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October 30, 2003:

The Honorable Trent Lott:


The Honorable John D. Rockefeller:

Ranking Minority Member:

Subcommittee on Aviation Committee on Commerce, Science, and 

United States Senate:

Subject: Issues Relating to Foreign Investment and Control of U.S. 

In May 2003, the Bush Administration proposed amending the legislation 
that currently restricts foreign ownership of U.S. airlines, raising 
the allowable percentage of total foreign ownership of voting stock in 
U.S. airlines from 25 to 49 percent. The Department of Transportation 
(DOT) suggested that implementing this amendment could provide 
significant benefits to U.S. consumers and airlines, particularly by 
providing access to additional capital, which would help the financial 
health of the industry. DOT and the Department of State also maintain 
that these new limitations would bring the United States in line with 
current foreign ownership laws of the European Union (EU).

Concerned about the effect that changes in foreign ownership and 
control requirements might have on the aviation industry, national 
interests, and consumers--and recognizing that we examined this issue 
in 1992 when DOT earlier proposed increasing the level of foreign 
ownership--you asked us to discuss two related topics: (1) current 
proposals to revise U.S. limits on foreign ownership and control, 
including information on current shareholders and past examples of 
efforts by foreign interests to purchase significant equity in U.S. air 
carriers and (2) whether key analytic issues raised in our 1992 report 
on foreign ownership and control remain relevant.[Footnote 1] This 
report summarizes the information we provided to Committee staff during 
our June 25, 2003, briefing pursuant to your request. The briefing 
slides, which provide more details about our analysis, are attached as 
enclosure I.

In summary:

Foreign airlines have attempted to invest in and influence the 
operations of U.S. airlines several times since the late 1980s. These 
foreign airlines have on occasion invested significant amounts of 
capital into U.S. airlines, only to later disinvest due in part to U.S. 
policies concerning airline control. The Administration's proposal does 
not seek to change U.S. law regarding control of air carriers.

Our 1992 report identified five key issues relating to raising the 
limit on foreign investment in U.S. airlines. In general, those issues 
covered the potential impact of foreign investment on domestic 
competition, national security, employment, safety, and international 
competition. Because the current economic environment and the state of 
the aviation industry are similar to that in existence at the time of 
the prior report, we believe that most of these issues remain relevant 


Congress first enacted citizenship requirements for U.S. airlines with 
the Air Commerce Act of 1926. That act required that U.S. citizens own 
at least 51 percent of any individual aircraft in order for it to be 
registered in the United States. Under the Civil Aeronautics Act of 
1938, Congress required that U.S. citizens own or control at least 75 
percent of the voting interests of U.S. airlines. This standard has 
remained the same since then.[Footnote 2]

Under current U.S. law, in order to operate as a U.S. airline, an 
entity must obtain a certificate of public convenience and necessity or 
an exemption from the certification requirement from DOT. A 
prerequisite for obtaining such authority is U.S. "citizenship." 
Current U.S. law defines a "citizen of the United States" as an 
individual U.S. citizen, a partnership whose members are U.S. citizens, 
or a corporation or association organized under U.S. law where at least 
75 percent of the voting interest is owned and controlled by U.S. 
citizens.[Footnote 3] The law also specifies that the President, as 
well as at least two-thirds of the Board of Directors of the 
corporation, must be U.S. citizens. In practice, DOT has interpreted 
control to mean that day-to-day management decisions must be made by 
U.S. citizens, even if there is substantial foreign investment in the 
airlines. That is, the law has been construed as requiring actual 
control of the enterprise to rest with U.S. citizens.

In addition to DOT's initial citizenship evaluation of an airline when 
it first applies for certification, DOT again reviews the airline's 
citizenship status following any substantial change in an airline's 
ownership, management or operations.[Footnote 4] This is done on a 
case-by-case basis. In a March 2003 review of DOT's citizenship 
evaluation process, the DOT Inspector General found that no single 
document defines the process or criteria to be applied for the review 
and that DOT examines several factors when determining the issue of 
control.[Footnote 5] These factors include any significant contracts 
between the airline seeking citizenship and its business partners, 
voting rights held by U.S. and non-U.S. citizens, and the terms of any 
debt instruments or bankruptcy agreements. During its analysis, DOT 
determines whether a foreign entity's influence over any of these 
factors shifts the actual, day-to-day control of the airline from U.S. 
citizens to foreign citizens.

DOT has previously proposed easing the restrictions on foreign 
investment in U.S. airlines. In 1991, the Secretary of Transportation 
proposed allowing foreign investors to own up to 49 percent of a U.S. 
airline's voting stock, although no legislative proposal was submitted 
to the Congress. According to DOT officials, the proposal was made in 
response to heavy losses suffered by U.S. airlines in 1990 and 1991, 
and experience gained in structuring foreign investments to maintain 
U.S. citizen control by working with two major U.S. airlines (Northwest 
Airlines (NW) and Continental Airlines) and their foreign investors. 
Congress did not adopt these proposals.

Proposed Legislation Would Affect Ownership and Control of U.S. 

The latest efforts to change U.S. foreign investment and control 
restrictions were submitted as two separate amendments to the Federal 
Aviation Administration (FAA) reauthorization bill (H.R. 2115 and S. 

The Administration proposed an amendment that would relax the 
restrictions on foreign-owned voting stock of U.S. airlines from 25 to 
49 percent, while not changing the policy that U.S. citizens control 
U.S. airlines. DOT suggested that increasing allowable foreign 
ownership limits would provide access to additional capital, which 
would provide several benefits that would help the financial health of 
the industry. This includes encouraging more efficient market-driven 
networks, creating opportunities for new airlines to enter the market, 
and bringing U.S. ownership limitations in line with European laws. DOT 
also sought to find additional tools for the airline industry to 
respond to unforeseen economic conditions, such as the recent effects 
of the Iraqi War or the Sudden Acute Respiratory Syndrome outbreak in 

A separate but related amendment addressed the issue of control of U.S. 
airlines. The House and Senate conference agreement on the FAA 
reauthorization bill includes a section that would revise the 
definition of "control."[Footnote 6] The bill would amend Section 
40102(a)(15)(C) of title 49 to include in the criteria for meeting the 
citizenship requirement as "(airlines) which (are) under the actual 
control of citizens of the United States." In effect, this language 
would codify DOT's existing practice.

There are differing levels of support by various aviation stakeholders 
for altering current foreign ownership and control statutes. Several 
key aviation stakeholders generally support the proposal of raising the 
allowable level of foreign ownership in U.S. airlines. Most major U.S. 
airlines favor increasing their access to foreign capital, and some 
have called for removing all restrictions regarding foreign ownership. 
The Air Transport Association issued its support in June 2003, citing 
the potential to create greater access to global capital for U.S. 
airlines, while also bringing U.S. foreign ownership laws into line 
with those of other countries.[Footnote 7] Certain international 
aviation organizations also support removing barriers to international 
investment and open markets. Both the International Civil Aviation 
Association and the International Air Transport Association support the 
liberalization of ownership and control. Other stakeholders, especially 
various labor groups, oppose increasing foreign ownership levels. For 
example, the Association of Flight Attendants has a preference that 
foreign ownership be handled on a case-by-case basis and not just as a 
blanket lifting of the limitations. They also support control of U.S. 
airlines by U.S. citizens. The AFL-CIO's Transport Trade Department 
also strongly opposes any relaxation of the rules on foreign control of 
domestic airlines, citing both national security and the economic 
welfare of U.S. workers among their concerns.

Current Status of Foreign Investment in U.S. Airlines:

As of July 2003, the amount of foreign investment in U.S. airlines 
remained limited. According to a major international investment bank, 
as of May 2003 no major stockholders--U.S. or foreign--owned more than 
20 percent of any major U.S. network carrier.[Footnote 8] American 
Airlines and Delta Air Lines both had significant blocks of stock owned 
by single shareholders, but these were U.S. financial service firms. 
Both NW (18 percent), and Continental (13 percent) have shares held by 
Axa Financial, a U.S. subsidiary of the French-based Axa 
Group.[Footnote 9]

Past Examples Show Control Has Been the Central Issue:

Foreign airlines have attempted to invest in and influence the 
operations of U.S. airlines several times since the late 1980s. These 
foreign airlines have on occasion invested significant amounts of 
capital into U.S. airlines, only to later disinvest due in part to U.S. 
policies concerning airline control.

In 1989, NW announced that it would be acquired in a leveraged buyout 
by Wings Acquisition, Inc. (Wings). KLM Royal Dutch Airlines (KLM) 
provided about 57 percent of the total equity in Wings and owned 5 
percent of the voting shares of Wings. KLM also proposed to gain the 
right to appoint one member of Wings' 12-member Board of Directors and 
to form a financial advisory committee to advise Wings on the 
management of NW.[Footnote 10] In its review of the proposed 
transaction, DOT objected to the proposed deal's structure and issued a 
consent order, with NW and Wings agreeing to (1) place KLM's interest 
above 25 percent of the total equity in a voting trust, (2) terminate 
KLM's right to appoint a financial advisory committee, and (3) 
disqualify KLM's board member from participating in all decisions on 
competitive and international aviation matters. NW petitioned for 
reconsideration in 1991. DOT then permitted KLM to own 49 percent of 
the total equity investment in Wings and allowed increased 
representation on Wings' board, since the United States and the 
Netherlands had an open skies bilateral aviation agreement.[Footnote 
11] DOT ordered modifications to the original investments and attached 
conditions to its approval to ensure that NW retained its decision-
making independence from its foreign airline investor. In 1997, KLM 
decided to disinvest from NW and instead focused on building up an 
alliance without direct financial investment. KLM and NW formed the 
first international code-sharing alliance granted antitrust immunity in 
1993.[Footnote 12]

In 1992, British Airways (BA) proposed investing $750 million in USAir 
in an arrangement that would have created the world's largest airline 
alliance.[Footnote 13] In the original proposal, BA's investment would 
include about 44 percent of USAir's total equity, 21 percent of USAir's 
voting stock and representation on USAir's Board of Directors.[Footnote 
14] BA included some important conditions to its investment, including 
one that it would have significant influence over major investment and 
financing decisions by USAir. DOT initiated a review of the proposal. 
BA withdrew its proposal before DOT issued a formal decision, in part 
because of changes being sought in the bilateral aviation agreement 
between the United States and the United Kingdom. BA later revised its 
proposal and invested $300 million, with an option to invest an 
additional $450 million in the future, and eliminated the governance 
condition. The alliance never functioned as the two airlines had hoped, 
according to court motions filed by USAir in 1996, and the BA-USAir 
alliance ended in 1997.

Changes in the ownership, management, and operations of DHL Airways 
illustrate that it is sometimes difficult to determine the control of 
an airline. DHL Airways (now ASTAR Air Cargo) holds a certificate of 
public convenience and necessity from DOT, and thus was found to meet 
U.S. citizenship requirements. In the fall of 2000, DHL Airways 
reported to DOT that it had undergone a substantial change in 
ownership, involving Deutsche Post, the German postal monopoly. DOT 
conducted an informal review of its citizenship, as is standard 
practice, and in May 2002, informed DHL Airways that it met U.S. 
citizenship requirements. However, Federal Express and United Parcel 
Service petitioned for a public review, alleging that DHL no longer met 
the citizenship requirement. DOT initiated a public proceeding to 
examine the issue.

In April 2003, P.L. 108-11 directed that DOT use an Administrative Law 
Judge to assist in resolving this issue. The Administrative Law Judge 
is to issue a recommended decision by December 1, 2003. DOT will then 
review that decision.

Prior GAO Report Identified Five Key Issues Relating to Changes in 
Foreign Investment Laws:

In 1992, we reported on the potential impact of changing U.S. airline 
foreign investment and control laws and evaluated DOT's 1991 proposal 
to allow for increased foreign investment in U.S. airlines.[Footnote 
15] We found that the five key issues identified in the prior report 
are still relevant today. This proposal, according to DOT officials, 
was in response to the heavy losses suffered by U.S. airlines in 1990 
and 1991, who were hurt by the generally weak economy. The report noted 
that six large U.S. airlines had declared bankruptcy and three of them 
had ceased operations. The report concluded that fewer airlines could 
mean less competition and higher fares. The report addressed five key 
areas that may be affected by changing ownership and control laws:

Domestic competition - Allowing greater potential access to foreign 
capital could give U.S airlines, particularly those in financial 
difficulty, additional capital which would allow them to enhance their 
domestic competitive position.[Footnote 16]

National security - U.S airlines, through their voluntary participation 
in the Civil Reserve Air Fleet (CRAF) program, provide the Department 
of Defense (DOD) with supplemental airlift capacity in 
emergencies.[Footnote 17] DOD was concerned that foreign investors 
might discourage continued participation in CRAF.

Employment - Increased foreign investment could put jobs at risk--for 
example, those of U.S. pilots and crew on international routes; but it 
could also help stabilize U.S. airline employment by strengthening 
financially weak airlines.

Safety - Increased foreign investment could place additional burdens on 
the Federal Aviation Administration's safety oversight 
responsibilities if foreign aircraft are transferred to U.S. registry.

International competition - The impact of increased foreign investment 
on international competition depends, in part, on existing bilateral 
aviation agreements. These agreements set the conditions under which 
U.S. and foreign airlines operate and compete, and can restrict 
competition by limiting the service that can be offered. There may be 
opportunities for relaxing operating restrictions in some bilateral 
agreements in exchange for relaxing restrictions on foreign investment 
in U.S. airlines. Eligibility to invest in U.S. airlines could be 
restricted to airlines from nations that allow greater access to their 
aviation markets or do not subsidize their airlines.

Issues Identified in Prior GAO Report Still Relevant Because Current 
Aviation Environment Is Similar to 1992:

Although 11 years have passed since we reported on the potential effect 
of changing foreign investment and control limits on U.S. airlines, 
most of the issues that we identified still appear to be relevant. As 
in the early 1990s, the U.S. commercial airline industry in 2003 faces 
a weak economy, relatively high fuel prices, and military action in the 
Middle East. These conditions, as in the past, have contributed to weak 
passenger demand, decreased airlines revenues, and some airline 
bankruptcies. The airlines have likewise used some of the same basic 
strategies to control operating costs. For example, major airlines 
responded to the 1992 economic downturn by implementing cost-cutting 
programs, laying off employees, canceling or delaying aircraft 
deliveries and refocusing service. These same strategies have been 
implemented again since 2001 by major airlines. For example, United and 
American have made huge employee cutbacks, and Continental Airlines 
announced in July, 2003 that it plans to defer prior orders for 
additional Boeing planes until the domestic economy recovers. Some 
airlines also are again expressing interest in acquiring capital 
through foreign investment. Therefore, general issues identified in our 
prior report appear to be still relevant to U.S. interests.

Domestic competition - U.S. airlines have made significant reductions 
in service, but continue to have more capacity than passenger demand. 
Airlines are seeking additional capital to provide operating funds to 
survive the reduced passenger traffic and revenues and avoid 
bankruptcy. The effect that airline bankruptcies might have on domestic 
competition is uncertain. Since most U.S. "legacy" airlines' balance 
sheets are considerably weaker than in 1992, DOT believes that the 
ability to access international capital markets is even more valuable 
to the airlines in the current economic environment.[Footnote 18]

National security - While DOD has traditionally been concerned about 
increasing foreign ownership due to the belief that any foreign control 
of U.S. airlines would negatively affect CRAF, it presently has no 
official comment on the administration's latest proposal. Questions 
already exist regarding the effectiveness of DOD's program incentives, 
and it is unclear if these incentives will be affected by changes in 
foreign ownership restrictions.

Employment - The impact of increased foreign investment on employment 
remains unclear. There are differing views on how changes in foreign 
investment restrictions could affect employment--would additional 
investment stimulate domestic aviation, thus domestic aviation 
employment, or would foreign investment lead to jobs being transferred 
to foreign workforces? DOT indicated that there is no evidence to 
suggest that increased foreign investment in U.S. airlines would have 
any effect on labor. DOT commented that, due to existing collective 
bargaining agreements and other regulatory requirements governing U.S. 
airlines and their employees, the administration's proposal would not 
affect the rights of labor or the obligation of airlines with respect 
to labor.

International competition - While bilateral "open skies" agreements 
between the United State and many EU member states have improved the 
access, level of integration, and volume of travel across the Atlantic, 
other aviation agreements, such as the Bermuda II Accord, continue to 
limit airline integration and efficiencies.[Footnote 19] As the United 
States and EU start negotiations for a new aviation agreement, one of 
the primary negotiations points for EU officials will be the relaxing 
of current U.S. foreign investment and control restrictions.[Footnote 
20] The effect that recent legislative proposals codifying control 
standards could have is unclear. DOT has stated that since 1992, many 
U.S. airlines have formed international alliances. These alliances may 
find mutual investments more desirable, either to sustain a valuable 
alliance partner experiencing financial difficulties or to solidify 
commercial relationships.

At this time, we do not believe that the FAA safety workload issue 
raised in the 1992 report continues to be a significant relevant 
concern in the current environment. In addition to any legal obstacles 
to transferring foreign aircraft to U.S. registry, it is not clear what 
incentives exist that would encourage a foreign investor to do so. U.S. 
carriers have grounded a significant number of aircraft and have been 
operating less frequency with existing fleets over the past 2 years as 
a result of the downturn in demand. Also, even if such a change were to 
occur, it is unlikely that aircraft would be added in such numbers so 
as to materially increase FAA's safety oversight responsibilities over 
and above its current workload.

Scope and Methodology:

To address the administration's current proposal and discuss the 
potential affect on domestic competition, national security, airline 
employment, airline safety, and international competition, we conducted 
interviews with key stakeholders and industry experts. This included 
representatives from DOT, the European Union, various member states, 
and U.S. airlines. In addition, we reviewed the literature regarding 
foreign ownership regulations and implications, studied transcripts of 
speeches by key U.S. government personnel, and reviewed financial 
regulations and materials. Finally, we examined documents filed with 
DOT regarding citizenship of airlines.

Agency Comments:

We provided a draft report with briefing slides to DOT for review and 
formal comment. DOT provided technical comments, which we have 
incorporated into this report as appropriate.

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from its date. At that time we will send copies to the Secretary of 
Transportation and other interested parties. We will also send copies 
to others upon request. In addition, this report will be available at 
no charge on our Web site at

For further information on this report, please contract JayEtta Hecker 
at (202) 512-2834. Individuals making key contributions to this report 
included Steve Martin, Emily Pickrell, Tim Schindler, and Matt Zisman.

JayEtta Z. Hecker:

Director, Physical Infrastructure Issues:

Signed by JayEtta Z. Hecker:


Enclosure I:

[See PDF for image]

[End of figure]


[1] U.S. General Accounting Office, Airline Competition: Impact of 
Change Foreign Investment and Control Limits on U.S. Airlines, GAO/
RCED-93-7 (Washington, D.C.: December, 1992).

[2] The United States has restricted ownership and control of U.S. 
airlines for four primary reasons: (1) protection of the then-fledgling 
U.S. airline industry, (2) regulation of international air service 
through bilateral agreements, (3) concern about allowing foreign 
aircraft access to U.S. airspace, and (4) military reliance on civilian 
airlines to supplement airlift capacity. See U.S. General Accounting 
Office, Airline Competition: Impact of Changing Foreign Investment and 
Control Limits on U.S. Airlines, GAO/RCED-93-7 (Washington, D.C.: Dec. 
9, 1992.).

[3] 49 U.S.C. 40102.

[4] 14 C.F.R. 204.5.

[5] Department of Transportation, Office of Inspector General, Letter 
to the Honorable Don Young, Chairman, Committee on Transportation and 
Infrastructure, U.S. House of Representatives, March 4, 2003.

[6] Section 807 of the conference report on H.R. 2115.

[7] The Air Transport Association is the principal trade organization 
for large U.S. airlines.

[8] Section 13(d) of the Securities Exchange Act of 1934, as amended, 
requires that any person who obtains beneficial ownership of 5 percent 
or more of any equity security must provide notice to the issuer of the 
security, to each exchange where the security is traded, and to the 
Securities and Exchange Commission (SEC). The notice must include 
detailed information on citizenship, the number of shares purchased, 
and other related business arrangements.

[9] We omitted information on ownership for United Airlines and US 
Airways due to their respective ongoing and recent emergence from 

[10] In addition, other foreign investors held about 15 percent of 
Wings' voting common stock, bringing the total voting stock held by 
foreign investors to about 20 percent of Wings' voting stock. 

[11] DOT allowed expansion of KLM's representation on Wings' board when 
the number of directors was increased and continued the 
disqualification provision regards decision on competitive and 
international issues. However, the order stated that appointment of 
foreign representatives to key positions on Wings' board, especially 
the position of chairman, would be "cause for us to review the 
citizenship of the affected air carrier."

[12] "Code sharing" refers to the practice of airlines applying their 
names--and selling tickets via reservation systems--to flights operated 
by other carriers. 

[13] USAir officially changed its name to the current US Airways on 
February 27, 1997.

[14] In 1992, we reported that the proposed investment included a 
number of potential benefits for the two airlines planning to integrate 
their services. It would have provided BA a secure partnership that 
could feed U.S. passengers to its international flights and allow USAir 
to better compete with U.S. airlines that have expanded their 
international routes systems by purchasing international route 
authority from struggling U.S. airlines. See U.S. General Accounting 
Office, Airline Competition: Impact of Changing Foreign Investment and 
Control Limits on U.S. Airlines, GAO/RCED-93-7 (Washington, D.C.: Dec. 
9, 1992.)

[15] U.S. General Accounting Office, Airline Competition: Impact of 
Changing Foreign Investment and Control Limits on U.S. Airlines, GAO/
RCED-93-7) (Washington, D.C: December, 1992).

[16] The 1992 GAO report (GAO/RCED-93-7) noted that while foreign 
investment had potential benefits for U.S. airlines, it was not a 
panacea for preserving domestic competition, because other factors--
such as airline control over gates and other facilities at major U.S. 
airports--also affect airline competition. 

[17] Under the CRAF program, U.S. airlines commit and put under 
contract aircraft and crew for DOD's use during emergencies. The 
commercial airlines receive no compensation for their participation in 
the program unless they are activated, but they are given an incentive 
to participate by being made eligible to bid for DOD's peacetime 
airlift business and General Services Administration's city pair 
program. Airlines are paid for missions they fly at predetermined rates 
based on a weighted average of their costs plus a return on investment.

[18] "Legacy" airlines generally refer to major U.S. airlines that 
operate network service, including both domestic and international 
operations, such as United, American, and Delta.

[19] The "Bermuda II Accord" is the 1977 agreement between the United 
Kingdom and the United States that restricts UK and U.S. flights 
serving London Heathrow Airport to two airlines from each countries.

[20] DOT has noted that any U.S.-EU agreement, which includes 
provisions on foreign investment would require implementing