|
 |
REMARKS OF
JEFFREY N. SHANE
UNDER SECRETARY FOR POLICY
U.S. DEPARTMENT OF TRANSPORTATION
INTERNATIONAL AVIATION CLUB
WASHINGTON, DC
SEPTEMBER 12, 2006
When I appeared before the International Aviation Club in November of last year,
I talked about the unfinished business of aviation deregulation. I called
aviation deregulation “a work in progress.” Today I want to pick up on two of
the issues that we are continuing to work on, as we seek to move deregulation to
the next level. The first is DOT’s proposal to liberalize the restrictions on
the extent to which foreign investors can participate in the governance of U.S.
airline companies. The second is our continuing quest for a transformational
“open-skies-plus” agreement with the European Union.
As I look around the room, I am struck by the increasing proportion of the
audience that has known the U.S. aviation industry only in its deregulated
incarnation. At a time when deregulation is so widely accepted a public policy
objective, it is all too easy to forget how immense an achievement it was. I
think of it as the public policy equivalent of the bumblebee flying. Just as
it’s not supposed to be physically possible for a bumblebee to fly, it shouldn’t
have been politically possible to deregulate the airline industry. In the
mid-1970’s deregulation was little more than a fashionable idea among a few
academic economists. The process whereby an arcane economic proposition was
placed on the national policy agenda with such prominence that it simply had to
be addressed is one of the most interesting stories in the annals of Congress.
It had every indication of turning into one of those quixotic non-contests that
we see so often in the legislative process: The public’s interest in
deregulation was marginal and diffuse; the industry’s opposition intense and
focused. And yet, in 1978 Congress passed the Airline Deregulation Act. Building
further on that historic public policy choice, Congress went on to deregulate
trucking, railroads, financial services, energy, and so on. Deregulation today
is rapidly taking its place as the default economic policy around the world. But
we shouldn’t forget that the deregulation of U.S. airlines came first.
Thanks to deregulation, the airlines have been given many of the tools necessary
to reinvent themselves in response to evolving consumer demands and competitive
challenges -- the flexibility to enter and exit markets at management's
discretion, the scope to choose aircraft and service levels in response to
market imperatives, and the opportunity to price services in any way that
stimulates demand. Although commercial freedom in these areas is not yet
universally enjoyed, regulatory constraints on these decisions are fast becoming
aberrational rather than the norm.
In this context, as I have pointed out many times before, it is ironic in the
extreme that the industry that was deregulated first and that has been the
engine for the globalization of so much of the world's economic activity, is
among the last to be able to take advantage of one of the most important
features of globalization – cross-border capital flows. And that brings me to
the first of my two topics – DOT’s rulemaking on foreign investment in U.S.
airlines.
Foreign investment in U.S. airlines. DOT’s avowed view that it is time to
increase the availability of offshore capital to the U.S. airline industry lies
at the heart of that rulemaking -- a proposal to recalibrate how we determine
whether U.S. citizens are in actual control of U.S. airlines. We proposed that
change because we believe, subject to our review of the comments submitted, that
it would positively influence the development of the U.S. airline industry. As
set forth in both the original Notice of Proposed Rulemaking and a Supplemental
Notice that we issued later, we think the economic benefits at stake are
potentially substantial.
Our proposal is primarily designed to enhance U.S. airline access to the global
capital marketplace. We think that, by expanding the pool of qualified
investors, it would introduce new competition among investors and thereby
provide U.S. airlines with better terms. The proposed change, in other words,
might well lower the cost of capital for U.S. airlines, a benefit of particular
importance at a time when the industry is restructuring to meet the demands of
an increasingly competitive global marketplace. To the extent that overseas
alliance partners might take advantage of the better climate for investment in
U.S. airlines, the proposed change would also enhance the efficiency and
durability of alliance relationships.
The proposal does not envision a one-way street for investment, however. One of
its most important and yet most overlooked provisions is a reciprocity
requirement. Under the proposal, only foreign investors who are from countries
that have open-skies agreements with the United States and that permit similar
investment opportunities for U.S. investors in their airlines would be eligible
for this less stringent treatment. I call this one of the proposal's most
important provisions because it has the potential to encourage a more liberal
approach to capital flows in aviation on a global basis. It would not only
afford U.S. carriers the opportunity to tap more global sources of capital; but
also under the reciprocity requirement, U.S. carriers would be able to enhance
their international presence by investing in foreign carriers.
To sum up, our proposal carries with it the prospect of a healthier and more
efficient U.S. airline industry, enhanced international alliances, far more
liberal treatment of airline investments everywhere, more competition for the
benefit of travelers and shippers everywhere, and expanded job opportunities for
airline employees. Those are the benefits we think would flow from the increased
investor confidence engendered by a policy that enhanced their ability to
protect their investments through greater input in commercial decision-making.
And the proposal was designed to accomplish all of that without changing any of
the statutory requirements that apply to U.S. airlines, most importantly the
obligation that they remain under the actual control of U.S. citizens.
As many of you know, this proposal is only the most recent in a number of
efforts to liberalize the nearly 70-year-old restrictions on foreign investment
in U.S. airlines. The first that I remember was a bill introduced by Congressman
Bill Clinger of Pennsylvania in 1991 to raise the statutory ceiling on
foreign-owned voting shares from 25 percent to 49 percent. The first Bush
Administration testified in favor of the proposal, but I don’t think it ever
left the House Aviation Subcommittee. This Administration had intended to
include a similar proposal in the Administration’s FAA reauthorization bill
three years ago but delays in the interagency clearance process prevented us
from transmitting it in time for consideration as part of what became Vision
100. We later requested that it be taken up as a free-standing bill but without
success.
Those initiatives, dating back fifteen years, were all proposals to change the
statute. None succeeded. In further pursuit of this objective, therefore, we
decided to take a different tack. Rather than trying to amend the numerical
limits in the legislation we would instead address the wholly administrative
constraints that, by our assessment, unnecessarily and excessively restrict the
activities even of those foreign investors who fully comply with the stringent
statutory limits. We thought we were pursuing a far more moderate and
evolutionary approach. While Congress is often reluctant to tamper with a
well-established statute, after all, adjustments in interpretation happen within
regulatory agencies all the time.
Piece o’ cake, we thought.
Well, you don’t have to be a pundit to have figured out how wrong we were. We
didn’t actually think it would be easy, of course; we knew there would be some
controversy. But none of us guessed how much controversy there would be. Our
first response to Congressional opponents of the change was to slow down the
process by issuing a supplemental notice of proposed rulemaking explaining
somewhat more clearly what we had intended to express in the original NPRM – the
reasons why we felt that U.S. citizens would remain in actual control of U.S.
carriers even if we implemented the change along the lines proposed.
By all accounts, the clarification did little to mollify the opposition. So we
decided in August to announce that we were slowing down the process yet again.
That decision reflected the Administration’s view that a change of this
importance, even if wholly within the purview of the Executive Branch – as we
maintain that it is -- should not and probably cannot be implemented over
significant opposition from members of Congress.
We again put the proceeding on a slower track, therefore, in order to engage
members and staff more aggressively, listening to the reasons for their
objections and discussing the likely consequences of the proposed change. There
will be no point in promulgating a new rule unless it is clearly sustainable.
So the rulemaking process continues, but further steps will await further
consultations. I will not speculate on when the proceeding will be finalized.
However, since everybody knows that the EU has drawn a linkage between the rule
and acceptance of the U.S.-EU aviation agreement, let me make clear that we do
not expect the proceeding to be finalized prior to the October 12 meeting of the
European Union Transport Council.
U.S.-EU Agreement. That brings me to the second major issue that I want to
discuss today -- the U.S.-EU Air Transport Agreement negotiated last November.
The text is done; it merely needs to be ratified by the parties. Nearly a year's
reflection has only served to confirm my assessment that our negotiators have
crafted a classic "win-win" in that document. In its potential for transforming
the transatlantic market, the agreement represents the next important step in
deregulation and globalization -- the removal of regulatory barriers to the
emergence of the European airline, the establishment of an EU-wide open-skies
regime with the United States, and trans-Atlantic cooperation in areas such as
security, competition policy, and consumer protection that goes well beyond what
is contemplated in our more traditional open-skies agreements. Moreover, the EU
and the U.S. agreed to begin a second stage of negotiations within 60 days of
the effective date of the agreement.
We are eager to begin reaping the benefits of the agreement, which has the
potential to fundamentally transform the framework within which transatlantic
air services operate, increasing dramatically the quality of competition in the
market and benefiting consumers, communities, and employees who rely on air
transport services both directly and indirectly. We believe that these benefits
will transcend anything achieved through our bilateral open-skies agreements.
Moreover, alliances between U.S. and EU airlines and the cross-border mergers
that are already occurring in Europe are dependent on having a stable open-skies
underpinning.
Completion of the U.S.-EU Agreement would not only enhance airline competition
across the Atlantic, it can also be expected to become the template for
liberalization around the globe, loosening the grip of protectionism on markets
worldwide.
As persuasive as the affirmative reasons for proceeding with a U.S.-EU Agreement
are, the consequences of failure to achieve that objective also need to be
understood. The European Court of Justice decided nearly four years ago that the
nationality clauses in bilateral aviation agreements were inconsistent with the
EU Member States' obligations under the Treaty of Rome. That’s a complicated way
of saying that EU law requires that EU airlines be permitted to compete with
each other for international traffic at their hubs. The nationality clauses in
our current agreements prevent that competition from taking place. The new
Agreement would solve that problem on day one. The European Commission has made
clear that, given the mandate of the Court of Justice, the status quo will not
be an acceptable option if the U.S.-EU Agreement is not implemented.
If, or perhaps more appropriately when, the Commission were to act against the
bilateral aviation agreements because of the nationality clause, the
consequences would include not only forgone benefits, but also serious
disruption to the carrier networks that have developed under open skies. And
lest there be any doubt, there’s no way to address the problems identified by
the Court of Justice except through a solution that involves the entire EU.
In short, there are likely to be serious repercussions if we do not move forward
with the negotiated Agreement. We would not put in place the new template for
international aviation, forgoing the incremental benefits for consumers of new
competitive initiatives and derailing long-overdue, broad-based structural
changes in the industry. We would put in jeopardy the economic benefits of
fifteen bilateral open-skies agreements, defer open-skies with ten additional
partners, and once again fail to remove the regulatory impediments to more
competitive service at London's Heathrow and Gatwick Airports. If we lose the
current open-skies agreements, we face the very real prospect of dismantling the
U.S.-EU airline alliance structure that provides so much international aviation
competition today, as well as the emerging cross-border airline mergers.
Antitrust immunity, which has helped to facilitate the efficient operation of
many of the current alliances, is necessarily predicated on underlying
open-skies agreements. Without legally secure open-skies agreements with their
guarantee of open market entry, it is very difficult to see how we could
continue to justify immunity from antitrust enforcement for airlines that are
potential competitors. And we should not forget that the U.S. operations of the
emerging European airlines that are the product of cross-border mergers within
Europe are, in part, similarly predicated on the continuance of the open-skies
agreements between the U.S. and the countries of the merger partners.
Very clearly, we have before us some very important opportunities to advance the
cause of deregulation in the interest of enhanced competition and a stronger
U.S. airline industry. Some controversial issues are on the table. But we have
an obligation to address those issues in a deliberate way, ensuring that the
choices we make are consistent with the long-term prosperity of this most
important of industries. The Administration looks forward to continuing to work
with Congress as we address these important issues.
By the way, the last time I checked, bumblebees were still flying.
Thank you for allowing me to share these thoughts with you today.
# # #