Turbulence in the Airline Industry: Rethinking America’s Foreign Ownership Restrictions – Note by Josh Cavinato

From Volume 81, Number 2 (January 2008)

The dawn of the twenty-first century has proven to be one of the most tumultuous times for the U.S. airline industry. Industry losses have soared past a staggering $40 billion since 2001, sending four of the top seven airlines—United, Northwest, Delta, and USAirways—into bankruptcy protection with others, such as American, narrowly averting the same fate. One estimate put half of all seats on U.S. airlines as belonging to bankrupt carriers. At a time of relative economic growth for the economy as a whole, the airline industry has weathered massive layoffs and pension fund defaults, including United’s record $9.8 billion pension default in 2005. As several airlines are seeking new sources of capital as one way to help regain the posture of the aviation industry as a global leader, a law restricting foreign sources of capital continues to hamper their ability to do so. This law requires that U.S. airlines be controlled and owned by U.S. citizens and prohibits foreign investors from owning 25 percent or more of the voting stock of any such airline. Tracing its roots back to when Calvin Coolidge was president, and strengthened during the presidency of Franklin Delano Roosevelt, the law, which was originally designed to protect an infant industry, has now hamstrung an ailing industry from seeking vital sources of capital. A rethinking of this restriction seems particularly ripe for discussion.



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