The sky must be no limit to global competition

Efforts to deregulate the airline industry both domestically and internationally span three decades. The evidence is unambiguous: when airlines are allowed – or forced – to compete, consumers benefit and the benefits are large.

These efforts have had to overcome opposition from interests that prefer the comfort of regulation to the rigours of the market. The latest example is the outcry over a Bush administration proposal to relax an antiquated administrative restriction on foreign control of US airlines. Under a 1938 law, US airlines must be owned and controlled by American citizens. Foreign ownership is capped at 25 per cent of voting stock, but the executive branch’s past interpretation of “control” has further impeded foreign investment. The Bush administration’s recent proposal would – without altering the statutory ownership cap or regulations affecting national security – allow foreign investors from like-minded countries to control commercial aspects of the operation of a US airline: marketing, scheduling and pricing.

Opposition in the US to the free flow of capital has been to investments abroad, which are seen as benefiting foreign economies. In the airline case, the direct benefit would almost certainly be to the US, since our major carriers are in desperate financial condition. Americans would benefit also from the fresh entrepreneurship of foreign investors such as Richard Branson, founder of the pioneering Virgin Atlantic, who has applied to set up a low-cost US affiliate but could not manage any part of it under current rules.

The proposal would also make possible a breakthrough transatlantic aviation agreement. The US has spent decades negotiating away bilateral restrictions on where and how often international carriers can fly, resulting in vastly expanded air service and lower fares. Now the government and the European Commission have reached a tentative agreement that would extend “open skies” to all 25 European Union members and open London’s vital Heathrow airport to all US and European airlines. The agreement is worth several billion dollars a year to consumers and would put pressure on other regions to follow suit. Europe sees the Bush proposal as a necessary offset to the agreement, which would let US carriers fly freely between EU countries.

Critics say that the proposed change should be accomplished through Congress rather than the “back door” of agency rulemaking. But administrative agencies necessarily have latitude in implementing broad legislative language in the light of changing assessments of the public interest – just as the US Civil Aeronautics Board did before Congress passed the 1978 Airline Deregulation Act.

Another objection is that increased foreign control will be bad for American workers. According to the pilots’ union, a foreign carrier could seek control in order to shift international flying to its own operations, thereby eliminating the jobs of the highest paid US pilots. But Europe’s international airlines, the only ones likely to be eligible under the Bush proposal anytime soon, pay wages comparable to America’s. Significantly, airlines that belong to the same global alliance, such as Northwest and the Dutch KLM, can already transfer international flying among themselves, yet have not done. What KLM cannot do under current rules is invest meaningfully in its US alliance partner, now in bankruptcy.

Critics also argue that the proposal will reduce air service to small communities. In fact, the big winners from bilateral open skies have been smaller cities and towns, which were poorly served by the regulated international air network. And the claim that it will harm national security is belied by a simple fact: the US Department of Defense has blessed it.

If anything, the proposal should go farther. The only reason to restrict foreign ownership and control is to ensure the defence department’s ability to mobilise commercial aircraft in a military emergency. But that can be done without limiting foreign investment: for maritime shipping, the department relies on commercial companies that are incorporated in the US and fly the US flag despite being foreign owned.

Airlines should have all the commercial freedoms of other inherently global industries. In the meantime, the administration’s proposal is a big improvement. Congress should let it fly.

Alfred E. Kahn was chairman of the Civil Aeronautics Board, 1977-78, the period of deregulation, and is professor of political economy emeritus at Cornell University. Dorothy Robyn handled aviation policy on President Bill Clinton’s economic team