thousands of jobs with them.
The doomsday argument is predicated on one thing, and that's the loss of good ole' American jobs. I've already addressed that in the previous point. But do we really care if one airline goes under because another is better and takes its place?

First of all, if a great airline like Singapore wants to come in and provide a better product, that in itself is a good thing (and if the product is not better, what's the point?). If it can succeed in this country at the expense of airlines that aren't nearly as good, then that works for me. But that being said, there has to be a level playing field. It obviously wouldn't be fair if Singapore Airlines started Singapore U.S. Airlines and brought in labor at much lower wage rates. But as mentioned above, that can be solved via regulation.

The reality is that most airlines that have survived in the U.S. know this market very well while those in other countries might not understand it nearly to the same extent. As has been shown by Virgin America's lack of profitability, people in this country don't necessarily want to pay for a better product nearly as much as they want convenient flight times and low fares. So any competitors coming in would have a tall task ahead of them, regardless of how good the product is.

Foreign airlines might not be as safe as domestic airlines.
Yeah, that's why we have safety regulations in this country. If an airline is going to fly in the U.S., it will have to live up to US safety standards. Besides, we've had our share of domestic airlines that have skirted the safety rules here anyway. There's no reason to think that a foreign airline would behave any differently than a U.S.-owned airline since it'll still be under the FAA's domain.
If foreigners own our airlines, we'll lose our national identity.
The whole nationalist fervor thing is something I've never understood. Where's the outrage that we don't have a national television manufacturer in the U.S.? Does your beer taste worse now that it's owned by a foreign company? (Yep, Anheuser Busch's parent is based in Belgium.) But when it comes to airlines, oh no, the horror of losing a national flag carrier! That's why we see flag carriers flying goofy routes all around the world. (My favorite is the recently discontinued flight between Caracas and Tehran.)

What really matters isn't where the airline is based but where the demand for travel is. There is a ton of air travel demand in the U.S. and it's going to be served by someone. With everyone whining about consolidation reducing competition, why not open up the U.S. to allow for additional competition if anyone else sees the opportunity? As long as U.S. jobs can be guaranteed, which they can, then I'm absolutely for opening up foreign ownership for U.S. airlines.

The reality, however, is that most airlines aren't going to be dumb enough to jump into a market that's already mature and has plenty of competition. Sure, acquisitions are possible, and that's likely to be aligned with global alliances. The first would probably see Richard Branson eliminate the necessarily-complicated ownership structure of Virgin America, for example. In the end, we might not see a ton of change, but if we do, it'll likely be for the better.