Listening to the drama in the U.S. airline industry is the corporate equivalent to reality TV these days: Who’s forming alliances, who thinks it’s a good idea (airline execs), who’s skeptical (unions) and who gets completely left out of the discussion (consumers).
Yet, one group of possible suitors for U.S. airlines is blocked from the consolidation party by U.S. policy: airlines and investors based abroad. Things may change. Recently, negotiations began on liberalizing foreign ownership restrictions between the United States and the European Union. Allowing increased international ownership of U.S. carriers would provide important benefits for airline employees and consumers.
Antiquated U.S. rules limit foreign investment in U.S. air carriers to no more than 25% of the voting stock of an airline–restrictions virtually unseen in any other sector of the U.S. economy. Little wonder America’s airlines faltered, its major players either emerging from bankruptcy or seeking partners to avoid a future Chapter 11 filing.
Currently, domestic airline consolidation is hardly a win for airline employees. The now defunct United Airlines-US Airways merger was estimated to create $1.5 billion in cost savings. Analysts said these cost savings were likely to be found by reducing operations, eliminating overlapping routes and consolidating hubs. Undoubtedly, this all meant job cuts.
Instead of domestic companies combining and eliminating redundancies, a foreign carrier would invest in a U.S. airline with an eye to expansion in the American market and achieving greater global scale. Cost-cutting would not be the rationale for the investment.
Air travelers would also benefit. According to the University of Michigan’s recent American Customer Satisfaction index, airline passengers are some of the most dissatisfied consumers in the United States (63% gave the industry a low D grade). Anyone who has flown on a non-U.S. carrier recently is not surprised that foreign airlines rank highest on nearly every survey of travelers in terms of service, comfort and timeliness. Ultimately, a U.S. airline industry open to foreign investment will mean airlines with stronger balance sheets, which in turn will mean they will be better able to invest in technology that would make travel more comfortable, less expensive and less harmful on the environment.
Security concerns? A red herring. Any fears, such as requirements to make planes available to transport troops in wartime, will be addressed as part of an acquisition. The U.S. has a system for national security reviews of foreign acquisitions of U.S. companies, managed by the Committee on Foreign Investment in the U.S. Just last year Congress clarified the review process and strengthened CFIUS’s powers.
Unions, U.S. airlines and consumer groups should embrace the international discussions to liberalize ownership restrictions. The time is ripe to continue the momentum that began with the recent success of the first phase of these negotiations and which went into effect at the end of March. The completion of the first phase allows U.S. and E.U. airlines to fly between virtually any E.U. and U.S. city– a positive step for U.S. consumers and airline employees. An agreement opening U.S. airlines to investment from Europe would also result in a reciprocal opportunity on the other side of the Atlantic for U.S. investors.
Companies that are based abroad but have major operations and employment in the United States make a huge contribution to the U.S. economy. U.S. subsidiaries of foreign companies support 5.3 million American jobs and an annual payroll of over $336 billion. Why should the airline industry be any different than the foreign companies in the U.S. manufacturing steel, providing financial services or even building the airplanes the airlines fly?
It makes little sense to continue the status quo of uniting troubled domestic carriers while prohibiting beneficial investments by foreign airlines with strong balance sheets and track records for delivering quality service to passengers. A more rational, market-driven approach to capital investment in the U.S. airline industry would bring friendlier skies to airline employees and U.S. travelers alike.