Ownership/Control of US air carriers

[Federal Register: December 8, 2006 (Volume 71, Number 236)]
[Proposed Rules]
[Page 71106-71109]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08de06-29]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 399

[Docket No. OST-2003-15759]
RIN: 2105-AD25


Actual Control of U.S. Air Carriers

AGENCY: Office of the Secretary, DOT.

ACTION: Withdrawal of certain proposed amendments.

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SUMMARY: Current law requires that U.S. citizens actually control each
U.S. air carrier, that U.S. citizens own or control at least 75 percent
of the shareholders' voting interest, and that the president and two-
thirds of the directors and the managing officers must be U.S.
citizens. The Department interprets this law in conducting initial and
continuing fitness reviews of U.S. air carriers. We are withdrawing a
proposal to modify by regulation the standards we apply in those cases
where ``actual control'' by U.S. citizens is at issue.
The proposal being withdrawn would have narrowed the scope of our
inquiry in such cases to those core matters affecting compliance with
U.S. requirements affecting safety, security, national defense and
corporate governance. These rationalized standards for deciding whether
U.S. citizens maintained ``actual control'' of a carrier would have
applied only to proposed transactions involving investors whose
countries have an open-skies air services agreement with the United
States and offer reciprocal investment opportunities to U.S. citizens.
Our interpretation of other aspects of the statutory citizenship
requirement would have been unchanged.
Although we are withdrawing the current proposal, we will continue
to consider other ways to rationalize and simplify our domestic
investment regime. The need for greater certainty and transparency in
our requirements and administrative process has become very apparent.
Indeed, public comment in this docket has only served to confirm the
Department's growing concern that the current regime is so unduly
complex and burdensome that it needlessly inhibits the movement of
capital that otherwise would flow into the U.S. airline industry and
thus interferes with the legitimate needs of U.S. carriers to attract
strategic investors from overseas markets. The Department notes that
most of the American economy has progressed well beyond the antiquated
notions that continue to apply to the airline industry because of our
administrative interpretations of the current statute. In a modern,
global industry such as aviation, we believe that the United States
should not shut its doors to foreign investment by perpetuating archaic
and time-consuming administrative practices that serve neither a
statutory purpose nor an identifiable policy interest of the United
States.
The Department had also proposed amendments to 14 CFR Part 204, the
rules governing the data used in fitness determinations, and invited
comment on the procedures used in fitness cases. The Department will
publish a separate decision on those matters.

FOR FURTHER INFORMATION CONTACT: William M. Bertram, Chief, Air Carrier
Fitness Division (X-56), Office of Aviation Analysis, U.S. Department
of Transportation, 400 7th Street, SW., Washington, DC 20590; (202)
366-9721.

SUPPLEMENTARY INFORMATION:

Introduction

Under Title 49 of the U.S. Code, only ``citizens'' of the United
States may obtain certificate authority to provide air transportation
within the United States or operate as a U.S. air carrier on
international routes. (49 U.S.C. 41102 or 41103.) The Department
proposed to modify its interpretation of ``actual control,'' an element
in the statutory definition of a citizen of the United States, 49
U.S.C. 40102(a)(15), because it believes that modernizing its policies
so as to allow more foreign investment in U.S. carriers would better
reflect the realities of a global aviation industry, strengthen the
U.S. air transportation system, and encourage other countries to open
their own air services and investment markets.
Our proposal would not have and could not have altered the
statutory test for citizenship nor was it an attempt to do so. We
stated our intention to continue vigorous enforcement of the statute's
express requirements. We did propose, however, to eliminate certain
additional citizenship restrictions that had been established
administratively over the course of decades in individual fitness cases
and that in our view are anachronistic, overly complex, and unduly
burdensome. Accordingly, the net result of our proposal would have been
to end a long-standing, extraneous administrative prohibition against
foreign investors having even a ``semblance'' of control over airline
commercial decisions; the revised approach would have applied only to
investors whose home countries had open-skies agreements with the
United States and provided reciprocal investment opportunities for U.S.
citizens. The proposal would have maintained the prohibition against
foreign citizen control of decisions on corporate governance, safety,
security, and participation in the Civil Reserve Air Fleet program and
other national defense airlift programs (for simplicity, referred to as
``CRAF'' hereafter). To ensure control by U.S. citizens, as an added
measure we would have required that any delegation of authority by U.S.
citizens to foreign investors be fully revocable by the shareholders or
board of directors.
We provided several opportunities for interested parties to comment
on the proposal, including a supplemental notice of proposed rulemaking
(SNPRM) that further clarified our proposed modified interpretation of
``actual control.'' 71 FR 26425 (May 5, 2006). In the supplemental
notice, we made refinements to our proposal reflecting further
consultations with our Federal Aviation Administration (FAA), the
Department of Homeland Security (DHS), and the Department of Defense
(DOD). We also acknowledged requests by members of Congress, who wanted
us to provide time for more public comment on the proposal and for
Congressional hearings on the topic.
The additional comments that we received in response to the SNPRM
confirmed our earlier determination that the Department's historic
interpretation of the actual control requirement did not serve the
public interest well.
During the rulemaking we also proposed several technical changes to
the rules governing the data for fitness determinations, 14 CFR Part
204. Those proposals were unopposed. We also requested public comment
on the procedures used by us in resolving citizenship issues. We will
publish our decision on those proposals in a separate rulemaking
document.

Background

A firm may not be certificated as an air carrier to operate within
the United

[[Page 71107]]

States or as a U.S. carrier on international routes unless it is a
citizen of the United States. 49 U.S.C. 40102(a). We examine carrier
citizenship primarily in two situations. First, when a firm applies for
authority to operate as a U.S. carrier, we conduct an initial fitness
review, which necessarily includes a review of the carrier's
citizenship. We conduct initial fitness reviews through adjudicatory
proceedings for which a public record is maintained in our docket.
Second, we conduct a continuing fitness review if a carrier undergoes a
substantial change in ownership, operations, or management. We usually
conduct continuing fitness investigations without a public proceeding
and thus without a public record or an opportunity for public comment.
In some continuing fitness cases, we may decide to use procedures that
are more public so that there will be a public record and an
opportunity for public comment. We may amend, modify, suspend, or
revoke the carrier's license, or begin an enforcement action if a
carrier no longer meets the citizenship test. See 71 FR 26426-26427.
The statute defines the requirements for United States citizenship. 49
U.S.C. 40102(a)(15)(C). For many years that statute required only that
the president and at least two-thirds of the board of directors and
other managing officers be citizens of the United States, and that at
least 75 percent of the voting interest be owned or controlled \1\ by
persons that are citizens of the United States. Our predecessor agency
in administering this statute, the Civil Aeronautics Board (the Board),
created an additional requirement not then required by the text of the
statute: the requirement that U.S. citizens must ``actually control''
each U.S. carrier. Willye Peter Daetwyler, d.b.a. Interamerican Air
Freight Co., Foreign Permit, 58 CAB 118, 120-121 (1971).
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\1\ We and the Board have always interpreted this part of the
statute as ``owned and controlled.''
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In order to determine citizenship to verify compliance with the
actual control requirement, both the Department and the Board have
employed a fact-specific method of inquiry. See 71 FR 26437, citing 68
FR 44675, 44676 (July 30, 2003). Each decision considered the
``totality of circumstances'' of the airline's organization, including
its capital structure, management, and contractual relationships, in
determining whether U.S. citizens actually control a carrier. We
developed our policies on interpreting the actual control requirement
through our decisions in individual cases, based on the facts and
circumstances of each case, and did not establish a specific definition
of ``actual control'' through any rulemaking. We have continually
modified our interpretation over time in light of changing conditions.
See 71 FR 27437, citing Northwest Airlines Acquisition by Wings
Holdings, Order 91-1-41 (January 23, 1991), and a more recent decision
enabling Hawaiian Airlines to complete its reorganization with some
foreign investment.
Neither the Department nor the Board has administered the actual
control requirement in a way that barred U.S. carriers from having
substantial commercial relationships with foreign carriers and other
foreign firms. For instance, we have held that a U.S. airline continued
to satisfy the actual control requirement when it had an alliance
relationship with a foreign airline that necessarily enabled the
foreign partner airline to influence the U.S. airline's commercial
decisions. Acquisition of Northwest Airlines by Wings Holdings, Inc.,
Order 92-11-27 (November 16, 1992), at 16-17.
Nonetheless, the Department's and the Board's interpretations of
``actual control,'' by effectively prohibiting foreign investors from
enjoying any meaningful participation in the decision-making of U.S.
airlines, has left foreign investors with a very limited ability to
protect their interests as minority investors. We at times implemented
the ``actual control'' requirement as barring foreign investors from
having any ``semblance'' of control, which effectively relegated them
to being passive investors, unable to participate in carrier commercial
decisions that affected the value of their own investment.
Three years ago Congress amended the citizenship definition by
expressly adding an actual control requirement to the statute. As a
result, the statute provides that a corporation can only be a citizen
of the United States if it is ``under the actual control of citizens of
the United States.'' Vision 100--Century of Aviation Reauthorization
Act, P.L. 108-176, Sec. 807, 117 Stat. 2490 (2004). Congress chose not
to define ``actual control.''

Notice of Proposed Rulemaking

We proposed our modified interpretation of ``actual control'' in
order to facilitate efforts by U.S. airlines to remain competitive in
the global airline industry. We grounded our proposal on three
premises: first, that in view of the changes taking place in the global
economy, U.S. air carriers should have the broadest access to the
global capital markets permitted by law; second, that our historical
interpretation of the term ``actual control'' has failed to keep pace
with the changes in the global economy; and third, that in order to
provide U.S. carriers with more flexibility to compete in the global
economy, we should not maintain an interpretation of ``actual control''
that is more restrictive than necessary to meet statutory requirements.
71 FR 26427-26429; 70 FR 67393-67394. In sum, we acted on the policy
that we should remove unnecessary restrictions on U.S. carriers seeking
access to global capital markets.
In 2003, we issued an Advance Notice of Proposed Rulemaking (ANPRM)
that sought comment on our standards and procedures for determining
whether U.S. citizens actually control a carrier. 68 FR 44675 (July 30,
2003). After considering the comments, we issued a Notice of Proposed
Rulemaking (NPRM) concerning our interpretation of ``actual control''
and use of informal procedures in most continuing fitness reviews. 70
FR 67389 (November 7, 2005). The Department proposed to update our
interpretation of ``actual control'' so as to end restrictions on
foreign involvement that, in our view, needlessly interfere with the
ability of U.S. carriers to access international capital markets and
thus to compete effectively in the global marketplace. Under our
proposal, U.S. citizens would remain in control of the carrier through
their authority over corporate governance and those areas of airline
operations subject to significant government regulation: Safety,
security, and CRAF participation. This modification would apply only if
the foreign investors' home country had an open-skies air services
agreement with the United States and, further, provided investment
reciprocity for U.S. citizens wishing to invest in that country's
airlines, or where the United States' international obligations
otherwise required the same approach.

Supplemental Notice of Proposed Rulemaking

We issued a Supplemental Notice of Proposed Rulemaking (SNPRM) to
address comments received on the NPRM, and to propose additional
refinements to the proposal in order to definitively clarify that U.S.
citizens would still retain actual control of U.S. carriers under the
Department's proposal. 71 FR 26425 (May 5, 2006).
The SNPRM retained our proposal to allow carriers to delegate
decision-making responsibilities to foreign citizens (except for
organizational documents, safety, security, and CRAF

[[Page 71108]]

participation matters). However, we added language to make clear that
such delegations would have to be revocable by the board of directors
or shareholders--whose votes would be controlled by U.S. citizens. The
right to revoke delegations of management authority, we felt, was
intrinsic to the requirement that U.S. citizens maintain actual control
of the carrier. We further proposed in the SNPRM to broaden the scope
of decision-making in the areas of safety, security, and CRAF
participation that must remain under the actual control of U.S.
citizens. The proposed revisions would unequivocally ensure that safety
and security decisions generally, not just those related to FAA and TSA
safety and security requirements, as well as all decisions on national
defense airlift commitments, not just CRAF commitments, remained firmly
under the actual control of U.S. citizens. Our refinement of our
proposals on safety, security, and CRAF participation reflected as well
our discussions with the FAA, DHS, TSA, and DOD.
We determined that we have the authority to interpret the statutory
definition of ``actual control,'' because we are responsible for
administering it; that authority enables us to modify our
interpretations when changing industry conditions and policies require
doing so; and our proposed modified interpretation would be consistent
with the language and purpose of the statute. We further stated that we
should change our interpretation when the past interpretation has
become inconsistent with commercial developments and the public policy
goals set by our statute, 49 U.S.C. 40101(a). Finally, we noted that
neither the statute nor its legislative history indicated that Congress
had intended to freeze our earlier interpretations of ``actual
control.'' 71 FR 26436-26439.
After we issued the SNPRM, the Aviation Subcommittee of the Senate
Committee on Commerce, Science, and Transportation held a hearing on
our proposal on May 9, 2006. The Aviation Subcommittee of the House
Transportation and Infrastructure Committee had held a hearing on our
proposal on February 8, 2006, based on the NPRM. Jeffrey N. Shane, the
Department's Under Secretary for Policy, testified at both hearings.
Several members of Congress have written letters to the Secretary
that contend that our proposal is unwise and a significant departure
from what they perceive as existing precedent. These concerns were also
raised at hearings and in proposed legislation.

Summary of Comments

We invited comments on the proposal as refined by our SNPRM. We
received 21 comments on the SNPRM from carriers, labor parties, and
industry associations, and three comments from individuals.
The majority of commenters supported the policy change as a way to
strengthen the U.S. airline industry and encourage the liberalization
of international aviation. The Department received general support for
its proposed changes from Airports Council International-- Europe
(ACI), Airports Council International-- North America (ACI-NA),
Association of European Airlines (AEA), bmi, Delta Air Lines (Delta),
DePaul University College of Law International Aviation Law Institute
(DePaul), Federal Express (FedEx), Hawaiian Airlines (Hawaiian),
International Air Transport Association (IATA), United Air Lines
(United), United Parcel Service (UPS), United States Airports for
Better International Air Service (USA-BIAS), U.S. Airways, and the
Washington Airports Task Force (WATF).
Other commenters--notably the Aircraft Mechanics Fraternal
Association (AMFA), Air Line Pilots Association (ALPA), British
Airways, Continental Airlines (Continental), Independent Pilots
Association (IPA), Transportation Trades Department AFL-CIO (TTD), and
Virgin Atlantic Airways (Virgin Atlantic)--opposed our proposal,
claiming that the proposed rule would be unlawful, impracticable,
ineffective in achieving the desired result, or harmful to the airline
industry and its unionized employees.
Both supporters and opponents of our proposal asserted that the
rule, as proposed, provided inadequate guidance to carriers and
potential foreign investors and that our final decision should provide
examples of the kind of business relationships that would or would not
be permitted by a final rule. See, e.g., AEA Comments at 4; British
Airways Comments at 3-4; IATA Comments at 6; Virgin Atlantic Comments
at 5-6; ACI Comments at 2. Other commenters asserted that it was not
clear whether our proposed revocability requirement--the requirement
that a U.S. carrier have the practicable ability to revoke any
delegation of decision-making authority to a foreign investor--would be
consistent with standard commercial practices in other industries,
which make a firm's ability to revoke a contract with its investors
subject to conditions limiting the ability to revoke in order to
protect the investors' legitimate interests. See, e.g., FedEx Comments
at 7-9; ACI-NA Comments at 4; DePaul Comments at 4; US-BIAS Comments.
Some commenters contended that our proposals were too restrictive;
Delta, for example, asserted that the revocation requirement was
``flatly inconsistent'' with our goal of encouraging foreign
investment. Delta Comments at 6-7.

Our Final Decision

We have decided to withdraw the proposal on interpretation of
``actual control.'' We still believe there are significant benefits to
be realized by liberalizing and rationalizing our domestic investment
regime for U.S. air carriers. Nonetheless, our policy could gain from
additional public insight into the practical advantages and drawbacks
of particular administrative reforms.
We maintain that our past administration of the ``actual control''
requirement is obsolete and the notion has needlessly precluded foreign
investment in the U.S. airline industry to its detriment. In the
Department's view, retention of the anachronistic administrative
standard for determining actual control serves no discernible policy
interest of the United States. Instead, it has prevented U.S. carriers
from entering into sound and desirable business relationships with
foreign allies ``relationships that U.S. corporate management concluded
would benefit their carrier, their employees and shareholders. See,
e.g., FedEx Comments at 2; Atlas & Polar Comments on NPRM at 3; United
Comments at 3. We continue to believe we need a way to enable strategic
investors ``interested in long-term gain, not short-term arbitrage--to
participate more meaningfully in the decision-making at U.S. carriers,
as such investors would ``more likely be concerned about a U.S.
airline's product quality, market strategy, and its capital
reinvestment plans than short-term investors who view airlines merely
as trading vehicles.'' 71 FR 26428. An up-to-date approach towards
administering the ``actual control'' requirement that takes into
account the realities of modern capital markets would permit our
carriers to catch up with increasingly competitive and financially
stronger foreign airlines in terms of integrating their operations and
services with those of marketing partners. It would also enable
investments abroad by U.S. air carriers and the formation of durable
business relationships with foreign carriers, such as Continental, for
example, enjoys with COPA, a leading Latin American airline.
Continental Airlines, SEC Report on Form 10-Q (July 21, 2006) at 34. In
our view, we

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should encourage additional foreign investment in the U.S. airline
industry, give U.S. carriers freedom in developing beneficial business
relationships across borders and eliminate outdated restrictions on
business conduct.
Our proposal has become controversial, as to both the questions of
whether our interpretation of ``actual control'' should be changed and
whether our specific proposal will effectively accomplish our
objectives. In addition, as noted, letters sent by members of Congress
have urged the Department not to adopt the proposal without further
discussion. In this particular instance, we have concluded that the
expressions of concern support the concept that more public discussion
of the underlying issues is warranted. By withdrawing the proposal, we
will be free to engage in broad-ranging dialogue without the
constraints of a specific rulemaking proposal.

Rulemaking Analyses and Notices

Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), as amended
by the Small Business Regulatory Enforcement Fairness Act of 1996,
requires federal agencies, as part of each rule, to consider regulatory
alternatives that minimize the impact on small entities while achieving
the objectives of the rulemaking. Because we are withdrawing our
proposal, we are not adopting any final rule requiring a regulatory
flexibility analysis.

Trade Impact Assessments

The Trade Agreement Act of 1979 prohibits federal agencies from
establishing any standards or engaging in related activities that
create unnecessary obstacles to the foreign commerce of the United
States. Legitimate domestic objectives, such as safety, are not
considered unnecessary obstacles. The statute also requires
consideration of international standards and, where appropriate, that
U.S. standards be compatible. The Department has assessed the potential
effect of this withdrawal of the proposed rule and has determined that
it will have no effect on any trade-sensitive activity.

International Compatibility

In keeping with U.S. obligations under the Convention on
International Civil Aviation, it is the Department's policy to comply
with International Civil Aviation Organization (ICAO) Standards and
Recommended Practices to the maximum extent practicable. The Department
has determined that there are no ICAO Standards and Recommended
Practices that correspond to this withdrawal notice.

Unfunded Mandates Reform Act of 1995

The Unfunded Mandates Reform Act of 1955 (the Act) is intended,
among other things, to curb the practice of imposing unfunded Federal
mandates on State, local, and tribal governments. Title II of the Act
requires each Federal agency to prepare a written statement assessing
the effects of any Federal mandate in a proposed or final agency rule
that may result in an expenditure of $100 million or more (adjusted
annually for inflation) in any one year by State, local, and tribal
governments, in the aggregate, or by the private sector; such a mandate
is deemed to be a ``significant regulatory action.'' This withdrawal
notice is not a final or proposed rule. The requirements of Title II of
the Act, therefore, do not apply.

Executive Order 13132, Federalism

This action has been analyzed in accordance with the principles and
criteria contained in Executive Order 13132, dated August 4, 1999 (64
FR 43255). This withdrawal notice does not have a substantial direct
effect on, or significant federalism implications for the States, nor
would it limit the policymaking discretion of the States.
It will not directly preempt any State law or regulation, or impose
burdens on the States. This action will have not a significant effect
on the States' ability to execute traditional State governmental
functions. The agency has therefore determined that this withdrawal
notice does not have sufficient federalism implications to warrant
either the preparation of a federalism summary impact statement or
consultations with State and local governments.

Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires federal agencies to obtain approval from the Office of
Management and Budget (OMB) for each collection of information they
conduct, sponsor, or require through regulation. Because this is a
withdrawal notice, it will not impose any additional requirements.
Thus, there is no change in the paperwork collection, as it currently
exists.

Issued in Washington, DC on December 5, 2006.
Andrew B. Steinberg,
Assistant Secretary for Aviation and International Affairs.
[FR Doc. 06-9603 Filed 12-5-06; 12:39 pm]

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