Circumventing the barriers of ownership and control regulation

17 June, 2017

There seems to be a growing consensus in the airline industry that the rules restricting the foreign ownership and control of airlines are archaic and should be significantly liberalised or abolished. However, a majority of delegates at the recent CAPA Airline Leader Summit in Dublin did not expect the rules to be discarded any time soon.

Removal of the restrictions would allow meaningful cross border mergers and acquisitions on a global basis and lead to significant benefits to the airline industry's economic performance. There has been change in this area and some significant examples of government relaxation, or waiving of the rules.

Nevertheless, the rules, which originate in the Chicago Convention of 1944, have proved to be notoriously durable over many decades. Currently, most of the change is coming from efforts exerted by airlines to find new ways to circumvent the rules on ownership and control. This simultaneously illustrates both the increasing irrelevance of the rules and their enduring stickiness.

As their name suggests, ownership and control (O&C) restrictions have two elements. The first, which is easier to define and monitor, involves placing explicit numerical limits on foreign nationals' ownership of the voting equity share capital of airlines. The second element of O&C restrictions stems from the nationality clauses present in the bilateral air services agreements between states. In essence, the traffic rights granted under these bilaterals require that airlines benefiting from these rights are substantially owned and effectively controlled by nationals of the state in question.

Ownership is relatively easy to establish, but effective control is more blurred. It is not always possible to express numerically the level of influence that an investor has in the management of an airline in which the former has invested. What is clear is that the industry has increasingly found ways to circumvent O&C rules with airlines finding many ways around the restrictions.

The global alliances and the antitrust immunised joint ventures within them are obvious examples. In the words of Professor Rigas Doganis, "the ATI JVs make a mockery of ownership rules". They control 80% of North Atlantic capacity, but their nationality cannot be defined. "The nationality issue is irrelevant", he says.

There are certainly examples where the requirement for effective control to be in the hands of nationals from the same state as the designated airline has been overlooked or interpreted in a particularly liberal manner. Delta Air Lines of the US owns 49% of the equity of Virgin Atlantic of the UK. This ensures that it does not contravene the EU's 49% limit on foreign ownership. However, effective control is not so straightforward and with Virgin Atlantic’s greater focus on the North Atlantic market, Delta’s influence is clear.

READ MORE… Airline ownership and control rules: at once both irrelevant and enduring