Statement of
Captain Duane Woerth, President
Air Line Pilots Association
Before the
Committee on Commerce, Science and Transportation
United States Senate

May 9, 2006

Foreign Investment in U.S. Air Carriers

Good afternoon. I appreciate the opportunity to appear before this Committee today to present our views on the Department of Transportation’s rulemaking proposal to allow foreign investors to obtain and exercise control over all commercial aspects of the operations of any U.S. airline. I particularly welcome the opportunity to discuss this matter before a Congressional committee, since the Congress has spoken clearly on this issue in the past – as a matter of legislation. The proposed change attempts to achieve by regulatory fiat what the administration could not achieve in Congress.

But the proposed change is more than poor lawmaking, it is also poor policy. As you know, this proposed change in U.S. policy is directly linked to the desire of the Administration to convince the European Union to sign a pending new air services agreement with the US. ALPA believes that the draft agreement offers little to U.S. airlines, and sizably more to their EU counterparts. It certainly does not warrant the kind of radical change in the US ownership and control rules that DOT has proposed.

That agreement, if finalized, would allow any European airline to fly from any point in Europe to any point in the United States and beyond. What then would U.S. airlines get in return? Apart from some additional routes beyond European gateway points that our cargo carriers might use – not much.

In June 2004, a report by the Government Accountability Office concluded that whatever benefit U.S. carriers and consumers might eventually gain from such an agreement would not be realized for several years. The reason? The United States already has open access to the vast majority of European traffic. And yet, the EU is apparently unwilling to sign this new agreement unless they also obtain for their citizens – especially their airlines – the right to gain control of U.S. airlines. The DOT’s proposal is devised primarily to satisfy the aspirations of European airlines to gain access to the U.S. domestic market.

Despite claims to the contrary, the DOT’s revised proposal released last week would, in fact, allow foreign interests to exercise actual control over all the commercial elements of a U.S. airline’s business. Under the proposal, U.S. citizens would have to retain control of only the four following areas:

1. The airline’s basic organizational documents;
2. Civil Reserve Air Fleet (CRAF) or other national defense airlift commitments;
3. Aviation security; and
4. Aviation safety.

As United Airlines CEO Glenn Tilton put it in a recent speech, the proposal “…would allow foreign investors in U.S. airlines to effectively control the bulk of the airline’s commercial operations.”

As far as ALPA is concerned, the proposal poses four major problems.

FIRST, DOT’s revised proposal remains at odds with Congress’s determination that actual control of a U.S. air carrier must be in the hands of U.S. citizens. The areas over which the Department would continue to require U.S. citizen control, while important, are ultimately peripheral to an airline’s core business operations and strategy.

While DOT’s supplemental notice states “all delegations of control to foreign interests must ultimately be revocable by the board of directors or shareholders,” the fact remains that foreign interests would be permitted to obtain and retain control unless and until that control is revoked. Furthermore, we think it quite unlikely that such a revocation would ever occur, once the foreign interests were in the driver’s seat.

The SECOND problem is that the NPRM fails to distinguish between investments by foreign air carriers and other potential sources of foreign capital. It thus would allow foreign air carriers to take control of U.S. airlines–perhaps even becoming the dominant force in the domestic U.S. airline industry.

When one air carrier seeks to acquire control of another, the goal of the acquisition is almost always to integrate the operations of the two carriers. If a foreign airline acquires control of a U.S. airline, it would likely use the U.S. airline to create a domestic network to feed traffic to the foreign airline’s international operations. As a result, any pre-existing international operations of the U.S. airline could diminish, while those of the international airline would be significantly expanded. The effect on U.S. airline jobs would be devastating.

The decline in international operations by U.S. airlines that would result from foreign control would also undermine the CRAF program, because it would reduce the number of long-range, wide-bodied aircraft in the U.S. carriers’ fleets. Although the Department’s proposed rule attempts to protect the CRAF program by ensuring that U.S. citizens retain control of a carrier’s CRAF commitments, the fact is that a foreign airline that has economic control of a U.S. airline would be able to determine how many CRAF-eligible aircraft the U.S. carrier has in its fleet.

Under the DOT’s proposal, U.S. workers would also suffer injury because U.S. labor laws do not apply to foreign air carriers. When one of the affiliated airlines is foreign and not subject to the same labor law, the employees face the prospect of being bid against each other without effective recourse. This is no hypothetical discussion. In the early 1990s, when British Airways bought into US Airways and KLM bought into Northwest, flightcrew jobs were either eliminated or grew disproportionately at the foreign partner.

The THIRD problem is that the proposal tries to separate safety and security from the other elements of an airline’s operations. DOT’s recent supplemental notice states that “U.S. citizens must control the carrier’s overall safety and security programs and policies, not just the carrier’s compliance with the requirements of the FAA and TSA.” However, the point ALPA makes continuously is that safety and security issues are inextricably linked to operational and economic decisions. Whoever controls the operations of the airline controls safety policies and implementation.

Finally, the FOURTH problem is that the DOT has utterly failed to present any data to support its claim that the U.S. airline industry is in need of more foreign investment, or that such investment is not available absent a change in the foreign control rules.

An abundance of evidence shows that when a U.S. airline develops a business plan with a promise of profitability, it attracts the capital it needs. Both United and US Airways have demonstrated that, after extensive restructuring, cost cutting, and changes in operations and services, exit financing was available and plentiful.

As a whole, DOT’s proposal raises more questions than it answers. That is all the more reason why changes of this magnitude and this complexity should be undertaken by the U.S. Congress and not by an administrative agency nor forced upon us by the European Union.

Sens. Inouye’s and Stevens’ amendment to the supplemental appropriations bill has put the necessary brake on the DOT’s rush to issue a final rule, and S. 2135 is the proper vehicle for considering whether a change to the control rules is even appropriate. The Air Line Pilots Association strongly urges this body to keep the Inouye-Stevens language in the supplemental appropriations bill and to begin an open and straightforward debate on S. 2135.

The U.S. airline industry cannot afford to get this issue wrong. Thank you.