February 12, 2013 10:14 pm

US airlines hurt by lack of foreign cash

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The merry-go-round continues

From Mr Shaun Read.

Sir, Your report “American and US Airways near tie-up” (February 11), on American Airlines’ merger with US Airways, highlights a fundamental problem facing the US airline industry: namely, the restrictions on foreign ownership. The US continues to restrict foreign ownership of domestic airlines to 25 per cent. These measures, introduced in 1926 to protect its then fledging airline industry and for national security and safety reasons, have, over time, severely limited the access of US airlines to foreign capital.

In October 2003, the US General Accounting Office (USGAO) wrote to the US Senate subcommittee on aviation reiterating the findings of a 1992 report in which it recommended an increase in foreign ownership to allow US airlines greater access to foreign capital. The USGAO letter pointed out that prior attempts to introduce foreign capital into the US airline industry had failed because of the restrictions on foreign ownership. In 1989, KLM Royal Dutch Airlines invested in Northwest Airlines only to divest a few years later after its request to increase ownership to 49 per cent was refused. Similar issues brought about the abandoned alliance between British Airways and US Airways. The Bush II administration responded by proposing in 2003 to increase the US limits on foreign ownership from 25 per cent to 49 per cent, in line with EU restrictions. The proposal repeated the 1992 USGAO recommendations, but was never implemented.

Faced with increased competition from Gulf and Chinese airlines, the European Commission has stated its intention to review EU restrictions and to seek a relaxation of the US ownership restrictions. The EU reportedly estimates that €12bn of economic benefits would be derived from the liberalisation of its ownership restrictions. Ironically, the very measures introduced to protect the US airline industry are now working against its very survival. For as long as the US retains its limitations on foreign ownership of its airlines, the US airline industry is bound to continue on its Chapter 11 merry-go-round.

Shaun Read, Director, Read Hope Phillips Attorneys, Johannesburg, South Africa

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