```

[Senate Hearing 109-1124]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 109-1124

                      REVIEWING THE DEPARTMENT OF
                  TRANSPORTATION'S NOTICE OF PROPOSED
                  RULEMAKING THAT CLARIFIES THE RULES
                      REGARDING FOREIGN INVESTMENT
                          IN U.S. AIR CARRIERS

=======================================================================

                                HEARING

                               before the

                        SUBCOMMITTEE ON AVIATION

                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 9, 2006

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                  U.S. GOVERNMENT PRINTING OFFICE
  65-069 PDF              WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001

       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                     TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona                 DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana                    Chairman
TRENT LOTT, Mississippi              JOHN D. ROCKEFELLER IV, West 
KAY BAILEY HUTCHISON, Texas              Virginia
OLYMPIA J. SNOWE, Maine              JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  BARBARA BOXER, California
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        MARIA CANTWELL, Washington
JIM DeMINT, South Carolina           FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana              E. BENJAMIN NELSON, Nebraska
                                     MARK PRYOR, Arkansas
             Lisa J. Sutherland, Republican Staff Director
        Christine Drager Kurth, Republican Deputy Staff Director
             Kenneth R. Nahigian, Republican Chief Counsel
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
   Samuel E. Whitehorn, Democratic Deputy Staff Director and General 
                                Counsel
             Lila Harper Helms, Democratic Policy Director
                                 ------                                

                        SUBCOMMITTEE ON AVIATION

                    CONRAD BURNS, Montana, Chairman
TED STEVENS, Alaska                  JOHN D. ROCKEFELLER IV, West 
JOHN McCAIN, Arizona                     Virginia, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          BYRON L. DORGAN, North Dakota
OLYMPIA J. SNOWE, Maine              BARBARA BOXER, California
GORDON H. SMITH, Oregon              MARIA CANTWELL, Washington
JOHN ENSIGN, Nevada                  FRANK R. LAUTENBERG, New Jersey
GEORGE ALLEN, Virginia               BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire        E. BENJAMIN NELSON, Nebraska
JIM DeMINT, South Carolina           MARK PRYOR, Arkansas

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 9, 2006......................................     1
Statement of Senator Burns.......................................     1
Statement of Senator Dorgan......................................     2
Statement of Senator Lautenberg..................................     3
Statement of Senator Lott........................................    11
Statement of Senator McCain......................................     2
Statement of Senator Pryor.......................................    22

                               Witnesses

Mica, Hon. John, U.S. Representative from Florida................     5
Oberstar, Hon. James L., U.S. Representative from Minnesota......     7
    Prepared statement...........................................     9
Shane, Hon. Jeffrey N., Under Secretary of Transportation for 
  Policy, Department of Transportation...........................    11
    Prepared statement...........................................    14
Smith, Frederick W., Chairman, President, and CEO, FedEx 
  Corporation....................................................    24
    Prepared statement...........................................    26
Smisek, Jeffery, President, Continental Airlines, Inc............    28
    Prepared statement...........................................    33
    Report from JPMorgan, dated May 5, 2006, entitled, ``Goodbye 
      Open Skies--A U.S.-EU Aviation Deal Founders Again''.......    30
Whitaker, Michael G., Senior Vice President--Alliances, 
  International and Regulatory Affairs, United Airlines..........    42
    Prepared statement...........................................    43
Woerth, Captain Duane, President, Air Line Pilots Association 
  (ALPA).........................................................    47
    Prepared statement...........................................    49

                                Appendix

Boyanton, Jr., Earl B., Assistant Deputy Under Secretary of 
  Defense (Transportation Policy), prepared statement............    61
Ensign, Hon. John, U.S. Senator from Nevada, prepared statement..    61
Response to written questions submitted to Hon. Jeffrey N. Shane 
  by:
    Hon. Daniel K. Inouye........................................    67
    Hon. Frank R. Lautenberg.....................................    70
    Hon. Ted Stevens.............................................    64
Response to written questions submitted by Hon. Ted Stevens to:
    Michael G. Whitaker..........................................    72
    Jeffery Smisek...............................................    71
    Captain Duane Woerth.........................................    73

 
                      REVIEWING THE DEPARTMENT OF
                  TRANSPORTATION'S NOTICE OF PROPOSED
                  RULEMAKING THAT CLARIFIES THE RULES
                      REGARDING FOREIGN INVESTMENT
                          IN U.S. AIR CARRIERS

                              ----------                              

                          TUESDAY, MAY 9, 2006

                               U.S. Senate,
                          Subcommittee on Aviation,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m. in 
room SD-562, Dirksen Senate Office Building, Hon. Conrad Burns, 
Chairman of the Subcommittee, presiding.

            OPENING STATEMENT OF HON. CONRAD BURNS, 
                   U.S. SENATOR FROM MONTANA

    Senator Burns. We'll call the Committee to order. And we've 
got a lot of ground to cover today. And I want to thank my 
friend from North Dakota for being here. And there'll be other 
members. They wrote--they said they'd be here, but, you know, 
they're not always the most reliable attenders at times. So, we 
will get started.
    I want to thank everyone for coming today. Before we start, 
I want to say we still send our ``Get Well'' greetings to the 
Ranking Member of this committee, Senator Rockefeller. He has 
had surgery, and he's still convalescing, I think, is the 
correct word. And he's still recuperating, and we wish him a 
speedy return, because I'm--we're going to need some help on 
some issues, coming up.
    Today, we review the recently issued Department of 
Transportation supplemental notice of proposed rulemaking that 
seems to clarify the rules regarding foreign investment in U.S. 
air carriers.
    Since 1926, Federal law has required U.S. air carriers, 
including cargo carriers, to be owned or controlled by citizens 
of the United States. The Department of Transportation is 
tasked with enforcing those statutes. One criteria of that 
enforcement is a citizenship review of who is in actual control 
of the airline. The interpretation and impacts of actual 
control of an airline will be examined today.
    Currently, both the House and Senate versions of the 
supplemental appropriations bill contain, in one form or 
another, provisions blocking this rulemaking. Conference 
meetings will soon commence on that bill, and I am hopeful that 
this hearing will assist us in making a principled decision on 
how to ultimately address this issue. Like many of my 
colleagues, I'm concerned about the possible impact such change 
would have on the CRAF program, along with the overall safety 
and security, is the application of such a rule plausible in a 
real corporate structure, and is it the right thing to do for 
aviation industry as a whole? Additionally, will further 
liberalization and foreign investment opportunities for 
airlines equate to better service and opportunity for my 
constituents? Route structure and availability are certainly on 
my mind. And I would like to be confident that rural markets 
would not be harmed by these new policies. I think everyone is 
also aware of the possible comprehensive Open Skies Aviation 
Agreement with Europe hangs in the balance. Our decision to 
move forward will certainly affect that negotiation's outcome.
    And I want to thank everyone for coming today. And now I 
recognize Senator Dorgan, from North Dakota.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    You're all familiar, of course, with hula-hoops and 
frisbees and slip-n-slides. They are all products produced by 
Whammo Corporation, which has just been purchased by the 
Chinese. No one heard a whisper from me about that purchase. I 
could care less whether there's foreign ownership of frisbees. 
But foreign ownership and control of U.S. airlines is of 
concern to me. And it's interesting to me that there is a 
rulemaking now on Federal law in which an agency is parsing 
words to try to understand, What do the two words, ``actual 
control,'' really mean? Only in Washington would we not 
understand what ``actual control'' really means. And my sense 
is that we are rushing, at 100 miles an hour, of course, toward 
a whole range of international interests and interconnections. 
It is a global economy, a global world, largely without the 
rules having kept pace. With respect to this issue, this single 
issue in which we legislated long ago, and have long-
established Federal law, that is the foreign ownership and/or 
control of airlines, I'd like us to slow down just a bit, think 
a bit, and come to a conclusion that makes sense for this 
country, for our economic security interests, and for our 
national security interests.
    I was troubled, when I read the briefing for this hearing, 
to understand how much we must pay some of the most well 
educated, bright people that are available to be hired who 
cannot understand the two words, ``actual control,'' it's 
something perhaps we can visit about the rest of the afternoon.
    Mr. Chairman, thank you very much.
    Senator Burns. We've always had problems with definitions.
    Now, the former Chairman of the Full Committee, Senator 
McCain.

                STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    Senator McCain. Thank you very much, Mr. Chairman. Thank 
you for holding this hearing.
    As you mentioned, in 1926 Congress enacted the Air Commerce 
Act, which restricted foreign ownership of any U.S. airline to 
49 percent. The government's goal at that time was, in part, to 
protect a fledgling industry. Twelve years later, protectionist 
leanings prevailed again, and foreign investors were limited to 
owning 25 percent of the voting stock of domestic air carriers. 
Forty years after that, the airline industry was generally 
deregulated. But 80 years after Calvin Coolidge signed the Air 
Commerce Act into law, and nearly 30 years after deregulation, 
we have yet to eliminate several regulatory restrictions on the 
airline industry, including the Perimeter Rule, the Wright 
Amendment, and the topic of today's hearing, legislation that 
severely restricts foreign ownership of domestic airlines.
    The President, in 2003, proposed loosening the ownership 
restrictions to lower the foreign ownership threshold back to 
49 percent. Congressional opposition scuttled that effort.
    A review of the Department of Transportation's proposed 
rule show that it's a modest proposal, at best. Nevertheless, 
the emergency supplemental for Iraq and Katrina--Iraq and 
Katrina--that's now in conference, contains a provision that 
would delay the rulemaking until the end of this fiscal year. 
What relation that has to do with Katrina and Iraq escapes me.
    Over the past 4 years, we've seen some of our Nation's 
largest airlines falter into bankruptcy--US Airways, United, 
Northwest, Delta. At one point last year, four of the Nation's 
seven largest airlines were in bankruptcy. And to recover from 
these bankruptcies and to sustain their operations, our 
Nation's airlines need sources of funding and a broader ability 
to enter into cooperative agreements with foreign carriers.
    This is not a theoretical problem. According to a 2003 GAO 
report, foreign airlines have attempted to invest in, and 
influence the operations of, U.S. airlines several times. The 
report notes that foreign airlines have, on occasion, invested 
significant amounts of capital into U.S. airlines, only to 
later dis-invest, due, in part, to U.S. policies concerning 
airline control. Rather than limiting the sources of funding 
for our Nation's airlines, we should be making sure they have 
all the capital they need to manage and expand their operations 
domestically and abroad.
    So, Mr. Chairman, we're back to the old protectionist issue 
again. And since we've made so little progress in the past, we 
will probably continue these protectionist policies, to the 
detriment of American economy, to the detriment of the American 
airlines, and certainly to the detriment of the airline 
passenger. I hope that someday we will wake up and recognize 
that we live in a global economy, and one in which foreign 
investment in our airlines can be very helpful, rather than 
harmful. And I would say that this issue, we have visited and 
revisited on numerous occasions. But I thank the Chairman for 
holding this hearing.
    Senator Burns. Senator Lautenberg?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman. I appreciate your 
holding this hearing.
    The question of foreign control of U.S. airlines, a 
critical issue, has implications for the safety of the air 
passengers, as well as our national security. Three years ago, 
Congress updated aviation law to specify that U.S. citizens 
must have ``actual control''--and we could have a debate about 
those couple of words, over our domestic airlines.
    The law is pretty clear. ``Actual control,'' means exactly 
what it says. However, this proposal, from the Bush 
Administration, performs all kinds of legal acrobatics to 
circumvent Congress and the law.
    Now, I was formerly a CEO, and I witnessed, personally, how 
tough it is to keep everybody working toward the same goal 
within an organization when their particular departmental or 
private interests differ. And it separates loyalties at times. 
But that is what the Administration is proposing to do with the 
ownership of domestic airlines.
    We have a chart. As a matter of fact, it's a pretty 
interesting art form, I thought, but it does show the confusion 
that exists by virtue of the fact that shareholders now have 
their particular--their particular opportunities--can you see 
it? Because I can't. But----
    [Laughter.]
    Senator Lautenberg.--the red indicates--those areas, the 
red circles--indicate those areas that would still be left to 
American control. And that's kind of interesting, to see how 
that might serve as a flow chart for a morning meeting. The 
only thing clear about this chart is that the Administration's 
proposal would be a recipe for confusion.
    Now, domestic airlines obviously play a significant role in 
our national defense. And in times of war or national 
emergency, the Department of Defense might need the airlines to 
transport materials, or even personnel.
    Now, there is a section called ``CRAF,'' which is designed 
to be reserved for decisionmaking by the American Government 
when there is conflict at our doorstep, but the chart doesn't 
look like a way to maximize the safety of our airlines or the 
security of our Nation. It looks more like something we might 
see from the senior management of a company like Enron. Now, 
can you imagine, if we have a difference of mission with the 
French, they could start calling them ``Freedom fries'' again. 
It would be terrible.
    But how do we entrust that function of our society? And as 
Senator McCain pointed out, the fact is, we went full bore to 
try and provide the liquidity that our airlines needed to work, 
over $20 billion since 9/11. Do we just say that, ``Well, OK, 
that was an investment to keep our guys going?'' But what 
happens when that company is owned and controlled by another 
foreign national or a foreign government and they run into 
financial problems? Do we then say, ``OK, well, you're not 
going to be operating between Chicago and New York, and L.A. 
and Chicago. We're not going to keep you going. You're a 
foreign entity?'' Those kind of decisions tell me that this is 
not a particularly good idea and certainly deserves far more 
debate than we're going to have here this morning.
    So, we're going to consider opening the door to more 
foreign control of and investment in our airlines. We ought to 
go about it the right way, and changes to the law ought to be 
aired before this committee. I had the opportunity over the 
years to join with Congressman Oberstar in some very 
significant aviation matters; in particular, the downing of Pan 
Am 103 and how essential it was that we had the full 
cooperation of a friendly nation. But if we didn't have, we'd 
never have been able to understand what took place in those 
days. And so, we're back, Jim, on a similar track today. We've 
got to protect our opportunity to direct our airlines as we 
think they should function.
    Thank you very much, Mr. Chairman.
    Senator Burns. Thank you, Senator.
    Senator Stevens, as Chairman of the Full Committee, do you 
have a statement?
    The Chairman. No.
    Senator Burns. We are joined today by two distinguished 
Members of the House of Representatives, and we'd like to hear 
from them now. We have the Honorable John Mica, representing 
the 7th District of Florida.
    Representative Mica, thanks for joining us today.

                 STATEMENT OF HON. JOHN MICA, 
                U.S. REPRESENTATIVE FROM FLORIDA

    Representative Mica. Thank you, Chairman Burns and 
distinguished members of the panel. Pleased to be with you and 
have this opportunity to----
    Senator Burns. You just have to pull it up a little bit 
closer to you.
    Representative Mica. Is that it? OK. Don't want to miss a 
word here. I'm pleased to be with you.
    Senator Burns. Hanging on every one of them.
    Representative Mica. Thank you. I know you will.
    [Laughter.]
    Representative Mica. Again, I'm pleased to present 
testimony on this important issue of foreign investment on the 
pending historic United States-European Union agreement.
    Today's hearing on the DOT rule in the supplemental 
offering that's been provided, and the United States-EU 
agreement, could present Congress with a very clear, but stark, 
choice. And that is, will the United States continue to lead, 
or will we abdicate a leadership role by succumbing to 
unfounded fears relating to this matter?
    I, for one, believe the United States should continue to 
lead. The U.S.-EU Open Skies Agreement creates the largest and 
the most important air service market in the entire world. It 
has the potential to be a watershed event in commercial 
aviation, and is long overdue.
    The benefits to, first of all, airlines, to consumers to 
shippers and to economies on both sides of the Atlantic, all of 
these benefits, really, if we look at them, are unquestioned. 
Potential benefits also will be seen by the U.S. airframe, 
aircraft engine, and avionic manufacturers. And they hold the 
potential for being tremendous advantages. Today, we have some 
70 Open Skies Agreements with air service trading partners, 
large and small, and also some of those with mature and also 
expanding economies.
    Mr. Chairman, by every measure, Open Skies has been a 
success for all of us. It's expanded competitive choices for 
consumers, passengers, and shippers alike. By building 
efficient air service trade bridges and expanding them between 
the U.S. in virtually every corner of the world, it's created 
superhighways in the sky for global trade and commercial 
activity. Building on this success last fall, the U.S. and some 
25 Member States of the EU reached a text agreement to fully 
open the transatlantic services and markets on a multilateral 
basis. That provisional agreement presents a very historic 
opportunity for the United States to leap beyond a patchwork of 
Open Skies and restrictive bilateral agreements with some of 
these European countries. And, in their place, I think we can 
substitute a wide-ranging multilateral Open Skies pact, and 
that's what's in the offering.
    Significantly, one of the newly opened markets will be the 
United Kingdom, whose--unfortunately, their restrictive 
aviation policy has harmed consumers on both sides of the 
Atlantic for nearly three decades. Given decades of Heathrow-
access-related frustration, this development, I believe, will 
be especially welcome. There's an active market for Heathrow 
slots, as the recent experience of carriers such as Qantas, the 
United Emirates, and Jet Airways shows. Carriers that rely on 
this secondary market can quickly build meaningful slot 
positions at Heathrow. This market option isn't without cost, 
and it requires hard work. But, quite clearly, there is a 
market-based alternative to sitting still and fighting much 
needed change.
    Last November, DOT announced a proposal to expand 
opportunities for cross-border investments in airlines by 
allowing foreign investors to participate more actively in the 
day-to-day commercial decisions of U.S. airlines, and I believe 
they did that without running afoul of the statutory 
requirements that U.S. citizens have--and we've heard the 
term--``actual control'' of these airlines.
    Mr. Chairman, let me be absolutely clear. If DOT's rule did 
not adequately protect the safety, security, and national 
defense and Civil Reserve Air Fleet requirements, I'd be the 
first Member of Congress in line to oppose any change. As much 
as I support the U.S.-EU Agreement, I'd never risk safety and 
security or national defense to attain it.
    I was pleased that DOT has recently issued a supplemental 
offering to its original proposal that elaborates further on 
safeguards to fully protect safety, security, and national 
defense issues. And I think you'll hear a little bit more from 
the Administration on the specifics of that.
    Finally, let me say, DOT's proposed rule is not mandatory. 
To the contrary, it's discretionary. In fact, it offers U.S. 
carriers an additional option to secure capital in the U.S. 
market on commercially-reasonable rates, and that's just like 
every other--just about every other industry you can name in 
America.
    So, again, I think that we also endanger, by not moving 
forward, the serious loss of credibility in our efforts to 
continue--continuing open and critical air service in some of 
the Southeastern Asia markets, China, Hong Kong, Japan, and, of 
course, as I said, the United Kingdom. And, finally, you can 
look for billions and billions of dollars in economic benefits 
to consumers, economic opportunities, jobs, creation of new 
opportunities for some of our struggling carriers in our 
industry.
    So, I think we're at a critical junction. I hope that we'll 
look very carefully at the provisions that FAA is--has crafted, 
and that we'll leave here not with a lot of rhetoric, but 
maintaining the U.S. leadership in global aviation.
    So, I look forward to hearing from my colleague in the 
House, and thank you for the opportunity to present my case.
    Senator Burns. Thank you. And now, our good friend and 
distinguished Member of Congress, Jim Oberstar. Thank you for 
coming today, and we look forward to your testimony.

             STATEMENT OF HON. JAMES L. OBERSTAR, 
               U.S. REPRESENTATIVE FROM MINNESOTA

    Representative Oberstar. Thank you very much, Mr. 
Chairman--Burns--and Chairman Stevens, colleagues, several 
former colleagues in the House, now in our other--distinguished 
other body. I appreciate that you are holding this hearing. You 
recognize the significance, the importance of this NPRM and 
this negotiation with the European community has for the future 
of aviation.
    And I listened with attention to what Senator McCain said 
about protectionism. In 1944, as the U.S. was--and our allies 
were drawing--could see the end coming in World War II, 
President Roosevelt convened an aviation conference in Chicago 
to map out the post-War shape of aviation, sent a telegram to 
Winston Churchill, in which he said, ``Let not the dead hand of 
protectionism stifle the promise of a great market in 
aviation.'' Churchill's response was to say that--he'd come out 
of World War II, America, as the--unscathed, it has the biggest 
aviation fleet in the world, we'll all be at a disadvantage. 
And the British, on behalf of themselves and others, negotiated 
what we know today as bilateral regime in what we know as the 
Chicago conference.
    In 1989--well, first, in 1978, I voted for deregulation, 
thought it would energize the aviation sector, and it did. 
Fares are, on average, $6 and a half billion a year less for 
travelers today than they were pre-deregulation, and to the 
benefit of air travelers. But in 1989, as Chair of the Aviation 
Subcommittee at a conference in Europe, I proposed to the 
European community, having done my graduate studies at the 
College of Europe, knowing all that it took to create the 
European economic community, that, ``We throw out the 
bilaterals, negotiate a single Open Skies agreement. But, if 
you don't, then we, the United States, will negotiate with you, 
country by country, and we'll get the better of the deal.''
    They weren't ready then. They weren't ready in 1944. They 
weren't ready in 1989. Now maybe they are. But the U.S. 
negotiators have thrown in something that has little, if 
anything, to do with Open Skies exchange of commerce, rights 
for rights, and values for values, and that is the ownership 
issue.
    Now, whether or not you agree with foreign investment in 
U.S. airlines, you should agree that that decision should be 
made by the legislative body and not by the Executive Branch, 
unless you want to duck the issue. For 65 years, aviation in 
the world's largest open air trade market, the United States, 
two-thirds of all air travelers last year traveled in our 
airspace. We account for more than half of all the aircraft in 
the world in commercial aviation. We account for more than 
half, maybe two-thirds, depending on how you calculate it, the 
world's value in aviation in the U.S. marketplace. Every other 
country wants to get into our market to deal here. But under 
the bilaterals--if we had done steel trade in the same way that 
we do aviation trade, bilaterals, we wouldn't have lost the 
steel industry, we wouldn't have lost other industries, because 
we trade value for value and rights for rights. Done under an 
Open Skies, it's gone. That's fine. You can trade on what basis 
you want.
    But the issue, for 65 years, has been, an airline qualifies 
as a citizen of the United States that provides service between 
cities in the United States or on international routes 
negotiated by the U.S. in our international trade agreements. 
``Citizen of the United States'' is further defined as one--as 
an airline that is under the control--and I'll give you the 
exact words--``corporation or association which is under the 
actual control of U.S. citizens.'' You don't need a dictionary 
to understand what ``actual control'' means. Clearly, the 
Department of State or Department of Transportation does not 
have the authority on its own to limit the requirement of 
actual control as proposed in their notice of proposed 
rulemaking to a requirement of control only over safety, over 
security, and over the Civil Reserve Air Fleet.
    Our courts have held that an Executive Branch agency has 
discretion to interpret a statute, but does not have the 
discretion to conflict with the plain meaning of the law.
    Now, how can you have actual control if the rule limits 
that control to certain policies of an airline, but not others? 
Under the NPRM, they--a foreign investor, foreign carrier, can 
decide fleet size, fleet composition--that is, what type and 
model of aircraft they fly in their fleet--which markets to 
serve, which markets to pull out of. The decision is very 
clear.
    Now, this make-up of control could decide that the foreign 
interest is going to change the fleet composition and take out 
the DC-10s and the 747s that are part of the Civil Reserve Air 
Fleet. Now, years ago I held hearings on that subject of the 
CRAF program, when we reauthorized it. In the current 
engagement in Iraq, CRAF was activated in February of 2003. 
Fifty-one passenger aircraft, 11 airlines, moved 11,000 tons of 
cargo and 254,000 troops. We have 1,293 aircraft in 39 U.S. 
airlines committed to the Civil Reserve Air Fleet. Foreign 
carrier can simply say, ``I'm not going to have 747s. They're 
whales. They consume too much fuel. We're not going to have DC-
10s in that fleet. They consume too much fuel.'' And during 
Gulf War I, those Civil Reserve Air Fleet aircraft flew troops 
and equipment into the Gulf and deadheaded back, while our 
competitors are flying revenue passengers out of the war zone 
into the United States. Now, is that the future that you want 
for aviation for the United States?
    So, they ran up against a wall, against that issue, and 
have issued a clarification. This is it, 75 pages of 
clarification of what they mean by ``actual control.'' And it's 
not in the rule. This is in the preamble to the rule.
    So, now they go and say they're having--they're 
reinterpreting the standard and are going to say that the 
requirement in the law is that the President of a U.S. airline 
must be a citizen of the United States--all right, that's 
fine--must be independent of foreign control--that's right. The 
President of the airline would have to be divorced from all 
commercial decisions if a foreign owner controls that airline. 
It would be inconsistent with a U.S. person who is President of 
the airline under foreign control to do other than what the 
foreign ownership wants it to do.
    So, how does that President of the U.S. airline be a 
President only for safety, only for security, and only for the 
CRAF program, has nothing to say about all those yellow dots--
I'm sorry, blue dots that Senator Lautenberg has on this chart. 
That's a very graphic description of what happens under the 
foreign ownership initiative in this document.
    Senator Burns. Can you wrap up----
    Representative Oberstar. OK.
    Senator Burns.--pretty quick? I've got a pretty full panel, 
and I don't want to be subject to a filibuster here.
    Representative Oberstar. Excuse my enthusiasm for the 
subject matter, Mr. Chairman----
    Senator Burns. No, you're very----
    Representative Oberstar.--but you're not going to hear this 
stuff from some of these other witnesses, and I just want to be 
very clear that--you know, you're going to hear, ``Oh, we've 
got such a good deal.'' We heard that before, in the Carter 
Administration, under Bermuda II negotiations, ``Oh, we've got 
such a good deal. We can't let this go.'' And, as a result, 
we've been strangled in the British market, which is half of 
the U.S. North Atlantic trade.
    This deal can sit on the table until the Congress has had 
an opportunity to decide what it wants to do, and not the 
Department of Transportation.
    [The prepared statement of Mr. Oberstar follows:]

             Prepared Statement of Hon. James L. Oberstar, 
                   U.S. Representative from Minnesota

    Chairman Burns, Ranking Member Rockefeller, you are holding 
this hearing because you recognize that our government is 
engaged in one of the most important aviation policy decisions 
since deregulation was enacted in 1978: the DOT's proposal on 
foreign ownership.
    The NPRM on foreign ownership in effect would trade away 
the crown jewel of American transportation--our Nation's 
airlines--at their most vulnerable moment, to their foreign 
competitors. This would be done to conclude an Open Skies 
agreement with the European Union, an Agreement which State and 
DOT describe as a major breakthrough, but which in reality, 
would provide only limited benefits for United States' 
airlines, given the difficulty of getting slots to implement 
the new rights that our carriers will get at Heathrow.
    Our negotiations team will likely tell you, as they have 
said in other venues: ``If we don't conclude this agreement 
now, this opportunity will be the last.'' Don't fall for that 
siren song--I've heard it before--at Bermuda, during the Carter 
Presidency. I heard it during the Reagan Administration, in 
negotiations on cargo rights with South Korea and Japan. I 
said, ``Go back and do better; we can wait.'' The U.S. accounts 
for two-thirds of the world's aviation market. Foreign carriers 
are dying to get in--they can enter our market when we enter 
theirs, on terms that balance the benefits--value for value, 
rights for rights.
    For the past 65 years, U.S. commercial aviation has been 
guided by a statute, which provides that only an airline that 
qualifies as ``a citizen of the United States'' may provide 
service between cities in the U.S., or on international routes 
obtained by the U.S. through international agreements. The law 
clearly says that an airline may qualify as a U.S. airline, 
only if the airline is ``a corporation or association . . . 
which is under the `actual control' of U.S. citizens.''
    Under DOT's proposed new standard, foreign investors would 
be allowed to exercise control over all commercial aspects of 
U.S. airline operations, including fleet mix, routes, 
frequencies, classes of service, and pricing etc. U.S. citizens 
would be required to control only decisions affecting the Civil 
Reserve Air Fleet (CRAF), transportation security, safety and 
organizational documents.
    It is clear to me that the Department does not have the 
legal authority to limit the requirement of ``actual control,'' 
to a requirement of control over only safety, security and CRAF 
decisions (and not over other economic decisions). Our courts 
have held that although an Executive Branch agency has 
discretion to interpret a statute, an agency does not have 
discretion to make interpretations that conflict with the 
``plain meaning'' of the law.
    I do not see how it can be consistent with the plain 
meaning of ``actual control'' to limit that term to a 
requirement of control over some policies of an airline, but 
not control over many important decisions, such as the rates to 
be charged and the service to be operated.
    Moreover, the proposed new interpretation of ``actual 
control'' is inconsistent with the requirement in the law that 
``the President'' of a U.S. airline must be a citizen of the 
United States. DOT has correctly ruled that not only must the 
President be a U.S. citizen in the technical sense, but he must 
also be independent of foreign control. This means that if an 
airline decided to allow foreign interests to control 
commercial decisions, the President of the airline could not 
carry out the policies of the foreign investors, because he 
would then lose his status as a U.S. citizen. The President, 
then, would have to be divorced from all commercial decisions. 
Surely, when the law required that the President of an airline 
must be a U.S. citizen, it meant a President who ran the entire 
airline, not just safety, security and the CRAF program.
    I would note that one of your witnesses today, Federal 
Express, stated in its initial comments in October 2003 on the 
foreign control issue that ``while the issue of citizenship is 
the center of noisy debate among aviation law pundits, the 
Department presently has no legal authority, nor any mandate 
from Congress, to make changes to its implementation of the 
U.S. citizenship requirements of 49 U.S.C. 40102(a)(15).'' I 
agree with Fed Ex's assessment of the legal limitations on 
DOT's authority.
    If DOT's new standard is allowed to be implemented, there 
could be serious consequences for our national aviation system, 
particularly since the most likely foreign investors would be 
foreign airlines or persons with interests in foreign airlines. 
Foreign interests could restructure the route system and fleet 
of a U.S. airline so that the U.S. airline would become, in 
effect, a ``feeder'' for the international operations of a 
foreign carrier. This could limit service and competition in 
markets served by the U.S. airlines, particularly service to 
small communities.
    There could also be effects on national security: A foreign 
investor could decide to take an airline out of the CRAF 
program, or it could accomplish this indirectly by changing the 
fleet mix of a U.S. airline to reduce the number of large, 
wide-body civilian aircraft that the Department of Defense 
relies on to supplement its military fleet in times of national 
emergencies.
    In addition, U.S. airline employees could lose high-quality 
job opportunities, in favor of employees of the foreign 
carrier. There could be similar effects on other aviation 
industry employees. Foreign investors would be inclined to 
support the purchase of aircraft produced by foreign companies, 
and to have the airline use foreign repair stations.
    The Department's Supplemental Notice of Proposed Rulemaking 
(SNPRM), issued last week, does not change the fact that DOT 
has stretched its interpretation of ``actual control'' well 
beyond the plain meaning of the statute.
    The SNPRM proposes several new limitations on foreign 
control, such as a requirement that an airline's stockholders 
must retain the right to revoke a delegation of control to 
foreign investors. These ``requirements'' are not part of the 
actual proposed regulation, but are ``obiter-dicta'' discussed 
in the preamble. Even the discussion of this and other 
requirements is vague, and would leave the Department with 
virtually unlimited discretion as to the exact limitation that 
will be required when the Department is asked to approve a 
specific proposal for foreign control.
    To make matters worse, the SNPRM indicates that the DOT 
will not use public procedures to decide upon most proposals 
for foreign control. The exact limitations will be worked out 
in private negotiations between DOT and the foreign investors.
    If the SNPRM becomes final, it is certain that prospective 
foreign investors will not want to run the risk that their 
right to control might be revoked. They will propose 
limitations on the process for revocation to ensure that it 
will never be exercised. Since DOT strongly supports foreign 
investment, it will have every incentive to accept limitations 
that undermine the right to revoke.
    Let's be honest with ourselves, in the real world, it is 
not realistic to rely on shareholder action as a check on 
foreign control. They don't do it even in domestic affairs. 
Shareholders of major corporations do not ordinarily vote on 
policy issues. A corporate law expert has advised me that 
getting a shareholder vote to revoke a delegation of control to 
foreign investors would be about as difficult as passing an 
amendment to the U.S. Constitution!
    Whatever the specifics of the power to revoke, it will be 
meaningless in most cases. How likely is it that shareholders 
will exercise a power to revoke when the consequences might be 
the withdrawal of the foreign investor's financial support, or 
expensive litigation over whether the power to revoke was 
properly exercised?
    I have been deeply concerned, as have many of my House 
colleagues, that under the DOT's proposal, the foreign 
interests that controlled an airline would also control safety, 
security, and the CRAF program. The SNPRM attempts to meet our 
concerns by claiming that under the proposal, foreign interests 
would not be allowed to supervise the managers responsible for 
safety, security or CRAF, or to control their budgets, and 
compensation. This seems unrealistic. Does this mean that a 
Vice President for Security would have unlimited budget 
authority and unfettered authority to set his or her 
compensation? In reality, when it comes to a specific case, a 
foreign investor is likely to insist on conditions that do not 
isolate it from all decisions affecting safety, security or 
CRAF.
    Late last year, 189 of my colleagues, including Chairman 
Don Young, joined me to introduce H.R. 4542, which prohibits 
the DOT, for 1 year, from issuing any final decision or final 
rule on the NPRM that would change its interpretation of what 
constitutes ``actual control'' of a U.S. airline.
    I urge the Senate to preserve the language in the defense 
supplemental appropriations that would prohibit the DOT from 
implementing this rule for the rest of the fiscal year. We must 
ensure that any changes in the law will come from Congress--not 
by Administrative fiat.
    If, in the unfortunate circumstance that the DOT proposal 
is made final before Congress can act, I strongly believe that 
the final rule will have a short life span. The new policy is 
certain to be challenged in court. I cannot imagine a court 
agreeing with the Department that it is consistent with the 
``plain meaning'' of the requirement of ``actual control'' to 
only require control of an airline's decisions on safety, 
security and the CRAF program. Nor would a court accept the 
DOT's argument that the requirement that the President of an 
airline must be a U.S. citizen can be satisfied by a President 
in name-only, with no authority over commercial decisions.
    Thank you very much for this opportunity today to discuss 
this very important issue.

    Senator Burns. Thank you, sir.
    Any questions of our distinguished members from the other 
side?
    [No response.]
    Senator Burns. Thank you very much, gentlemen. We 
appreciate that very much.
    We have been joined by Senator Lott, who used to chair this 
Subcommittee.
    Senator Lott, do you have an opening statement, or----

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Not at this time, Mr. Chairman. I'd like to 
hear what these witnesses have to say.
    Senator Burns. That's fine.
    Now we call to the table the Honorable Jeffrey Shane, Under 
Secretary for Policy, United States Department of 
Transportation, from right here in this 17 square miles of 
logic-free environment.
    Thank you very much. Secretary Shane, nice having you with 
us today.

    STATEMENT OF HON. JEFFREY N. SHANE, UNDER SECRETARY OF 
    TRANSPORTATION FOR POLICY, DEPARTMENT OF TRANSPORTATION

    Mr. Shane. Thank you very much, Mr. Chairman, I'm delighted 
to be here to represent the Department of Transportation--of 
course, Secretary Mineta, who sends his regards to the panel.
    I have a prepared statement, Mr. Chairman, which I'd like 
to have incorporated in the record, and I'd like to sum it up, 
if I may.
    Senator Burns. It will be a part of the record. You may 
summarize, if you so--if you choose.
    Mr. Shane. Thanks.
    Because we're in the middle of a rulemaking process, I 
think every member of the panel knows, we've just issued a 
supplemental notice of proposed rulemaking. I can't tell you 
what final decisions are going to come out of the Department of 
Transportation, and I literally don't know, which is why I 
can't tell you, but, of course, we're all aware of the 
importance of this initiative, and we recognize the Committee's 
interest in it. And, for all of those reasons, we wanted to 
share, to the extent possible, the Department's thinking in 
proposing to refine the administrative policies that guide our 
citizenship reviews.
    In the initial notice that we published last November, we 
proposed that under certain circumstances, the Department would 
move away from more than 60 years of administrative 
interpretation of the statute which allowed no semblance of 
foreign control in determining whether U.S. citizens were in 
control of U.S. airlines. That interpretation, which was never 
required by the words of the statute, has had the effect of 
relegating foreign investors to a largely passive role in any 
U.S. airline unable to participate in the commercial 
decisionmaking affecting the value of their own investment. 
Despite occasional efforts to introduce some measure of 
flexibility, that policy has remained essentially intact. The 
net result of that policy has been to discourage foreign 
citizens from investing even that which the statute allows. But 
the Civil Aeronautics Board and the Department of 
Transportation have always required--and what the statute now 
says explicitly after its 2003 amendment is that U.S. airlines 
must be under the actual control of U.S. citizens. What the 
initial notice proposed to do was to explore whether more 
foreign investment within the numerical limits always allowed 
under the statute might be encouraged if, in applying the 
actual control requirement, we adopted a less forbidding and 
less categorical policy regarding the ability of foreign 
investors to participate in the commercial decisionmaking of 
U.S. airlines.
    Let me emphasize that our proposal is not designed to 
loosen the statutory caps or to encourage more investment than 
the statute allows. It is designed not to encourage increased 
investment. It is designed to encourage some investment.
    I also want to emphasize that the only decisionmaking that 
would be affected by the proposal is commercial decisionmaking. 
As you have heard, ultimate responsibility for management 
decisions relating to safety and security and U.S. airlines' 
participation in Department of Defense programs including, of 
course, the CRAF program, would be reserved exclusively to U.S. 
citizens. We chose to issue a supplemental notice, because 
we're now proposing changes to our original proposal in 
response to comments, in response to concerns that have been 
expressed by interested parties, including other Federal 
agencies and, of course, by Members of Congress. We think these 
changes will serve to clarify both our intent and the way the 
proposed rule would work in practice if we finally adopt it.
    We are interested in hearing people's reactions to the 
changes over the course of the next 2 months. We think the 
economic benefits at stake are substantial. Our proposal is 
designed to enhance U.S. airline access to the global capital 
marketplace, consistent with our statutory obligation to 
encourage U.S. airlines in their ability to attract capital. We 
think the proposal would have a long-term positive effect on 
the industry by expanding the pull of investors, introducing 
new competition among investors, providing U.S. airlines with 
better investment terms, and enhancing strategic partnerships 
between U.S. and foreign airlines. The changes could lower the 
cost of capital for U.S. airlines and enhance asset values. 
This proposal does not envision a one-way street for 
investment. However, one of the proposal's most important 
provisions is a reciprocity requirement designed to encourage 
further liberalization of the market for airline capital, just 
as we have liberalized the market for airline services. It will 
offer U.S. citizens opportunities to invest abroad in foreign 
airlines--under the proposal, only foreign investors who are 
from countries that have Open Skies Agreements with the United 
States--and that permit similar investment opportunities for 
U.S. investors, and their airlines would be eligible for this 
approach.
    A proposal, therefore, would not only afford U.S. carriers 
the opportunity to tap more global sources of capital, but U.S. 
carriers would be able to enhance their international presence 
by investing overseas in ways that they cannot do in most 
places today. In other words, our proposal carries with it the 
prospect of far more liberal treatment of airline investments 
everywhere, resulting in more robust international alliances, a 
healthier and more efficient global airlines industry, more 
competition for the benefit of travelers and shippers 
everywhere, and expanded job opportunities for airline 
employees.
    Please understand, nothing in the proposal that we have on 
the street right now would allow the sale of U.S. airlines to 
foreign interests. Under the proposal, U.S. citizens would 
still have to own 75 percent of the voting stock of the 
airline, would still make up two-thirds of the board of 
directors, would still include the President and two-thirds of 
the managing officers of the company, all as prescribed by 
statute today. U.S. citizens would have to retain actual 
control of the airline. Any delegation of commercial 
decisionmaking authority to the foreign investor would have to 
be revocable. Again, decisions relating to safety, security, 
and national defense, and the carrier's organizational 
documents, could never be delegated and would have to be 
controlled exclusively by U.S. citizens.
    I want to emphasize that we've proposed this interpretation 
because we believe it is justified on its own merits due to the 
potential benefits for the U.S. airline industry. At the same 
time, the European Commission and its 25 Member States have 
stated publicly that the results of this rulemaking will be a 
factor in their decision whether to agree or not to a proposed 
U.S.-EU Air Services Agreement.
    That Agreement has the potential to fundamentally transform 
the framework for transatlantic air services, dramatically 
increasing the quality of competition in the market. It would 
benefit U.S. airlines, consumers, and communities on both sides 
of the Atlantic, transcending anything we have yet achieved 
through our existing Open Skies accords.
    If we do decide, therefore, to adopt a final rule along the 
lines of our proposal, a transformational Open Skies Agreement 
with Europe could be an important byproduct. Globalization of 
the airline industry has already begun. It is time that U.S. 
airlines are permitted to take advantage of the opportunities 
waiting for them.
    I thank you very much for the opportunity to share the 
Department's transportation prospectus with you. And I, of 
course, am more than happy to answer your questions.
    [The prepared statement of Mr. Shane follows:]

    Prepared Statement of Hon. Jeffrey N. Shane, Under Secretary of 
        Transportation for Policy, Department of Transportation
    Thank you, Mr. Chairman, members of the Subcommittee. I am pleased 
to appear before you today in response to your invitation to review the 
status of DOT's rulemaking regarding ``actual control'' of U.S. air 
carriers. As you know, it is unusual for DOT to appear at a hearing 
concerning an ongoing rulemaking. Because we are still in the middle of 
the rulemaking process, having issued a supplemental notice of proposed 
rulemaking just last week, I cannot tell you what final decisions the 
Department is going to make because I don't know. We are all aware of 
the importance of this initiative, however, and we recognize the 
Committee's interest in it. For those reasons, I wanted to share, to 
the extent possible, the Department's thinking in proposing to refine 
the administrative policies that guide our citizenship reviews. Because 
the comment period for the SNPRM is open, I can only discuss general 
themes and policies in the rulemaking. I cannot address substantive 
issues or comments made to the Notice published last November or to the 
Supplemental Notice. But I will say that we carefully reviewed the 
comments we received, and considered them when drafting the 
Supplemental Notice, as we will do with any comments we receive in the 
next 2 months. Even though I must be relatively circumspect in my own 
comments here today, I will do my best to be responsive to you within 
those parameters.
    With the publication of this Supplemental Notice, we are 
encouraging a thorough and broad-based debate. We chose to issue a 
Supplemental Notice because we have made substantive changes to our 
original proposal in response to comments and concerns expressed by 
interested parties, including other Federal agencies and Members of 
Congress. We believe these changes will serve to clarify both our 
intent and the way the proposed rule would work in practice if we 
finally adopt it. We are interested in hearing people's reactions to 
those changes.
    In the initial Notice published last November, we proposed that, 
under certain circumstances, DOT would move away from more than sixty 
years of administrative interpretation of the statute, allowing ``no 
semblance of foreign control'' in determining whether U.S. citizens 
were in control of U.S. airlines. That interpretation--not required by 
the words of the statute--has had the effect of relegating foreign 
investors to a largely passive role in any U.S. airline, unable to 
participate in the commercial decisionmaking affecting the value of 
their own investment. Despite occasional efforts to introduce some 
measure of flexibility, the policy has remained essentially intact.
    What the Civil Aeronautics Board and DOT have always required--and 
what the statute now says explicitly after its 2003 amendment--is that 
U.S. airlines must be under the actual control of U.S. citizens. What 
the initial Notice proposed to do was to explore whether more foreign 
investment (within the numerical limits always allowed under the 
statute) could be encouraged if we, in applying the ``actual control'' 
requirement, adopted a less forbidding, less categorical policy 
regarding the ability of foreign investors to participate in the 
commercial decisionmaking of U.S. airlines.
    I want to emphasize that the only decisionmaking that would be 
affected by the proposal is commercial decision-making. Ultimate 
responsibility for management decisions relating to organizational 
documents, safety, security, and U.S. airlines' participation in 
Department of Defense programs--including CRAF--would be reserved to 
the U.S. citizen investors only.
    The economic benefits at stake are substantial. Our proposal is 
primarily designed to enhance U.S. airline access to the global capital 
marketplace. Our proposal would have positive and long-term effects on 
the industry by expanding the pool of qualified investors, introducing 
new competition among investors to provide U.S. airlines with better 
terms, and enhancing strategic partnerships between U.S. and foreign 
airlines. These changes could lower the cost of capital for U.S. 
airlines, which would be enormously beneficial for the U.S. industry as 
it restructures to meet the demands of the global marketplace. 
Additional investment opportunities in the airline industry can and 
will strengthen U.S. airlines.
    This proposal does not envision a one-way street for investment, 
however. One of the proposal's most important provisions is a 
reciprocity equirement designed to encourage further liberalization of 
aviation markets and offer U.S. citizens opportunities to invest abroad 
in foreign airlines. Under the proposal, only foreign investors who are 
from countries that have Open Skies Agreements with the United States 
and that permit similar investment opportunities for U.S. investors in 
their airlines would be eligible for this approach. I call this one of 
the proposal's most important provisions because it has the potential 
to encourage a more liberal approach to capital flows in aviation on a 
global basis. It would not only afford U.S. carriers the opportunity to 
tap more global sources of capital; but also under the reciprocity 
requirement, U.S. carriers, either alone or as part of a larger group 
of U.S. investors, would be able to enhance their international 
presence by investing in foreign carriers.
    Thus, our proposal carries with it the prospect of far more liberal 
treatment of airline investments everywhere, resulting in more robust 
international alliances, a healthier and more efficient global airline 
industry, more competition for the benefit of travelers and shippers 
everywhere, and expanded job opportunities for airline employees.
    At a February hearing conducted by the House Subcommittee on 
Aviation, opponents of the rulemaking testified that the proposal will 
relegate U.S. airlines to mere ``feeder'' status, and that the 
lucrative and prestigious long-haul international flights will migrate 
to the foreign investor airlines. In contrast to that fearful 
prediction, I have seen an investment banking report from Europe 
alleging that, by leaving untouched the statutory 75-percent minimum 
U.S. voting stock ownership requirement, our proposal is intentionally 
designed to ensure that U.S. carriers remain dominant players in the 
global airline industry.
    I don't know whether U.S. carriers will dominate global aviation in 
the future, but we do believe that our proposal would, in fact, 
strengthen the U.S. airline industry without undermining any of our 
important national interests.
    What we have done in the Supplemental Notice is to build upon and 
clarify the ideas we proposed in the initial Notice of Proposed 
Rulemaking. In light of the comments and concerns expressed about the 
NPRM, we consulted with other Executive agencies, particularly the 
Departments of Homeland Security and Defense, as well as our own 
Federal Aviation Administration, to refine our proposal to better 
ensure not only that U.S. airlines remain under the actual control of 
U.S. citizens, but also that they remain safe, secure, and available to 
meet the Nation's defense needs. The areas that would continue to be 
scrutinized for exclusive, non-delegable U.S. citizen control--safety, 
security, and national defense--would require DOT to strictly review 
the airline's structure, with particular focus on the carrier's 
fundamental organizational documents, which must also remain under 
exclusive U.S. citizen control.
    In the Supplemental Notice, we have refined our previous proposal 
in part to make it clearer to airlines that might seek to benefit from 
our revised approach. Our proposal sets out two prerequisites to a 
foreign investor's eligibility to take advantage of this new 
interpretation: Does the foreign investor's home country have an Open 
Skies Agreement with the United States? If it does, then: Does the 
foreign investor's home country have a similarly open investment regime 
in its airlines for U.S. investors? Only if these two questions were 
answered in the affirmative would the Department commence a review of 
the carrier under this new interpretation. If the answers are ``Yes,'' 
then the questions that would be examined are:

   Do the corporate documents--the charter, the by-laws, the 
        basic agreements, etc.--reflect actual control by U.S. citizens 
        of those documents?

   Is the foreign investor delegated any commercial decision-
        making authority?

   Is this authority ultimately revocable by the U.S. citizen 
        majority owners?

    To ensure full control by U.S. citizens of the carrier's activities 
in three key areas:

   Are U.S. citizens clearly and completely in actual control 
        of all decisions having to do with the carrier's policies and 
        implementation with respect to safety?

   Are U.S. citizens clearly and completely in actual control 
        of all decisions and activities having to do with the carrier's 
        policies and implementation with respect to aviation security?

   Are U.S. citizens clearly and completely in actual control 
        of all decisions having to do with Department of Defense 
        programs?

    And remember, the burden of proving all of these requirements would 
remain with the applicant. If the applicant could not meet that burden, 
it could not be licensed as a U.S. air carrier. Similarly, an already 
licensed carrier that received a significant offshore investment would 
be subjected to what we call a ``continuing fitness review'' including 
the same requirements and the same burden of proof. Failure to meet 
that burden would call into question the carrier's continuing 
eligibility to hold an air carrier certificate.
    While U.S. citizens will continue to exercise ``actual control'' of 
every U.S. airline, the only areas that could not be delegated to 
foreign investors would be these four--safety, security, national 
defense, and the carrier's organizational documentation. Pursuant to 
arrangements with the U.S. citizen majority owners, foreign investors 
would be permitted to participate in the airline's commercial decision-
making in a more meaningful way.
    I want to emphasize several points. First, the physical safety and 
security of every U.S. airline would be under the close supervision and 
control of the FAA, TSA, and other relevant authorities, as they have 
always been. CRAF carriers would also be subject to inspection by the 
military exactly as they are today. Second, the Department has a long 
history of closely examining carriers' structure and operations to 
ensure that actual control remains in the hands of U.S. citizens; this 
function should actually be made easier by a narrower focus on the 
areas of corporate documents, safety, security, and defense activities 
for investments from citizens of qualified countries. Third, we think 
carriers that receive foreign investments as the result of the new 
rule, if we adopt it, are likely to be more careful than ever to ensure 
that all CRAF-related functions remain securely in U.S. hands, to avoid 
any question.
    Under DOT's proposal, U.S. citizens would have to continue to be in 
``actual control'' of a U.S. airline for it to be eligible to retain 
its certificate. As the statute dictates--and we are in no way 
proposing to alter or change the statute--U. S. citizens would have to 
own 75 percent of the voting stock of the airline, would make up two-
thirds of the Board of Directors, and would include the President and 
two-thirds of the managing officers of the company. U.S. citizens would 
ultimately control the decisionmaking of the airline; any delegation of 
decision-making authority to the foreign investor would have to be 
revocable and could not be in the spheres of safety, security, national 
defense, or organizational documents.
    In addition, we are not proposing any change in our criteria for 
ascertaining ``control'' for airlines not meeting the conditions for 
using the proposed interpretation and for those areas that we examine 
for airlines that do meet the conditions. The Advance Notice of 
Proposed Rulemaking published seven non-exclusive criteria that DOT's 
Inspector General cited in his report as being generally used by the 
Department. We intend to continue to use those criteria.
    The potential benefits of DOT's proposal go well beyond enhancing 
the availability of capital to U.S. airlines. The international 
alliances that currently exist among U.S. and foreign airlines 
represent a surrogate for the kind of globalization that occurs around 
the world in other networked industries through conventional mergers 
and acquisitions. New opportunities for liberalized air services 
agreements bring competition home in the form of competitive prices to 
consumers and shippers.
    I want to emphasize that we have proposed this interpretation 
because we believe it is justified on its own merits due to the 
potential benefits for the U.S. airline industry. However, the European 
Commission and its 25 Member States have stated publicly that the 
results of this rulemaking will be a factor in their decision whether 
to agree or not to a proposed first-phase U.S.-EU Air Services 
Agreement. Let me briefly address this Agreement, which is currently 
pending before the EU Transport Ministers.
    The Agreement has the potential to fundamentally transform the 
framework for transatlantic air services, dramatically increasing the 
quality of competition in the market. It will benefit consumers and 
communities on both sides of the Atlantic, transcending anything we 
have yet achieved through our existing Open Skies accords. The 
Agreement will also enhance the quality of transatlantic cooperation in 
the areas of safety and security, competition law and policy, and 
environmental and consumer protection. Moreover, the Agreement 
represents only a first stage of opening markets and enhancing 
cooperation.
    Completion of the U.S.-EU Agreement would not only enhance airline 
competition across the Atlantic, but would also set a new standard for 
liberalization around the world. This Agreement will enable U.S. and 
European airlines--singly and in combination--to capitalize on the 
importance of a newly unified transatlantic market and develop a truly 
global presence. Success here can be expected to encourage emulation in 
other regions, accelerating the attainment of more open markets for 
international air services.
    The globalization of the aviation industry has already begun; it's 
time that U.S. airlines are permitted to take advantage of the 
opportunities waiting for them.
    Thank you for the opportunity to share the Department of 
Transportation's perspectives with you. I would be pleased to respond 
to your questions.

    Senator Burns. Thank you very much, Mr. Shane.
    I want to ask you one question, then I'm going to switch to 
the Chairman of the full Committee. He has a statement to make, 
here, in about 20 minutes, and has to get to the floor, and 
then I will sacrifice my time and then go to Senator Dorgan.
    I just have one question that probably could start this 
debate. What would further liberalization and foreign capital 
mean to rural states like Montana? Do you see any change that 
would anticipate that foreign investors will care more about 
routes in rural America, opposing those thoughts of holding 
onto the high traffic airlines like New York, Chicago, and Los 
Angeles? What do you think would happen to even our hub system 
that is in place now that has been very beneficial, to be 
honest with you, to areas like my state and remote areas with 
low-density population?
    Mr. Shane. We think the prospects for rural air services 
are actually enhanced by the possibility of bringing more 
capital to the airline industry. Recall the only incentives 
that would be permissible in encouraging any foreign investment 
would be purely commercial incentives. That is, the incentive 
to make money in the airline business. To the extent that an 
investment is attractive to a foreign citizen, it will be 
because there is the possibility of earning a return on that 
investment. It is the same motivation, Mr. Chairman, that would 
motivate a U.S. citizen. So, the fact of the passport that the 
investor holds is not going to have any impact on the plans 
that the investor has for the airline.
    Senator Burns. We'll--I was going to move to the Chairman 
of the full Committee. You have no questions, then?
    The Chairman. No, thank you.
    Senator Burns. Senator Dorgan?
    Senator Dorgan. Mr. Chairman, I come from a really small 
town, so I'm having trouble understanding all of this.
    It appears to me that you're suggesting, with your rule, 
that a foreign entity can come in and pay a substantial amount 
for a big piece of the action, but, legally, they would still 
be defined as having a smaller piece of the action.
    Mr. Shane. No----
    Senator Dorgan. Is that what you're saying?
    Mr. Shane.--Senator, they would be limited by the statute 
of how much they could invest. And that----
    Senator Dorgan. I understand that.
    Mr. Shane.--that's 25 percent, maximum, in terms of the 
voting shares. If they wanted to invest money and not get any 
voting power for it, we've allowed, for Open Skies investors, 
up to 49 percent, but that has no impact on governance. So, 
we're really only talking about the 25 percent which is still 
in place.
    Senator Dorgan. So, you have decided, down at the agency, 
this is something within your purview, it is not something that 
is required to be done by the United States Congress?
    Mr. Shane. Well, I want to emphasize, we haven't decided 
anything. We have made a proposal. We believe the proposal is 
within the purview of the Executive Branch. We're 
reinterpreting an interpretation, if you will, that was an 
administrative interpretation in the first instance. The 
statute didn't say anything about what the words ``actual 
control'' mean, whether it be possible for foreign citizens to 
participate in commercial decisionmaking. That was a CAB 
decision that said, ``No. No semblance of influence, no shadow 
of influence, no semblance of foreign control.'' Those are 
administrative constructs over the statute. The statute has to 
be interpreted, we think, in keeping with other statutory 
obligations that we have within the Federal aviation laws. And 
one of those statutory obligations is to facilitate U.S. 
airlines in their efforts to attract capital, facilitate U.S. 
airlines in their efforts to be profitable, to facilitate new 
entry into the airline industry, to foster a competitive 
airline industry. The attraction of capital into the airline 
industry is part and parcel, we think, of the large corpus of 
obligations that the Congress has vested in the Department of 
Transportation.
    Senator Dorgan. Yes, the need to attract capital doesn't in 
any way change the underlying law that says ``actual control.''
    But let me ask another question. What if a foreign entity, 
perhaps a foreign government that owned its own airline--there 
are some of those, is that correct? Would they be prevented 
from being involved in this play?
    Mr. Shane. Yes. The reciprocal obligation that we have 
insisted upon as part of the proposal would say that only if 
U.S. citizens can invest in airlines of that country would we 
be receptive to investments from investors in that country. And 
if it's a state-owned airline, it's very unlikely that we'd 
have that ability.
    Senator Dorgan. But they would not be prohibited. Well, let 
me----
    Mr. Shane. They would----
    Senator Dorgan.--let me ask it----
    Mr. Shane.--prohibited.
    Senator Dorgan.--a different way.
    Assume a foreign carrier decides, ``We want to make a 
substantial or a sizable investment in a domestic carrier here 
in this country, and we've decided we want to change the type 
of equipment, and we would like to essentially compete in 
several large city pairs.'' That carrier happens to fly in 
small communities in Alaska, North Dakota, and Montana, and has 
service with DC-9s and some RJs and so on. But the foreign 
carrier decides, ``I want to change the nature of this company. 
I'm going to invest in it, and I'm going to run it. I'm going 
to decide routes and fleets. And I've decided I'm not 
interested in rural service anymore.'' What remedy do we have?
    Mr. Shane. Well, you would have no remedy, any more than 
you would have if U.S. investors decided to do all of that. 
Again, U.S. investors and U.S. owners are in charge of this 
airline. Any kind of delegation of authority that would give a 
foreign investor some say over fleet selection or route 
selection would have to be specifically with the agreement of 
the majority owners, the people that own 75 percent of the 
voting shares of the company. Those are all U.S. citizens, 
under the law.
    Senator Dorgan. Now I'm very confused, because my 
understanding from your testimony and from what I'm told this 
proposal suggests is that the foreign interest that would be 
running these companies, if they made a significant purchase in 
a domestic carrier, would decide schedules and decide the kind 
of airplanes they would use and so on. That would be the kind 
of management control they would have to run their airline.
    Mr. Shane. We're talking about the full range of logical 
possibilities. We don't know. It would be up to the U.S. owners 
and managers of the company to decide what they felt like 
agreeing with foreign investors would be OK for foreign 
investors to decide. The U.S. citizens remain in control, 
Senator.
    Senator Dorgan. So, the foreign investors come in, and they 
invest sufficient money in a domestic carrier so they can run 
the carrier, presumably, without more than 25 percent control, 
and they're not going to determine what routes they serve and 
what kind of airplanes they use?
    Mr. Shane. They would only be able to determine any of 
those issues with the express agreement of the majority 
shareholders, which----
    Senator Dorgan. You know something? I don't think I'm 
getting a straight answer from you, Mr. Shane. I don't think 
that's at all in concert with what your proposal is. Now maybe 
I am wrong about this, but from what I understand this proposal 
is that it's completely the opposite of what you just 
described.
    Mr. Shane. It's exactly what I've described. Everybody is 
in agreement that U.S. citizens must remain in actual control 
of U.S. airlines. There is no way that anybody from the 
Administration can tell you that U.S. citizens would remain in 
actual control of U.S. airlines unless they are in a position 
to decide whether or not foreigners will have----
    Senator Dorgan. Then why do you need a proposal?
    Mr. Shane. Because today under the old 66-year-old policy, 
developed by the CAB in 1940 as we were preparing for war, 
citizens of foreign countries can have no say whatsoever in 
anything having to do with the commercial management of a U.S. 
airline.
    Senator Dorgan. You want to give them a say. Is that 
correct?
    Mr. Shane. In order for them to----
    Senator Dorgan. With respect to scheduling?
    Mr. Shane.--at least have some incentive to invest capital 
or to compete for investments in U.S. airlines for the health 
of the U.S. airline industry, yes, Senator.
    Senator Dorgan. Mr. Chairman, I don't mean to belabor this 
at great length, but I think the answer, based on what I know 
and have looked at, the answer is that if a foreign carrier 
comes in, under your proposal, and makes a significant 
investment, and decides they're going to try to run this 
company, which you would allow, they're going to decide what 
kind of company they're going to run, what their schedule is 
going to be, what kind of fleet they're going to have. That's 
my understanding.
    Mr. Shane. It's wrong. Senator, they----
    Senator Dorgan. Well, I'm----
    Mr. Shane.--can only invest 25 percent.
    Senator Dorgan. I'm sorry, I can----
    Mr. Shane. They can have no more than 25 percent of the 
voting shares.
    Senator Dorgan. I understand the investment issue. That 
wasn't my question.
    Mr. Shane. They cannot run the company with 25 percent, 
Senator. That is the clearest----
    Senator Dorgan. Well, what's your----
    Mr. Shane.--possible statement I can make.
    Senator Dorgan. What are you then offering a foreign 
investor? You're offering----
    Mr. Shane. The ability to agree with the majority 
shareholders that they might want to have something to say 
about the management of the company.
    Senator Dorgan. And what is that they're going to have to 
say?
    Mr. Shane. Whatever the U.S. citizens who run the company 
and own the company say that should be permissible.
    Senator Dorgan. Your proposal offers them the ability to 
say something. What are you going to tell us they're going to 
say to the domestic company that--which they have now just 
purchased, in part, and have decided to run? What are they 
going to have to say in that purchase?
    Mr. Shane. This would be an arm's-length commercial 
decision in the best interest of the shareholders of the 
company. The directors and officers of the share--of the 
company have a fiduciary responsibility to shareholders. This 
is purely commercial. Everybody is going to have the same 
incentive, and that is to make money with this company.
    Senator Dorgan. Mr. Shane, I don't mean to browbeat you, 
but it appears to me this is an illusion of some type. And, 
frankly, I'm very interested in aggressive, robust, good 
airline service across this country, and I'm very worried about 
this proposal.
    I appreciate your coming, but I don't think I got a 
straight answer, Mr. Shane.
    Senator Burns. Senator Lautenberg?
    Senator Lautenberg. Mr. Chairman, Senator Dorgan is not 
wrong. The fact of the matter is that it's truly escaping 
reality when we divide up the chart as we see it here, because, 
though there will be an American ostensibly in charge of 
security, safety, et cetera, those four categories--but is that 
American executive going to say to the CEO of this company, 
who's in Paris, that, ``No, no, no, you don't get it, CEO. The 
fact is that I'm sticking up for the contract as it exists, and 
we're going to do these things.'' That doesn't sound like a 
very efficient management structure to me. And we have 
something called the Essential Air Service that both our 
colleagues have talked about, and a lot of American airlines 
aren't crazy about that Essential Air Service. The Federal 
Government now pays a fee for that. Will we continue to do 
that, I don't think so. I mean, business is business, is what 
we're saying here. And if there is an agreement between a 
greedy American shareholder, Senator Dorgan, if--if there's a 
greedy American shareholder--and there have been a couple who 
ventured into the airlines business and stripped them of their 
assets and didn't continue to find money for operations. If 
this greedy person got an agreement with the 25 percent foreign 
shareholder and said, ``Hey, you know what? Suppose we bought a 
few more Airbuses or Embraers or whatever they are--airplanes 
made outside the country,'' because that's a category that is 
reserved for the ownership and for the management of the 
company, and 25-percent block is a pretty significant block, 
even though it's the voting shares. And the thing that, 
frankly, I think is being missed here is, the way technology is 
developed and transportation is designed is that our aviation 
system is like an extension of an American highway, except it's 
in the skies and, as a consequence, gets us an ability to 
extend our military power when we need it. We wouldn't let a 
foreign government decide which way our highways go, but, in 
this position, with the investment they have, I think we'd be 
in a precarious position to really exert the kind of interest 
that we want upon the foreign investor, the 25 percent 
investor. We've had this battle here about who does the 
screening. We know that it was done very badly by private 
industry, and, as a consequence, necessitated a great change 
into the DHS structure. I don't think those things are 
particularly clear.
    Once again, I'd look to the history of the airline 
industry. I mentioned before that we had put some $20 billion 
in the last 5 years to keep the industry from--keep major 
airlines from going bankrupt altogether. And there have been a 
couple of--I'll call them robber barons who went in there and 
took the assets in Texas in one place and other places around 
the country, and stripped these airlines of their opportunity 
to continue. And what happens if it's not an absolutely free 
market and the foreign investor will have substantial voice? 
They can buy all of the nonvoting shares that they'd like to 
have. Is that correct?
    Mr. Shane. Citizens of--Open Skies partners are allowed to 
get up to 49 percent of the total equity of the company, 
including nonvoting.
    Senator Lautenberg. Including nonvoting.
    Mr. Shane. But not more than 49.
    Senator Lautenberg. So, to me, it seems like it's an asset 
that we have to preserve our--all of our decisionmaking in. And 
the airline business now, competitive as it is, we have to 
fight like the devil to get entry into some of the better 
airports, or the busier airports in the world. It's getting 
better, but no one is being deprived of opportunities. So, 
maybe we ought to discuss it in terms of routes instead of 
ownership, instead of equity, and continue American ownership 
of these essential parts of our society.
    Thank you.
    Senator Burns. Still no questions from this side over here? 
What are you guys just taking the afternoon off over here or 
something?
    [Laughter.]
    The Chairman. Well, I'm waiting for the panel. Mr. 
Chairman----
    Senator Burns. Oh, you're waiting for the panel. Well, I'll 
get to it in just--I've got a couple--yes, I'm sorry.
    The Chairman. I have a series of questions I'm going to ask 
you to allow me to submit to the witnesses, because I have to 
be to the floor, but I--we do want to listen to the panel. That 
was the idea.
    Senator Burns. OK, I'll--I just got a--along with the 
questions that come from Senator Lautenberg and Senator Dorgan, 
you state in this supplemental rule that delegation of 
decisions can be revoked by company shareholders. When you 
looked into this, how often did--in the real world, did 
shareholders revoke or change such decisions, any actions that 
they may have taken? And did you base this on previous models, 
or have you discussed this with Wall Street?
    Mr. Shane. We've discussed it informally, I think, over 
many years with----
    Senator Burns. OK.
    Mr. Shane.--with Wall Street investment bankers, but this 
is predicated mostly on just administrative notice of what 
happens within corporations. It is certainly possible for 
majority shareholders to terminate relationships with minority 
shareholders where minority shareholders are exercising more 
than the authority that their shares would normally accord 
them. So, I don't think there is any controversy about the 
ability of the majority to revoke, but we don't have to really 
leave any of that to chance. The Department would be reviewing 
the citizenship of every airline which had substantial foreign 
investment, specifically with an eye to determining whether or 
not it complied with the tests that are laid out in the 
proposal, if, indeed, we adopt this proposal as a final rule.
    Senator Burns. Tell me, does it concern you about the CRAF 
whenever you started to make--to write this rule? Does that 
concern you about our arrangement with our commercial carriers?
    Mr. Shane. Absolutely. The first place we went when this 
proposal was still a gleam in our eye was to the Department of 
Defense to talk to them about it before it was a live proposal. 
I spent, Mr. Chairman, if I can just be personal for a moment, 
7 years, while in the private sector, as Chairman of the 
Military Airlift Committee of the National Defense 
Transportation Association. I have worked with the CRAF 
probably for 15 years, and understand its equities completely. 
They're our heroes in the Air Mobility Command and in 
USTRANSCOM, and they're doing a marvelous job for America every 
day of the week. The last thing in the world Secretary Mineta 
would want, and the last thing in the world that I would want, 
or anybody else at the Department, would to compromise the CRAF 
program in any way, shape, or form. So, we--that is the number 
one priority for us, making sure that we enhance and not 
detract from the CRAF program's prospects.
    Senator Burns. Well, we thank you for--does anyone else 
have any questions for the witness?
    Senator Pryor. Mr. Chairman, I do. I'm sorry I was late 
joining the----
    Senator Burns. Senator----
    Senator Pryor.--hearing.
    Senator Burns.--good to see you.

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you. I'll try to make it very brief.
    Mr. Shane, if I may, I know that three of the things you 
look at and you consider as part of this process are the 
economics, the safety, and the security aspects of an airline. 
Do you, or does your agency, have a clear delineation about 
where one of those starts and the other one ends? Because, to 
me, it seems that they're intertwined. When you talk about 
economics, safety, and security, it seems that some of those 
are inextricably linked, and they overlap. But I'd like to hear 
your thoughts on that.
    Mr. Shane. Well, let's just take safety as an example. We 
absolutely think there has got to be a bright line between the 
safety management of an airline and anything else that goes on 
in the airline. The pilot in the cockpit is the safety officer 
on that aircraft, along with the rest of the crew. And that 
captain has an absolute obligation to provide safe service. 
When a little light goes on in the cockpit suggesting that 
there's a mechanical problem somewhere, the captain does not 
call the Chief Financial Officer of the company, he doesn't 
call the marketing department. He doesn't call anybody. He 
makes a decision based on safety. And if the FAA, in its 
regulation of safety, thought that there was any compromising 
of that independence, that airline would probably be grounded. 
So, there is a long history of drawing bright lines between 
safety, on the one hand, and the commercial operations of an 
airline, on the other.
    Senator Pryor. When you talk about the commercial 
operations, you mention the pilot, but what about the general 
maintenance? There are a lot of economic aspects to the 
maintenance of these airplanes. And, as you well know, that can 
be very expensive. So, again, maybe there is a bright line, but 
I'm not so sure. I'd like to know, for the Committee's 
understanding, I'd like to know where those lines are drawn so 
that maybe we could get comfortable with this; whereas, some of 
my colleagues may not be right now. Is that fair enough? Can 
you provide that to the Committee?
    Mr. Shane. Yes, Senator, thank you.
    Senator Pryor. Another question I have is in regards to the 
ability to contract. In other words, if a foreign investor 
group comes in, is there anything in your proposal, or what you 
would like to see happen--is there anything that might prevent 
the airline from entering into a contract that might give them 
various decisionmaking authority in various areas, maybe more 
than the 25 percent stake they may have, but where, in effect, 
they may actually have actual control of the airline? Is there 
anything that would prevent entering into such a contract?
    Mr. Shane. Well, the Department would insist that the 
majority shareholders and the majority of the board remain in 
actual control of the airline. U.S. citizens must be in actual 
control of the airline at all times. If there is to be any 
delegation to the foreign investors or foreign citizens of any 
aspect of the commercial operations, it has got to be pursuant 
to an agreement which gives them that ability, but that 
agreement is still subject, at the end of the day, to the 
ultimate decisionmaking of the majority shareholders, the U.S. 
citizens, who, if they don't like the outcome of that activity, 
if they don't think it's delivering value to the airline or to 
its shareholders, are in a position to terminate it. That's 
what the Department's review would ascertain. That's the only 
way we can sit here and say with a straight face that U.S. 
citizens remain in actual control, notwithstanding the fact 
that there are foreign citizens exercising some influence over 
some commercial aspects of the company.
    Senator Pryor. Well, the reason I ask that is because I can 
see a circumstance in which a U.S. airline is in distress, 
financial distress, and some foreign investment group comes in 
and says, ``We'll buy up to 25 percent,'' and basically bail 
out the airline, get you back on financial footing. They may 
have, in my view, much more influence with that airline, 
because, in effect, they save the airline, more so than what 
the 25 percent stake may be. Twenty-five percent is a big stake 
in any company, but they may have more influence than that, and 
the Board may defer to them in ways that they wouldn't 
otherwise. I have that question. Would you comment?
    Mr. Shane. Well, I want to be clear. That is what we 
contemplate. If the board--whether it was a bailout situation 
or simply an arm's-length relationship with new investors, if 
the board--if the majority of the board felt that having the 
investor play a more substantial, meaningful role in the 
commercial operation of the airline, that that would be in the 
interest of shareholders, even beyond the 25 percent interest 
that they own, they would be permitted to do that. That would 
be the change that we are proposing. Today, under--in the 
present policy, there is no possibility of attracting that 
investment, because there is no possibility of giving any 
foreign investor anything to say--any way of protecting his or 
her investment.
    Senator Pryor. Mr. Chairman, I'm out of time. Thank you.
    Senator Burns. Thank you.
    And thank you, Mr. Secretary. I appreciate your appearance 
here today. And I'm sure there'll be further questions on this. 
And if you could respond to the Committee and the individual 
Senator, I'd certainly appreciate that.
    Mr. Shane. We will, Mr. Chairman. Thank you very much.
    Senator Burns. Thank you very much.
    Now our second panel today, made up of Mr. Frederick Smith, 
Chairman, FedEx Corporation, of Memphis, Tennessee; Mr. Jeffrey 
Smisek, President, Continental Airlines, Houston, Texas; Mr. 
Michael Whitaker, Senior Vice President--Alliances, 
International and Regulatory Affairs, for United Airlines; and 
Captain Duane Woerth, President, Air Line Pilots Association, 
from here in Washington, D.C.
    Gentlemen, we welcome you to the Committee today and look 
forward to your testimony.
    Captain, good to see you again.
    We'll start off, today, with this panel, with Mr. Frederick 
Smith, FedEx Corporation, out of Memphis.
    So, Mr. Smith, thank you very much for coming today.

STATEMENT OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CEO, 
                       FedEx CORPORATION

    Mr. Smith. Thank you, Mr. Chairman. On behalf of 260,000-
plus folks that make their living with FedEx, we're pleased to 
be represented at this hearing.
    FedEx Express, our largest operating company, is the 
largest transporter of goods by air in the world. It operates 
the largest fleet of wide-body airplanes in the world, the 
largest fleet of cargo wide-body airplanes of any fleet in the 
world. It provides over half of the DOD Civil Reserve Air Fleet 
cargo airlift. And, in fact, during the Desert Storm/Desert 
Shield operations, moved over 30 percent of all the cargo that 
was moved into the theater in support of U.S. operations. We 
operate throughout the world, with extensive networks in 
Europe, across the Atlantic, into Latin America, across the 
Pacific, intra-Pacific, through our hub in Manila, the 
Philippines, and between Asia and Europe. We are very familiar 
with the history of the aviation bilateral system that 
Congressman Oberstar did such a good job of explaining. As he 
noted, the United States tried to get a multilateral regime 
and--over the objections of the British and others. And, in 
that last analysis, a bilateral regime was adopted. This has 
resulted in some 10,000 separate aviation bilateral treaties. 
And, over the years, this bilateral system has been an 
effective tool for carriers and governments who want to protect 
vested interest to restrain competition and progress in the 
aviation markets. We, at FedEx, are the product of deregulation 
and have worked hard to achieve Open Skies Agreements around 
the world. And there has been a great deal of progress. We are 
particularly interested in an Open Sky Agreement such as the EU 
and the U.S. have tentatively agreed upon, which would allow us 
to significantly expand our operations within the EU, and from 
the EU to Asia.
    The NPRM that the Department of Transportation has 
proposed, listening to the conversation today, has been stood 
on its head. In actual fact, the chart that Senator Lautenberg 
put up there, with the blue and the red circles are not the 
things that the carrier--the minority investor, the foreign 
investor, can control; in fact, they are the things that they 
cannot participate in. The facts of the matter are that 75 
percent of the U.S. air carrier must be owned by American 
interests and under the actual control. And that means 
schedules and so forth.
    The protection that's afforded by this NPRM was a direct 
descendant of many of the investments made particularly by 
European carriers which ended up very badly for those carriers. 
You will hear from Continental Airlines today about their 
opposition to this NPRM. In fact, Scandinavian Airlines System 
made a significant investment in Continental in 1988 and 1990, 
I think, and lost that investment when it went bankrupt. KLM 
made a substantial investment in Northwest. You will hear from 
Captain Woerth about that. It was not the investment in 
Northwest by KLM that allowed them to coordinate their 
schedules and to allow KLM to do flying which should have been 
done by American interests. It was the antitrust immunity in 
the alliance that was provided by the Department of 
Transportation under the current bilateral system. And in 
Memphis, for instance, the flight was--KLM flies our flight to 
Amsterdam off the Northwest complex there as a result of that 
collaboration, which, in any other industry, would be illegal.
    So, we feel that this NPRM, which codifies what foreign 
interests can and can't do, and gives them some protection, as 
opposed to the 1940 regulations that Secretary Shane mentioned, 
is a very good thing, and, if it leads to Open Skies with 
Europe, that's good for American aviation interests, it's good 
for American employees, it's certainly good for FedEx.
    And, finally, Mr. Chairman, I would note to you that the 
term ``actual control'' really comes from our industry, when 
foreign interests bought into one of our competitors and we and 
United Parcel Service vehemently objected to these foreign 
interests exerting what we felt was de facto control, even 
though there was a de jure majority American shareholder that 
owned 75 percent. So, there's a long history to this bilateral 
system. There's a long history to this negotiation. And we 
would urge the approval of the Congress of this NPRM and the 
negotiation of a new Open Skies Agreement between the United 
States and the EU.
    [The prepared statement of Mr. Smith follows:]

Prepared Statement of Frederick W. Smith, Chairman, President, and CEO, 
                           FedEx Corporation
    Chairman Stevens, Ranking Member Rockefeller and members of this 
Subcommittee, I appreciate the opportunity to testify today on this 
important matter. Aviation liberalization has been critical to our 
company, FedEx, since it was founded in 1973. Opening up the air 
transport market has allowed U.S. air carriers to innovate and develop 
new products such as our overnight express service. The DOT's proposed 
rule will move U.S. aviation policy in a positive direction, for 
shippers, passengers, and our national economy.
    Today, I would like to briefly address the merits of the DOT's 
proposed rule. Then, I would like to expound on the benefits to all 
Americans of trade liberalization in general, and aviation 
liberalization in particular.
I. Department of Transportation's Proposed Rule
    The DOT has crafted a Rule with at least four salient and 
attractive benefits. First, the DOT's proposal is straightforward. It 
would allow foreign investors to take part in certain commercial 
management tasks at a U.S. airline and thereby protect their 
investment, without fear that DOT will decide that they are in ``actual 
control'' of that airline. Since the existing statute limits foreigners 
to a minority equity position in a U.S. airline, overall ``actual 
control'' will at all times remain in the hands of U.S. citizens.
    Second, the DOT's proposal is a modest one; it does not change 
current law. Instead, DOT is encouraging foreign investment by adding 
more certainty to what ``actual control'' means. This interpretation is 
the normal exercise of discretion that administrative agencies such as 
the DOT have. The NPRM provides for areas in which foreign 
participation will be allowed--the commercial arena--and reserves 
others for U.S. citizens--matters of safety and security. By 
bifurcating the management responsibilities--a technique used in other 
security-sensitive businesses--the proposal would work well for U.S. 
carriers, U.S. airline employees and management, as well as the foreign 
investment that it seeks to encourage, without harming U.S. 
governmental interests.
    Third, the DOT's proposal encourages foreign direct investment in 
U.S. airlines. Direct investment benefits our economy in several ways. 
By increasing the number of bidders for U.S. businesses, foreign 
investment increases the prices the U.S. owners can hope to realize. 
New investors often introduce efficiencies or new technologies. A 
foreign investor can enhance competition, leading to better service at 
lower prices. Finally, since a foreign investor will invest only if it 
thinks it can make a profit, the investment should make jobs more 
secure and increase tax revenues.
    Finally, adoption of the Rule protects U.S. companies by assuring 
``equal opportunities'' between trading partners. Only those investors 
from like-minded countries can claim its benefits. By requiring 
reciprocal investment opportunities, it will assure that U.S. investors 
will be able to participate in other countries' air markets. This is 
good news for our airlines that want to spread their business models 
beyond our domestic market. Further, the rule offers a new incentive 
for countries to enter into Open Skies agreements--supporting what is, 
without a doubt, the most successful policy initiative of the DOT in 
the last quarter century. For airlines like FedEx, which need the 
foreign access provided by Open Skies to participate in new markets, 
this is the best news. How these incentives work are laid out in our 
DOT comments, which I ask be incorporated into the record as part of my 
written testimony.
II. Benefits of Trade and Aviation Market Liberalization
    While the proposed DOT rule is clearly beneficial to the United 
State, I believe the central question to this debate is more 
fundamental. Does removing trade barriers and liberalizing aviation 
markets benefit the United States? The short answer to this question is 
``yes.'' Trade liberalization is beneficial, necessary and rational -
America should be enhancing opportunities for foreign investment and 
foreign commercial participation in a critical infrastructure industry 
such as aviation. Several important points must be made in support of 
aviation liberalization.
    International air transportation is now a global industry, not 
merely a bilateral one. Connecting the U.S. to foreign points is an 
important function, but as services expand, carriers can make such 
connections more efficient and effective if they can develop networks 
that include third country market opportunities. FedEx is among the 
best at building networks--our international hub and spoke air network 
is without peer--but we could not have accomplished this without the 
system of aviation agreements spawned by the Open Skies policy of the 
DOT. Today, the DOT is trying to move beyond these bilateral agreements 
to multilateral ones, which can create even more efficient networking 
opportunities.
    The multilateral agreement with the most immediate possibility and 
enormous potential impact is the U.S.-EU agreement. Under the 
provisions of this new agreement, FedEx would be able to continue 
building its network with the completion of a system of intra-European 
Fifth Freedom rights--the rights to operate in international markets 
beyond our shores--and we very much support that proposed agreement. 
With this proposed agreement, market barriers such as the antiquated 
Bermuda II agreement would end. Our services would be made more 
efficient and our network stronger, which would benefit both our U.S. 
and our global customers. We would expand our airline's reach, creating 
more jobs for our pilots on the much-desired international flying legs. 
The negotiated terms of this agreement are available at this time, but 
this window will not remain open indefinitely. To extend what has 
already been a long and difficult negotiation puts this carefully 
crafted agreement in jeopardy.
    However, while FedEx is seeking access to international markets 
beyond the United States, foreign airlines, competitors, and investors 
are eyeing the U.S. market. Some may want to link their international 
network more closely with a U.S. carrier, while others see possibility 
in bringing new business models, which would add new dimensions to the 
U.S. marketplace. Market liberalization will benefit the U.S. consumer. 
Domestic deregulation has been, at times, difficult and controversial, 
but the biggest beneficiary has been the U.S. consumer. Expanding 
market participation internationally, in the measured, controlled 
manner DOT has proposed, can only improve the services available to 
U.S. shippers and travelers.
    No discussion of trade liberalization is complete until we address 
the impact that market liberalization has on American jobs. Despite 
what you hear, trade liberalization benefits U.S. workers. We've heard 
a lot about the risk of job migration offshore--in fact, I have no 
doubt that you will hear more about it as this debate continues. But 
throwing up trade barriers and stopping the internationalization of 
aviation does not create jobs, it merely fences them off inefficiently. 
Ultimately, healthy, competitive companies create jobs, regardless of 
their homeland. We need to provide U.S. businesses with the best 
possible tools to reach new markets, to obtain the best capital and 
management, and thus to create the very best jobs right here in our 
home market.
    Some opponents have claimed that liberalizing aviation markets 
would undercut the U.S. CRAF program. The DOD is not saying that. The 
DOT supplemental notice reflects that the DOD has reviewed the proposal 
and agrees with it. As long-time participants, we believe that the CRAF 
program, an important part of U.S. defense logistics, will not be 
harmed by this proposal. CRAF participation today provides profitable 
government contracting incentives for U.S. companies, and we believe 
that foreign investors would support pursuing those profitable 
opportunities as well.
    Globalization cannot be one way. If the U.S. wants to expand 
opportunities for its businesses abroad, it must provide opportunities 
for others here at home. America has benefited tremendously from 
foreign investment. There is nothing novel or theoretical about the 
proposition that greater foreign investment can benefit U.S. airlines 
and their U.S. employees. It is an incontestable fact that past foreign 
investment in U.S. airlines has saved and created U.S. jobs. British 
Airways' investment in US Airways, Scandinavian Airlines' investment in 
Continental and KLM Royal Dutch Airways' investment in Northwest all 
protected U.S. jobs, and none of these investments spurred an offshore 
exodus of U.S. jobs. In fact, the exact opposite was true--they 
stimulated new American jobs.
    At the same time, U.S. companies have become world players through 
reciprocal foreign investment. FedEx has invested in major facilities 
abroad to open up new markets to U.S. shippers and exporters, including 
our hub in Paris and the planned hub in Guangzhou, China. With these 
hubs, we are able to offer U.S. businesses more efficient worldwide 
express services, creating American jobs as we grow. So, foreign 
investment can be good for U.S. businesses, workers, and consumers. But 
it is, and must be, a two-way street.
    Congress has expressed its concern about the security aspects of 
foreign investment, and I agree that is important. Clearly, we must 
manage the security risks carefully, but we must be careful not to 
block foreign investment altogether. For aviation, the United States 
must continue to require strict compliance with U.S. aviation safety 
and security regulations. The DOT's proposal as supplemented, with its 
safeguards for U.S.-citizen control over functions such as safety and 
security, is a wise and measured way to address that concern.
    I hear some argue that this is the wrong time to be promoting trade 
liberalization, and the concept of open markets is the wrong message to 
send to the rest of the world. They say the United States should be 
protecting, not liberalizing, access to world markets. I disagree: this 
is exactly the right time and the right message for the future of our 
industry. To reject this opportunity would be to send a message that 
the U.S. is no longer interested in new international opportunities for 
its airline industry, at a time when its future--and the future of the 
jobs its supports--hinge on expanding these opportunities.
    Look closely at those opponents of liberalizing aviation markets. 
While they claim important government regulatory concerns motivate 
their arguments, instead their primary concerns are narrow, 
protectionist interests. Their interests have almost nothing to do with 
concerns over ``ownership and control''; in most cases, they simply 
oppose the U.S.-EU bilateral agreement, which the proposal would 
advance. Some airlines want to slow down competitive forces, hoping to 
retain their privileged market positions, and to benefit from the 
indirect government subsidies that protectionism provides. Others have 
been vitriolic, raising false concerns ranging from cockpit security to 
a mass migration of jobs offshore. These arguments are not new, and 
they hold little merit under close scrutiny.
III. Conclusion
    The DOT proposal is another step in a long history of opening up 
opportunities in aviation, in creating value and jobs for our economy, 
and in expanding a dynamic, growing global marketplace. Global trade--
both in goods and in services--presents important opportunities for 
U.S. business and U.S. workers. The DOT proposal encourages global 
trade, starting with the creation of new opportunities for more 
effective foreign participation in U.S. carriers. It opens the door for 
investment by our citizens in aviation abroad. Alone, the proposal is 
good for U.S. airlines, workers, and consumers. Combined with a U.S.-EU 
Open Skies Agreement, it could be a tremendous boost for the U.S. 
aviation industry. We at FedEx support the DOT proposal and hope that 
this committee will do the same.
    On behalf of the 260,000 employees and contractors of FedEx 
Corporation, and especially those at FedEx Express, our express 
transportation company, I want to thank you for inviting me here today.

    Senator Burns. Mr. Jeffrey Smisek, of Continental Airlines?

            STATEMENT OF JEFFREY SMISEK, PRESIDENT, 
                   CONTINENTAL AIRLINES, INC.

    Mr. Smisek. Thank you.
    Good afternoon. My name is Jeff Smisek, and I'm the 
President of Continental Airlines. On behalf of my 42,000 co-
workers, I appreciate the opportunity to express our opposition 
to the Department of Transportation's supplemental notice of 
proposed rulemaking on foreign ownership and control.
    We, at Continental, support increasing U.S. airlines' 
access to foreign capital; however, we continue to oppose the 
Department's proposed rulemaking, for three reasons. First, it 
is unlawful. Second, it is unworkable. And, third, it will not 
result in increased access to foreign capital.
    In their Alice in Wonderland world, the Department of 
Transportation is trying to interpret a requirement that actual 
control of U.S. carriers must be in the hands of U.S. citizens 
to mean that actual control of U.S. air carriers may be in the 
hands of foreign citizens. Both the original proposal and now 
the supplemental proposal would allow foreign citizens to 
control virtually every commercial aspect of a U.S. airline. 
The DOT says it is addressing concerns raised by its initial 
proposal by still allowing foreign control of U.S. airlines, 
but requiring that foreign control be revocable by a majority 
of the board of directors or shareholders. So, the only 
significant difference between the new and the old proposals is 
that the DOT asserts that it will rely on U.S. boards of 
directors and shareholders to protect U.S. interests. Never 
mind that these private citizens have no responsibility and no 
incentive whatsoever to protect national interests rather than 
shareholder interests. Never mind that boards of directors have 
a fiduciary duty to protect shareholder interests, not national 
interests.
    Since the DOT doesn't explain how the revocation might 
work, and doesn't even bother to include it in the actual 
proposal itself, let's think about how it might work in a real-
world example.
    Let's say Senator Inouye--think of him as a foreign 
investor that DOT wants to attract--would like to invest in the 
Commerce Committee, but only if he can share it. So, he offers 
the Committee, through Senator Stevens, a billion dollars, as 
long as Senator Inouye gets to control or chair the Committee 
to make sure his investment's protected. Senator Stevens and 
the other Republicans--think of them as the board of 
directors--agree, because, without the billion dollar foreign 
investment from Senator Inouye, the Committee will be merged 
with the Governmental Affairs Committee, and everyone would 
lose their seniority. Clearly not acceptable.
    So, the Republicans say, ``Sure, we'll take your billion 
dollars, but we must retain the right to revoke your 
Chairmanship anytime we want to.'' Does Senator Inouye say, 
``Fine, you can revoke my right to control the Committee and 
still keep my billion dollars?'' Of course not. Senator Inouye 
will say, ``OK, but if you ever revoke my control, you have to 
pay me back my billion dollars, plus the amount I would have 
made on it, had I invested it somewhere else.'' Let's say a 
$1.2 billion, total.
    Now, Senator Stevens and the Republicans have the 
theoretical right to take the chair back, but only if they can 
cough up $1.2 billion in cash. But if they had $1.2 billion in 
cash sitting around, they wouldn't have turned over control in 
the first place. So, the probability that Republicans are ever 
actually going to revoke Senator Inouye's right to chair the 
Commerce Committee is zero. ``But wait,'' says the DOT, ``maybe 
the voters''--think of them as the Commerce Committee 
shareholders--``will throw out their Republican Senator-
Directors, because they turn control over to the Democrats.'' 
Well, as you know, voters, like shareholders, have nothing to 
do with the day-to-day operations of Senate Committees, and no 
real way to change them, except to theoretically throw out all 
the Senators on the Committee. But the probability that the 
voters in multiple states are going to band together and 
organize a recall of all the Republicans on the Commerce 
Committee is zero.
    Now, you may think this example is laughable, but this 
absurd construct is exactly what the DOT relies on to assure 
the Congress that U.S. citizens will maintain control of U.S. 
airlines, as required by law.
    The probability that the board of directors or shareholders 
of a U.S. airline, having bargained away control to a foreign 
investor in return for a substantial cash infusion, will turn 
around and revoke that control, when it would be contrary to 
the very shareholder interest that the board has a fiduciary 
duty to protect, is precisely equal to the probability of being 
eaten by a shark while being struck by lightning.
    The truth of the matter is, the proposed rule doesn't offer 
any protection whatsoever from foreign domination or control, 
except for a limited, naive, and impractically crafted attempt 
of DOT to carve out safety, security, military airlift, and 
organization documents. But DOT says the EU treaty is so 
important that we can't wait for Congress to change the law, 
and, therefore, DOT must step in, seize power, and immediately 
give foreign investors the right to control U.S. airlines. At 
the same time, DOT says to Congress, ``Don't worry, foreign 
investors won't really have the right to control U.S. airlines, 
because the U.S. directors or shareholders will be able to 
revoke that control anytime they want to.'' But the rule can't, 
and doesn't, do both things.
    The DOT is trying to convince both sides of the Atlantic 
that everyone gets exactly what they want. DOT is promising 
foreign investors that they will have control over U.S. 
airlines, because, otherwise, the EU would refuse to sign the 
Open Skies Agreement. And DOT is promising Congress that 
foreigners won't have control of U.S. airlines. So, the 
proposed rule will create years of substantial uncertainty for 
both foreign and domestic investors as the legal and practical 
consequences are sorted out and, I assure you, litigated.
    Now, I've got a research report from JPMorgan that just 
came out. JPMorgan said in this research report that, ``We 
would now advise--this is based on the SNPRM--that, We would 
now advise European airlines not to invest at all under 
conditions of revocable authority currently proposed.'' I'd 
like to submit the JPMorgan report----
    Senator Burns. Without objection.
    [The information previously referred to follows:]

            JPMorgan--European Equity Research, May 5, 2006

       Goodbye Open Skies--A U.S.-EU Aviation Deal Founders Again

    The U.S. DOT has put a new rule out for comment covering foreign 
ownership and control of U.S. airlines, responding to growing domestic 
protectionist sentiment sparked both by the previous proposed rule and 
by the Dubai/P&O transaction.
    We had not expected the DOT to try to modify its contentious 
proposed rule--we thought that the issue would remain parked in the 
long grass in the hope that protectionism might die down.
    The proposed new rule shifts the balance of the proposal back in a 
U.S. direction, trying to appease the domestic opposition. The 
technique added to the previous proposed rule is to permit controlling 
U.S. shareholders to revoke unilaterally their delegation of authority 
to a non-U.S. airline/investor.
    While this may satisfy some U.S. objectors, we believe that it 
fundamentally undermines the previous liberalisation proposed.
    We had difficulty before in creating plausible scenarios where 
European airlines might invest significant sums in U.S. airlines under 
the last proposed rule.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    We would now advise European airlines not to invest at all under 
the conditions of revokable authority currently proposed, since their 
original basis for investment could be unilaterally withdrawn, leaving 
them with a material minority investment and no control. We have been 
there before with BA/USAir and KLM/Northwest.
    Consequently, we fail to see how this new proposal permits European 
airlines to do anything new in terms of investing in U.S. airlines, and 
we would expect the EC negotiators to tell their U.S. counterparts that 
this proposed rule does not conform with their previously-negotiated 
tentative deal.
    Open Skies between the U.S. and the EU is now, in our view, less 
likely than it was earlier this year (we said ``too hard to call'' in 
January). This has particular implications for London Heathrow, where 
the competitive landscape will not change materially until Open Skies 
arrives. We think that has reverted to ``if'', not ``when''.
The DOT's New Proposed Rule
    The DOT has put a modified rule out for comment on the subject of 
foreign ownership of U.S. airlines. The tentative agreement between the 
U.S. and the EU last year on an Open Skies deal requires change in U.S. 
rules such that EU airlines could take greater control if they invest 
material sums in U.S. carriers. (EU = European Union, i.e. the block of 
25 countries. EC = the Commission which is the negotiator.)
    The initial proposed rule which we wrote on in January this year 
came close to satisfying the EU's objective of permitting EU airlines 
effective control over a U.S. airline's commercial decisions in the 
event of a transaction. The DOT needed U.S. persons to control the 
company's legal documents, and its relations with FAA, DHS, TSA and 
CRAF (safety, security and military airlift), but a non-U.S. investor 
could ``dictate'' commercial policy and decisions. All provided that 
U.S. persons owned 75 percent or more of the voting stock, and 67 
percent+ of the management positions.
Under the Previous Proposal, a Viable Transaction Could Be Drawn
    Under that proposed rule, it was possible to envisage a transaction 
which made commercial sense to contracting parties, even if there would 
be vocal opposition from, for example, U.S. airline labour unions. One 
could see how an EU airline might invest $1 bn-plus in a (bankrupt?) 
U.S. major for a 25 percent equity stake, but accompanied by a contract 
with the 75 percent U.S. owners under which the EU airline could manage 
the U.S. airline (its $1 bn+ investment) in all areas except those 
listed above (safety, security and military airlift). The EU airline 
would be able to manage its investment's route network, commercial 
strategy and labour relations under that scenario.
In January, We Put the Probability of U.S./EU Open Skies as the Best 
        for 20 Years
    Although that rule did not attempt to change the U.S. 75 percent 
voting majority ownership rule, the result of that rule was that an EU 
airline could effectively buy control of most of a U.S. carrier's 
business. Consequently, the rule met the spirit of the tentative open 
skies deal between the U.S. and the EU, and in January 2006 (with 
significant hurdles still to jump) we put the probability of an Open 
Skies deal being too close to call (i.e., 50/50), the best probability 
ever in our near-20 years following this specific issue.
Growing Protectionism Meant That Proposal Foundered
    However, the January proposed rule coincided, unfortunately, with a 
rising tide of global protectionism. In the U.S., there were two 
specific currents which caused that proposed rule to lose relevance, 
First, the Dubai Ports acquisition of P&O, and the consequent potential 
ownership of U.S. port facilities by that acquiror, caused a 
protectionist wave in the media, and this issue is not yet finished. 
Second, Continental Airlines caused a backlash against the proposed 
rule among politicians, and publicly said that it would take the DOT to 
court for acting beyond its jurisdiction.
    In the circumstances, we expected DOT to keep its head below the 
parapet, and simply wait (hope?) for the protectionist wave to die down 
before trying something again. The DOT has not done that--it has 
reissued a new rule for comment, bending in the direction of its 
domestic opponents. However, by shifting ground, we believe that the 
tentative agreement with the EU will now have been lost.
    We see two key changes in the new proposed rule. The first is a 
relatively minor one--U.S. persons' control of matters relating to 
security, safety and military airlift is widened. The second is, in our 
view, a deep, deep cut into the heart of the last-proposed balance 
between U.S. and EU interests in control of a U.S. airline.
The New Rule Permits Management Authority To Be Unilaterally Revoked
    The DOT's new rule permits the U.S. 75 percent voting owners or the 
directors (minimum 67 percent U.S. persons) to unilaterally revoke the 
authority that they have given which permitted a non-U.S. person (i.e., 
an EU airline) to control the U.S. airline's commercial activities. 
This is an important strengthening of the U.S. side of the balance--in 
our view, too much.
    Trying again to create a hypothetical transaction under this new 
scenario appears to us to fail--one side's position is simply not 
commercial. An EU airline, offering to put $1 bn+ equity into a 
(bankrupt?) U.S. carrier, would now contract with the 75 percent U.S. 
voting interests to manage the airline's commercial activities. 
However, even if the contract did not say this, the U.S. shareholders 
could simply revoke the contract at some future point, if, for example, 
they did not like what the EU airline was proposing to do with its 
quasi-acquisition. All fine from the U.S. protectionist side--$1 bn+ of 
foreign equity, 75 percent U.S. voting control and a veto to reverse 
the contract that was the core of the $1 bn injection in the first 
place.
The U.S. Shareholders and/or Directors Would Have That Power
    However, from the EU investing airline, the proposed new rule is 
fundamentally different to the last because of the power of revocation 
given to the U.S. 75 percent voting equity owners. What management 
would invest under such circumstances? The previous rule had many 
queries against it from EU airlines, with the longevity of the new rule 
being a key one--what the DOT set, the DOT could take away. However, 
this new rule gives the other shareholders (and/or the directors) in 
the investment the veto power to unilaterally take away the power that 
they gave in return for a $1bn+ investment.
We Would Not Be Happy To See an EU Airline Invest its Money on These 
        Terms
    We would be less than happy with an EU airline who invested its 
shareholders' money into such an ill-protected investment, We look back 
at BA/USAir and KLM/Northwest for real examples where an initial 
(welcomed) equity stake ended up in rancour/rancor and the courts. If 
revocation of some authority previously granted had been available to 
the U.S. shareholders in either case, it would, we believe, have been 
used,
We Believe That This New Proposal Moves Us Away From Open Skies
    By making the delegation of authority to manage revocable at will 
on the U.S. side, we believe that this new proposed rule does not 
change materially the foreign ownership and control rules for U.S. 
airlines from their current state today. We cannot see how the EC 
negotiators can conclude differently, and would be surprised if this 
proposed rule leads now to U.S./EU open skies.
    We believe that the probability of such an open skies deal has now 
slumped back down to a low level as global protectionism gains ground.

    Mr. Smisek. The truth of the matter is that the DOT has 
developed this tortured and poorly constructed rule as part of 
their blind pursuit of a so-called Open Skies Agreement with 
the EU which is anything but open. The Agreement that U.S. has 
negotiated gives the U.S. combination airlines, like 
Continental, little except the meaningless right to fly to 
London Heathrow Airport without being permitted to land there. 
If we started doing that, we'd run out of airplanes pretty 
fast, because we'd send them over, and they wouldn't come back. 
Commercially-competitive slots and facilities are simply not 
available at London Heathrow, which is the most important 
business market in Europe.
    We, at Continental, believe that the DOT should go back to 
the drawing board on its proposed rule and on the EU treaty. As 
to foreign ownership, DOT should stop trying to take the law 
into its own hands and should instead persuade the Congress to 
change the law in a way that opens additional access to capital 
markets while meeting the national needs. As to the EU deal, 
they should go back to the bargaining table and insist on fair 
access to slots and facilities so U.S. carriers, like 
Continental, will be able to compete, from day one, on a level 
playing field.
    I want to thank you for this opportunity to speak before 
you, and I'd be happy to answer your questions.
    [The prepared statement of Mr. Smisek follows:]

Prepared Statement of Jeffery Smisek, President, Continental Airlines, 
                                  Inc.
    Good afternoon. My name is Jeff Smisek, and I am the President of 
Continental Airlines. On behalf of my 42,000 co-workers, I appreciate 
the opportunity to express our opposition to the Department of 
Transportation's supplemental notice of proposed rulemaking on foreign 
control.
    Continental supports increasing U.S. airlines' access to foreign 
capital, and Continental supported legislation sent to Congress by this 
Administration to nearly double the level of permissible foreign 
investment in U.S. airlines. If Congress takes the leadership, access 
to foreign capital for U.S. airlines can be enhanced lawfully in 
accordance with clear and practical standards. In sharp contrast, the 
Department of Transportation's Supplemental Notice of Proposed 
Rulemaking and the original Notice of Proposed Rulemaking before it are 
unlawful under current statutory standards, totally unworkable in the 
real world of airline operations and likely to inhibit access to 
foreign capital by U.S. airlines. Although the Supplemental Notice of 
Proposed Rulemaking makes some changes in the Department of 
Transportation's description of what it intends to do, the proposed 
policy itself is virtually unchanged and is no more legal, workable or 
likely to encourage investment than the original proposal was. I have 
attached for your consideration the Continental press releases 
responding to issuance of these proposals.
    As Continental's comments on the Department of Transportation's 
Notice of Proposed Rulemaking (copy attached) * amply demonstrated, the 
Department's decision that ``actual control'' by U.S. citizens permits 
``actual control'' by foreign citizens over all commercial aspects of a 
U.S. airline is unlawful. Although the Supplemental Notice of Proposed 
Rulemaking relies on the Department of Transportation's discretion to 
interpret the aviation statutes, in an analogous situation the D.C. 
Circuit said this in reversing a decision of the Securities and 
Exchange Commission interpreting the Public Utility Holding Company Act 
(PUHCA):
---------------------------------------------------------------------------
    * The information referred to has been retained in Committee files.

        The Commission may well be right that PUHCA's region 
        requirement is outdated. . . . In view of the statute's plain 
        language, however, only Congress can make that decision. . . . 
        In the meantime, the Commission may not interpret the phrase 
        ``single area or region'' so flexibly as to read it out of the 
---------------------------------------------------------------------------
        Act.

National Rural Elec. Co-op. Ass'n v. S.E.C., 276 F.3d 609, 618 (D.C. 
Cir. 2002)

    Clearly, ``actual control'' by U.S. citizens means precisely what 
it says: actual control of an entire airline all the time. The 
statutory definition does not say ``actual control sometimes,'' or 
``actual control of parts of an airline's operations,'' or ``actual 
control only of areas already regulated by the government'' or ``actual 
control when foreign owners are citizens of some countries but not 
others.'' Neither the Notice of Proposed Rulemaking nor the 
Supplemental Notice of Proposed Rulemaking provides a shred of 
statutory analysis to suggest that the phrase ``actual control'' of 
U.S. airlines by U.S. citizens was intended to mean control of only 
certain aspects of an airline's operations, control only at certain 
times or control delegated but subject to revocation. Moreover, 
requiring that 75 percent of shareholders, the President and two-thirds 
of Board members and managing officers be U.S. citizens does not 
necessarily mean that U.S. citizens control an airline. If these 
requirements alone always satisfied the control test, there would have 
been no need to impose the additional requirement that the airline be 
under the ``actual control'' of U.S. citizens.
    Congress expressed its view that U.S. airlines must be entirely 
controlled by U.S. citizens when it added the ``actual control'' 
requirement to the aviation statutes in 2003, and over the last 6 
months it has again expressed its view that ``actual control'' of U.S. 
airlines must be vested in U.S. citizens at all times. Beginning with a 
November 18 letter signed by 85 Congressional Representatives saying 
that the Department's proposal is ``contrary to recent Congressional 
mandates,'' including the requirement that U.S. interests ``control 
economic and competitive decisions of the airlines, as well as safety 
and security decisions'' and that the ``Department has overstepped its 
authority in this proposal with its revised interpretation of `actual 
control,' '' Congress has repeatedly expressed serious concerns about 
the Department's unlawful proposal. With nearly 190 co-sponsors, H.R. 
4542 reflects these Congressional concerns, notes that the Department's 
proposal is ``contrary to the plain language'' of the aviation 
statutes, prohibits the Department from issuing its decision for a 
period of 1 year and requires a report from the Department regarding 
the impact of its proposal on U.S. airlines and the aviation industry 
and how the Department would implement its proposed policy. Similarly, 
the House Appropriations Committee unanimously adopted report language 
saying ``the Committee believes that the U.S. aviation industry is part 
of our critical infrastructure as are the ports,'' and ``it is critical 
that any final rule regarding foreign control of U.S. airlines not only 
comply with current laws regarding foreign ownership, but also comply 
with statutes recently passed by the Congress which require that all 
U.S. airlines be under the `actual control' of U.S. citizens'' and 
therefore ``directs the Secretary of Transportation to refrain from 
issuing a final rule for 120 days'' because the ``Committee is 
seriously concerned about the promulgation of any rule which would 
allow any minority foreign investor to exercise control or 
decisionmaking authority over any aspect of a U.S. carrier operation.'' 
More recently, the Senate Appropriations Subcommittee on 
Transportation, Housing and Urban Development and Related Agencies 
adopted legislation that would prohibit the Department from using any 
of its funds to issue or implement a decision in this proceeding or to 
make any fitness determinations based on new standards.
    Other U.S. and foreign airlines also recognize the uncertainty 
resulting from the Department's proposal and the need for Congressional 
action. As US Airways said, the Department's proposal ``could cause 
uncertainty and possible harm to the U.S. airline industry'' (US 
Airways comments at 1), and Delta said, ``Investor concerns about . . . 
the extent to which a statutory amendment may be required to provide 
legal certainty'' and the ``scant guidance'' in the Department's 
proposal on implementation of the control provisions separating 
``commercial'' operations from security and safety areas with which 
they are inextricably intertwined would undermine the Department's 
objectives. (Delta Comments at 8, 11) Alaska also said that Congress, 
not the Department, should address any changes to the control 
standards. (Alaska Comments at 1-2) As Virgin Atlantic put it, ``the 
NPRM raises as many questions as it answers, creating an unacceptably 
high level of uncertainty for would-be investors'' (Virgin Atlantic 
Comments at 1) Similarly, British Airways said the Department's 
``objectives would best be achieved through amendment or elimination of 
the existing statutory restrictions'' and recognized that the 
Department's proposal would be ``subject to potential reversal or 
modification by Congress, the Federal Courts or the Department 
itself.'' (British Airways comments at 1)
    In the wake of these extraordinary public and Congressional 
concerns about the control of critical transportation facilities by 
foreign nationals and pending legislation, the Department should 
suspend its pending rulemaking proposal and instead seek legislation to 
make any potential changes to the definition of ``actual control'' in 
the aviation statutes.
    Indeed, the very proceeding in which the Department now plans to 
abandon the unequivocal decades-long interpretation of the actual 
control requirements was begun because of Congressional concern about 
the lack of clear, published standards for determining that actual 
control of airlines was held by U.S. citizens and the lack of 
transparency in the Department of Transportation's procedures for 
reviewing citizenship determinations. Congress had even been forced to 
pass legislation requiring the Department of Transportation to 
institute a formal proceeding to investigate the citizenship of a cargo 
airline after years of complaints by Federal Express and United Parcel 
Service that the cargo airline was controlled by foreign interests. 
Despite these repeated Congressional criticisms, however, the 
Department of Transportation is proposing to publish only the most 
skeletal policy statement and to continue making its foreign control 
determinations behind closed doors in negotiations with foreign 
investors and the airlines they seek to control.
    Although the Department of Transportation has described its 
original and supplemental proposals as a ``clarification'' of its 
interpretation in the U.S., it has told foreigners that the proposals 
represent a ``profound change'' to the actual control standards. The 
proposals clearly represent a profound change since they are 
diametrically opposed to the standards historically applied and the 
actual words of the statute. They are anything but a ``clarification.'' 
They would be better described as a ``reversal'' and an ``obfuscation'' 
than a ``clarification.''
    The entire text of the proposed Department of Transportation policy 
is:

        (b) Policy. In cases where there is significant involvement in 
        investment by non-U.S. citizens and either where their home 
        country does not deny citizens of the United States reciprocal 
        access to investment in that country's carriers and does not 
        deny U.S. air carriers full and fair access to its air services 
        market, as evidenced by an Open Skies Agreement, or where it is 
        otherwise appropriate to ensure consistency with U.S. 
        international legal obligations, the Department will consider 
        the following when determining whether U.S. citizens are in 
        ``actual control'' of the air carrier:

           (1) All organizational documentation, including such 
        documents as charter of incorporation, certificate of 
        incorporation, by-laws, membership agreements, stockholder 
        agreements, and other documents of similar nature. The 
        documents will be reviewed to determine whether U.S. citizens 
        have and will in fact retain actual control of the air carrier 
        through such documents.

           (2) The air carrier's operational plans or actual operations 
        to determine whether U.S. citizens have actual control with 
        respect to:

             (i) Decisions whether to make and/or continue Civil 
        Reserve Air Fleet (CRAF) or other national defense airlift 
        commitments, and, once made, the implementation of such 
        commitments with the Department of Defense;

             (ii) Air carrier policies and implementation with respect 
        to aviation security, including the transportation security 
        requirements specified by the Transportation Security 
        Administration; and

             (iii) Air carrier policies and implementation with respect 
        to aviation safety, including the requirements specified by the 
        Federal Aviation Administration.

    Clearly, these skeletal provisions raise more questions than 
answers, and not one of the ``safeguards,'' such as revocability, cited 
by the supplemental notice's rationale is even mentioned in the policy 
itself. What is ``significant involvement in investment'' by non-U.S. 
citizens? What does ``reciprocal access to investment'' mean? In what 
situations would it be ``otherwise appropriate to ensure consistency 
with U.S. international legal obligations'' to permit foreign control 
by citizens of a country which neither permits reciprocal investment 
nor has an open-skies agreement with the U.S.? Although the proposed 
policy says the carrier's ``organizational documentation'' will be 
reviewed ``to determine whether U.S. citizens have and will in fact 
retain actual control of the air carrier through such documents,'' the 
Department's own statements make perfectly clear that the Department 
has no intention whatever of insuring that the air carrier is actually 
controlled by U.S. citizens. How could the Department of Transportation 
actually ``consider'' an ``air carrier's operational plans or actual 
operations'' to determine whether U.S. citizens have actual control 
with respect to decisions on CRAF or other national defense commitments 
and implementation of those commitments, policies and implementation 
``with respect to aviation security'' and ``aviation safety?'' The 
standards that would apply to any of these decisions are totally absent 
from the proposed policy.
    Just as importantly, no one will ever know what standards are being 
applied, or have been applied, to citizenship determinations since the 
decisions will be reached behind closed doors in negotiations between 
foreign investors, the airlines they are investing in and Department of 
Transportation officials who are not experts in corporate governance or 
airline operations.
    Although the Supplemental Notice of Proposed Rulemaking purports to 
broaden the scope of U.S.-citizen control required for safety, security 
and national defense decisions, it fails to recognize the fundamental 
fact that corporate control of such decisions cannot be bifurcated. 
Clearly, every decision that affects budgets, personnel, promotions, 
wage rates, financing and investment affects safety, security and 
national defense. If indeed ``all critical elements of a carrier's 
decision-making that could impact safety, security and national defense 
airlift'' must be made by U.S. citizens who are not beholden to foreign 
investors, then foreign citizens may not control aircraft acquisition, 
routes, financing, budgets, personnel or any other significant aspect 
of the U.S. airline's management or operations. That may be what the 
Department of Transportation is telling its U.S. audience, but you can 
bet assurances will be given Europeans that such constraints will not 
be applied.
    Although the Department of Transportation's witness in House 
hearings testified that foreign citizens could contract with U.S. 
airlines to transfer control for all commercial aspects of an airline's 
operation to foreign citizens, the Supplemental Notice of Proposed 
Rulemaking raises even more questions about how control would be 
monitored and distributed. Although the supplemental proposal would 
require U.S. citizens to ``control the carrier's organizational 
documents,'' it would not prevent those citizens from amending those 
organizational documents to turn control over to foreign citizens to 
facilitate the ``greater alliance integration'' and consolidation in 
the airline industry that the Department of Transportation supports.
    Although super-majority, ``golden share'' and other control 
provisions are normally bargained for and exchanged for significant 
financial benefits, the Supplemental Notice of Proposed Rulemaking says 
that the Board or voting shareholders must retain the power to revoke 
delegations of managerial responsibilities to foreign investors and 
that the ability to revoke the delegation could not be conditioned on 
terms that would make revocation ``impracticable.'' This requirement 
appears nowhere in the proposed policy, and constant monitoring by the 
Department of Transportation to ensure that agreements between the 
parties have not made revocation ``impracticable'' would require hiring 
airline, financial, legal and corporate governance experts. Would 
revocation be ``impracticable'' if the result would be termination of a 
codeshare or alliance with a foreign airline partner? Would refusing to 
make further foreign investments needed by the U.S. airline in the 
event of revocation render revocation ``impracticable?'' Would a 
mandatory redemption of equity securities or repayment of indebtedness 
render revocation ``impracticable?'' Once a U.S. airline had terminated 
its transatlantic flights in favor of its foreign partner's flights, 
would revocation be ``impracticable'' because the U.S. airline would 
lose access to transatlantic traffic?
    The Department's proposal to bifurcate a carrier's management and 
operations into foreign-controlled and U.S.-controlled segments is both 
naive and totally unworkable. As Continental and other airlines have 
explained, safety, security and defense commitments are integral to an 
airline's entire operations and cannot be separated from ``commercial'' 
decisions. If, as the supplemental notice of proposed rulemaking 
indicates, foreign investors could not hire and fire corporate 
officers; all managing officers responsible for safety, security and 
national defense must have only U.S.-citizen supervision; and budgets 
and compensation for these areas must be determined only by U.S. 
citizens who may not be appointed by or otherwise beholden to'' foreign 
interests, then the scope of delegable foreign control would be 
extremely narrow since any significant financial, fleet, resource 
allocation or integrated budget could not be subject to foreign 
influence. Given the Department of Transportation's objective of 
offering foreign investors effective control to cement their alliances 
with U.S. airlines and protect their investments, however, it seems 
unlikely that the Department of Transportation would take the steps 
necessary to prevent foreign influence over these significant resource 
allocation decisions.
    Beyond super-majority provisions that require concurrence for 
bankruptcy or dissolution, the Department says it cannot define what 
kind of super-majority provisions would violate the requirement that 
``actual control'' remain with U.S. citizens, providing no discernible 
standards by which to test proposed transactions and leaving all such 
decisions to the obscurity of private, closed door meetings between the 
Department of Transportation and foreign investors. Although the 
Department of Transportation says it would approve of ``standard 
provisions obtained by minority shareholders,'' it is unable to name 
any such provisions except for those related to bankruptcy or 
dissolution.
    Although the Department's original proposal indicated that foreign 
investors could control fleet decisions, the Supplemental Notice of 
Proposed Rulemaking says that a ``carrier could not allow foreign 
investors to make decisions that would make participation in or other 
national defense airlift operations impossible as a practical matter,'' 
in direct contradiction of advice given to European negotiators by the 
Department of Transportation's Under Secretary that foreign investors 
could control the ``commercial decision'' whether to participate in 
CRAF or not as well as fleet decisions that would eliminate all CRAF-
eligible aircraft from the U.S. airline's fleet. Now, the Supplemental 
Notice of Proposed Rulemaking says that it ``would likely investigate'' 
if a U.S. carrier's ability to contribute to CRAF or other national 
defense airlift operations were precluded by ``decisions made or 
significantly influenced by foreign investors.'' Apparently this 
``investigation'' would occur after a U.S. carrier had already become 
unable to contribute to the U.S. airlift. But how would that preserve 
the ability of our Department of Defense to move the troops? Could the 
deed be ``undone?'' Would the Department of Transportation require that 
planes that have been sold, transferred or otherwise disposed of be 
brought back to the U.S. carrier's fleet? Even if the Department of 
Transportation could unwind any transaction or series of transactions 
that created the problems for the Department of Defense as to military 
aircraft--could it possibly be done in the real time that the 
Department of Defense might need to move troops to a conflict in a 
timely manner? Of course not. Even worse, what is the likelihood that a 
U.S. airline controlled by a foreign government or an airline owned by 
a foreign government would volunteer for national defense missions 
enforcing U.S. policies the foreign government opposes?
    Both the original proposal and the supplemental proposal assume 
that corporate decisions can be separated into distinct compartments 
and that boards and shareholders can and will undertake the 
Department's responsibility to ensure that U.S. citizens actually 
control the airline regardless of the economic interests of the 
directors and shareholders themselves. As the supplemental notice 
itself points out, ``strategic investors'' in U.S. airlines do not 
invest to maximize shareholder value per se but to maximize integration 
between the strategic investor and the airline being invested in. That 
integration may well enhance shareholder value, but it could do so at 
the expense of airline employees and other vital interests of the U.S. 
airline and its stakeholders. Formation of a new U.S. airline to feed 
traffic between major U.S. cities and a foreign investor airline's U.S. 
gateways may well enhance the foreign investor's interests and the U.S. 
airline's profitability while draining traffic and revenue from U.S. 
airlines that today provide comprehensive network service including 
small cities throughout rural America as well as the major cities 
served by the foreign-controlled airline. The network airline may be 
forced to terminate services at smaller cities to survive the onslaught 
of new foreign-controlled airlines on major U.S. routes feeding traffic 
to international foreign-airline competitors. And a nominally U.S. 
airline owned or subsidized by a foreign government would create an 
even greater threat to U.S. owned, operated and controlled airlines.
    The ultimate responsibility for directing the affairs of any 
corporation resides with the board of directors, where one-third of the 
members could be appointed by the foreign investor. Although the boards 
meet only four to eight times a year and do not manage day-to-day 
affairs of a company, they appoint a company's executive officers and 
exercise their authority by hiring, firing, demoting or promoting 
senior corporate officers, setting overall corporate policy and 
monitoring corporate results. Lacking sufficient time, power or 
information to manage a company, corporate boards rely on a 
corporation's management for information about what and how a company 
is doing, and management ties to a foreign investor who may well be the 
largest single shareholder in the company will clearly influence what 
management does and what it reports to the board. Under standards 
recognized by virtually every government agency that has considered 
``control,'' it is clear that an investor holding a significant share 
of voting stock exceeding 10 percent of the total voting shares can 
possess control: ``the power to direct or cause the direction of the 
management and policies of'' a company ``whether through the ownership 
of voting securities, by contract, or otherwise.''
    The likelihood that individual, disparate smaller shareholders who 
collectively own a majority of the voting stock would be able to 
counteract the power of a large, focused minority investor and the 
company's management would be exceedingly slim. Although shareholders, 
like creditors and minority investors, may have specific rights to vote 
on extraordinary matters such as mergers, bankruptcy or dissolution and 
recapitalizations, their only recourse otherwise is engaging in an 
extremely difficult, expensive and rarely successful proxy fight to 
nominate their own slate of directors. Other than the replacement of 
directors, shareholders have no practical way to affect directly how a 
corporation operates or to have a voice in a corporation's management. 
As a practical matter, shareholders have about as much practical 
ability to affect corporate policies by vote as the U.S. public has to 
repeal Acts of Congress by amending the Constitution. And those actions 
happen with about the same frequency--practically never.
    As the DOT neither explains how revocation might work nor includes 
it in the actual proposed rule, let's think about how it might work in 
a ``real world'' example. Let's say Senator Inouye would like to invest 
in the Commerce Committee but only if he can chair it. So, he offers 
the Committee, through Senator Stevens, $1 billion as long as Senator 
Inouye gets to ``control'' or chair the Committee to make sure his 
investment is protected. Senator Stevens and enough of the Republicans 
agree, because without the $1 billion investment, the Committee will be 
merged with the Government Affairs Committee and everyone would lose 
their seniority--clearly not acceptable! So, the Republicans say, 
``we'll take your $1 billion but we need to retain the right to revoke 
your Chairmanship at any time we want to do so!''
    Does Senator Inouye say--fine--the Republicans can revoke my right 
to chair and still keep the $1 billion? No, of course not! Senator 
Inouye may say OK--but if you ever revoke my control you have to give 
me back my $1 billion plus the amount I would have made on it had I 
invested the money elsewhere--say $1.2 billion total.
    Now, Senator Stevens and the Republicans (think of them as the 
Board of Directors) have the theoretical right to take the Chair back--
but only if they can cough up $1.2 billion in cash. But, if they had 
$1.2 billion sitting around in cash they wouldn't have turned over the 
Chair in the first place! So the likelihood that the Republicans are 
actually ever going to be able to revoke Senator Inouye's right to 
chair the Commerce Committee is zero.
    But wait, maybe the voters (the Commerce Committee Shareholders) 
will throw out their Republican Senator/Directors because they turned 
over control to the Democrats? Well, as Senators know, voters (like 
shareholders) have nothing to do with the day to day operations of 
Senate Committees and no real way to change them except to throw out 
the Senators on the Committee. So, the likelihood that the voters in 
multiple states are going to get together and organize a recall is 
zero.
    Senators may think this example is laughable, but this absurd 
construct is exactly what the DOT relies on to assure the Congress that 
U.S. citizens will maintain control of U.S. airlines as required by 
law.
    The Department of Transportation claims that control of 
fundamental, pervasive, interrelated fleet, pricing, marketing, 
financing, ``commercial'' and safety, security and defense management 
and operating decisions can be separated because antitrust-immunized 
airlines have apparently been able to avoid colluding on specific full 
fares on a few specific international routes. While extremely-limited 
carve-outs may be possible for a few airline fares on a few routes or 
for such one-time major issues as mergers, bankruptcy/dissolution and 
recapitalization, separating control of some pervasive operating issues 
from other pervasive operating issues is no more possible than 
unscrambling eggs. Since all of an airline's decisions are 
``commercial'' and have effects throughout the organization, separation 
of control of specific items is impossible. Moreover, this is nowhere 
more true than in the area of legal and regulatory compliance. Everyone 
may be in favor of safety and security compliance, but the real issue 
is what resources, both financial and human, will be devoted to those 
areas rather than to more commercially-beneficial areas. Time and 
again, the root cause of a compliance failure is unwillingness to spend 
the money necessary to create and maintain an effective compliance 
infrastructure. Although U.S. citizens controlling U.S. airlines are 
aware of the extraordinary importance of optimizing safety and 
security, foreign investors may not be. Compliance generates costs, not 
sales, and a company facing criticism from analysts and falling stock 
prices as well as marketing or customer service issues may well find 
that its foreign investors insist on allocating resources to priorities 
other than safety and security.
    Because ``control'' is a practical test which cannot be measured by 
share ownership and management numbers, the Civil Aeronautics Board, 
the Department of Transportation and Congress have all recognized that 
``actual control'' by U.S. citizens must be maintained in addition to 
the numerical standards in the aviation statutes. In addition to super-
majority voting requirements, classes of shares with different voting 
rights, contractual arrangements in debt, equity or management 
agreements, voting agreements among shareholders, agreements as to 
composition of key Board committees and the practical effects of a 
concentrated holding of up to 25 percent with a widely-dispersed 
holding of up to 75 percent can readily and effectively hand control of 
a U.S. airline over to foreign interests.
    The current proceedings before the Department of Transportation to 
reconsider foreign control standards began as an effort to strengthen 
the standards to ensure U.S. control of U.S. airlines and to make the 
process more public and transparent. Only when the prospect of a U.S.-
EU deal entered the picture did the proposal make a 180 degree turn and 
become a proposal to permit near total foreign domination and control 
of U.S. airlines and retain the clandestine procedures previously 
followed. Disclaimers to the contrary notwithstanding, it is perfectly 
clear that the Department of Transportation is pursuing its effort to 
allow foreign control of U.S. airlines to secure a multilateral ``open 
skies'' agreement with the European Union. The U.S. already has Open 
Skies Agreements with The Netherlands, Belgium, Finland, Denmark, 
Norway, Sweden, Luxembourg, Austria, Switzerland, the Czech Republic, 
Germany, Romania, Italy, Portugal, Poland, France, Albania, and Bosnia 
and Herzegovina, and those Agreements permit airlines of those 
countries to offer service between any point in Europe (or the world) 
and any point in the U.S. as well as permitting all U.S. airlines to 
offer service between any point in the U.S. and any points in one or 
more of those countries. Moreover, in other European countries that 
have not yet signed Open Skies Agreements, U.S. airlines are already 
offering substantial amounts of services and have been freely able to 
expand, with one primary exception: access to London Heathrow.
    Since most European countries already have open skies agreements 
with the U.S., there are very few limitations on the rights of U.S. 
airlines to serve points throughout Europe. London Heathrow, Europe's 
largest and most significant airport for U.S.-Europe travel, is closed 
to entry by additional U.S. airlines by the U.S.-U.K. bilateral air 
transport agreement, and it would remain effectively closed to 
additional U.S. airlines even if the U.S.-Europe multilateral open 
skies agreement were signed because competitive slots and facilities 
will not be available at London Heathrow to remedy the effects of years 
of discrimination against Continental and other U.S. airlines denied 
entry at London Heathrow. (See the attached report by the London 
Heathrow slot coordinator.) Absent the provision of competitive, 
economically-viable slots and facilities to Continental and other U.S. 
airlines historically excluded from London Heathrow, the greatest 
single impediment to free and fair U.S.-Europe competition will remain 
in place with or without a U.S.-EU multilateral agreement. The right to 
fly is meaningless without the right to land.
    Usurping Congress's role in determining the scope of permitted 
foreign control over U.S. airlines for the purpose of securing an 
agreement with the European Union for the meager benefits to 
combination carriers and the passengers they serve that might result 
from such an agreement would be a poor trade at best. Without 
competitive, economically-viable slots and facilities at London 
Heathrow--the primary bottleneck for effective U.S.-Europe 
competition--available to independent U.S. airlines such as 
Continental, reaching an agreement by standing the ``actual control'' 
standard on its head would be a travesty.
    We believe the Department of Transportation should go back to the 
drawing board on its proposed rule and on the EU treaty. As to foreign 
ownership, the Department of Transportation should stop trying to take 
the law into its own hands and should instead persuade the Congress to 
change the law in a way that opens additional access to capital markets 
while meeting the national needs. As to the EU deal, the U.S. should go 
back to the bargaining table and insist on fair access to slots and 
facilities at London Heathrow so U.S. carriers like Continental will be 
able to compete, from day one, on a level playing field.
    Thank you for this opportunity. I am happy to answer the 
Committee's questions.
                                 ______
                                 
                               Airport Coordination Limited
                                                    6 February 2006
Briefing Note: EU-U.S. Open Skies and Access to Heathrow Airport
    The EU-U.S. ``Open Skies'' Air Transport Agreement of 18 November 
2005, if approved, would authorise every EU and U.S. carrier to fly 
between any EU and U.S. city pair. The current Bermuda II limitations 
on transatlantic operations at Heathrow Airport would be removed.
    ACL is the independent coordinator, appointed in accordance with 
the EU Slot Regulation, with sole responsibility for the allocation of 
Heathrow slots. We have received a number of inquiries about the 
availability of Heathrow slots and the process of slot allocation. We 
are issuing this briefing note in the interests of openness and 
transparency and to provide all interested parties with a common set of 
information and advice.
Slot Availability
    Heathrow is the world's busiest international airport, with 68 
million passengers and 472,000 air transport movements in 2005. Its 
facilities are also very constrained. There are physical constraints on 
runway, terminal, and apron capacities, and environmental limits on the 
number of night flights and air transport movements.
    Heathrow slots are highly scarce and demand far outstrips supply. 
Incumbent carriers have grandfather rights to about 97 percent of the 
airport's capacity. Grandfather rights are subject to a use-it-or-lose-
it rule, but the failure rate is less than 0.5 percent each season.
    There has been little increase in runway capacity since 2002, after 
a decade of steady improvement. Slots are particularly scarce during 
the morning period. Capacity is reviewed in advance of each season, but 
no new landing slots have been added between 0600--1259 (local time) 
since 1998.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The U.K. Government places strict limits on flights during the 
night quota period (2330-0600 local time). Heathrow's quota equates to 
about 15 flights per night and is fully allocated to established air 
services.
    The U.K. Government also introduced a limit on the annual number of 
air transport movements as a condition of approval to build Terminal 5. 
The limit is fixed at 480,000 annual ATMs, which is only 1.7 percent 
higher than current traffic levels. The ATM Cap will become the 
dominant scheduling constraint within the next 18 to 24 months.
Future Capacity
    Terminal 5, due to open in Spring 2008, provides the terminal and 
apron capacity necessary for Heathrow to grow to over 80 million 
passengers per annum. It does not address the shortage of runway 
capacity, however, and brings with it the ATM Cap condition.
    The U.K. Department for Transport plans to consult this year on the 
possibility of mixed mode operations at Heathrow. Currently the two 
runways at Heathrow are operated in segregated mode: one runway is used 
for takeoff and one for landing, and the runway use is alternated each 
afternoon to provide noise relief for the local community. Operating in 
mixed mode (using both runways for takeoff and landing at the same 
time) would provide additional runway capacity but, if approved, is 
unlikely to be available before 2010. Government permission to lift the 
ATM Cap is also necessary if the new capacity is to be used for growth.
    The U.K. Government's Future of Air Transport White Paper, 
published in December 2003, supported the development of a 3rd runway 
at Heathrow, but not before 2015 and only if stringent environmental 
limits can be met.
Allocation Priority
    The liberalisation of a bilateral agreement does not make airport 
slots available or confer any special allocation priority. Some 
carriers, such as the U.S. carriers currently restricted to Gatwick 
under Bermuda II, will qualify as ``new entrants'' to Heathrow. This 
gives them priority in the allocation of 50 percent of pool slots. 
However, the lack of pool slots at viable times for transatlantic 
services means that new entrant status is of little practical value.
Slot Mobility
    Slots are not route specific, so incumbent operators could add new 
transatlantic services using their existing slots. British Airways and 
Virgin Atlantic could add transatlantic frequencies; American Airlines 
and United Airlines could operate to new U.S. gateways; and other EU 
carriers such as BMI, Lufthansa or Air France could enter the Heathrow-
U.S. market.
    Slots may be exchanged, one for one, between air carriers. Slots 
may also be transferred between air carriers by way of a slot exchange. 
Carriers like Continental, Delta, Northwest and U.S. Airways could use 
this mechanism to acquire Heathrow slots from alliance partners or from 
the secondary market more generally.
    All transfers and exchanges are subject to confirmation of 
feasibility by the coordinator, in particular that the change of use 
does not cause prejudice to airport operations. For example, there may 
be insufficient terminal or apron capacity to accommodate a change from 
shorthaul to transatlantic operations using a larger aircraft.
    Prior to the opening of Terminal 5 in 2008, shortages of terminal 
and apron capacity will limit the number of new transatlantic services 
that can be accommodated. The number of feasible new services will 
depend critically on the exact slot times, aircraft size, and terminal 
of operation. It will also depend on how rapidly new services are 
introduced and how flexible carriers can be to fit within the airport's 
constraints.
Winter 2006/07 Coordination
    The EU-U.S. Air Transport Agreement will require approval by the EU 
Transport Council of Ministers, which meets on 8-9 June 2006. The 
agreement could be applied from the start of the Winter 2006/07 season. 
However, carriers must submit their winter slot requests by 11 May 2006 
and the initial allocation of slots must be complete by 1 June 2006.
    ACL will accept slot requests for new transatlantic services in 
advance of approval of the agreement. Given the lack of suitable slots 
at Heathrow, we do not expect to be able to make any slot offers from 
the pool. Any new transatlantic services are likely to be sourced from 
carriers' existing slot portfolios and the secondary market.

                                                James Cole,
                                          Director of Coordination.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Senator Burns. Thank you very much.
    Now we'll hear from Mr. Michael Whitaker, Senior Vice 
President of United Airlines. Thank you for coming, sir.

         STATEMENT OF MICHAEL G. WHITAKER, SENIOR VICE

            PRESIDENT--ALLIANCES, INTERNATIONAL AND

              REGULATORY AFFAIRS, UNITED AIRLINES

    Mr. Whitaker. Thank you, Mr. Chairman. I'm afraid I don't 
have an interesting parable about Senator Inouye taking over 
the Commerce Committee, but I do want to talk about the long-
term health of the industry.
    U.S. passenger airlines have lost their position of 
leadership in global aviation. United, American, and Delta are 
no longer the big three. Air France, Lufthansa, and Japan 
Airlines now hold those spots.
    This committee is very familiar with the decline of the 
U.S. airline industry over the last 5 years. Network carriers 
have lost over $40 billion--billion with a ``b''--since 9/11, 
and over 100,000 airline jobs have been eliminated. And though 
many airlines have dramatically improved cost efficiencies in 
recent years, at $75 a barrel for oil, even the most efficient 
of the U.S. carriers struggles to reach profitability.
    What you may be less familiar with is the fact that our 
international competitors have fared much better, even in the 
face of $75 oil. While the U.S. industry lost $10 billion last 
year, our competitors in Asia and Europe enjoyed profits of 
nearly $5 billion. These airlines are growing, investing in 
their products, and buying new airplanes.
    The poor results in the U.S. have a real impact on our 
economy, on jobs, and on other U.S. businesses. As an example, 
Boeing's latest aircraft, the 787, has attracted 350 orders in 
the short time it's been on the market. Only 25 of those 
orders, a mere 7 percent, are from U.S. passenger airlines.
    One reason the U.S. airlines suffer so much is that, unlike 
other industries, we have been prohibited from taking full 
advantage of international opportunities to spread our business 
risk. During our prosperous years, we were prohibited by law 
from investing in operations outside the United States or from 
building foreign hubs that would have diversified our exposure 
to economic downturns. These restrictions have limited our 
access to the most vibrant growth markets in the world, 
including China and India. And because we've been unable to 
spread our business risks geographically, we are unable to 
flatten the drastic peaks and valleys of the airline business 
cycle.
    In most sectors of the U.S. economy, companies have the 
right to invest abroad, and their foreign competitors have the 
right to invest in the United States. This is true for the 
automotive sector, oil and gas, telecommunications, insurance, 
financial services, and virtually all manufacturing businesses. 
Foreign investment in these areas has not led to a decline in 
safety or security in the United States, as some opponents of 
the NPRM suggest, nor has it harmed our economy. In fact, the 
opposite is true. By all accounts, the U.S. has been a net 
beneficiary of globalization, and our economy has been strong 
for decades.
    U.S. airlines cannot gain the right to invest abroad unless 
a reciprocal right exists in the United States. And while DOT's 
rulemaking proposal does not eliminate the legal restrictions 
on foreign investment, it is an important step in the right 
direction. It is the right policy direction to enable the U.S. 
airline industry to begin to regain its position of leadership.
    Much of the debate around the NPRM has focused on the CRAF 
program and service to small communities. In truth, these 
issues are no more than red herrings raised by parties with 
other agendas. U.S. carriers participate in CRAF and serve 
small communities because it makes business sense to do so. As 
Senator Lautenberg said, ``Business is business.'' We serve 
small communities either because we are paid to do so under the 
Essential Air Service program or because those services add 
economic value to our networks. Likewise, there are economic 
incentives to participate in CRAF. We participate in that 
voluntary program, because we gain the right to bid on valuable 
government traffic.
    These economic principles and incentives operate in any 
language and are understood by airline managers of whatever 
nationality. The government should not allow one company's 
short-term commercial interests, however disguised, to 
interfere with completing the work of deregulation. What this 
debate should be about is how to remove the remaining 
regulatory limits that keep our network carriers from 
prospering. The NPRM is one important step toward eliminating 
the outdated restrictions on foreign investment that apply 
stubbornly and uniquely to the airline industry. Allowing the 
NPRM to proceed will also facilitate the conclusion of the 
U.S.-EU Agreement, another important step in completing the 
deregulation of direct access to foreign markets.
    Together, these initiatives will allow this industry to 
participate more fully in the global marketplace and regain its 
leadership position. Now is precisely the time to remove these 
protections. The restructuring this industry has undergone in 
recent years has strengthened our ability to compete 
effectively in any international arena. We are looking for 
opportunities to compete more effectively in the world market, 
not for regulatory protection against foreign competition or 
foreign investment.
    Thank you, again, for the opportunity to testify, and I'm 
pleased to answer any questions.
    [The prepared statement of Mr. Whitaker follows:]

   Prepared Statement of Michael G. Whitaker, Senior Vice President--
    Alliances, International and Regulatory Affairs, United Airlines
    Mr. Chairman, members of the Committee, thank you for the 
opportunity to present the views of United Airlines on the Department 
of Transportation's (DOT) proposal to reduce regulatory barriers and 
expand investment opportunities for U.S. and foreign carriers in the 
global aviation market. As the Nation's largest international airline, 
we strongly support the elimination of outmoded restrictions that 
discourage cross-border investment in the airline industry. Excessive 
restrictions on the ability of foreign investors to participate in the 
commercial management of U.S. airlines--and reciprocal restrictions 
that other countries impose on U.S. investors in foreign airlines--
constrain our ability to tap global capital markets and to compete most 
effectively in the international marketplace.
    The DOT last week published a 74-page supplemental rulemaking 
proposal (SNPRM) that refines the proposal on which today's hearing 
focuses. While we are closely reviewing that document, and expect to 
submit detailed comments on it, United wishes to make clear that it 
supports the overall direction DOT is taking, and fully endorses the 
process in which the Department is engaged.
    Facilitating a more market-oriented environment for cross-border 
investment is a natural, logical, and necessary extension of 
longstanding U.S. open skies policy for aviation. With the strong 
support of several Administrations, Republican and Democratic, that 
policy has already done much to transform international aviation from a 
highly-regulated, government-directed sector to a robustly-competitive 
worldwide enterprise at least partly guided by free market forces. In 
just 15 years, the U.S.-led open skies campaign has afforded U.S. and 
foreign airlines much greater freedom to traverse the globe without 
artificial limits on where, when, and how often they can fly, what they 
can charge, or how they can market their international services.
    The DOT proposal to facilitate cross-border investment by enabling 
meaningful foreign investor participation in the commercial management 
of the airlines in which they invest represents another significant and 
positive step along this same market-opening path--a path that started 
with the 1978 deregulation of the domestic airline industry. We would 
prefer that DOT go further and eliminate, reciprocally, all limits on 
foreign ownership and control, except as they relate to national 
security oversight. But we welcome this progress toward the ultimate 
goal of allowing the airline sector to operate with the same freedom 
and flexibility as any other global U.S. industry--like financial 
services, energy, and telecommunications.
    That is the only goal that makes sense in today's global economy--
one in which our international passengers can readily access their 
multinational bank accounts, stay in international hotel chains, and 
connect with worldwide communications networks on a global basis. In 
today's business world, it is profoundly ironic that U.S. international 
airlines--the quintessential infrastructure of the global marketplace--
remain bound by regulatory restrictions of a bygone era.
    The DOT proposals to encourage cross-border airline investment come 
at an important moment, and should not be unnecessarily delayed or 
unduly limited in scope. The benefits are very clear--not only for the 
financially-challenged U.S. airline industry, but also for consumers 
and communities, and for U.S. international competitiveness.
    U.S. airlines have undergone tremendous financial stress over the 
last 5 years, and today face escalating fuel and other costs that 
threaten the balance sheets of every major airline. We at United have 
come through a difficult and extended bankruptcy--one of the largest 
ever in the U.S.--in a process that required sacrifice and painful 
adjustment for thousands of employees and businesses across the 
country. We have emerged with a much more stable financial base--unit 
costs down 20 percent (excluding fuel), anticipated annual average cost 
savings of $7 billion through 2010, and productivity up by 27 percent. 
Despite these hard-won gains, we must further build our financial 
strength to respond to tough competition and extraordinary fuel prices. 
We and virtually all of our U.S. competitors must be able to continue 
to attract new capital investment in response to market forces and 
incentives, without undue regulatory impediments.
    Enhancing opportunities for investment is also plainly in the 
interest of not only U.S. airlines, but also of the many communities 
that depend on financially-stable and successful U.S. airlines for 
their economic well-being, jobs, and needed air services. Ironically, 
some have suggested that allowing more foreign participation in the 
management of U.S. airlines would somehow undermine U.S. carrier 
service to smaller markets. Except for certain markets within the 
Essential Air Service (EAS) program, in which service is legally 
guaranteed, domestic markets are served because they generate adequate 
revenues for the airlines. There is no basis to assume that foreign 
managers would have less of a profit motive than U.S. citizen managers, 
and would drop profitable services to communities now being served.
     The DOT proposal is far more than a matter of attracting foreign 
capital to U.S. airlines, though. We at United also look at it from the 
standpoint of potential U.S. investment in, and partnership with, 
foreign airlines (DOT properly proposes to offer the benefits of its 
proposal only to investors of those foreign countries that afford U.S. 
airlines reciprocal investment freedoms). We hope that the proposal, 
when finalized, will remain sufficiently broad to meaningfully 
facilitate U.S. carrier investment in, and integration with, foreign 
carriers in key markets. In the long run, the enduring path to aviation 
industry success is to become more competitive, embracing opportunities 
for international growth, integration, and inter-carrier cooperation 
and consolidation, including through strategic cross-border 
investments.
    Significantly, the DOT proposals afford particular impetus to 
longer-term, strategic investment in U.S. airlines--investment by those 
interested in building and maintaining airline businesses, not just 
venture capital or hedge funds seeking transitory investment gains. 
Short-term, speculative investors are unlikely to be concerned about 
participating in the commercial management of their investment targets. 
In contrast, the DOT proposal will encourage the kind of longer-term 
strategic industry investment--whether by foreign investors in the U.S. 
or by U.S. airlines in foreign carriers--that can play an important 
role in stabilizing the volatile airline sector.
    Expanded foreign investment opportunities would enhance the scope 
and level of inter-carrier integration that has been shown to benefit 
consumers. Specifically, it would enable airlines to take today's 
alliance-based airline cooperation to the next level by facilitating 
cross-carrier equity investment and participation in business decision-
making. Such investment and financial commitments would cement and 
strengthen the inter-carrier relationships that today rest solely on 
contractual agreements, albeit in some cases enhanced by DOT-granted 
antitrust immunity.
    From a broader policy perspective, strategic cross-border airline 
investment may be the surest way to enlist market forces to help 
stabilize a global industry--a sector that is notoriously sensitive to 
world economic shifts and regional booms and busts, and vulnerable to 
unpredictable geopolitical events. Such global diversification among 
international airlines enables carriers in one region to broaden their 
financial exposure to other regions where growth and demand may be 
relatively strong, and so help flatten the often drastic and cyclical 
peaks and valleys of airline operations and profitability. Conversely, 
global equity-based financial exposure can help spread risk--and so 
avoid the potential catastrophic impact of what has become for aviation 
the expectation of the unexpected--from SARS to terrorism to the 
potential for avian flu. Strategic cross-border investment can also 
help normalize airline industry structure, eliminating some of the 
inefficient and destructive fragmentation of the international airline 
market.
     Opponents of the DOT proposal have predictably failed to focus on 
its benefits for U.S. aviation competitiveness in the global economy. 
Instead, they have sought to stoke overblown fears that allowing 
minority foreign investors to participate in certain commercial 
management decisions of U.S. airlines will somehow subvert the safety 
and security of U.S. aviation. Such misplaced efforts to protect U.S. 
aviation from foreign competitors obscure the opportunities for U.S. 
airlines to regain their historic primacy in the global marketplace.
    Historic U.S. leadership of global aviation--and scores of other 
global industries--has long been built on forward-looking, risk-taking 
competitive zeal, not on protecting U.S. flag companies from foreign 
competition or foreign investment. Reducing some constraints on the 
regulatory conditions now imposed on cross-border investment can help 
bolster U.S. competitive strengths and entrepreneurial resilience in an 
international marketplace where the opportunities are manifest. While 
North America's share of world air traffic is projected by Boeing to 
shrink from 25 percent to 20 percent over the next two decades, for 
example, the share of all intra-Asia markets will grow from 16 percent 
to 20 percent. And while domestic air traffic grows only 3.5 percent 
annually during that period, transatlantic traffic is projected to grow 
by 4.6 percent annually, at the same time traffic to Southeast Asia and 
China jumps every year by 7.3 percent and 8.0 percent respectively--
more than double the rate of North American growth.
    With improved cost efficiencies and renewed competitive strength in 
important international markets, we at United are eager to pursue these 
global service opportunities, including through partnerships with 
foreign airlines. Over the last 3 years, we began service to 12 new 
foreign cities, increased the number of foreign routes we serve by 44 
percent, and grown our overall international departures by 31 percent.
    In the end, efforts to protect U.S. airlines by restricting cross-
border investment, or by other means, just do not work. To the 
contrary, since European regulators facilitated and encouraged open 
cross-border investment within the European Union, international 
aviation leadership has been shifting from U.S. carriers to such 
combinations as Air France/KLM--now the world's largest airline by 
revenues. And U.S. carriers now lag far behind their Asian and European 
competitors in the acquisition of new long-haul jet aircraft--with no 
U.S. passenger orders for the super-jumbo Airbus 380, and only a 
relative few for the high-efficiency Boeing 787 or Airbus 350 aircraft.
    Mr. Chairman, while the DOT airline investment initiative has real 
merit on its own, it is also a fact that the pending agreement to 
create a full open skies aviation market between the U.S. and Europe 
will not occur without significant progress on this issue, as the 
Europeans have made abundantly clear. We would not support a bad DOT 
policy simply to gain European approval of the pending agreement, nor 
do we see any reason to believe the U.S. Government would do so, but it 
is essential to understand the importance of the U.S.-EU agreement that 
may hang in the balance here. We fully support the U.S.-EU agreement, 
in light of the open skies and operational flexibility benefits it 
offers us and other U.S. airlines. And we do so even though it will 
expose United to significant new competition from major European 
airlines, as well as from U.S. competitors on certain key routes.
    The proposed U.S.-EU agreement would enable any European airline, 
regardless of its nationality, to fly to anywhere in the U.S. from any 
city in Europe, not just from the airline's homeland. Together with the 
proposed new investment policy, the agreement would mean more 
competition for United--including from foreign airlines serving key 
U.S. markets from London's Heathrow airport, where we are now one of 
only four U.S. and European airlines authorized to serve that airport. 
In addition, a new transatlantic open market agreement would open 
Heathrow service to other U.S. airlines as a matter of law. United 
recognizes this competitive reality, and is prepared to accept this 
commercial challenge. We are willing to pay this competitive price 
because, in the long run, we will only succeed if we can prevail in a 
truly open global market. United and other U.S. airlines can do so, and 
can reassert U.S. aviation leadership, but only if they are prepared to 
compete efficiently and effectively as normal businesses on a global 
playing field.
    Not every U.S. carrier has taken this long-term view. Indeed, even 
some who actually stand to gain in the short-term--like Continental 
Airlines, which would obtain legal access to Heathrow Airport under a 
U.S.-EU agreement--have loudly and extravagantly protested. To be 
frank, Mr. Chairman, we are surprised at the degree of rancor that this 
relatively modest DOT proposal appears to have generated, albeit by a 
small minority of U.S. airlines. Looked at fairly, the DOT proposal is 
essentially an incremental step--albeit an important one--along an 
extended path to a fully-deregulated, market-based, global industry. 
The proposal does nothing to affect the actual foreign ownership 
statutory requirements--that U.S. citizens own 75 percent of voting 
stock and serve as President and two-thirds of every U.S. airline's 
Board; rather, it would relax only the regulatory interpretation of the 
regulatory control requirement.
    The SNPRM issued last week makes even clearer that DOT's proposal 
would not infringe on U.S. citizen control of U.S. airlines. Aside from 
even more specifically ensuring U.S. citizen control over issues 
relating to safety, security, and Defense Department obligations of 
U.S. airlines, the SNPRM makes explicit that the U.S. citizen-dominated 
Board of a U.S. airline maintains actual control of the airline. 
Particularly with this clarification, it is difficult to see any 
remaining basis for legitimate concerns about U.S. control. To the 
contrary, it will be important to ensure that DOT's effort to clarify 
this issue in its SNPRM does not provide fodder for opponents of the 
proposal--here and abroad--to argue that it now does not go far enough 
to encourage foreign investment.
    The other significant source of concern about the DOT proposal, 
voiced by part of the organized labor community, is that the proposal 
could lead to fewer or less desirable jobs for U.S. airline workers. 
The fact is that U.S. airline labor has borne much of the burden as 
airlines have struggled to cut costs, increase efficiency, and compete 
effectively in an extraordinarily competitive environment. But it is 
impossible to see how the proposal to encourage more investment in 
their U.S. carrier employers can realistically make matters any worse 
for U.S. labor. Nor is it clear why foreign participation in a U.S. 
airline's managerial decisions would increase outsourcing of that 
airline's operations, including maintenance or long-haul operations, 
where the economics did not dictate such a shift. To the contrary, U.S. 
workers could only benefit from a more robust and competitive U.S. 
airline industry.
    Given the circumscribed nature of the regulatory step at issue 
here, it is clear that much of the high-pitched opposition to it is 
generated by those pursuing other individual agendas. DOT's critics 
raise exaggerated fears of minority foreign investment in U.S. 
companies, and of appeasement of European interests, while virtually 
ignoring the numerous direct benefits of U.S. investment in foreign 
airlines, and the broader importance of maintaining global momentum for 
open aviation markets, free trade, and investment freedom. Regrettably, 
such objections are not entirely unexpected. Virtually every 
significant step toward aviation liberalization has met unwarranted 
opposition--from the 1978 deregulation of the U.S. domestic industry, 
to the pursuit of global open skies policy more than a decade later, to 
the current DOT proposal on foreign investment.
    Mr. Chairman, DOT's proposal to facilitate cross-border airline 
investment, together with the transatlantic open market agreement we 
hope it will encourage, represents an important step for U.S. and 
international aviation--one that works to the benefit of a resilient 
U.S. airline industry and to consumers. Especially as the proposal 
moves toward freeing airlines from anachronistic marketplace 
distortions, and in the direction of enabling U.S. airlines to compete 
like other global businesses, it can help bring about a more fully 
deregulated environment in which U.S. carriers can regain their 
historic global aviation leadership.
    We urge the Committee to support this modest effort, and we also 
take the opportunity to encourage DOT to maintain its focus on 
achieving the many, critical deregulation goals that remain. In today's 
competitive international airline industry, the only path that makes 
sense is the one that leads toward full deregulation, and the 
elimination of restrictions that continue to hold back U.S. carriers.
    Thank you again for the opportunity to appear and present the views 
of United Airlines. I would be pleased to respond to any questions of 
the Committee.

    Senator Burns. Thank you, Mr. Whitaker. We appreciate that.
    Now we'll hear from Captain Duane Woerth, President, Air 
Line Pilots Association. Welcome, and thank you for coming.

         STATEMENT OF CAPTAIN DUANE WOERTH, PRESIDENT, 
               AIR LINE PILOTS ASSOCIATION (ALPA)

    Mr. Woerth. Thank you, Mr. Chairman. I'd like my statement 
be entered into the record, my full statement, please. And I--
--
    Senator Burns. Your full statement will be a part of the 
record.
    Mr. Woerth. I represent, as you know, 62,000 pilots, United 
States and Canada, from 39 airlines. And we believe the 
original NPRM, and the supplemental, are flawed public policy, 
for a number of reasons.
    First, the NPRM is the wrong process. Only Congress should 
amend foreign ownership laws which prohibit actual foreign 
control. Let's have a real debate, starting with S. 2135, which 
ALPA supports. The NPRM does not distinguish adequately between 
types of foreign investors. Private citizens, mutual funds, 
foreign airlines, and even government-owned airlines are all 
essentially the same. I do not accept that the reciprocity 
requirement is adequate to defend against this. Some states 
have a state-owned or a ``golden share'' airline, but they also 
have other airlines, so it would be permissible to buy a small 
airline, while somebody buys United. I think the reciprocity 
piece is simply not good enough.
    The NPRM also has faulty assumptions about American 
corporate governance. As was stated before, safety and security 
simply cannot be carved out separately. I also do not agree 
that a major shareholder with 25 percent cannot control a U.S. 
corporation. It happens every day. It's happening all over the 
Fortune 100. The rest of the diversified investors do not 
operate as one, and a majority investor can soon get control of 
the board.
    The supplemental assumes a rebelling in the ranks in the 
board that would somehow revoke the decisions made by majority, 
and I must say, frankly, this does not pass the laugh test of 
the corporate board I served on, which was Northwest Airlines.
    In the real world, Board members are recruited. They're not 
come out of the--they're not elected. They are recruited, 
usually by the Chairman and the CEO. And after a couple of 
years, the largest investor will successfully nominate a slated 
Director who's satisfactory to the majority investor. And that 
includes independent directors who know how they got on the 
board in the first place.
    And, incidentally, the supplemental rule is only one page 
long. Just one page. But the DOT has added 74 pages of 
explanations and assurances about how the threats to foreign 
control could be mitigated. Unfortunately, none of these ideas 
actually are in the rule itself, and are unenforceable by any 
realistic standards. In other words, where I come from, the 
supplemental appears to be all hole and no donut.
    The NPRM assumes U.S. airlines are clamoring for foreign 
airline capital. The truth is the NPRM represents the wish 
list, and now the demand, of EU airlines, not U.S. airlines, 
and certainly not U.S. airline employees. As you all--you all 
know the executives of our airline industry; they're not 
bashful about asking Congress for something, but they're not 
lined up outside your doors asking to get this NPRM through. 
They're not doing it. I don't see where the push is in U.S. 
interests.
    Congress should not be stampeded into a rushed blessing of 
a deeply flawed NPRM simply to satisfy the arbitrary and 
artificial deadlines represented by scheduled meetings of EU 
ministers. And, incidentally, the EU ministers, which, by the 
way, failed to ratify our first EU-U.S. Open Skies, that 
agreement, they could have already had, but they shot it down. 
We negotiated, in good faith. They shot it down.
    Now, ALPA, I want to make clear, does support the EU Open 
Skies Agreement. We wish it was already in effect, and we hope 
the new agreement would be voted on by the European Union. I 
think I need to say that I find very objectionable 
preconditions or side deals to good-faith negotiations between 
the United States and the European Union or anybody else, for 
that matter. I think Chairman Mica might have stated, if I 
heard him correctly, that our negotiating credibility was at 
risk. I think it's just the opposite. We negotiated in good 
faith twice. They shot down the first deal, they're threatening 
to shoot down this deal. Our negotiating credibility isn't at 
risk; it's the European Union's credibility which is at risk.
    Now, the NPRM simply ignores the real-world history of 
foreign airline investments in the United States, which ended 
up in significant boardroom conflicts of interest, which 
ultimately forced the divestiture of British Airways investment 
in US Airways, at a substantial profit, and of KLM's investment 
in Northwest, also at a substantial profit. I was on that board 
when the conflict occurred--lawsuits, huge conflict. It was 
finally resolved once the stock was gone. Now they've got a 
great joint venture. But while a foreign airline was in the 
Northwest Board, conflict was aplenty.
    The US Airways pilots and flight attendants were replaced 
by British crews almost immediately after the investment in 
British Airways in US Airways. That--the routes to London were 
just gone, and it was taken over by the British. That is the 
one thing that our U.S. airline crews from United and Delta and 
Northwest and Continental across this country are aware of. 
They saw what happened there, and they're quite afraid that 
they're going to be replaced over time by their foreign 
counterparts.
    And I might add, Mr. Chairman, that many of my pilots, 
almost 30,000 of them, serve Mississippi, and they serve 
Bozeman, Montana, and Billings. They serve North Dakota and 
Arkansas. And our regional pilots really wonder what's really 
going to happen. They know most of the passengers they fly are 
in domestic service. There's some traffic that flows across to 
Amsterdam and Paris and London and Frankfurt, but they're 
wondering what's going to happen to them if this NPRM would 
take effect.
    So, bottom line, we support U.S.-EU Open Skies. We want it 
to occur. We don't think this should be a precondition. And we 
certainly hope that Congress would exert its efforts to control 
this process, and a little more lengthy debate on its vital 
interest would be worthwhile. We think we can amend foreign 
investment laws sensibly, but I'm sorry to say I don't think 
the NPRM is the way to go.
    I'll answer any questions you have, Mr. Chairman.
    [The prepared statement of Mr. Woerth follows:]

        Prepared Statement of Captain Duane Woerth, President, 
                   Air Line Pilots Association (ALPA)
    Good afternoon. 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 U.S. 
Department of Transportation's proposed policy on foreign control of 
U.S. airlines. While DOT has recently modified that proposal, we 
continue to have deep reservations about several of its substantive 
provisions and believe that Congress, rather than the Department, 
should determine the rules that apply to the ownership and control of 
U.S. airlines. We fully support S. 2135, which is designed to ensure 
that Congress has an opportunity for meaningful review of DOT's 
proposal and its implications, as well as Senators Inouye and Stevens' 
proposed amendment to the supplemental appropriations bill that would 
prohibit the issuance and implementation of DOT's proposed rule through 
the end of Fiscal Year 2006.
Background--The Proposed U.S.-EU Text
    DOT's proposal is closely tied to the text of a possible air 
services agreement that was initialed by the U.S. and the European 
Union last year. In fact, the EU has expressly linked the outcome of 
DOT's rulemaking process to the EU's decision to finally accept or 
reject that initialed text. Accordingly, as a preliminary matter it is 
important to assess the contents of that text.
    ALPA believes that the initialed text 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 U.S.-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. DOT's proposal is the Department's effort to 
satisfy this EU objective.
The Foreign Control Rulemaking
    So let me turn to that rulemaking process and DOT's proposed policy 
change.
    The Department's proposal was first issued on the eve of the round 
of negotiations that resulted in the initialed text. After reviewing 
the comments that were submitted on the proposal, DOT issued a 
supplemental proposal last week. That revised proposal would permit 
foreign interests to exercise actual control over all the commercial 
elements of a U.S. air carrier's business, including, apparently, such 
fundamental matters as the ``definition of and quality of product, 
branding, fleet mix, origins and destinations, [and] network issues 
defining the business of the company.'' 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) or other national defense 
        airlift commitments, and, once made, the implementation of such 
        commitments with the Department of Defense'';

        3. The carrier's ``policies and implementation with respect to 
        aviation security, including transportation security 
        requirements specified by the Transportation Security 
        Administration''; and

        4. The carrier's ``policies and implementation with respect to 
        aviation safety, including 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 commercial elements of the carrier's business and 
operations. As United Airlines CEO Glenn Tilton put it in a recent 
speech the proposal ``would allow foreign investors in U.S. airlines to 
effectively control the bulk of the airline's commercial operations.''
    We do appreciate DOT's consideration of the comments that were 
filed on the initial proposal and the Department's efforts to be 
responsive to some of the expressed concerns. We intend to examine the 
supplemental proposal closely and file our comments at the appropriate 
time. But even on a first reading, we believe there continue to be a 
number of flaws in the Department's proposal.
The Statutory Issue
    First, even as revised, 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. In fact, DOT's application of the ``actual 
control'' test historically has been focused on the ability of foreign 
entities to control the economic and operational aspects of U.S. 
airlines. 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.
    DOT's supplemental notice requires that ``all delegations [of 
control] to foreign interests ultimately be revocable by the board of 
directors or shareholders.'' But this proposed ``fix'' does not address 
the fundamental problem--that foreign entities will be permitted to be 
in actual control of key economic and operational aspects of U.S. 
airlines. The U.S. aviation statutes simply do not allow the dissection 
of airlines into components that can be under foreign control and those 
that cannot: the entire airline must be under U.S. citizen control.
    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.
    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 might well 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 could 
diminish or disappear, while those of the international carrier would 
be expanded.
    Such a result is fundamentally inconsistent with 49 U.S.C. 
Sec. 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. [Emphasis added.]

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 
1990's 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:

        ensure that the U.S. airline maintains at least the percentage 
        of the combined total ASMs operated by both the U.S. airline 
        and the foreign affiliates between the United States and any 
        country or region that it had as of a date 6 months prior to 
        the announcement of the acquisition. This condition ensures 
        that the CRAF program has access both to a sufficient number of 
        the appropriate (i.e., long-haul wide-body) aircraft and to the 
        crew necessary to fly them in a military emergency. It 
        simultaneously ensures that U.S. jobs are not transferred to 
        foreign entities.

    The second restriction proposed by the ABA Working Group would 
require that ``[t]he U.S. Government and the appropriate foreign 
government(s) . . . establish in advance a legal framework containing 
fair procedures to regulate labor representation and collective 
bargaining on such multinational airline systems.'' The purpose of this 
recommendation, of course, is to eliminate the unfair advantage that 
would otherwise result if the U.S. carrier and the foreign carrier were 
subject to different rules relating to labor representation and 
collective bargaining.
    While ALPA does not endorse the Proposed Position Statement of the 
ABA Working Group, we do believe the statement has at least identified 
the basic concerns that must be addressed if any change is to be made 
in existing rules relating to foreign ownership or control of U.S. air 
carriers.
    In its supplemental notice DOT attempts to address some of these 
concerns. We will examine and respond fully to DOT's suggestions in our 
comments on the supplemental notice. However, we would make some 
preliminary observations.
    First, DOT states that even if foreign entities control the 
operations of a U.S. airline that airline would still be subject to the 
Railway Labor Act and thus ``all employees at any U.S. carrier would 
retain all the protections created by United States' labor laws.'' But 
that truism has never been at issue. The concern, as stated above, is 
that U.S. labor laws may be inadequate to deal with the job allocation 
issues that may arise if two airlines subject to two separate sets of 
labor laws are under common ownership.
    Second, DOT concludes that if a foreign investor who had been 
delegated authority to control of a U.S. airline were to shift long-
haul flying to a foreign carrier U.S. investors would withdraw the 
delegation of authority if the transfer was contrary to the interest of 
the U.S. carrier and the U.S. citizen investors. The conclusion simply 
does not square with the reality of how board rooms work, especially in 
publicly-held companies where the foreign investors may be far and away 
the largest and most dominant shareholders. Moreover, while DOT 
discusses at length the right of U.S. shareholders or board members to 
revoke authority from foreign investors, the Department's actual policy 
(which is only a page long) says nothing about this right. Exactly, how 
the right would be enforced is obscure.
    Third, DOT proposes to revise its initial proposal to require that 
U.S. citizens must control a U.S. carrier's commitments with respect to 
all national defense airlift operations. But the Department's 
supplemental rule still does not address the fact that foreign 
investors would be able to make fleet decisions that could eliminate 
all the aircraft suitable for CRAF operations. In other words, while 
U.S. citizens may have to have control over honoring CRAF and other 
national defense airlift commitments once made, foreign managers could 
make fleet decisions that leave no aircraft available for the 
commitment in the first place.
The Impact on Safety
    DOT's supplemental proposal discusses a number of safety concerns 
raised by ALPA and other commentators and proposes to broaden the 
language of the initial rule to clarify that ``U.S. citizens must 
control the carrier's overall safety and security programs and 
policies, not just the carrier's compliance with the requirements of 
the FAA and TSA.'' ALPA will review DOT's assessment and file comments 
on the revised proposal. However, ALPA notes that safety and security 
issues are completely intertwined with operational and economic 
decisions and that whoever actually controls the operations of the 
airline is likely to ultimately control safety policies and 
implementation.
The Lack of Supporting Data
    Finally, the Department has presented no data either to support its 
claim that the U.S. airline industry is in need of more foreign 
investment, or its claim that such investment is not available absent a 
change in the foreign control rules. We believe that the fundamental 
premise on which the supplemental NPRM appears to be based--that the 
U.S. airline industry is in need of enhanced access to worldwide 
financial resources, and that such access to foreign capital cannot be 
achieved without granting foreign investors substantial control of U.S. 
carriers--is erroneous. Certainly, the proposal contains no hard data 
to substantiate these propositions, and we are not aware that any such 
data are available.
    In fact, there is evidence that when a U.S. airline shows some 
significant promise of profitability, it is able to find the capital it 
needs. For example, United Airlines, after engaging in extensive 
restructuring, cost-cutting and changes in operations and services 
while in Chapter 11, was able to obtain $3 billion in debt exit 
financing on terms that pleased United's management. The airline's own 
press release stated that it had received offers of subscription for 
more than twice the capital necessary to support the financing it 
sought and that the money was provided at rates better than it had 
expected to receive. Similarly, US Airways, after going through its own 
Chapter 11 restructuring and merging with America West, obtained $1.5 
billion in exit financing, of which $350 million was in the form of 
equity commitments. Moreover, $75 million of the equity was foreign 
investment provided by ACE Aviation Holdings, the parent of Air Canada. 
These major financings strongly indicate that both foreign and domestic 
capital is available to U.S. airlines if they appear to offer a 
reasonable return to the investor.
    If there is hard evidence that the U.S. airline industry is 
seriously suffering from a dearth of capital, and that the existing 
rules relating to foreign control are somehow responsible for the 
problem, that evidence has yet to be produced. Before lack of capital 
is used as a rationale for considering dramatic changes in the foreign 
control rules, there should be a thorough and systematic study to 
determine whether the problem it is attempting to cure actually exists.
Conclusion
    DOT's proposal is based on two premises, both of which are 
erroneous. The first is that airlines need enhanced access to foreign 
capital to be competitive. But as we have shown above, U.S. airlines 
with sound business plans have been able to find ample capital on 
reasonable terms. The second is that Congress has decided ``the airline 
industry should be largely deregulated (except of course, for safety 
and security regulation).'' But the airline industry remains regulated 
in myriad ways, and just as safety and security have not been 
deregulated Congress has not deregulated airline citizenship; if 
anything, Congress has recently tightened the citizenship rules. DOT's 
proposal would essentially rewrite these rules. The Department's 
proposal could have broad, potentially negative effects on the 
competitive posture of U.S. airlines and their employees and raises a 
number of key public-policy issues that have not been adequately 
addressed by the Department. Consideration of changes of this magnitude 
should be undertaken not by an administering agency but by Congress. S. 
2135 is thoughtfully designed both to afford time for Congress to 
consider whether a change to the control rules is appropriate and to 
help develop a record on which that consideration can be based and 
Senators Inouye and Steven's amendment to the supplemental 
appropriations bill would freeze further action by DOT while that bill 
moves forward. We urge this committee to support these measures and to 
ensure that the DOT does not unilaterally impose changes to the 
longstanding rules on ``actual control'' of U.S. airlines.
                                 ______
                                 

                   Air and Space Lawyer--Winter, 2005

             Working Group Position Statement On Relaxing 
                 Airline Foreign Ownership Restrictions

                      by American Bar Association

    The Position Statement presented herein is a composition of the 
various forces that must be addressed if meaningful change is going to 
be made to foreign ownership of U.S. airlines. This proposal, which 
contains suggested changes to the law on foreign ownership and control, 
grew out of the efforts of the individuals whose names appear below the 
statement. The group met as part of and in preparation for a 
presentation to the Forum on Air & Space Law's Fall Meeting in Santa 
Monica, California, on October 28, 2004. The ex officio members 
participated in the deliberations leading up to the final draft but did 
not vote on approval of the final draft. Each participant may have 
personal views that vary from the consensus statement, but all were 
able to agree on the statement to reach a consensus. The consensus 
views do not necessarily reflect the views of any individual 
participants or their employers and/or clients.
    Nor does the statement represent the views of the ABA or the Forum. 
The value of the proposal is less in its details (all of which are 
worthy of serious consideration) than in demonstrating the methodology/
process by which competing interests may need to be accommodated. The 
Position Statement reflects the summation of research papers on various 
related subjects, including legislative history, *20 maritime law as it 
applies to foreign ownership of U.S. shipping interests, the Omnibus 
Trade and Competitiveness Act of 1988 (Exon-Florio) legislation and the 
operation of the Committee on Foreign Investments in the United States 
(CFIUS), Civil Reserve Air Fleet (CRAF) issues, and labor-related 
issues.
    A principal objective of the deliberations was to critically 
examine the original justifications for the restrictions on foreign 
ownership and control and to determine what, if anything, about the 
airline industry might require the continuation of special rules that 
apply to almost no other industry.
    Only one of the original justifications, as reflected in the 
legislative history, held validity--the national security concern. 
Specifically, how can we ensure that the Department of Defense (DOD) 
has access to sufficient lift with crews in times of national 
emergency? A second area of concern identified was that a change in the 
ownership and control rules could give rise to labor-management issues 
not adequately addressed by the current laws of the United States and 
other countries.
    The Position Statement appears below:
             Proposed Position Statement for Consideration 
                 by the ABA Air and Space Law Forum\1\
---------------------------------------------------------------------------
    \1\ The Proposed Position Statement reflects the consensus views of 
the individuals whose names appear below the statement. The ex officio 
members participated in the deliberations leading up to the final 
draft, but did not vote on approval of the final draft. The views 
expressed in the Position Statement reflect the consensus views of 
those who fully participated and do not necessarily reflect the views 
of any individual participants or of their employers and/or clients.
---------------------------------------------------------------------------
    It is the recommendation of this Working Group that Congress amend 
the statutory restriction on foreign ownership and control of U.S. 
airlines, subject to the conditions set out below. Congress first 
restricted foreign ownership of U.S. airlines in the 1920s. The Civil 
Aeronautics Act of 1938 and its successor, the Federal Aviation Act of 
1958, incorporated the current prohibition on substantial foreign 
ownership or control, to protect the heavily subsidized, fledgling 
airline industry and to provide for the national defense. That 
prohibition, embellished by years of regulatory interpretation by the 
Civil Aeronautics Board and the Department of Transportation (DOT), has 
served to strictly limit foreign ownership and control, and largely 
exclude foreign equity capital. It is the Working Group's judgment 
that, if certain safeguards are put in place, the statutory prohibition 
is no longer needed to protect our aviation industry or provide for the 
national defense.
    Under our proposal, there would be no restriction on the ability of 
a foreign entity that is not an airline or an airline affiliate to 
invest in a U.S. air carrier, except for the following statutory 
safeguard to protect national defense:

    1. Congress should amend the Transportation Code (49 U.S.C.) to 
require a foreign-owned U.S. air carrier to enter into a binding 
contract with the DOD that provides for participation in CRAF. To 
ensure compliance, a carrier must waive any objection to the DOD's 
obtaining a Federal Court injunction (including an injunction to allow 
seizure of any aircraft that the carrier has pledged to CRAF). If, 
following DOD activation of CRAF, a foreign-owned U.S. air carrier 
fails to make available the aircraft and crews it has pledged, the DOT 
will automatically revoke the carrier's certificate of public 
convenience and necessity upon notification of such failure by the 
DOD.\2\
---------------------------------------------------------------------------
    \2\ Consideration was given to amending the so-called Exon-Florio 
provision of the Defense Production Act to require notification of the 
Committee on Foreign Investments in the United States (CFIUS) if a 
foreign entity seeks to own more than 25 percent of the voting equity 
in a U.S. air carrier that operates long-haul wide-body aircraft 
suitable for the Civil Reserve Air Fleet (CRAF). This change (CFIUS 
notification is now voluntary in most cases) would ensure that the 
Department of Defense (DOD) and other U.S. Government agencies have the 
opportunity to block or condition a proposed airline acquisition on 
national security grounds, if appropriate. Because we are unaware of 
any instance where failure to notify has had a demonstrated detrimental 
impact on national security, we have determined not to recommend any 
changes in this area.

    Moreover, a foreign airline or its affiliate would have the same 
opportunity to invest in a U.S. carrier subject to two additional 
---------------------------------------------------------------------------
conditions:

    2. 50 percent of any incremental flying to and from the United 
States must be flown by the U.S. carrier, as measured by available seat 
miles (ASMs).\3\ In addition, the U.S. carrier must maintain a 
sufficient level of capacity on any major long-haul U.S. international 
routes (e.g., the transatlantic or the U.S.-Asia/Pacific). 
Specifically, the foreign-owned airline(s) controlling the U.S. airline 
shall ensure that the U.S. airline maintains at least the percentage of 
the combined total ASMs operated by both the U.S. airline and the 
foreign affiliates between the United States and any country or region 
that it had as of a date 6 months prior to the announcement of the 
acquisition. This condition ensures that the CRAF program has access 
both to a sufficient number of the appropriate (i.e., long-haul wide-
body) aircraft and to the crew necessary to fly them in a military 
emergency. It simultaneously ensures that U.S. jobs are not transferred 
to foreign entities.
---------------------------------------------------------------------------
    \3\ That is, the foreign airline owner may operate, with its own 
aircraft and crews, no more than 50 percent of any incremental flying 
by the combined entity on U.S. international routes, as measured by 
ASMs. If the foreign airline owner reduces the amount of flying by the 
U.S.-based carrier on U.S. international routes, it must reduce its own 
flying on U.S. international routes by the same amount, as measured by 
percent of ASMs.

    3. The U.S. Government and the appropriate foreign government(s) 
would have to establish in advance a legal framework containing fair 
procedures to regulate labor representation and collective bargaining 
---------------------------------------------------------------------------
on such multinational airline systems.

    Whether or not the foreign owner is an airline, a U.S. carrier that 
has foreign ownership or control, as a ``U.S. air carrier,'' will be 
organized under U.S. law and operated subject to all U.S. laws and 
regulations (e.g., safety, security, labor relations, environment, 
etc.) just as if it were fully owned by U.S. citizens. The current 
provisions of the statute with respect to the citizenship of U.S. 
airline officers and directors would remain in place. The current 
control and voting tests would be modified as set forth herein.
    Any foreign entity seeking to control a U.S. air carrier (like any 
prospective U.S. air service provider) would have to apply to the DOT 
for a certificate of public convenience and necessity. If the (DOT-
approved) foreign owner is an airline or its affiliate, conditions 1 
and 2 would be incorporated into the certificates of both the foreign 
airline owner and the U.S. air carrier. (The DOD should participate in 
the DOT certificate-approval process to ensure that national defense is 
adequately considered.) If the applicant is a foreign airline that is 
owned in whole or in part by a foreign government, DOT would need to 
make a finding on the record that such investment by a government-owned 
entity would not harm competition or otherwise be contrary to the 
public interest.
    Lastly, the rights provided for in our proposal extend only to 
nationals of those countries or regional entities that provide U.S. 
citizens with investment rights of comparable value.

        Jonathan B. Hill, Chairman

        Russell Bailey

        Jonathan Blank

        Richard Magurno

        Jeffrey Manley

        Dorothy Robyn

        Mark Dayton, ex officio

        Dwight Moore, ex officio

    Senator Burns. Thank you, Captain Woerth. I appreciate that 
very much.
    Now, when we're talking about this today, we're mostly 
talking about passenger. Is--does--Secretary Shane, you're 
right behind--does this also pertain to cargo?
    Mr. Shane. Yes, sir.
    Senator Burns. It does. Cargo and the whole works. I was 
wondering about that. And does it concern any of you that it 
may be a state-owned airline that would be doing the investing 
in our domestic airlines here?
    Yes?
    Mr. Smith. Well, as I mentioned briefly, the DOT approved 
the German government buying one of our competitors. The 
airline was separated to meet U.S. ownership laws, but we made 
the case, as did UPS, that the foreign entity was exercising de 
facto control, but not de jure control. And there must have 
been something to it, even though the DOT approved it, because 
it was restructured to have bona fide U.S. interests after 
that.
    So, our point is, we don't care whether it's governments. 
We don't care who is involved, as long as we have the same 
opportunity to compete around the world. And that's a--that's 
embedded in this NPRM, this reciprocity, which was our point of 
opposing the DOT's approval of DHL. So, if you want a real-life 
example of this, all these hypotheses of the takeover of the 
Commerce Committee and one thing or another, just go in our 
industry. You see it right now. There are foreign interests 
that own them, 25 percent. They don't tell them, you know, what 
to do, other than they can be involved in coordinating 
schedules and so forth. It's a much better regime than this 
alliance situation, which gives, to foreign and U.S. carriers, 
immunity, which, in any other industry, Mr. Chairman, would be 
illegal. It would be a criminally sanctioned event. They can 
coordinate schedules. They can coordinate rates and so forth.
    And, finally, the elephant in this room--you heard it twice 
here--was--is Heathrow. Heathrow means nothing to the cargo 
folks. What Continental, quite rightly, wants is access to 
Heathrow, because it's very important. The reason British 
Airways took over the flying when they invested in US Air 
wasn't because there was some conspiracy to do away with 
American pilots. It was because US Airways doesn't have any 
gates--authorities or slots into Heathrow, and British Airways 
did. And that was a very lucrative transaction.
    So, this is not a simple issue here. And there are many 
competing interests. And that's one of the things that is very 
disheartening to FedEx and the other cargo interests who employ 
more people than the airlines put together, because the cargo 
interests have repeatedly been put behind Heathrow, DOT's 
interest in doing another deal, and so forth. I mean, it's very 
important to the United States. As I mentioned in my opening 
remarks, we provide, alone, half of the cargo airlift for the 
Civil Reserve Air Fleet. But our interests are always sort of 
over here, and Heathrow and these alliances and all are over on 
the other side.
    So, we strongly support anything that will move European 
Open Skies, and do not think that all of these hypotheticals 
are real risks. And I, by the way, have served on six New York 
Stock Exchange boards. I know very well how boards are 
selected. And I can tell you, I have never seen a board of 
directors that can exercise their fiduciary duty to the 
shareholders, of making money, and accede to some noneconomic 
interest of a 25-percent shareholder. That's ridiculous.
    Mr. Smisek. Mr. Chairman, could I add to that?
    Senator Burns. Yes.
    Mr. Smisek. Fred has been--as he's admitted--been very 
eloquent on both sides of this issue. But your question about, 
Would we be concerned about a foreign government investing in a 
U.S. airline and controlling it? We would, for a number of 
reasons, not the least of which would be, that would--they can 
just turn on the tap in the treasury. That would be grossly 
unfair competition against U.S. airlines, because we have to go 
out and compete for--compete every day in the market. We have 
to go out and compete for capital. A foreign government owning 
a U.S. airline would have an--infinite resources, because all 
they--they can print the money on the other end. So, we'd be 
quite concerned about that.
    Mr. Smith. We have that situation, Mr. Chairman. We do 
compete with the Government of Germany. They own 60 percent of 
one of our two largest competitors. Every day, we compete with 
them. And the fact that they have unlimited funds doesn't 
necessarily mean they're going to be successful in the 
marketplace. But there's nothing in this NPRM that says that 
the foreign government can do anything other than own 25 
percent of the shares and participate in those blue dots that 
Senator Lautenberg had, but not the red dots. Any of that was 
prohibited under the 1940 regulation that Secretary Shane 
mentioned.
    Mr. Smisek. Yes, I think----
    Mr. Smith. And that's what the quid pro quo is with the 
Europeans.
    Mr. Smisek. I think Mr. Shane's previous testimony made it 
very clear that foreign carriers could dominate and control 
every commercial aspect of a U.S. airline other than safety, 
security, CRAF, and the organizational documents. Now, they've 
add--that was in the original proposal--now they've added this 
concept of revocability, which is completely illusory, because 
if truly those matters were revocable, then the foreign 
investor would never make the investment. JPMorgan makes that 
point. And if it's nonrevocable, that means basically that the 
foreign investor will be in total domination and control of a 
U.S. airline.
    Senator Burns. You bet, you're in.
    Senator Lott. Thank you very much.
    I'm flabbergasted to hear--let me make sure you hear this--
I'm flabbergasted to hear what you just said. I don't believe 
he indicated anything of that kind.
    My question to you, Mr. Smith, was--I'm a little shocked at 
what I've been hearing from a lot of the discussion today. Is 
the sky falling? I mean, is this going to cause, you know, 
aviation to collapse? What is going on here? I cannot believe--
look, I've got a huge populist streak in me, but I just--I find 
it unfathomable that, if you might have 25 percent investment 
from foreign interests, that you're going to control a company. 
Where did that come from? Am I missing something here?
    Mr. Smith. Well, as I said a moment ago, Senator Lott, in 
my experience on six major New York Stock Exchange boards, I 
have never seen a case where 25 percent can outvote the 75 
percent if the majority directors are acting as fiduciaries in 
pursuing the shareowners' best interests. Now, if there are de 
facto agreements on the side, which is exactly the situation 
that we felt was the case when DHL was permitted to de facto on 
a U.S. air carrier, that's a different matter. And, to some 
degree, the DOT is being accused of doing something that 
they're actually trying to protect against. And that was the 
point about Senator Lautenberg's chart. It wasn't that--the red 
dots are the important things, that they cannot be involved in 
that, and they can only be involved in the blue dots, to the 
extent that the 75 percent of the shares and the board of 
directors wants to permit them to do that.
    Senator Lott. Let me flip the question on you, then. Tell 
me why, succinctly, this is--it's in the best interest that we 
do this.
    Mr. Smith. Well, it's in the best interest for us to do it, 
Senator, because the history of American aviation shows that as 
markets liberalize around the world, American aviation 
interests prosper. And I think you had Mr. Whitaker give a very 
good case of that. If Bermuda II had not been in place, and 
American aviation interests had not seen our beyond rights 
negotiated away in 1978 under Bermuda II, you would have seen 
perhaps Continental, Northwest, United setting up a hub in 
Luten or Stanstead. Couldn't have done it in Heathrow, no 
question. But you--then you would have had a competing hub and 
a diversification of interests.
    Now, if you think that's farfetched, just go read the case 
history of FedEx. We have a hub in Paris. We fly beyond, 
everyplace we're permitted. We're not permitted to fly into the 
U.K. We actually withdrew from Heathrow. We have a hub in the 
Philippines.
    Senator Lott. But under this NPRM, you would be able to do 
that, then, right?
    Mr. Smith. Well, if this NPRM passes, and the United States 
and the EU put an Open Skies Agreement, FedEx would be able to 
add significant additional operations from European points to 
Asian points and connect to other parts of our network, with 
substantial increase in employment of our pilots and inuring to 
the best interests of our shareholders.
    Senator Lott. Well, that was going to be my next question. 
I'm under the impression that this agreement would lead to 
significant impact in future agreements in China and Asia, 
which is where there's going to be a huge movement----
    Mr. Smith. Well, and that's the case, Senator, because this 
thing transcends and is much greater than just the EU 
agreement. If the United States demonstrates that we're unable 
to make this tiny step forward to further liberalize our 
agreement in Europe, I can assure you, there are protectionist 
forces in China and Asia and India and elsewhere that would use 
that as a signal to keep those aviation markets restricted. And 
we're on the cusp, I believe, in China, at least in all-cargo, 
of getting an Open Skies Agreement.
    Senator Lott. Captain--well, first of all, thanks to all of 
you for being here--Captain, it's good to see you again.
    Mr. Woerth. Thank you, sir.
    Senator Lott. I always enjoy hearing from you, and meeting 
with you, and hearing your testimony. In this case, it looks to 
me like this agreement could lead to more cargo being moved, 
more pilots being needed. So, why wouldn't you be for it? I 
mean, you--because it would be more opportunities for more 
pilots.
    Mr. Woerth. We are for the Open Skies. We advocate Open 
Skies. We do believe we participate fairly in Open Skies when 
we have our carriers under U.S. control. Even if the Europeans 
or somebody may get more, we gain some that I'm not going to 
hold back just so somebody might gain more than me.
    Senator what I'm afraid of--we probably watched Air 
France--well, we're--the French community has a different 
social contract with its citizens, apparently, with all the 
riots----
    Senator Lott. Sure.
    Mr. Woerth.--that we witnessed on television. I'm worried, 
if Air France, which has a government stake in the airline, and 
KLM, which has a golden share, but it's under one bottom line--
I'm worried, if they buy Delta or Northwest now, at fire-sale 
prices, that we start getting replaced across the North 
Atlantic. I mean, even if it was just a redundancy and we had a 
recession and wanted to lay off somebody, it's not going to be 
financially feasible to lay off a French person, let alone 
politically. It's four times more expensive. They're 
unemployment laws and their laws just don't prohibit it. So, a 
board--a fiduciary board acting in a fiduciary sense of the 
U.S. shareholders, would say, ``We're laying off Americans. We 
can't afford to lay off the French, and we can't afford to lay 
off the Dutch or the Germans.'' So, I think--to the question 
from the Chairman, as well, I think they're kind of related 
here.
    My concerns are that a lot of these airline interests 
around the world, whether it be Deutsche Post into DHL, which I 
know that Mr. Smith is worried about, but all the foreign 
airlines, they're still kind of a government entity in this 
regard. They're seen as an instrument of foreign policy and 
national pride. They're not just consumer items, like we have 
in this country. And I think if the Senate would take up S. 
6135 and, you know, get all these issues on the table and see 
what we can do, I'm interested in more foreign investment, and 
I'm certainly interested in more opportunity. I just think this 
particular process, Senator Lott, falls a little short of what 
American workers would probably want out of this deal.
    Senator Lott. Well, that's why we have hearings like this, 
is to make sure we've thought through all the angles and hear 
differing points of view. I certainly don't want us to have to 
fly with French pilots. What a horrible thought that is.
    [Laughter.]
    Senator Lott. But I still don't see how this level of 
investment is going to lead to French pilots. So, I just--I 
want to talk with you further about it. You know, I'm disposed 
to be supportive of this agreement and what we're--the 
Administration is trying to do. But I do appreciate your 
different points of view.
    Thank you, Mr. Chairman.
    Senator Burns. Thank you, Senator Lott.
    I've got about two or three--I'm really running up against 
the fire here a little bit, and I've got about two or three 
more questions. I'm going to address those questions to you and 
let you respond.
    Thank you very much for your testimony here today. And as 
we move forward, I can't--personally right now, I can't see 
where 25 percent of a company you're going to be able to 
dictate the domestic policy that we have in this country, or 
our laws. We--I'm leaning that way, too. But I think there has 
to be some questions, and we haven't answered enough of those 
concerns right now to really make a decision right now.
    So, I thank you for your testimony today, and I appreciate 
you coming today. You've opened up some areas where I had 
questions, and I think you've kind of laid those questions 
aside.
    So, thank you for coming. And any other comments that you 
would like to make at this time with regard to this, we'll be 
in negotiations or in conversation with my friend from Hawaii 
and the rest on this committee before we do a final thing on 
the supplemental.
    Thank you. This hearing is adjourned.
    [Whereupon, at 4:10 p.m., the hearing was adjourned.]
                            A P P E N D I X

    Prepared Statement of Hon. John Ensign, U.S. Senator from Nevada
    Thank you Mr. Chairman. The deregulation and liberalization of the 
aviation industry has proven to be successful at lowering the cost of 
air travel, improving the quality of service, and increasing the number 
of travel options available to consumers. In an increasingly global 
world, it is Congress' duty to ensure that the laws that govern 
aviation are keeping pace with the ever-changing realities of the 
aviation industry. I look forward to reviewing the testimony of the 
esteemed witnesses that the Chairman has arranged for today's hearing.
    The Department of Transportation (DOT) has issued a Notice of 
Proposed Rulemaking and a Supplemental Notice of Proposed Rulemaking 
that seek to clarify the rules regarding foreign investment in U.S. air 
carriers. Some of these rules date back to 1938 when both aviation and 
the world looked very different. The DOT's proposed Rule does not 
change the law, a power which lies solely with Congress. Rather, the 
proposed Rule seeks to only change the manner in which the existing law 
is exercised. It is wholly appropriate that the DOT now undertakes a 
review of how it interprets current statutes regarding foreign 
investment.
    Increasing domestic air carriers' access to foreign investment is a 
worthy goal that I support. With many of our U.S. air carriers 
struggling financially, it is in the best interests of the country that 
they have as much flexibility as possible to attract capital 
investment. In addition, liberalizing the criteria that determine 
whether an air carrier is a U.S. citizen could pave the way for the 
signing of a U.S.-European Union Open Skies agreement. Such a free-
market agreement would benefit American air travelers through increased 
competition while opening up vast new markets for U.S. airlines in 
which to compete.
    However, the security and safety of the United States must be the 
foremost consideration in any attempt to reinterpret the foreign 
investment rules. Because of security concerns in a post-9/11 world, 
the importance of protecting the Civil Reserve Air Fleet program, and 
the indispensable nature of aviation in our Nation's economy, U.S. 
airlines must remain under the control of U.S. citizens.
    As aviation enters its second century, the United States must work 
toward modernizing its aviation laws and regulations so they accurately 
reflect that the world has become a global marketplace. As the Congress 
and this Subcommittee prepare to take up FAA reauthorization next year, 
today's hearing is an important part of this ongoing effort. Thank you.
                                 ______
                                 
  Prepared Statement of Earl B. Boyanton, Jr., Assistant Deputy Under 
              Secretary of Defense (Transportation Policy)
Proposed Changes to Department of Transportation Evaluation of U.S. Air 
 Carrier Actual Control by U.S. Citizens During Initial and Continuing 
                            Fitness Reviews
    Chairman Burns, Senator Rockefeller, and other distinguished 
members of the Committee:
    Thank you for the opportunity to provide information relative to 
the Department of Transportation (DOT) proposed rulemaking to clarify 
policies that DOT may use to evaluate air carriers' citizenship during 
initial and continuing fitness reviews. As the Assistant Deputy Under 
Secretary of Defense for Transportation Policy, I am responsible, in 
part, for developing policy supporting the Civil Reserve Air Fleet 
(CRAF) program. The U.S. Transportation Command (USTRANSCOM) and its 
Air Force component Air Mobility Command (AMC), are charged with 
implementing and executing CRAF policy. As requested by the 
Subcommittee's staff, this testimony addresses four points: (1) 
Department of Defense (DOD) coordination with DOT regarding the 
proposed rulemaking; (2) CRAF information; (3) DOD's thoughts on the 
impact to CRAF of a new rule; and (4) DOD concerns about a new rule.
DOD Coordination With DOT
    DOT has actively coordinated with and provided information to DOD 
relative to the Notice of Proposed Rule Making (NPRM) and, 
subsequently, the Supplemental NPRM. In September 2005, DOT initiated 
discussions with DOD prior to issuing the NPRM. Since that time DOT has 
continuously kept DOD informed through meetings, telephone and video 
conferences, and e-mail. Likewise, the Office of the Secretary of 
Defense, of which my office is a part, and the USTRANSCOM staff have 
communicated with the DOT staff about the proposed rule.
Civil Reserve Air Fleet (CRAF) Program
CRAF History and Background
    Instituted in 1952, CRAF is a voluntary, contractual arrangement 
between DOD and U.S.-owned air carriers to transport passengers and 
cargo in both peacetime and crisis. Air carriers contractually commit 
to provide aircraft and crews to augment DOD airlift during 
contingencies/emergencies when requirements exceed the capability of 
organic military aircraft. In exchange for that commitment, both as an 
incentive for participating and as compensation for the business risk 
that DOD might execute its contractual claim on the airline, DOD offers 
CRAF member carriers peacetime airlift business proportional to their 
respective contributions to the CRAF. The Fly CRAF Act (Title 49, 
United States Code, Section 41106) requires that DOD contracts for 
airlift be awarded to CRAF carriers, if available, in order to support 
CRAF participants.
     Other than our commitment to offer peacetime airlift business 
proportionate to a carrier's commitment to the CRAF, no extra 
incentives or subsidies have been provided in the 50-plus years of 
CRAF's existence. However, DOD submitted enabling language, currently 
embodied in Section 802 of the draft conference report of the Fiscal 
Year 2007 National Defense Authorization Act bill, to provide DOD with 
legislative authority to contractually commit to an annual amount of 
business with CRAF carriers and to pay the commitment even if business 
does not materialize. This requirement recognizes that, in the late 
1990s and 2000-2001 prior to hostilities, DOD peacetime sustainment 
movement of passengers and cargo diminished to the point that our 
business available to CRAF carriers dropped substantially. When the 
current operations tempo associated with Operation Iraqi Freedom and 
Operation Enduring Freedom diminishes, and planned realignments of U.S. 
forces based overseas is complete, we expect again that DOD peacetime 
international traffic will diminish significantly. A guaranteed line of 
business is the only incentive that will assure that air carriers 
maintain types and quantities of aircraft needed to augment DOD in the 
event of crisis.
    CRAF provides over 90 percent of DOD's troop movement capacity and 
over 35 percent of cargo capacity. This longstanding government-
private-sector partnership significantly enhances the United States' 
ability to undertake unilateral action without having to rely on 
foreign sources for airlift capacity or to ask the American taxpayer to 
fund additional quantities of air transport aircraft to be owned and 
operated by DOD.
CRAF Capability and Participants
    CRAF is structured in three levels of effort, or stages:

   Stage I is the smallest and is designed to support a minor 
        regional crisis.

   Stage II is designed to meet the needs of a major theater 
        war.

   Stage III is designed to meet the needs of full national 
        mobilization.

    In addition to these stages, CRAF is composed of three segments 
representing specialized roles. Each segment reflects the range and 
authorized areas of operation for the aircraft in the segment:

   International Segment: Long- and short-range passenger and 
        cargo capability. A significant number of aircraft in CRAF 
        today are in the short-range international segment (less than 
        1,500 nautical miles).

   Aeromedical Evacuation Segment: Specialized medical airlift 
        capability. When aircraft committed to this segment are used, 
        the seats are removed and specialized aeromedical kits, 
        litters, and other equipment are installed.

   National Segment: Domestic and Alaskan passenger and cargo 
        capability. (Hawaii is in the International Segment).

    If one compares the number of aircraft committed to the CRAF 
program in the three stages and the various segments to a typical 16-
aircraft Air Mobility Command (AMC) Airlift Squadron, it is clear that 
CRAF can rapidly ``super size'' AMC's airlift capability (the following 
equivalents are cumulative):

   CRAF Stage I adds over 6 Squadron equivalents.
   CRAF Stage II adds over 16 Squadron equivalents.
   CRAF Stage III adds nearly 54 Squadron equivalents.

    Depending on the CRAF stage and segment, civil carriers 
participating in CRAF must provide aircraft and crews within 24 or 48 
hours of notification. At CRAF activation (discussed below), all CRAF 
crews are provided security clearances by AMC. For this reason, all 
crews must be U.S. citizens and airlines must ensure background checks 
are completed. The airline pilots and other crew members committed to 
operate CRAF flights for DOD are over and above any airline employees 
who are subject to call-up as members of the National Guard or 
Reserves.
    Since inception of CRAF, the member air carriers have participated 
in every military contingency involving the United States, either as 
volunteers or under CRAF activation. CRAF provides immediate access to 
airlift assets valued at over $45 billion with trained U.S. crews and 
maintenance capabilities without extra cost to American taxpayers. In 
1996, the Government Accountability Office calculated savings to the 
U.S. of $50 billion to $90 billion over the life of the CRAF program 
when compared to the cost of having the same capability in DOD's fleet 
of military aircraft. An update to 2006 would, in our estimation, show 
a savings range from $60 billion to $120 billion.
CRAF Activation Authority
    Throughout the half-century of CRAF existence, the member air 
carriers have staunchly supported DOD requirements, most of which have 
been met through the carriers' voluntary participation. For example, 
the full duration of the Vietnam conflict was supported in this manner. 
However, if DOD's requirements exceed the carriers' voluntary offers, 
we can invoke the airlines' contractual CRAF commitment. This step is 
called activation, and is executed in the previously-described stages 
and segments. (For example, Stage I long-range international passenger 
capability might be activated.)
    The Commander, USTRANSCOM, with Secretary of Defense approval, is 
the CRAF activation authority. When activated, in accordance with Title 
I of the Defense Product Act (DPA) (50 U.S.C. App 2071) CRAF carriers 
must give priority to DOD orders for service. In return, the DPA 
protects carriers from breach-of-contract lawsuits for abandoning their 
peacetime commercial contracts to respond to DOD CRAF activation.
    The CRAF was activated (Stage II long-range international passenger 
and cargo) for the first time in its history to support Operations 
Desert Shield and Desert Storm in 1991. Over 5,500 airlift missions (20 
percent of the total) were flown by U.S. CRAF member carriers, who were 
paid $1.35 billion by DOD for this service during activation and 
voluntary periods. In this instance, CRAF carriers transported to the 
Gulf 62 percent of the passengers moved and 27 percent of air cargo, 
and redeployed to the U.S. 84 percent of passengers and 40 percent of 
air cargo.
    CRAF was activated for the second time (Stage I long-range 
international passenger) in 2003 in support of Operation Iraqi Freedom 
deployment: 399,212 passengers (93 percent of total). During the same 
period a total of 9,004 tons of cargo were transported by CRAF 
volunteers. Each of the activations were limited in duration, with 
subsequent support provided on a voluntary basis by the industry.
DOD's Thoughts on the Impact of a New Rule on CRAF; DOD Concerns About 
        a New Rule
    The viability of the CRAF program is extremely important to DOD. 
Any change to U.S. control of U.S. airlines must address its effect on 
our partnership with CRAF carriers. The ultimate authority of 
USTRANSCOM to effectively activate parts or all of the CRAF fleet must 
not be compromised. DOD has had a number of productive meetings and 
phone conversations with DOT in order to better understand the rule, 
and its prospective application in practice, to assess whether there is 
a potential impact to the CRAF program. We would expect to have 
concerns if impacts are identified and not mitigated or if, after 
assessment, uncertainty remains. However, at this time we have not 
reached a conclusion on impacts.
    Based on our ongoing consultations, it is clear that DOT intends 
for the proposed rule to ensure the availability of commercial aircraft 
for national defense purposes, including CRAF commitments. We will 
continue to work with DOT to ensure that the rule achieves this end, 
and will advise the Subcommittee of our conclusions.
Conclusion
    The CRAF program relies heavily on voluntary participation from 
civil air carriers. Civil airlift is a more critical element than ever 
before in support of the National Defense Strategy. Except for the 
requisitioning of ocean vessels, no authority exists to nationalize or 
seize any transportation asset, even when war has been declared. Having 
mentioned ocean vessels, it should be noted that approximately half of 
the Maritime Security Fleet (MSF) vessel companies are ultimately owned 
by foreign interests. Nevertheless, they meet the MSF statutory 
requirements to participate in the Voluntary Intermodal Sealift 
Agreement (VISA), which is the sealift equivalent to CRAF as a national 
emergency mobilization program. These ocean carriers have thoroughly 
proven their willingness and ability, notwithstanding ownership, to 
quite satisfactorily support Operations Iraqi Freedom and Enduring 
Freedom.
    The decreasing numbers of military airlifters has resulted in a 
greater reliance on civil aircraft to meet airlift requirements in 
peacetime and contingency situations. Volunteer programs such as CRAF 
are essential to meet our national defense needs. CRAF embodies a 
significant capability to support the Combatant Commanders and the 
Soldiers, Sailors, Airmen, Marines, and Coast Guardsmen who execute the 
orders of the Commander-in-Chief.
    In closing Mr. Chairman, thank you for the opportunity to provide 
this written testimony before the Committee about DOT's proposal to 
clarify policies that DOT may use to evaluate air carrier actual 
control by U.S. citizens during initial and continuing fitness reviews 
and the potential impact on CRAF.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                         Hon. Jeffrey N. Shane
    Question 1. Under Secretary Shane--It's been documented that the 
U.S. and EU Open Skies Agreement may hang in the balance of Congress' 
decision on your rulemaking. What does that Open Skies agreement mean 
to the American consumer and traveler?
    Answer. The Agreement will enable U.S. consumers to obtain lower 
fares and a greater variety of airline services in transatlantic 
markets. The Agreement could have a profound impact in reshaping the 
route maps for transatlantic aviation. Business travelers, tourists and 
shippers will be able to choose from the whole panoply of U.S. and 
European airlines, because the Agreement will authorize every EU and 
every U.S. airline:

   to fly between every city in the EU and every city in the 
        United States, including opening up operations between the 
        United States and the United Kingdom;

   to operate without restrictions on routes or capacity, 
        including unlimited rights to fly beyond the EU and U.S. to 
        points in third countries;

   to set fares freely in accordance with market demand; and

   to enter into cooperative arrangements with other airlines, 
        including code-sharing and leasing.

    This Agreement has the potential to dramatically increase the 
quality of competition in the market and benefit consumers and 
communities on both sides of the Atlantic, in ways that transcend 
anything achieved through our existing open-skies accords.
    Completion of the U.S.-EU Agreement would not only enhance the 
quality of airline competition across the Atlantic, it would set a new 
standard for liberalization around the world. By enhancing the 
competitiveness of U.S. airlines, the Agreement would create a center 
of gravity and a tool that could loosen the grip of protectionism in 
other markets.

    Question 2. Under Secretary Shane--The Department of Defense CRAF 
program relies on appropriate fleet composition. CRAF needs large 
international-range aircraft. Some opponents of your rule have 
suggested a foreign entity could essentially move all wide-body large 
aircraft to their overseas routes, leaving only small non-CRAF usable 
aircraft in the U.S. Should Congress be concerned about unintended 
impacts on the CRAF program fleet?
    Answer. No. Congress should not be concerned about unintended 
impacts on the CRAF program fleet as a consequence of our proposed 
rule. The Department strongly believes that our proposed rule will not 
have any negative effect on DOD programs. Because our proposed rule 
requires that U.S. citizens control all decision-making involving CRAF 
and other national defense programs, the air carrier could not allow 
foreign investors to make decisions that would make participation in 
CRAF or other national defense airlift operations impossible as a 
practical matter.
    Were a U.S. airline to decide to withdraw its participation in the 
CRAF program or to sell off its fleet of intercontinental aircraft, or 
to implement any other decision damaging to our national defense 
airlift needs, we would expect the Department of Defense to advise us 
of the situation and its impact on its programs, just as we would 
expect to hear about safety or security problems from FAA or TSA. In 
such circumstances, the Department would undertake an immediate 
investigation to determine whether the air carrier was conforming to 
its obligations under our proposed rule to ensure that U.S. citizens 
wholly controlled decisions relating to DOD programs. Importantly, a 
failure to comply with that obligation would call into question the air 
carrier's eligibility to retain its operating certificate. Therefore, 
airline management can be expected to take those obligations very 
seriously.

    Question 3. Under Secretary Shane--During the last FAA 
reauthorization debate, Congress essentially codified the citizenship 
standards to include ``actual control.'' Under what authority do you 
believe these requirements can be changed by DOT and not Congress?
    Answer. The Department has not proposed to change (and could not 
change) the requirement that U.S. citizens must actually control each 
U.S. carrier. The Department will continue to ensure that U.S. citizens 
actually control each U.S. carrier.
    The statute, however, does not define ``actual control,'' and the 
Department never established a fixed definition of ``actual control'' 
before or after Congress added the requirement to the statute. Because 
Congress gave the Department the responsibility for enforcing the 
requirement, the Department necessarily has some discretion to define 
``actual control'' and to modify that interpretation when changing 
industry circumstances make doing so appropriate. In fact, the 
Department over the years has changed its interpretation of ``actual 
control.''
    The Department's SNPRM contains a detailed discussion of the 
Department's tentative conclusions on its authority to modify its 
interpretation of ``actual control.'' 71 Fed. Reg. at 26436-26438. The 
parties may address this issue in their comments on the SNPRM, and the 
Department will carefully consider those comments in making its final 
decision on whether it may or should adopt its proposal.

    Question 4. Under Secretary Shane--Can you discuss the situation 
regarding Heathrow Airport in London? Some of the challenges to the 
Open Skies agreement revolve around access to Heathrow. If an Open 
Skies agreement and the rulemaking went forward, do you anticipate 
domestic winners and losers in gaining access to Heathrow, and why 
wasn't Heathrow access part of the Open Skies discussion?
    Answer. The current agreement between the United States and United 
Kingdom allows only two U.S. and two U.K. airlines to serve Heathrow. 
The Open-Skies agreement will give every U.S. air carrier the 
opportunity to serve that airport, subject to the availability of 
slots.
    There is a well-established market for slots at Heathrow. The U.K. 
courts have upheld the longtime practice of trading slots with 
additional compensation going from one airline to the other. Thus, 
contrary to assertions by some, slots are traded actively and can be 
obtained at Heathrow. They may not be immediately available at the very 
best times, and they will not be free. But U.S., British, and third-
country carriers have for years traded and, in effect, purchased slots 
at the airport. I cannot predict the results for individual U.S. 
carriers that would be newly eligible to serve Heathrow under a U.S.-EU 
agreement. However, I am certain that the longer we wait to make all of 
our carriers eligible to fly to Heathrow, the harder it will be for 
them to get acceptable slots as congestion continues to grow.
    During the negotiations, the concerns of some U.S. carriers about 
slot limitations at European airports, in particular Heathrow, were 
raised. The U.S. negotiators sought and obtained language in the 
agreement that allows us to address slot and other infrastructure 
problems in the Joint Committee. The U.S. side did not, however, pursue 
special infrastructure advantages solely for American carriers, such as 
designated slots, gates, and counters at London's Heathrow Airport. 
Such a provision would be inconsistent with EU slot regulations and 
with established nondiscriminatory international norms for slot 
allocation--norms that we insist on for U.S. carriers with other 
countries.

    Question 5. Under Secretary Shane--If Congress eliminated the 
language currently in the Supplemental Appropriations bill and allowed 
the rulemaking to move forward, what is the timeline on a new rule, and 
when do you expect the European Commission to decide on the Open Skies 
agreement?
    Answer. Comments on the Supplemental Notice of Proposed Rulemaking 
are due on July 5. The Department intends to consider carefully the 
comments received. If, following our review, we decide to finalize the 
rule, we hope to do so in time for the European Commission and its 25 
Member States to decide on the proposed U.S.-EU Air Transport Agreement 
at the October 12 EU Transport Council meeting.

    Question 6. Under Secretary Shane--Opponents have stated foreign 
investors could essentially gain ``super majority'' control over U.S. 
airlines through your rulemaking. Could you describe what is meant by 
``super majority'' and how the rulemaking would address that scenario?
    Answer. A ``super-majority'' voting clause in a corporation's 
articles of incorporation (or charter) or by-laws requires specified 
types of decisions to be approved by more than a bare majority of the 
directors or shareholders (a clause might, for example, require 
approval by two-thirds of the directors or voting shares). Minority 
investors in U.S. corporations often obtain super-majority clauses of 
this kind in order to protect their legitimate interests as investors. 
A super-majority clause does not give the investor any ability 
affirmatively to require a corporation to take any action.
    The Department stated that its proposal could allow qualified 
foreign investors to hold some super-majority rights essential to 
protect their interests, but that the Department could not now define 
which kinds of super-majority voting clauses it would permit under the 
actual control requirement. The Department tentatively concluded that 
the appropriateness of any specific super-majority voting requirement 
would depend on the precise nature of the clause and the nature of the 
foreign investors' involvement in the carrier. If the proposal is 
finalized, foreign investors could not use super-majority voting rights 
to control a carrier's organizational documents, safety and security 
matters, or its participation in national defense airlift operations, 
including CRAF, because those matters would remain under the present 
regulatory regime in which no substantial foreign influence is 
permitted. The SNPRM gives the parties in the rulemaking the 
opportunity to comment on this issue, and the Department expects to 
receive a number of comments on super-majority voting clauses.

    Question 7. How many European air carriers are state-owned or 
partially state-owned?
    Answer. Although the Department does not systematically monitor 
ownership of foreign airlines, in an effort to be responsive, we 
undertook a limited ownership review of European air carriers using 
various public data-sources that were available to the Department. We 
sampled 31 foreign air carriers whose homelands are members of the 
European Union (we sampled all European Union countries) and who now 
provide U.S.-Europe scheduled combination air service (persons, 
property, and mail), all-cargo service, and charter services. Our 
evaluation of this category of companies indicated that five air 
carriers are wholly owned by their governments (three are from Eastern 
European countries), and seven air carriers are partially state-owned. 
Importantly, while the Department does not maintain current ownership 
information on foreign airlines, we note that all prospective foreign 
investors in a U.S. air carrier wanting to take advantage of our 
liberalized control policies would be required to fully satisfy the 
Department that the requisite reciprocity of investment opportunity 
exists.

    Question 8. Under Secretary Shane--Under the rulemaking, the 
investment situation with another country must be reciprocal. What do 
you envision would happen if a U.S. carrier wanted to invest in a 
foreign, state-owned or partially state-owned airline?
    Answer. If a foreign country effectively bars U.S. citizens 
reciprocal investment and commercial decision-making opportunities in 
that country's airlines because those airlines must remain wholly 
state-owned, reciprocity would be lacking and, unless otherwise 
required under U.S. international obligations, investors from that 
country would not be able to take advantage of our proposed rule, if we 
make it final. With respect to partially state-owned airlines, we are 
not aware of any reason that the reciprocity requirement could not be 
met, as long as U.S. citizens could invest in the same amount of voting 
stock as allowed under U.S. law and have the same commercial decision-
making opportunities as we are proposing for foreign citizens.

    Question 9. Under Secretary Shane--Would this rulemaking lead the 
European States to invest in their airlines in order to block U.S. 
investment?
    Answer. One trend in Europe, reinforced by aggressive European 
Commission action against state aid, has been a decline in state-
ownership interests, and another has been a rise in both multinational 
European airlines and privately-owned low-fare carriers. We expect 
those trends, based on their own commercial imperatives, to continue. 
Moreover, the Europeans recognize that an important element of our 
rulemaking proposal is the reciprocity condition. If reciprocity cannot 
be established, investment opportunities in the United States will not 
be available.

    Question 10. Under Secretary Shane--Since no U.S. airlines are 
state-owned, would there be disproportionate opportunities available to 
European investors versus U.S. carriers?
    Answer. No. Under current U.S. law, qualified foreign investors can 
hold up to 25 percent of the voting stock of a U.S. airline. Our 
proposed rule does not alter that foreign investment limit. If made 
final, however, our proposal would permit foreign investors to take 
advantage of our more liberal commercial decision-making opportunity 
standards, only if the foreign investors come from countries that have 
signed an open-skies agreement with the U.S. and provide to U.S. 
investors reciprocal investment opportunities in their airlines.
                                 ______
                                 
  Response to Written Questions Submitted by Hon. Daniel K. Inouye to 
                         Hon. Jeffrey N. Shane
    Question 1. Under your proposal, you allow a foreign investor to 
control key economic decisions of a U.S. air carrier. The foreign 
investor, for example, would have the authority to change the fleet mix 
of that airline's domestic operations, including reducing aircraft that 
are used by the Department of Defense (DOD) in a crisis, under the 
Civil Reserve Fleet Program (CRAF). What role will the DOD have in 
reviewing a decision by a foreign entity to sell off key assets?
    Answer. The Department strongly believes that our proposed rule 
will not have any negative effect on DOD programs. First, we would 
expect each air carrier to continue to make its fleet decisions based 
on its perceptions of the fleet mix best suited to a successful 
commercial operation. The Department expects that foreign investor 
interests will be the same as U.S. investors', when permitted by the 
airline's U.S. citizen majority owners to affect fleet decisions. 
Additionally, to remain compliant with our proposal, the U.S. citizen 
owners would have to retain the right to revoke any delegation of 
decision-making to the foreign investors.
    Were a U.S. airline to decide to withdraw its participation in the 
CRAF program or to sell off its intercontinental aircraft, or to 
implement any other decision damaging to our national defense airlift 
needs, we would expect the Department of Defense to advise us of the 
situation and its impact on its programs, just as we would expect to 
hear about safety or security problems from FAA or TSA. In such 
circumstances, the Department would undertake an immediate 
investigation to determine if foreign investors had made or unduly 
influenced the U.S. air carrier's ability to contribute to DOD programs 
and whether the air carrier was conforming to its obligations under our 
proposed rule to ensure that U.S. citizens wholly controlled decisions 
relating to DOD programs. Importantly, a failure to comply with that 
obligation would call into question the air carrier's eligibility to 
retain its operating certificate. Therefore, airline management can be 
expected to take those obligations very seriously.

    Question 2. As the Department of Defense (DOD) notes, the Civil 
Reserve Air Fleet (CRAF) program relies heavily on voluntary 
participation, and with the exception of requisitioning ocean vessels, 
no authority exists to nationalize or seize any transportation asset, 
even when war has been declared. The DOD has not reached a conclusion 
on the impact of your proposal, but believes they would expect to have 
concerns if uncertainty remains following their assessment. Why are you 
certain that the CRAF will not be affected by the Supplemental Notice 
of Proposed Rule Making (SNPRM) prior to implementation of a final rule 
when the DOD is not similarly convinced?
    Answer. The CRAF program is a voluntary, quid pro quo arrangement 
by which airlines agree to commit aircraft for military airlift, and in 
return, gain access to U.S. Government business. Because each carrier's 
participation in CRAF and other national defense airlift operations is 
voluntary, the Department crafted its proposed rule to ensure that U.S. 
citizens control each U.S. air carrier's decision on whether to 
participate in the program. In formulating this position of protecting 
the CRAF program, we consulted with DOD and we will continue to work 
with the officials at the Department of Defense toward this objective.
    As our proposed rule states, its provisions would not permit 
foreign investors to control U.S. air carrier decisions on CRAF or 
other national defense airlift participation, even if the foreign 
investors became more involved in other areas of the air carrier's 
operations. The Department would require such decisions to be clearly 
and demonstrably subject to actual control by U.S. citizens. This would 
mean that the air carrier could not allow foreign investors to make 
decisions that would make participation in CRAF or other national 
defense airlift operations impossible as a practical matter. As the DOD 
notes, participation in CRAF has been and will continue to be 
voluntary, therefore, just as today, each air carrier will continue to 
choose whether it will participate in CRAF or other national defense 
airlift operations. We do not believe that anything in our proposed 
rule would negatively affect such a choice.

    Question 3. When is the DOD assessment of your proposal expected to 
be completed?
    Answer. The Department of Defense has already indicated that it 
does not object to the adoption of a rule along the lines currently 
proposed. DOD and DOT are working together to establish new inter-
departmental procedures ensuring that DOD concerns regarding CRAF 
carriers are fully addressed. Similarly, the Department of Homeland 
Security, after reviewing the proposal with great care, has indicated 
that they also do not object to our adoption of the proposed rule.

    Question 4. The Committee on Foreign Investment in the United 
States (CFIUS) reviews are necessitated when a foreign entity acquires 
control through an acquisition, merger, or takeover of a U.S. company. 
Will the expanded foreign investment into U.S. air carriers, allowed 
for by the Department of Transportation's (DOT) Supplemental Notice of 
Proposed Rule Making (SNPRM), require a CFIUS review?
    Answer. No. CFIUS applies only to acquisitions, mergers, and 
takeovers, none of which would be permitted under this rule. Whether or 
not the proposal is finalized, foreign investors' stock ownership is 
now and would continue to be limited by the statute to no more than 25 
percent of the voting stock of an air carrier. A CFIUS review would not 
be required or necessary because the air carrier would remain majority-
owned and controlled by U.S. citizens.

    Question 4a. If so, why would that be necessary if the DOT is 
confident that ``actual control'' of domestic air carriers will remain 
in the hand of U.S. citizens?
    Answer. As stated in the previous question, we do not believe that 
implementation of our proposed rule would require a CFIUS review.

    Question 5. You have long supported a change in U.S. foreign 
investment laws in domestic air carriers. Why did the Department of 
Transportation (DOT) not come to the Congress to ask for a change in 
the law, so that a deal with the European Union (EU) could be 
negotiated?
    Answer. The Department has not sought legislation for its proposed 
modification of its past interpretation of the actual control 
requirement, because the Department believed that no legislation was 
necessary. The Department is proposing only to modify its own 
interpretation of ``actual control,'' not to modify any requirement 
imposed by Congress. Because Congress did not enact a definition of 
``actual control,'' the past interpretations of ``actual control'' were 
created by Department decisions in initial certification proceedings 
and continuing fitness reviews. The Department will continue to enforce 
all of the statutory citizenship requirements for U.S. carriers, 
including the requirement that U.S. citizens must actually control each 
U.S. carrier.
    Additionally, I wish to emphasize that this rulemaking has been 
initiated and pursued based on its own merits and not for purposes of 
achieving any agreement with the European Union.

    Question 6. Did you believe that allowing greater foreign 
investment by increasing the 25 percent threshold to 33 percent or even 
49 percent would not be sufficient to spur investment? So, without 
changing even the percentage threshold, how does your proposal equate 
to greater foreign investment?
    Answer. Foreign citizens would be more likely to make investments 
in a U.S. carrier if they could obtain some ability to protect their 
investment and influence the carrier's use of the funds provided by 
them, even if they may not own more than 25 percent of the 
shareholders' voting interest. Minority investors in any U.S. company 
typically wish to obtain some protection for their investment, such as 
agreements requiring their consent before the company may implement 
certain types of major corporate transactions, and some ability to 
influence the company's use of their investment. The Department's 
traditional implementation of the actual control requirement barred 
foreign investors in U.S. carriers from obtaining either such 
protection or any significant ability to participate in managing the 
carrier's use of their investment. The Department's proposed policy, if 
adopted, would allow foreign investors to obtain some protection for 
their interests and some ability to influence the carrier's operations. 
As a result, it would encourage foreign citizens, especially strategic 
investors, to make minority investments in U.S. carriers that they 
would not be willing to make under the current interpretations.

    Question 7. If the Department of Transportation (DOT) does complete 
a final rule based on the SNPRM, will it guarantee ratification of an 
Open Skies agreement with the EU?
    Answer. I cannot guarantee what the European Commission and its 25 
Member States will do. All indications are that the Europeans are 
satisfied with the proposed Agreement reached in November. Therefore, I 
am optimistic that it can be approved. However, I am convinced that the 
Agreement will not move forward without DOT's issuing a final rule.

    Question 8. Under your proposal, could Air France merge with a U.S. 
carrier, assuming it already has antitrust immunity for its dealings 
with a carrier?
    Answer. As a practical matter, I believe that Air France would 
never merge with a U.S. carrier due to the requirements imposed by 
existing Federal statutes even if the Department adopts its proposed 
modified interpretation of ``actual control.'' The statute states that 
a carrier cannot be a U.S. air carrier unless U.S. citizens hold at 
least 75 percent of the shareholders' voting interest and the carrier 
is a corporation organized under the laws of the United States, one of 
the states, the District of Columbia, or a territory or possession of 
the United States. As a result, a merger between Air France and any 
U.S. air carrier would only be possible under U.S. law if the surviving 
corporation were the U.S. carrier and the foreign investors were 
willing to hold no more than 25 percent of the voting interest in that 
corporation. If Air France acquired a U.S. carrier without complying 
with these requirements, the U.S. air carrier would lose its operating 
authority as a U.S. carrier. On the other hand, if the surviving 
corporation were a U.S. carrier, it presumably would not be deemed a 
French carrier by the United States or foreign governments under 
applicable air services agreements and so would likely lose any route 
rights created by such agreements for the benefit of French carriers.

    Question 9. Under what section of law is this type of merger 
permissible?
    Answer. If a foreign carrier wished to merge with a U.S. carrier, 
the surviving carrier would be a U.S. carrier only if it continued to 
comply with the statutory definition of a U.S. citizen, 49 U.S.C. 
40102(a)(15). The merger would also be subject to the antitrust laws 
enforced by the Justice Department, including the Hart-Scott-Rodino 
Act, which proscribe foreign acquisitions of U.S. firms only when they 
would be anticompetitive.

    Question 10. The proposed rule indicates that you will leave 
control of key areas, such as safety, security, and Civil Reserve Air 
Fleet (CRAF), in the hands of U.S. citizens. However, the process that 
determines whether or not U.S. citizens maintain control will be 
confidential. How can the Senate judge the impact of this rule without 
specific details regarding enforcement or oversight?
    Answer. Initial applications for air carrier certificates are 
docketed public proceedings. Moreover, any significant investment in a 
publicly-held U.S. air carrier must, by law, be disclosed in the 
company's SEC filings. Further, the Department has the discretion to 
make public continuing fitness reviews when the Department believes 
that it would be in the public interest to do so. For example, we 
recently released a letter to Hawaiian Airlines that set a useful 
precedent that we felt the public should be aware of so that others 
could take advantage of it. We have also docketed continuing fitness 
reviews in the past--up to and including oral evidentiary hearings 
before an Administrative Law Judge.

    Question 11. Safety impacts almost everything an airline does. Can 
you be more specific about the sort of decisions reserved for U.S. 
citizens in the areas of safety, security, government procurement, and 
organizational documents?
    Answer. With any air carrier, there are officials whose 
responsibilities involve primarily safety and security matters, such as 
the Directors of Safety, Operations, and Maintenance, the Chief Pilot, 
the Chief Inspector, the Aircraft Operator Security Coordinator, and 
the Ground Security Coordinator. Those officials, as well as others 
whose primary concerns are safety, security, and national defense 
airlift participation would have to report to U.S. citizens, up to and 
including the President and CEO of the company, who must be U.S. 
citizens. The carrier will have to designate the individuals 
responsible for these core decisions, including the officials who are 
charged with the decision-making duties for national security 
commitments, who they report to, and who sets their budgets and 
compensation.
    As to the organizational documents, the U.S. citizens would have to 
set up a structure consistent with the parameters set out in the 
rulemaking, and the foreign minority investor would not be permitted to 
alter those documents or structure. These organizational documents 
additionally could be the means by which any delegation of authority to 
the foreign investor would occur, and, similarly, where provisions for 
revocability of that delegation would exist.
    While there could be a disagreement between those officials 
responsibility for safety, security, or national defense commitments, 
and a foreign official with delegated authority to make some commercial 
decisions, that conflict would--as with all large organizations--rise 
to the levels of the senior executives or Board of Directors for 
resolution. As a majority of those officials and directors must, by 
statute, be U.S. citizens, U.S. citizens necessarily would determine 
the outcome of those disagreements.
                                 ______
                                 
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to 
                         Hon. Jeffrey N. Shane
    Question 1. Do you feel the Federal Government has performed 
adequate safety and security oversight over airline maintenance 
operations, including maintenance performed at foreign facilities?
    Answer. Yes. Over the last several years, the Federal Aviation 
Administration (FAA) has changed the way it oversees aircraft 
maintenance. In the past, FAA's inspectors were required to complete a 
prescribed number of oversight activities focused on compliance with 
FAA regulations. In 1998, FAA began overseeing the ten largest airlines 
using the Air Transportation Oversight System (ATOS) model which goes 
beyond simply ensuring regulatory compliance. The goal of the oversight 
model is to foster a higher level of air carrier safety using a 
systematic, risk-management-based process to identify safety trends and 
prevent accidents. ATOS has improved safety because it identifies and 
helps manage risks before they cause problems by ensuring that carriers 
have safety standards built into their operating systems.
    Oversight of repair stations is a good example of why our current 
focus on risk management is preferable to compliance based oversight. 
We know that, if some maintenance component is identified as a risk, 
our oversight focus would be triggered, regardless of who or where the 
maintenance is performed.
    I am confident that the changes we have made in our oversight 
philosophy and the work we continue to do with input and assistance 
from the aviation community, Congress, and the international community 
has contributed to this historically safe period of commercial aviation 
safety. Our safety oversight must keep pace with the industry as it 
changes and I think we are well positioned to accept that challenge.
    The FAA is currently assisting the Transportation Security 
Administration (TSA), DHS, in drafting a notice of proposed rulemaking 
to address security requirements and to conduct security audits of FAA 
Part 145 certificated repair stations. TSA will also use a risk 
management-based approach in developing assessment criteria, assessment 
schedules, and decisionmaking matrices to address repair station 
findings. A required self-assessment tool and on-site inspections will 
begin after the publication of a final rule. As the program matures TSA 
will refine its risk management process. TSA has requested and received 
FAA assistance in the development of repair station training materials. 
Additionally, the FAA has agreed to assist in delivery of repair 
station training.

    Question 2. Do you feel the Federal Government has sufficient 
resources to adequately perform safety and security oversight over 
airline maintenance operations, including maintenance performed at 
foreign facilities?
    Answer. Yes. Funding provided in FY 2006 has enabled FAA to address 
critical safety and security oversight requirements. In addition, FAA 
has reprogrammed some funds and has requested that Congress approve the 
use of funds consistent with Section 511 of last year's appropriation 
bill. With these additional funds, Flight Standards (AFS) will be able 
to hire 139 safety-critical staff in FY 2006--55 with funds already 
appropriated by Congress and 84 with funds from the Section 511 request 
and internal reprogramming. Most of this additional safety-critical 
staff--80 new staff--will strengthen our safety oversight of repair 
stations, including foreign facilities. This includes implementing the 
Enhanced Repair Station Oversight Program at all 5,018 repair stations.
    This oversight program will:

   Establish a risk-based surveillance system to identify and 
        target inspector resources as required.

   Enhance the surveillance process by expanding on the current 
        facility inspection program.

   Capture data for risk mitigation.

   Establish a repair station assessment program comprised of 
        focused inspections.

   Establish oversight programs that utilize resources more 
        effectively for large and complex repair stations performing 
        maintenance on air carriers (e.g., certificate management 
        teams).

    The balance of 59 new staff will provide needed increases in other 
areas of safety oversight, including financially distressed carriers, 
fractional ownership, and emergency medical services.

    Question 3. The Department's proposal would make any delegation of 
authority to foreign citizens ``revocable.'' What evidence does the 
Administration rely on to show that this contract/model could work or 
has worked in the context of a complex entity like an airline 
operation?
    Answer. It has been the Department's practice to prevent foreign 
investors in any U.S. air carrier from exerting control or undue 
influence over any aspect of an air carrier's operations, regardless of 
the amount of foreign investment made and/or percentage of equity held 
by the foreign interests. In most cases, U.S. air carriers include 
numerous provisions in their organizational documents (i.e., charter 
agreements, bylaws, etc.) to prevent foreign control over the company 
and to maintain its strict adherence to the Department's U.S. 
citizenship requirements. In reviewing an air carrier's ownership 
structure in initial and continuing fitness review cases, we have found 
that air carriers are fully aware of the Department's scrutiny when 
foreign investors are involved and that these air carriers take the 
necessary steps to remain under the actual control of U.S. citizens. 
The Department's current practices have proven very effective in these 
matters, and we are confident that they will continue to serve the 
public interest well.

    Question 4. Will foreign investors truly be able to control and 
protect their investment, if control is subject to revocation at any 
time? And if they don't have this control, why would they invest in the 
first place?
    Answer. The Department's proposal would allow foreign investors to 
have greater involvement in the commercial decisions of the airlines in 
which they have invested, giving the investors some protection over 
their investments. As a practical matter, in most cases, the U.S. 
citizens in control of the airline would revoke delegated authority 
only in the event that the foreign investor attempts to make decisions 
that are contrary to the airline's best interests, therefore contrary 
to the interests of the majority U.S. stakeholders. For our part, the 
Department believes that foreign investor motivations would usually 
complement U.S. investor motivations in these matters. Even with the 
revocability provisions, the proposal is attractive to foreign 
investors because, again, it would allow them to participate more 
actively in the air carrier's commercial decisions, whereas under 
existing policy, foreign investor involvement is virtually nonexistent.

    Question 5. Do you believe that U.S. commercial pilots should be 
certificated by the USDOT beyond age 60? What is the basis of your 
decision?
    Answer. Certificating U.S. pilots in part 121 operations beyond age 
60 would require rulemaking to demonstrate to the public how such a 
modification would maintain safety. The consistency of findings across 
both FAA and non-FAA studies have shown aging to be a factor in 
commercial piloting. The findings of these empirical studies, using 
various analytic methodologies, do not support a rule change.
    The Air Line Pilots Association and the International Federation of 
Airline Pilots' Associations currently support an age 60 limit. In 
September 2002, we received nearly 7,000 comments in response to a 
petition for an exemption to the age 60 rule, the majority of which 
favored retaining the age 60 limit. Commenters cited safety and medical 
issues most often in their reasoning.
    For these reasons, we are unable to justify a rule change at this 
time.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Ted Stevens to 
                             Jeffery Smisek
    Question. Continental is a member of the SkyTeam alliance, along 
with 9 other major international airlines. Of those airlines, none have 
rights to serve London's Heathrow Airport from the U.S. Does 
Continental object to the Open Skies framework under negotiation 
between the U.S. and EU? Is your opposition to the rulemaking a 
reflection of your concerns about a new U.S.-EU agreement?
    Answer. Continental is the only U.S. Member of SkyTeam that does 
not hold antitrust immunity with any other SkyTeam Member. Of the ten 
carriers in SkyTeam, * four (Air France, KLM, Alitalia, and CSA Czech) 
are from the EU, and each has access to (and currently serves) Heathrow 
and would, even under their current bilateral Open Skies Agreements 
with the U.S., have the right to fly between their home countries and 
the United States through London's Heathrow Airport. Even Korean Air 
lines (also a Member of SkyTeam) could fly from Korea through London's 
Heathrow Airport to the United States under the current U.S.-Korea Open 
Skies agreement. Therefore, it is not correct that ``none have rights 
to serve London's Heathrow Airport from the U.S.'' Although all of the 
foreign SkyTeam carriers (with the exception of Aeromexico and 
Aeroflot) may serve the U.S. through London's Heathrow Airport, not one 
of the U.S. carriers in SkyTeam has that right. While the EU Open Skies 
agreement would technically allow the U.S. carriers to serve Heathrow 
Airport, it has been well documented that there are no competitive 
slots and facilities available. Therefore, Continental would not gain 
competitive access to Heathrow.
---------------------------------------------------------------------------
    * SkyTeam carriers: Aeroflot, Aeromexico, Air France, Alitalia, 
Continental, CSA Czech, Delta, KLM, Korean Airlines, Northwest.
---------------------------------------------------------------------------
    Continental is uniquely disadvantaged by the U.S. failure to gain 
slots and facilities at Heathrow, as part of the EU Open Skies 
Agreement. Unlike Delta and Northwest, we do not have antitrust 
immunity with any of the EU carriers (or any other SkyTeam carrier), so 
there is no reason that other SkyTeam members would consider 
transferring slots to Continental. While Delta and Northwest have 
limited service to the U.K., Continental has developed an extensive 
U.S.-U.K. network, serving 7 U.K. cities from the U.S. and, therefore, 
is currently the strongest U.S.-U.K. competitor to British Airways and 
Virgin Atlantic in U.K. markets where we are allowed to compete 
unconstrained. If the so-called EU ``open skies'' agreement were to be 
ratified, the U.K. carriers, who hold the vast majority of all slots at 
prime times for transatlantic service, would expand their Heathrow-U.S. 
services without any constraints. Without competitive access to 
Heathrow, Continental's entire U.K. network would inevitably be 
weakened, strengthening the power and market share of the U.K. carriers 
and their partners.
    This is exactly why Continental finds it frustrating that the U.S. 
DOT has been willing to ignore U.S. law in order to provide European 
carriers immediate and unfettered access to U.S. markets, while 
refusing to even negotiate for a process whereby U.S. carriers could be 
assured of the commercially viable slots and facilities necessary for 
competitive access to the most important airport in the EU as soon as a 
U.S.-EU agreement is signed.
    Additionally, we object to the rulemaking because it is blatantly 
unlawful and, as a result, ineffective in encouraging any new foreign 
investment. In fact, JPMorgan, one of the most sophisticated investment 
banks in the world, has recently indicated that it could not recommend 
foreign investment in U.S. airlines based on the Department's 
proposals.
                                 ______
                                 
     Response to Written Question Submitted by Hon. Ted Stevens to 
                          Michael G. Whitaker
    Question 1. United is one of the major members of the Star 
Alliance. Star now has 18 members. How do you expect U.S. carrier's 
financial health or viability to change as a result of this rulemaking?
    Answer. U.S. airlines have weathered enormous financial challenges 
in recent years. Foreign competitors, including members of the Star 
Alliance, have fared much better. The current international regulatory 
environment contributes to our financial weaknesses by limiting 
markets, discouraging investment and inhibiting international 
expansion.
    The NPRM, the pending air services agreement between the United 
States and the European Union, and other actions to remove outdated 
regulatory barriers on international aviation are very important for 
U.S. carriers to regain long-term financial stability. U.S. airlines 
need greater access to growing markets around the world, the ability to 
invest in operations outside the United States, and more opportunity 
for cooperation with our international partners. Such improvements 
would allow airlines to spread business risk geographically and better 
withstand economic peaks and valleys inherent in the airline industry.

    Question 2. What sorts of daily operational decisions could be 
affected by foreign strategic investors in United, if possible?
    Answer. The Department of Transportation's proposal regarding 
foreign control of U.S. airlines is intended to provide greater 
flexibility to U.S. carriers seeking to attract foreign investment. Our 
understanding is that U.S. carriers would have the option to offer 
foreign investors a greater degree of involvement in the commercial 
decision-making and management of U.S. carriers than is currently 
permitted by DOT case law precedent. The precise nature and degree of 
such involvement (within the limits prescribed by the proposal) would 
be established on a case-by-case basis between the U.S. carrier 
majority owners and the foreign investors. In general, the DOT proposal 
would permit the U.S. carrier majority owners and the foreign investors 
broad authority to allocate commercial decision-making and management 
responsibility between them, so long as U.S. citizens retain actual 
control (including control over organizational documents, safety, 
security and the Civil Reserve Air Fleet program) of the U.S. carrier.
                                 ______
                                 
    Response to Written Questions Submitted by Hon. Ted Stevens to 
                          Captain Duane Woerth
    Question. It has been suggested that allowing increased foreign 
investment in U.S. airlines will better position our carriers for 
financial health and internal growth. Lacking additional financial 
opportunities exposes the industry to more hardship during the next 
downturn. What is ALPA's view of projected growth in the domestic 
industry, particularly as it applies to hiring new pilots to meet 
increasing demand? Would changing the limits on foreign ownership 
contribute to the certainty of future growth?
    Answer. Per your inquiry, we would point out at the outset that 
DOT's proposal does not change the existing limits on foreign 
investments in U.S. airlines. The limit would remain at 25 percent of 
the voting shares. Rather, what DOT is proposing to change is the 
prohibition against foreign control of U.S. airlines, in the hope that 
this change would attract more foreign investment (up to the existing 
limit).
    DOT has presented no hard data to show that such radical change in 
the foreign control rules is necessary to ensure that the U.S. airline 
industry has adequate access to capital investment. If some U.S. 
carriers are currently having difficulty finding capital, we believe it 
is because of the precarious financial condition of the industry rather 
than any regulatory restrictions on foreign investment.
    In fact, there is evidence that when a U.S. airline shows some 
significant promise of profitability, it is able to find the capital it 
needs. For example, United Airlines, after engaging in extensive 
restructuring, cost-cutting and changes in operations and services 
while in Chapter 11, was able to obtain $3 billion in debt exit 
financing, on terms that CEO Tilton described as ``good even for my old 
business.'' Similarly, US Airways, after going through its own Chapter 
11 restructuring and merging with America West, obtained $1.5 billion 
in exit financing, of which $350 million was in the form of equity 
commitments. Moreover, $75 million of the equity was foreign investment 
provided by ACE Aviation Holdings, the parent of Air Canada. These 
major financings strongly indicate that both foreign and domestic 
capital is available to U.S. airlines if they appear to offer a 
reasonable return to the investor.
    DOT asserted in its NPRM that the carriers currently in Chapter 11 
have ``struggled to find the capital necessary to enable them to exit 
Chapter 11 protection.'' 70 Fed. Reg. 67393. It is not surprising that 
the search for capital for an enterprise--any enterprise--that has had 
to seek Chapter 11 protection will be something of a ``struggle.'' What 
is more significant is that two major airlines, United and US Airways, 
successfully found such financing once they had restructured and put 
together a promising business plan, despite their long histories of 
financial difficulty. And in the case of US Airways, such financing 
included a substantial contribution by a foreign investor, ACE, which 
will also have a seat on the airlines Board of Directors. While there 
are several other airlines currently in Chapter 11 that have not yet 
obtained exit financing, those airlines have also not yet completed 
their restructuring. If they are able to restructure and produce a 
viable business plan as United and US Airways have done, there is no 
reason to believe they will not also find whatever financing they 
require. Indeed, a Dow Jones Newswire reported in December that 
Northwest Airlines has already reached a new financing agreement with 
Airbus, pursuant to which ``Airbus affiliate AVSA [will] provide or 
procure financing for 85 percent of an undisclosed number of Airbus 
A319 aircraft scheduled for delivery this year,'' and ``for 85 percent 
of up to 10 A330 aircraft to be delivered in 2006 and 2007.''
    In short, ALPA believes that there is no need to change the foreign 
control rules to ensure that the airline industry has adequate access 
to capital investment. Rather, what is needed are measures to promote 
the economic health of the industry, such as relief from discriminatory 
and burdensome taxes.

                                  

```