Statement of 
Captain Duane Woerth, President
Air Line Pilots Association Before the 
Subcommittee on Aviation
Committee on Transportation and Infrastructure

United States House of Representatives
February 8, 2006

United States-European Union Air Services 
And DOT’s NPRM on Foreign Control of U.S. Airlines

Good morning. I am Duane Woerth, the President of the Air Line Pilots Association. ALPA represents over 62,000 pilots at 39 airlines in the United States and Canada. We appreciate the opportunity to appear before this Subcommittee today to present our views on the initialed text of a possible air services agreement between the United States and the European Union and on the U.S. Department of Transportation’s proposed policy on foreign control of U.S. airlines that is linked to that text. We have deep reservations about both the initialed text and DOT’s proposal. We also fully support H.R. 4542, which is designed to ensure that Congress has an opportunity for meaningful review of DOT’s proposal and its implications. 

The Proposed U.S. – EU Text

With respect to the initialed text, ALPA believes that it offers little to U.S. airlines, but much to their EU counterparts. That text would allow any European airline to fly from any point in Europe to any point in the U.S. and beyond. For example, Lufthansa could fly from Paris to Atlanta; Air France could fly from Munich to Chicago. Thus, the initialed text would solve the problems raised for the Member States of the European Union by the December 2002 European Court of Justice decision that found that the ownership and control clauses in the bilateral agreements between the United States and individual European Member States were illegal because they violated the right of establishment provisions of the EU’s organizational statutes. The text would also facilitate the consolidation of European airlines, potentially allowing them to be more efficient and effective competitors vis a vis U.S. carriers. In addition, under the initialed text EU carriers would receive the right to provide aircraft and crew to U.S. airlines on international routes, a right they have long sought, but which appears to be in square violation of the Federal Aviation Regulations and directly threatens the jobs of U.S. airline pilots. Clearly the initialed text provides substantial benefits to EU carriers. 

What would U.S. carriers get if the initialed text were to go into effect? Apart from some additional routes beyond European gateway points that our cargo carriers might use, not much. In June 2004, the U.S. Government Accountability Office issued a report titled “Transatlantic Aviation: Effects of Easing Restrictions on U.S.-European Markets.” That report contained an assessment of what U.S. carriers and consumers stood to gain if the U.S. entered into an “open skies” agreement with the EU that eliminated, as does the initialed text, the nationality restrictions on EU carriers. The GAO concluded that whatever benefit U.S. carriers and consumers would eventually gain from such an agreement would not be realized for several years. This, according to the GAO, is because the U.S. already has open access to the vast majority of European traffic and the only significant restricted market -- London -- is subject to significant airport capacity constraints that would not be eliminated by a liberalized agreement. In other words, in the GAO’s view, U.S. carriers were not likely to benefit in the short term and possibly only to a small extent even in the longer term by a US-EU “open skies” agreement similar to the initialed text.

But as favorable as the initialed text is for European carriers, they want more. Throughout the negotiations the European carriers sought the inclusion in any new agreement of the right for them to own and control U.S. airlines. Although that right was not included in the initialed text, at the end of the negotiations the Commission expressly linked the outcome of DOT’s rulemaking process to the EU’s decision to finally accept or reject that text.

The Foreign Control Rulemaking

So let me turn to that rulemaking process and DOT’s proposed policy change. 

The Department’s proposal, which was issued on the eve of the last round of the negotiations that resulted in the initialed text, would permit foreign interests to exercise actual control over all the commercial elements of a U.S. air carrier’s business, including such fundamental matters as “choice of markets, type of equipment, and rate-setting.” Under the proposal U.S. citizens would have to maintain actual control of only four areas:

1. The carrier’s “organizational documentation, including such documents as charter of incorporation, certificate of incorporation, by-laws, membership agreements, stockholder agreements, and other documents of similar nature;”

2. The carrier’s “[d]ecisions whether to make or continue Civil Reserve Air Fleet (CRAF) commitments, and, once made, the implementation of such commitments with the Department of Defense;”

3. The carrier’s “policies and implementation with respect to transportation security requirements specified by the Transportation Security Administration;” and

4. The carrier’s “policies and implementation with respect to safety requirements specified by the Federal Aviation Administration.”

As long as these four areas remain under U.S. control -- and the other requirements of the statute relating to place of incorporation, ownership of voting stock, and the citizenship of managers and directors, are met -- the Department would permit foreign citizens to control all other parts of the carrier’s business and operations, including rates, routes, fleet structure, marketing, alliances and branding. As United Airlines CEO Glenn Tilton put it in a recent speech to the UK Aviation Club, the proposal “would allow foreign investors in U.S. airlines to effectively control the bulk of the airline’s commercial operations.”
We believe there are a number of flaws in the Department’s proposal.

The Statutory Issue

First, DOT’s proposal is simply at odds with Congress’s determination that actual control of a U.S. air carrier must be in the hands of U.S. citizens. While the four areas over which the Department would continue to require U.S. citizen control may have their importance, they are ultimately peripheral to an airline’s core business operations and strategy. Control over the four narrowly defined areas simply does not add up to the “actual control” of the entire air carrier as required by Congress. The most critical issues that managers of a U.S. airline must address are such matters as the markets to be served, the type of aircraft to be flown, the alliances to participate in, the extent to which the carrier out-sources maintenance and other services, the carrier’s schedules, fares, etc. These are the fundamental economic decisions that determine the very nature of an airline’s operations, and its role in the air transportation system. To permit these matters to be controlled by foreign citizens, as the Department proposes to do, simply cannot be reconciled with the statutory requirement that U.S. citizens retain “actual control” of the airline.

DOT’s NPRM acknowledges that, unless Congress changes them, the Department cannot alter the statutory standards that define a carrier’s U.S. citizenship -- i.e., the requirements relating to place of incorporation, ownership of the voting stock, and the citizenship of managing officers and directors -- because they are mandated by law. The same is true of the “actual control” requirement. Indeed, the underlying purpose of all the statutory requirements is to ensure that U.S. citizens retain actual control of a U.S. airline. Without “actual control,” the other statutory requirements are meaningless.

Application of the “actual control” standard does require analysis of the specific facts and circumstances of each particular case and thus the Department does have some discretion to define the criteria for determining whether U.S. citizens have “actual control” of a carrier. That discretion, however, does not give the Department authority to change the plain meaning of the term “actual control” itself, so that control over such basic matters as a carrier’s route selection, fare structure, or choice of aircraft is simply excluded from the definition of “actual control.” This is not interpretation but legislation, and it is the province of Congress, not the Department.

Apart from the legal issues there are a number of policy issues raised by the Department’s proposal.

The Impact on U.S. Airlines and Jobs

A key policy issue, in our view, is whether foreign air carriers should be permitted to acquire or exercise the kind of control over the basic business decisions and strategy of U.S. air carriers that the proposed rule change would permit.

Remarkably, the NPRM does not address this issue at all. Rather, it speaks throughout of hypothetical foreign investors in U.S. carriers, without any effort to distinguish between investments by foreign air carriers and other potential sources of foreign capital. But the distinction is of crucial importance. 

When one air carrier seeks to acquire control of another, the goal of the acquisition is almost always to combine the operations of the two carriers so as to create an integrated network. Since foreign carriers cannot operate domestically, the reason a foreign carrier would seek control of a U.S. carrier would normally be to combine the U.S. carrier’s domestic services with the foreign carrier’s international services. While this also occurs when U.S. and foreign carriers form alliances, an acquisition of control is very different from an alliance. In an alliance each carrier remains autonomous and able to protect its own economic interests. A very different situation would be created if a foreign carrier is permitted to acquire control of the key economic elements of a U.S. carrier’s business strategy -- such as route structure, schedules, fleet type, and the like. In such a situation, it is inevitable that the foreign carrier would exercise its control to maximize its own interests, not those of the U.S. carrier.
What would likely happen when a foreign carrier acquires control of a U.S. carrier is that the foreign carrier would use the U.S. carrier to create a domestic network that would support and feed traffic to the foreign carrier’s international operations. As a result, any pre-existing international operations of the U.S. carrier would diminish or disappear, while those of the international carrier would be expanded. 
Such a result is fundamentally inconsistent with 49 U.S.C. § 40101(a)(15), which sets forth as a U.S. policy goal:

strengthening the competitive position of [U.S.] air carriers to at least ensure equality with foreign air carriers, including the attainment of the opportunity for [U.S.] air carriers to maintain and increase their profitability in foreign air transportation. 

This goal simply could not be accomplished if foreign carriers are permitted to control the basic operations and business strategy of U.S. carriers.

The decline in international operations by U.S. carriers that would result from foreign control would also undermine the CRAF program, because it would necessarily cause a reduction in the number of long-range wide-bodied aircraft in the U.S. carrier’s fleet. 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 carrier that has economic control of a U.S. carrier would be able to determine how many CRAF-eligible aircraft the U.S. carrier has in its fleet. And it is predictable, for the reasons stated, that the foreign carrier’s business strategy would cause that number to diminish over time.

The decline in international operations by U.S. carriers would also be injurious to U.S. airline workers, including in particular the pilots. International flying of wide-bodied aircraft is the most remunerative, and therefore the most desired, flying performed by pilots; pilots spend their entire careers accumulating the seniority required to gain access to such flying opportunities. In an era when the career expectations of pilots and other airline workers have already been repeatedly frustrated by airline bankruptcies, furloughs, wage concessions, pension plan terminations, and the like, it would be a crowning blow for the U.S. government now to adopt a policy that would tend to eliminate international flying by U.S. carriers.

U.S. workers would also suffer injury because U.S. labor laws do not apply to foreign air carriers. When two or more U.S. carriers are commonly controlled, the employees of all of them are subject to the Railway Labor Act and therefore have the same collective bargaining rights and opportunities. This allows the employees on all the affiliated carriers to try to equalize their wages and working conditions, thereby preventing the carriers from playing one employee group against another. When one of the affiliated carriers is foreign and therefore not subject to the same labor law, the employees of all the affiliates are placed at a severe disadvantage and face the prospect of being bid against each other without effective recourse against the entity (perhaps a foreign holding company) that is allocating the work. These are not hypothetical concerns. In the early 1990s when British Airways bought into US Airways, and KLM bought into Northwest, flight crew jobs were either moved to or grew disproportionately at the foreign partner.

The validity of these concerns was recognized recently by a Working Group appointed by the American Bar Association’s Air and Space Forum to study the issue of whether the statutory restriction on ownership and control of U.S. airlines. The Working Group issued a Proposed Position Statement (attached hereto) which, despite being favorably disposed to lifting the restrictions on foreign ownership and control of U.S. carriers, clearly recognized that ownership or control by foreign airlines should not be permitted until and unless special safeguards are enacted. The Working Group therefore recommended adoption of two important restrictions on foreign air-carrier control of a U.S. carrier. The first of these restrictions would require any foreign carrier that acquired control of a U.S. carrier to: