THE “VALUE-ADDED” APPROACH TO AIRLINE REGULATION
Remarks of
Jeffrey N. Shane
Under Secretary for Policy
U.S. Department of Transportation
Phoenix Sky Harbor International Airport
Aviation Symposium 2006
Phoenix, Arizona
April 26, 2006
It is always a pleasure to come to Phoenix and to share ideas about the aviation
industry with so many good friends. The breadth and timeliness of the topics are
as impressive as always, and I am grateful for the invitation to introduce this
first segment of the program.
Life in the air transportation business is never dull, but the last few years
have taken the adventure – and the stress -- to an entirely new level. The
collapse of the traditional high-end air travel market in 2000, the exacerbating
impact of 9/11, the burden of unprecedented new security requirements, the
transition of our largest airlines to new and more relevant business models,
draconian cost-cutting throughout the industry, the advent of the internet as a
mainstream marketing and distribution channel, and of course fuel prices that
have soared to historic highs – all of these developments have transformed the
industry more profoundly than in any other period I can recall.
That the industry is subject to so much challenge and change can be attributed
to – some would say “blamed on” -- one of the most important public policy
decisions ever taken by the U.S. Congress: the decision 28 years ago to
deregulate the airline industry. Given the impact of the past six years on our
airlines, their shareholders, and their employees, we are beginning to hear
occasional expressions of regret about that decision. Even some members of
Congress who voted for deregulation in 1978 say that, had they known then what
they know now, they would have voted the other way.
Well, let’s be glad that they didn’t know. These have been difficult times, to
be sure, but they furnish no reason to regret deregulation. The Airline
Deregulation Act was predicated on incontrovertible evidence – collected in a
great many congressional hearings -- that airline regulation was imposing costs
on the economy that simply could not be justified by any coherent public policy
rationale. If the legislation hadn’t passed in 1978, it surely would have been
enacted a few years later. It was simply an historic inevitability.
It was no accident that Congress went on to deregulate motor carriers,
railroads, electricity, energy, telecommunications, and financial services. And
it is no accident that governments around the world have themselves increasingly
voted for market-based approaches. For more and more of the global economy,
deregulation has become the default policy.
I can tell you, too, as somebody who devotes as much time to our surface
transportation modes as to aviation, that the greater efficiency engendered by
deregulation among transportation providers meant that our existing stock of
transportation infrastructure assets served us well for at least a
quarter-century longer than we might otherwise have expected. It is only now
that we find ourselves exploring new models for adding capacity that will serve
us equally well in the future. That’s why, in aviation, you are hearing so much
about the Next Generation Air Transportation Initiative. And that’s why we will
spend the next year debating the best way to finance our aviation
infrastructure, to ensure that it continues to accommodate the rapidly growing
demand we know we will face.
The “Value-Added” Test
No, this is no time to fantasize about whether we might unscramble the
deregulation egg. On the contrary, it is time to ask whether there is even more
that government can do to facilitate the ability of airlines to deal more
effectively with the challenges they face. That’s why, under Secretary Mineta’s
leadership, we have placed such emphasis on what might be called the
“value-added” test for regulatory policy. Simply put, at a time when the
industry is being buffeted by so many external forces – some attributable to the
marketplace, some to geopolitical challenges – government needs to ensure that
each of its regulatory requirements continues to serve a valid public purpose.
I am proud to say that the Bush Administration has been applying that test
rigorously, and finding ways to reduce further the regulatory load. For example
* We eased the requirements on airports relating to the filing of competition
plans.
* We repealed in their entirety DOT’s 20-year-old regulations governing the use
of computer reservation systems
* We created an expedited, simplified procedure to award “route integration
authority” for five years to all U.S. carriers who apply for it.
* We have eased tariff filing requirements for the airlines of countries with
which the U.S. enjoys a liberal aviation relationship.
* We simplified the requirement for disclosure of code-share and long-term wet
lease arrangements in print advertising.
* We issued a proposed rulemaking – still pending -- seeking comment on whether
DOT’s regulation of airline price advertising should be maintained as is,
modified, or scrapped.
We will continue to review our regulations in an effort to eliminate any that no
longer serve the public interest.
Regulation of Investment
Even our proposals over the years to encourage greater interest on the part of
offshore investors in making capital available to U.S. airlines should be
understood in this context. After all, if we’re serious about the “value-added”
proposition, we need in particular to ensure that those regulatory restrictions
that result in the most significant departures from conventional corporate
behavior continue to deliver some public good. And one of the most conspicuous
of those restrictions is our current policy with respect to the flow of capital
in the airline industry.
Note that I said “our proposals over the years.” There have been a couple of
efforts, spaced a decade apart, to amend the ownership provisions of the federal
aviation laws to increase the ceiling on foreign-owned voting stock in a U.S.
airline from 25 percent to 49 percent. Neither effort attracted much interest in
Congress, and neither proposal ever received even a committee vote as far as I
know.
Those were proposals to increase the amount of foreign investment that is
allowed by statute. The NPRM that DOT published last November, and that is still
pending, is different. It is not a proposal to encourage increased investment in
our airlines; it is a proposal to encourage some investment. All it would do, if
we finalize it, is encourage more of the offshore investment that the current
statute expressly allows.
It would do that by revisiting an interpretation that dates back to a Civil
Aeronautics Board decision in 1940. I don’t know about you, but I think a pretty
good rule of thumb in deciding which regulatory policies are ripe for review is:
Start with 66-year-old policies.
That policy – not required in any way by the words of the statute – had the
effect of relegating offshore investors to a passive role in any airline they
invested in. Phrases like “no shadow of influence” and “no semblance of control”
– as applied to foreign citizens – began appearing in CAB decisions and became
established policy. DOT took the baton in 1985, when the CAB closed its doors,
and, despite occasional efforts to introduce some measure of flexibility,
essentially maintained the policy intact.
What the CAB and DOT have always required – and what the statute now says
explicitly as the result of a 2003 amendment – is that U.S. citizens must
exercise “actual control” of every U.S. airline. What the Department’s proposal
tries to do, therefore, is explore whether the offshore investment allowed by
the statute since its inception might actually materialize if we (i) maintained
the “actual control” requirement but (ii) adopted a less forbidding, less
categorical policy regarding the ability of offshore investors to participate in
the commercial decision-making of the airlines.
I should emphasize that the only decision-making that would be affected by the
proposal is commercial decision-making. Management decisions relating to safety,
security, and the carrier’s participation in Department of Defense programs –
including CRAF – would have to be reserved to U.S. citizens.
Paradoxically, one of the most important features of the proposal has received
the least attention. It is the provision that limits eligibility for the newly
proposed treatment to offshore investors who are citizens of countries that have
open-skies agreements with the U.S., and that provide U.S. citizens with
equivalent opportunities to invest in their own airlines.
I call it one of the proposal’s most important provisions because it has the
potential to encourage a more liberal approach to capital flows on a global
basis. The proposal doesn’t envision a one-way street for investment. It carries
with it the prospect of far more liberal treatment of airline investments
everywhere, engendering more robust international alliances, a healthier and
more efficient global airline industry, and better, more competitive services
for the benefit of travelers and shippers everywhere.
Some skeptics in the U.S. say that the proposal will relegate U.S. carriers to
mere “feeder” status, and that the lucrative and prestigious long-haul
international flying will migrate to the foreign airlines that invest in U.S.
carriers. We will certainly consider that prediction carefully. But I have also
seen an investment banking report from Europe charging that the proposal, by
leaving untouched the 75-percent minimum requirement for U.S.-owned voting
stock, is intentionally designed to ensure that U.S. carriers become the
dominant players in the global airline industry of the future. I wondered why I
didn’t use that line when I testified on the proposal before the House Aviation
Subcommittee.
Despite the controversy, Secretary Mineta fully intends to continue the
rulemaking proceeding. Because some members of Congress have expressed a desire
to understand the proposal better, however, the Secretary has agreed to provide
additional time. We are still in the internal clearance process and so I’m not
supposed to announce anything specific today, but the additional procedure will
be made public very shortly.
Without offering any premature conclusions about what will end up in the final
rule, I think the Administration has a very good story to tell about the genesis
of this proposal and its underlying motivation. Opponents of the NPRM have done
a pretty good job, we think, of totally confusing just about everybody. It’s
time to conduct a more objective, more coherent discussion of this proposal and
its implications for the future of this industry. The concerns expressed by
Congress relate to some very important equities – national defense, security,
safety, jobs, and the health and viability of the U.S. airline industry.
Secretary Mineta and all of us at DOT take those concerns very seriously, of
course, and want to ensure that our partners in the Congress have the
opportunity to get good answers to all of their questions.
U.S.-EU Agreement
The final point I want to make this morning is to note that the “value-added”
approach to airline regulation is of course what lies at the heart of our
government’s long quest for liberalized international aviation markets. From the
liberalized pricing, designation, and capacity clauses of the late 1970s, to the
“under-served cities” program of 1990, to the advent of the open-skies model in
1992, to our present effort to forge a breakthrough agreement with the European
Union covering all air transportation between the EU and the U.S. – all of these
initiatives have been based on the conviction that 1940s thinking and the highly
mercantilist Bermuda model that it produced are the wrong approach to
international air transportation today.
We were pretty close to achieving that agreement a couple of years ago, but the
EU Transport Ministers rejected it. More rounds of talks and lots of hard work
on both sides – ably led by Deputy Assistant Secretary of State John Byerly and
the European Commission’s Director of Air Transport, Daniel Calleja – produced a
new text last November. The delegations are satisfied with the agreement; the
U.S. Government has indicated its acceptability; and even the EU transport
ministers appear to like it. Success may well be within reach.
This Agreement 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 and communities on both sides
of the Atlantic, in ways that transcend anything achieved through our existing
open-skies accords. U.S. acceptance of the “EU airline,” a key objective on the
European side, means that consolidation of the EU airline industry will be able
to proceed unimpeded by nationality-based restrictions.
The Agreement will also enhance the quality of trans-Atlantic cooperation in the
areas of safety and security, competition law and policy, government subsidies
and support, environment, and consumer protection.
For all of those benefits, the Agreement represents only a first stage of
opening markets and enhancing cooperation. The EU and the United States have
agreed to begin a second stage of negotiations within sixty days of the
effective date of the Agreement.
Completion of the U.S.-EU Agreement would not only enhance airline competition
across the Atlantic; it would set a new standard for liberalization around the
world. The agreement will enable European and U.S. airlines – singly and in
combination -- to leverage the power of the newly unified trans-Atlantic market
and thereby develop a truly global presence. Their success can be expected to
encourage emulation in other regions, hastening the achievement of more open
markets for international air services everywhere.
If there are good reasons to adopt the agreement, there are equally good reasons
to avoid the consequences of not adopting it. As everyone here knows, the EU
Commission has made it clear that the existing Open Skies agreements between the
U.S. and fifteen EU member states are no longer acceptable. That’s because the
European Court of Justice has held that the nationality clause contained in each
of those agreements – reserving the rights in the agreements exclusively to the
airlines of the contracting states -- violates European law. The Commission has
said that, if those agreements are not supplanted by an agreement that permits
EU carriers to compete with each other across all EU gateways, it will take
steps to terminate them.
The antitrust immunity that some transatlantic alliances enjoy today is
predicated on the guaranteed open entry that is the hallmark of every market
governed by an open-skies agreement. If those agreements go away and the
open-entry guarantee disappears, it is difficult to know how antitrust immunity
could be sustained. If we fail to get to yes on the new agreement, therefore, we
face the very real prospect of dismantling the cross-border alliance structure
upon which so much trans-Atlantic aviation competition is based today. This
would seem like a particularly inopportune moment in airline history to create
so disruptive a legal morass.
The EU member states have told us that they want to see what we finally do with
the proposed rule on “actual control” of U.S. airlines before they commit to
adopting the new agreement. As I have explained, we are putting that rulemaking
on a somewhat slower track in order to facilitate a more productive debate. That
means the ministers won’t be in a position to form a view of the outcome of the
rulemaking at their upcoming meeting in June. It is our hope, however, that they
will be able to consider the final rule in time to render a decision on the
agreement at their next meeting, in October.
Conclusion
The “big idea” I would like you to take away from this discussion is that all of
our efforts in the context of aviation regulation reflect a commitment to taking
deregulation further. Our rulemaking on “actual control” began with the
tentative view that the deregulation of market access for air services enshrined
in our open-skies agreements may well continue to produce sub-optimal results
unless we find some scope to deregulate market access for investors. Similarly,
the effort to conclude a major new “open-skies-plus” agreement with the European
Union is predicated on our conviction that the purely bilateral approach, even
in its most enlightened form – open skies – still leaves too much regulation in
place.
Regulation is too often the enemy of opportunity and innovation. We have a
fundamental obligation – never more important than in a time as economically
challenging as this – to validate our oversight of the industry on a continuing
basis and, where possible, to get out of the way.
Thank you again for allowing me to share these thoughts with you.
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Briefing Room
