GUEST EDITORIAL
by Charles J. Simpson, Jr.

On November 15 of last year, the United States and four other APEC member countries reached agreement on a multilateral open skies agreement (modestly entitled the "Multilateral Agreement on the Liberalization of International Air Transportation"). This document was borne of negotiations among government delegations from Brunei, Chile, Singapore, New Zealand and the U.S. The document contemplates that other countries may sign on and thus provides a potential foundation for a broad multilateral open skies regime. It is fair to say that this achievement promises to be another jewel in the open skies crown that the United States – and outgoing Transportation Secretary Slater – have been so proud to wear.

But there were seeds of controversy within this golden fruit, and the United States was responsible. One of the major accomplishments of the agreement (which, by the way, has not yet been signed by any country) lies in the area of ownership and control of designated airlines. The agreement retains the traditional Bermuda I requirement that an airline be "effectively controlled" by nationals of the country whose government designates the airline to serve another country. Significantly, however, the agreement does away with the traditional requirement that an airline must also be "substantially owned" by nationals of the designating country. In place of that requirement is a requirement that the airline simply be incorporated in that country and have its principal place of business there.

So far, so good. By eliminating the "substantially owned" requirement, the agreement could open the door to increased cross-border investment in airlines, who historically have been forced to rely almost exclusively on domestic sources of investment capital.

But there is a bizarre quirk in the agreement. The agreement states that each government has the right to reject an airline designated by another government if the airline is "substantially owned" by nationals of the first country (in other words, the United States may refuse to authorize service by a Chilean airline if the airline is "substantially owned" by U.S. nationals).

At first blush (and second and third) this seems counter-intuitive. Shouldn’t a government, including the U.S., be most comfortable with a "foreign" airline that is owned by its own citizens? Why would a government want special protection from its own citizens? Why did experienced negotiators allow this very un-liberal provision into their pioneering new agreement?

The answer can be summarized in one word: labor. U.S. labor interests were reportedly concerned that "cross-border investment" would mean that U.S. airlines would export capital and jobs to low-cost, foreign airline subsidiaries. And so U.S. unions reportedly secured a commitment from the USDOT that this fear would be fully addressed. U.S. negotiators then proposed the provision, which was nominally included in the agreement as a means to address concerns about "flags of convenience."

Unfortunately, the story did not end there. DOT, it appears, also made a commitment to give teeth to the ownership provision: a reporting system enabling the U.S. to monitor the degree of U.S. ownership of foreign carriers. DOT wasted no time in following through on this: on November 24, DOT – to the surprise of virtually all concerned -- issued an order proposing to impose an unprecedented reporting requirement on the airlines of the four other countries. Under the proposal, each airline (including Lan Chile, Air New Zealand, Singapore Airlines and Royal Brunei Airlines) would have to give DOT 30 days’ advance notice of any change of ownership in excess of five percent of its voting stock. No comparable requirement is imposed on the airlines of any other countries, including countries with the most restrictive bilateral agreements with the U.S.

The airlines, predictably and justifiably, reacted unfavorably to this proposal and filed strong objections with DOT. The airlines rightly demanded to know how it was possible, as a matter of policy and common sense, for the U.S. to impose a unique regulatory burden on the airlines of the four countries who had just agreed with the U.S. to establish the most liberal and unregulated environment in the aviation world. They warned that the requirement violated the spirit and the letter of the agreement and was unworkable. The governments of Chile, New Zealand and Singapore signaled their disapproval to the United States, and suddenly the future of the agreement – both among the specific five countries but also as a means toward a broader multilateral regime involving other countries – was thrown into doubt.

The U.S. spent the next month scrambling to repair this self-inflicted wound. On January 18, the next-to-last official working day of the Clinton/Slater administration, DOT issued a "final order" containing a compromise: a reporting requirement would still be imposed on the foreign carriers, but the burden would be substantially reduced. Instead of advance reporting of any ownership change in excess of 5 percent of voting stock, the order directs the carriers to report, after the fact, any transaction in which a U.S. national either increases its ownership of a foreign carrier’s stock by 20 percent or results in a U.S. national owning 40 percent or more of a foreign carrier’s stock.

It is possible, and perhaps likely, that one or more of the foreign governments consented to this compromise before DOT made it official. If so, this will probably bring the saga to a close. But the objectionability of any regulatory burden that is imposed only on the airlines of the U.S’s most liberal aviation partners remains, and the airlines retain the option of asking the new Bush/Mineta administration to take a fresh look at the matter.

We shall see.

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