Lift U.S. Airlines Via Foreign Ownership

Overseas carriers should be permitted to buy U.S. airlines in full. Pro or con?

Pro: Innovation, Not Nationality, Flies Best

Today’s rusting airline ownership rules—a tangled mess of archaic 19th century maritime law and unvarnished protectionism—should be scrapped, making way for a modern free market in the sky bounded only by a lightweight regulatory framework.

Foreign ownership of U.S. strategic assets is a debate-worthy topic, but our domestic airlines have long ceased to fall into the “strategic” category. Instead, they have degenerated into an embarrassment of tortured inefficiency. Greater overseas ownership—and the ebullience that relaxing of current rules would bring with it—would give the U.S. airline industry a second wind, full of market-based incentives to innovate.

There’s little evidence the impact on labor would prove more substantial than that of the current outsourcing craze, which already has carriers retooling planes in remote parts of the globe. And foreign-owned, U.S.-incorporated airlines would, of course, be subject to U.S. safety, security, and employment rules.

Take Southwest (LUV), a rare bright spot, which has managed to create value for passengers and shareholders by lowering its labor costs while putting a companywide emphasis on the value of its employees. Working within slightly more liberal rules than other carriers, the company has lowered fares without demoralizing or exploiting its labor. Greater foreign ownership is another step in that direction and would encourage similar ventures.

The current system of nearsighted protections shelters mediocrity—and does nothing to boost the national ego. Instead, let the pride of the U.S. be an exemplary free market where domestic airlines can truly compete and succeed.

Con: Foreign Owners Would Diminish the U.S.

Each time the U.S. airline industry hits a turbulent patch, the solutions flow for fixing its long-term stability and protecting shareholders. Inevitably, some industry players propose to loosen Uncle Sam’s restriction on how much of a U.S. carrier a foreign entity may own.

Virgin Group would probably be among the early strategic buyers, as would deep-pocketed flag carriers such as Air France-KLM (AFRAF), British Airways (BAIRY), and Singapore Airlines. Great, you say, all four are superior to U.S. carriers, so bring ‘em on. Well, not so fast.

For one thing, the rule limiting foreign control of a U.S. airline serves as a buffer against job loss. Aviation accounts for 6% of U.S. economic activity, according to Representative Jim Oberstar (D-Minn.), who has battled efforts for years to curb the ownership rules. A foreign-owned operation will not have the same incentives to support domestic aviation jobs in U.S.-owned maintenance services, flight crews, and airports, or at Boeing (BA).

And what if the big-time overseas behemoth saw no good business sense in daily flights to the hinterlands? Foreign-owned U.S. airlines would turn into vast regional players designed to route urban-dwelling Americans to other U.S. urban centers and to all points around the globe.

And the type of fine dining on which many Asian and European airlines have made their reputations would inflate costs, preventing the low fares that U.S. fliers demand. So your 8 a.m. flight to Phoenix is going to be every bit as delayed, crowded, foodless, and exhausting as you know it now.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Senjo

Who cares for economics and politics on this issue? I have no nostalgia for the U.S. airline industry. It is in a complete mess. It is the fault of the actual airlines themselves. The USA for all of its ability to foster entrepreneurship should get out of the business of running airlines. I am pro foreign ownership of U.S. airlines. Have you taken a flight recently with Emirates, Singapore Airlines, Qantas, etc.? Their service is superior, their aircraft are very new, and the crew treat their customers very well. These guys know how to run an airline. They keep their cost base low by doing such things as outsourcing of maintenance offshore, they have great pilots who are paid well but not overpaid, and customers are willing to pay a premium for this level of service. The U.S. airline industry should wake up and sell out. I took a flight with United from Sydney to Los Angeles. I flew first class, and it was appalling.

trh

Why don't we sell all the sewers in the country to foreigners and see if they take an interest in cleaning things up? Answer: Because you will still need (and have) to take the same old crap, but somebody else will be telling you when you can do it.

nick

I took a US Airways flight from Germany to Los Angeles, and it made me so sick I ended up in bed for five days.

- The seat was broken, wouldn't recline
- Two passengers behind me were coughing
their lungs out
- Service was non-existent
- Plane was dirty
- Landing was horrible

I swear to never commit the same mistake to try to save $400. Next time I'll pay more for a Lufthansa ticket.

random

"For one thing, the rule limiting foreign control of a U.S. airline serves as a buffer against job loss... A foreign-owned operation will not have the same incentives to support domestic aviation jobs in U.S.-owned maintenance services, flight crews, and airports, or at Boeing."

If a foreign-owned operations buys planes from Boeing, they have little incentive not to turn to the company in its home country for advice. They will also have more than enough incentive to keep the vast majority of current employees in place, because it would be incredibly expensive to relocate pilots, flight attendants, mechanics, schedulers, air bosses, etc. with their families from Europe or Asia and transplant them into a new country.

Airlines have to maintain a sizable footprint in the countries in which they operate fleets. It's far too difficult to coordinate hundreds of flights in the US from a quarter or half a world away. There are certainly going to be layoffs, but wouldn't airline employees rather tolerate a round of layoffs or two than lose their jobs in whole and have their pay frozen for years on end?

"Foreign-owned U.S. airlines would turn into vast regional players designed to route urban-dwelling Americans to other U.S. urban centers and to all points around the globe."

This is exactly what American airlines do now with the hub and spoke system.

"And the type of fine dining on which many Asian and European airlines have made their reputations would inflate costs, preventing the low fares that U.S. fliers demand."

What about all the discount European airlines out there like Ryanair, easyJet, and Germanwings? They're not exactly known to serve fillet mignon on their flights. In fact, they're more like now-late Skybus rather than British Airways.

Asian airlines are fundamentally different because of their business model, true. But it's not as if they couldn't adapt. I would also argue that U.S. fliers would be willing to pay more if they had better service than they do now. Let's see, I can pay $300 and get on a dirty plane an hour after the supposed to take off time for a five hours or I could pay $450 and be perhaps 15 minutes late in departure but on a clean plane with maybe even something to eat on a trans-national flight. I'm going to go with the more expensive ticket.

"So your 8 a.m. flight to Phoenix is going to be every bit as delayed, crowded, foodless, and exhausting as you know it now."

Not so. Foreign players are very used to the concept of slots and understand that you can't overbook an airport and have anything good come out of it. But their U.S. counterparts do it all the time just because they want to offer what they think are nice times for fliers.

This is not to say that every foreign-run flight would be on time, but we'd be very likely to see a major reduction in delays on the runway.

dw

Not sure allowing them to be bought out by foreign carriers is such a good idea. After all, the government has contracts with all of them to supply flight service on demand, and helped them fund the aircraft. Why would a foreign carrier want to do that? It puts their assets as risk. But this mess they have gotten themselves in is of their own making. They could have kept the eye on the ball, knowing that oil was going to go up some time, and started to replace their fleet of gas hogs. Now they may just ground them, reducing service instead. Maybe the next choice would be to allow those same foreign carriers to provide service to make up for our domestics' inability to do so.

go

I guess if El Al bought an airline, they would improve security.

cm

Nick,
Pretty interesting comment about the US Airways flight from Germany to L.A. Last I checked they've never flown a Germany flight beyond Philly, Pittsburgh, or Charlotte.

Otherwise, foreign ownership would work wonders. Let's quit trying to save the maintenance guy's job that should be in El Salvador in the first place. Somehow it's ok for Ford, Chevy, etc., to all put the vast majority of their cars together outside of the States, so why can't the airlines take their cars to the shop in Central America? If it were logistically possible, don't you think the average family of four would take the mini-van to Mexico to save a buck on an oil change? Heck yes, they would.

Stevie

Absolutely not. Do you really want Europe or Asia to monopolize air travel? Would it enhance competition? No. Would it lower prices? No. Prices are too low now--that is why they are losing money. I am in favor of putting airlines back under regulation and letting the government mandate pricing. At least until the airlines can cut costs and improve efficiencies. P.S. Airlines should not have to pay for security at airports. The municipal government should foot that bill. And if they cannot afford it, the Fed should pay.

john

The last thing we want is foreign ownership of airlines. Why don't we just close the U.S. altogether and divide it into different pieces owned by other countries? Have you all lost your minds? Foreign ownership will not change the snotty, rude, self-serving Americans. America is going down the toilet, because we are so self-centered and too full of the entitlement attitude. We used to have the best airline system in the world. Then deregulation came about and every U.S. citizen was now entitled to fly wherever and whenever for the ridiculous low fares that are in existence today. It is not a right to fly. It is a privilege. Airline travel has been reduced to Greyhound travel. Just look at the way people dress on aircraft. It is pathetic. Foreign ownership will not change delays, food quality, or any of the other issues. We need to change our attitudes so that airline travel is not Greyhound.

Blake

A complicated subject that's treated far too simply by the media.

First, Southwest Airlines is for all intents a commodities trading company that happens to fly planes on the side. Review how much of its profit comes from fuel hedges vs. flying planes before holding it up as the model for all others.

Second, much of the U.S. airline industry is part of the civil reserve air fleet for the Department of Defense. The military can use civilian aircraft to move troops and equipment in in times of emergency or when they're simply overloaded. Politics aside, consider the implications of Emirates or Lufthansa owning one of the airlines involved in this. The Pentagon's concern with Apple buying P.A. Semi last week pales in comparison.

The U.S. public wants Nordstrom service at Wal-Mart prices, buys the cheapest ticket and ignores what airline it's on, and then complains afterward. Nick--why would you buy a ticket on US Airways? They're consistently rated among the lowest of U.S. airlines, are still struggling through the merger with America West, have had very visible operational breakdowns in their check-in and baggage systems in the last two years, and have the smallest international presence of any U.S. airline. You could have flown Continental or American and had (on average) a much better trip. But that US Airways was probably $50 cheaper, huh?

John Campbell

Yes, by all means, sell American airlines to any overseas interest stupid enough to buy something that can never make money. Well, not until they own them all. Then they will collude to raise prices. The idiots in Washington will say there is nothing they can do to stop that because, after all, the airlines are foreign companies. Did someone see Alfred Kahn slinking around?

chris

Most people choose their ticket based on price. You are getting what you paid for. Searching today I have seen fares for $250 round trip from LAX to JFK and MIA. Those are five-hour flights one way. Anyone who thinks that foreign ownership is the answer I ask to show me any five-hour route in the world that they charge $250 round trip on. Most foreign carries charge more and can because they restrict competition. Low-fare carriers are starting to pop up throughout the world, and it is only a matter of time before the big foreign carriers come under the same pressures that the U.S. carriers do.

BlueSky

It is true--since "deregulation," the U.S. flagged carriers have declined in pretty much every category. In truth, the most innovative ideas we have come up with since then was the LCC model for the masses and condo jets for the rich. Yep, aren't we innovative? So why haven't we thought up anything better? I mean, the airlines are "deregulated," right? Wrong.

The airline business is still as hog-tied by regulation as it was before. The only aspect that was "deregulated" was the fares. American consumers have benefited by it, just like they were able to consume more when discount store chains came along.

The broken business model of the U.S.-based airlines is not there by the choice of their boards and management teams. Allow foreign ownership in this same overly constrained business environment, and we will lose ownership of a key U.S. industry, and they will lose their shirts.

Tango Oscar

1. No foreign carrier will offer to carry a pax from coast to coast RT for $350. No one can drive it for that, but they want the airlines to provide it.

2. People need to grow up and stop whining. If you got it, pop for $7,000 and go Net Jets, or stop crying. You made the decision to go cheap. Live with it.

TomV

One of the items not mentioned in the article or the comments I've read so far is the impact of unions on U.S. airlines. Like any unions today, they don't seem to realize that the usefulness of unions is past, but they continue to cling to their belief that somehow, if they blame management enough, their demands for wages and benefits that make any U.S.-based business un-competitive in the world market seem all right. Look at the Northwest/Delta merger. Know who is fighting this the most? The unions for both airlines, afraid of losing their choke hold on the individual companies, a choke hold the people in the unions now don't want to lose. Why? Hey, if the slowly dying company they are killing lasts long enough for them to reach retirement, who cares about the company.

Bir

Most un-intelligent discussion I have read so far since becoming a daily reader of BW.com. The pro and con arguments were definitely written by non-pros. How was the Southwest analogy linked to selling off to foreign airlines?

My two cents: Selling off isn't going to solve the problem. Solving the problem requires guts and humility with lots of creativity. Stop being merely bean counters, and let's be more problem solvers.

With the right attitude, smart people in the airline industry can come up with solutions. Unfortunately for the airline industry just like for any other industry, people on Wall Street never allow permanent solutions. They need quick bandage treatment to profitably circulate their equity.

John C.

The state of the U.S. airline industry is in the gutter.

The way businesses are run in the U.S. airline industry is for the CEOs to keep fattening their pockets and not do anything to improve service that will keep passengers coming to fly with a particular company again and again.

The CEOs are looking at their own interest first and then at the ones for their employees. If the employees aren't happy, believe me an airline won't fly.

There needs to be a new way of running things where the CEOs are just like regular employees and not entitled to rich retirement packages worth millions.

I am all for 100% foreign ownership of U.S. airlines as long as they obey international and U.S. laws.

Pilatesplusla.com

After Daimler-Chrysler, I don't think any foreign company wants to take over a failing American airline business. The only foreigners who want to take it over are the scumbags who buy up businesses and liquidate their assets for a quick profit while canning the employees en masse.

Richard Vu

The aviation business is regulated by government entities such as the FAA in the USA or EASA in Europe. The maintenance and overhaul of aircraft and engines can only be performed by qualified personnel in facilities vetted by these regulatory entities. The entry costs to the maintenance business are too prohibitive for "mom and pop" shops to offer alternatives to the existing competition. Delta and United have their own maintenance shops where they perform also maintenance on third-party aircraft, i.e., aircraft belonging to other airlines. As a result, a foreign takeover of U.S. airlines will not change the maintenance equation.

I agree with John C. (May 1 1:11 PM post). In general, the U.S. airline industry has been badly managed by greedy CEOs. Look at Lufthansa. Shortly after their purchase of Swiss, they made it into a better-operated airline. Last December Lufthansa invested $400 million in Jetblue. They have installed Christoph Franz (a German), CEO of Swiss on the board of Jetblue. That's why I've bought several thousands shares of Jetblue recently. Watch out for even better developments at Jetblue in the near future.

Colin Y

It really is difficult to compare the foreign carriers' business model with the American model. Most countries generally only have one major player, and the rest are generally regional or have limited reach. In the U.S., there are too many majors chasing the same market. That being said, this does not excuse the lack of service that has become pervasive throughout the industry. I would say that the first thing that needs to be addressed is the treatment of labor; once they are happy, service will increase. It is very difficult to smile through the minimal salaries and retirement benefits that are given to them. Also we may need to reregulate the industry to a degree so that there aren't carriers coming on board that sell loss leading fares just to gain market share while everyone else bleeds. Last, investments need to be made to the infrastructure, and this is where the government is at fault.

Maxileery

There is already enough foreign ownership of U.S. assets. The airlines do more than carry traffic. They are part of the strategic airlift capability of the U.S. Let's not hamstring ourselves with countries whose government objectives are almost always inimical to ours. Every time we get into some difficulty, our first response is to outsource.

JIMBOB

I'm running for president. 1. All illegals go back the day I take office. 2. All businesses getting tax breaks for installations on foreign soil? Over. 3. Forget Mars. This nation is going to develop alternative energy systems within 10 years. Until then, we're drilling our own. Our "friends" in the Mideast, Russia, etc., can drown in it. "Waaahhh, Iraq is all about the oil." It is now. 4. The President has term limits. So will Congress. It's called "public service," not life on the teat. If Social Security is good enough for Americans, it's good enough for all Americans. Congress ruined it, and they better fix it before they retire.

Randy

Jimbob,
After a year of suffering through the Presidential primaries, I'm ready to vote for you, seriously, after one paragraph.

Regarding the airlines, as a major airline pilot for the last 15 years, I can tell you the American airline employee is capable of providing the best service--if they are not managed by vindictive, cheap-ass shortsighted bean counters. The success of Southwest, prior to the fuel price run-up, was that their management did not come from inside the airline industry.

Airlines have always been low-margin businesses, and the people who aspire to mange them have always been the bottom of the class at Wharton, et al. The sharp guys go where the money is. As for us pilots and flight attendants, an airline is the only place you can do this kind if work, if that is your calling/profession.

The only difference between Southwest and Lufthansa, vs. say United and U.S. Airways, is the management. The troops will always follow as well as they are led. Look at Iraq pre- and post-Petraeus. It's always about the leadership.

Gary Miller

Foreign competition has given us great, cheap autos, great cheap TV's and stereos. All the arguments used to defend our indefensible airlines against foreign competition have been used by poorly run, high labor-cost businesses for years. Efficient transportation is too vital to allow union labor apologists to win on this issue. Efficient markets should allow broad competition. If the domestic carriers can't compete, bring in someone who can run them in a profitable manner. The majority of Americans will benefit, and that's what counts.

Gary

Free trade makes everyone better off.

CHAP

To Jimbob: Err, this is the land of free you are writing out of?

To Mr. Neelman (Jetblue): Welcome to Brazil. It's about time our country had some real deal competition in that market.

Rob Thomas

For more fun on the issue, see:
http://arieff.blogs.nytimes.com/2008/05/30/fear-of-flying/

igor

I don't really understand what the problem is. An airline is an expensive business to run anyway you look at it. If they should lift the prices, lift them and don't hesitate. Business is about making a profit. Lift the rates to appropriate levels and return the on-flight service. As for customers, you want comfort and efficiency? Pay for it. If you want cheap, get on a Greyhound.

JS

The high cost food was, in fact, a way of getting around price controls 30 years ago.

Pat

Soon to be foreign companies, because 75% of their profits comes from overseas, but they currently enjoy no tax status by the U.S. in order to make those high profits distributed to insiders. It's not much different than the legal or illegal immigrant who arrives in any state, works, then returns home with the U.S. government paying his Social Security, complete with cola protections.

It is why companies should not be indulged with corporate personhood at the same time they deny corporate responsibility and corporate national loyalty.

If divided loyalties are rewarded, the world is trained to have no loyalties of significance in commerce, which eventually permeates society, and nationality becomes irrelevant.

It's always why the VAT became the instrument of choice in England, probably. When all of commerce is split between diverse ownership, there is no loyalty except to the common tie of company seeking profits from any method.

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