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28–260 PDF 2006

U.S.-E.U. OPEN SKIES AGREEMENT:

WITH A FOCUS ON THE U.S. DEPARTMENT OF TRANSPORTATION’S

NOTICE OF PROPOSED RULEMAKING (NPRM) REGARDING ACTUAL CONTROL OF U.S. AIR CARRIERS

(109–44)

HEARING

BEFORE THE

SUBCOMMITTEE ON

AVIATION

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

FEBRUARY 8, 2006

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

JEAN SCHMIDT, Ohio

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

(II)
SUBCOMMITTEE ON AVIATION

JOHN L. MICA, Florida, Chairman

THOMAS E. PETRI, Wisconsin

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

ROBIN HAYES, North Carolina

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

CHARLES W. DENT, Pennsylvania

TED POE, Texas

JOHN R. ‘RANDY’ KUHL, JR., New York,

Vice-Chair

LYNN A. WESTMORELAND, Georgia

DON YOUNG, Alaska

(Ex Officio)

JERRY F. COSTELLO, Illinois

LEONARD L. BOSWELL, Iowa

PETER A. DEFAZIO, Oregon

ELEANOR HOLMES NORTON, District of

Columbia

CORRINE BROWN, Florida

EDDIE BERNICE JOHNSON, Texas

JUANITA MILLENDER-MCDONALD,

California

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

TIM HOLDEN, Pennsylvania

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

BEN CHANDLER, Kentucky

RUSS CARNAHAN, Missouri

JOHN T. SALAZAR, Colorado

NICK J. RAHALL II, West Virginia

BOB FILNER, California

JAMES L. OBERSTAR, Minnesota

(Ex Officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Byerly, Hon. John, Deputy Assistant Secretary for Transportation Affairs,

U.S. Department of State .................................................................................... 15

Dunkerley, Mark B., President and Chief Executive Officer, Hawaiian Airlines, Inc. ............................................................................................................... 44

O’Keefe, M. Rush, Jr., Senior Vice President and General Counsel, FEDEX .... 44

Shane, Hon. Jeff, Under Secretary for Policy, U.S. Department of Transportation ..................................................................................................................... 15

Smisek, Jeffrey A., President, Continental Airlines ............................................. 44

Whitaker, Michael G., Vice President, Alliances, International and Regulatory

Affairs, United Airlines World Headquarters .................................................... 44

Woerth, Captain Duane, President, Air Line Pilots Association ......................... 44

Wytkind, Edward, President, Transportation Trades Department, AFL-CIO ... 44

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Costello, Hon. Jerry F., of Illinois .......................................................................... 70

Johnson, Hon. Eddie Bernice, of Texas .................................................................. 77

Oberstar, Hon. James L., of Minnesota ................................................................. 81

Porter, Hon. Jon, of Nevada ................................................................................... 89

Salazar, Hon. John T., of Colorado ........................................................................ 90

PREPARED STATEMENTS SUBMITTED BY WITNESSES

Byerly, Hon. John .................................................................................................... 60

Dunkerley, Mark B. ................................................................................................. 73

O’Keefe, M. Rush, Jr. .............................................................................................. 84

Shane, Hon. Jeff ...................................................................................................... 92

Smisek, Jeffrey A ..................................................................................................... 96

Whitaker, Michael G ............................................................................................... 147

Woerth, Captain Duane .......................................................................................... 158

Wytkind, Edward ..................................................................................................... 180

(1)

U.S.-E.U. OPEN SKIES AGREEMENT: WITH A

FOCUS ON DOT’S NPRM REGARDING ACTUAL CONTROL OF U.S. AIR CARRIERS

Wednesday, February 8, 2006

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE AVIATION, COMMITTEE ON TRANSPORTATION AND INFRASTRUC- TURE, WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 10:00 a.m., in Room

2167, Rayburn House Office Building, the Hon. John L. Mica

[chairman of the subcommittee] presiding.

Mr. MICA. Good morning. I would like to welcome everyone this

morning. We are getting accustomed to some of the new electronic

and other improvements that have been made here in the committee room. This is the first time we are doing our hearing in these

renovated facilities.

And we are pleased to see Jimmy Miller back. Where is Mr. Miller? Everybody wishes him a speedy recovery.

[Applause.]

Mr. MICA. It looks like he is doing well and back at it again. We

do appreciate his many years of service, and it does take a toll on

one’s health, but we appreciate all he has done and wish him a

speedy recovery.

Well, this morning, the Aviation Subcommittee’s hearing is going

to deal with the United States and European Union Open Skies

Agreement, and also the other subject that is closely related is the

Department of Transportation’s Notice of a Proposed Rule Change

relating to actual control dealing with aviation ownership issues.

The order of business will start with opening statements. I will

start with mine and then yield to members. Then I believe we have

two panels of witnesses today, and we will proceed with those witnesses.

So, again, I would like to welcome everyone this morning, and we

will go ahead and get started.

I have an opening statement, and I will proceed with that and

then, as I said, will yield to other members.

This morning’s hearing, as I said, will focus on two issues that

are both timely, and I believe very important. The Subcommittee

will receive testimony, first about the Department of Transportation’s Actual Control Rulemaking Proposal, and then secondly,

we are going to take a look and review the status of the tentative

Open Skies Agreement between the United States and the European Union.

There is some urgency to resolving these issues. Several United

States airlines in recent months have announced plans to expand
2

and in some cases to significantly increase their international services. This reflects the increasingly common belief that greater service to foreign locations will be a very key element in the U.S. airline industry’s efforts to recover from some four years of very difficult financial problems. The American aviation industry has lost,

as we know, some $40 billion since 2001. It does need the freedom

today to compete and succeed anywhere and everywhere.

Some of the best future opportunities for expansion will really

depend on having U.S. cities link with growing markets that are

across the globe. All of us in labor management, U.S. communities,

and government have an important stake in the removal of barriers that will allow our airlines to pursue competitive opportunities necessary for future economic success in that global marketplace. Expanding air transportation between the United States and

foreign countries can indeed hold the promise of directly improving

the well being of our airline workers, can also benefit our air travelers, and certainly can also benefit American cities that have this

service.

This hearing will permit us to learn more about the status of the

Administration’s efforts to secure a new Open Skies Agreement

with the European Union. We have to ask ourselves today, however: Are the skies between Europe and America opening, or will

the protective self-interests provide enough thunder and clouds to

rain on that prospect?

The growing opportunities that we have seen with Open Skies

Agreements has been a singular achievement for our Nation’s

international commercial aviation policy. It began amidst much

skepticism, both in the United States and among our aviation trading partners overseas. Of course, reality has silenced some of the

initial skeptics. Our Government’s perseverance exhibited by administrations of both parties in pressing for accepting of Open

Skies principles has produced extraordinary benefits for both passenger and for cargo airlines.

With difficulties, again that the American aviation industry has

had in attracting capital and also in expanding service and providing better future opportunities, wages, and benefits for employees,

Open Skies, I believe can have many positive aspects and benefits

for the future.

However, one contentious issue that has emerged is the question

of ownership and control of the United States airlines. Our European counterparts regard this as indeed a very critical issue. The

Department’s November 7th Actual Control Notice of Proposed

Rulemaking is an effort to respond to that concern.

Congress has been involved in the criteria for U.S. airline and

aircraft ownership for nearly eight decades now. The Air Commerce

Act of 1926 included a U.S. ownership requirement. Most recently,

Congress in 2003 revised the longstanding definition of a citizen in

our Federal Aviation Law. That definition can be traced back to the

Civil Aeronautics Act of 1938. This history tells us that Congress

has been always mindful of citizenship and ownership issues. This

hearing continues that tradition.

We look forward to Under Secretary Shane informing us on how

the Department’s Proposed New Actual Control Test will affect

labor management relations in the airlines, also its effect on con-
3

sumer protection issues and day to day management of U.S. airlines. Also we need to look at how this affects the Department of

Defense’s ability to obtain the civilian airlift it so critically needs

with respect to the Civil Reserve Air Fleet Program.

Similarly, we look forward to both Deputy Assistant Byerly and

Under Secretary Shane advising us whether a change in the Actual

Control Test language will result, what exactly will be produced as

a result, or do we risk the rejection and disappointment that we

experienced in June of 2004.

Our Subcommittee also will look forward to hearing the views of

the second panel which is composed of airline and labor leaders

from across the Country.

All of us who have a role in the formulation of the United States

Government’s Commercial Aviation policies realize the importance

of encouraging U.S. aviation to maintain its historic preeminence.

We hope that today’s witnesses will provide us with some insights

to how we can achieve that goal.

I am pleased now to recognize the Ranking Member of the Subcommittee, the gentleman from Illinois, Mr. Costello.

Mr. COSTELLO. Mr. Chairman, thank you, and Mr. Chairman, I

do have a statement which I will enter into the record.

I first want to thank you for calling this hearing today to examine the U.S. Open Skies Agreement with a focus on DOT’s NPRM

regarding actual control of U.S. carriers. The Department’s proposal would change longstanding policies prohibiting foreign interests from exercising actual control over United States airlines.

The question before us today is: Is it beneficial to allow foreign

interests to exert a greater authority or even operational control

over the operations of domestic carriers? I have serious concerns of

allowing greater control, and I certainly believe that this should

not be in the hands of the Department of Transportation solely, but

the Congress of the United States should have the authority to

issue a final opinion and to legislate on this matter.

For over 65 years, the Civil Aeronautics Board and its successor,

the Department of Transportation, have required U.S. citizens to

have actual control over all management decisions of U.S. airlines.

Congress has repeatedly refused requests from the Department of

Transportation to pass legislation to allow foreign interests to gain

increased control over U.S. airlines. In fact, in 2003, Congress

passed an amendment requiring the Department of Transportation

to continue to prevent foreign interests from exercising actual control over U.S. airlines.

Yet, despite our strong opposition, the opposition of the Congress

to any change in foreign control, the Department of Transportation

proposed new standards: foreign investors would be allowed to exercise control over all commercial aspects over U.S. airline operations. This includes marketing, fleet composition, routes, branding, alliances, and pricing, just to name a few. U.S. citizens would

be required to control only decisions affecting the Civil Reserve Air

Fleet, transportation security, safety, and organizational documents.

I don’t believe the Department of Transportation has the legal

authority to interpret the statutory requirement that U.S. citizens

must have actual control of a U.S. airline and limit it to a require-
4

ment that U.S. citizens should have control over only safety, security, and Civil Reserve Air Fleet and not over economic decisions.

If the new standard is allowed to be implemented, there could be

serious consequences for the Nation’s aviation system. Foreign interests could restructure the route system and fleet of U.S. airlines

so that the U.S. airlines would become, in effect, a feeder for the

international operations of foreign carriers. Employees of U.S. airlines would lose high quality jobs to employees of foreign carriers.

The service, particularly service to small communities, the essential air service program in the United States today serving rural

America in Illinois, in my District, my State, and throughout the

United States could be impacted by any changes in the route system and fleet decisions.

We should not underestimate the impact of the Department of

Transportation’s policy proposal in how it would affect safety. I am

particularly concerned that allowing foreign interests to control

U.S. carriers will accelerate the outsourcing of critical safety functions, such as maintenance and flight attendants’ jobs.

Paul Gretch, Director of the Office of International Aviation at

DOT on November 29, 2005, stated that if the NPRM was made

final, foreign investors would be able to direct the airlines to buy

foreign aircraft and to have repairs exclusively done overseas. A

policy that eliminates U.S. jobs and may compromise the safety of

the flying public is a policy that we cannot and should not support.

I strongly support H.R. 4542, which prohibits the Department of

Transportation for one year from issuing any final decision or final

rule that requires the Department of Transportation within 90

days of enactment to issue a report to Congress that assesses the

impact on all aspects of U.S. airlines operations including national

defense, safety, security, competition for small communities, air

service, and airline employees. H.R. 4542 will ensure that Congress

has adequate time to review these complex issues, and I urge my

colleagues to co-sponsor and support this legislation. Any major

change in policy on foreign control of U.S. airlines should be approved by the Congress, not imposed by the Department of Transportation.

Mr. Chairman, I look forward to hearing from our witnesses

today and yield back the balance of my time.

Mr. MICA. I thank the gentleman, and his entire statement will

be made part of the record without objection.

I am pleased to recognize the distinguished gentleman from Tennessee, Mr. Duncan, former Chair of the Subcommittee.

Mr. DUNCAN. Well, thank you, Mr. Chairman. I will be very brief

because both you and Mr. Costello have summarized the issue very

well in your statements, and as both of you have made clear, this

is not a simple issue or as simple as it might appear on the surface.

I agree with Mr. Costello that this is something that both the Department of Transportation and the Congress should look at very,

very closely to try to find all the different ramifications. We want

to make sure that we don’t lose, in some indirect ways, more American jobs to other countries. That is very, very important to all of

us.
5

I thank you for calling this hearing, and I am glad that we are

looking into this in a detailed way. We should look before we leap

on this particular matter.

Thank you very much.

Mr. MICA. I thank the gentleman.

I am pleased to recognize the Ranking Member of the full Committee, Mr. Oberstar.

Mr. OBERSTAR. Thank you very much, Mr. Chairman. This is a

very important hearing. I am glad you have called it. I am glad to

see the room full. I welcome our witnesses and those in the audience to our newly refurbished committee hearing room, although

we are missing a few elder statesmen on the wall.

We gather to examine in detail the most important aviation policy decision since deregulation was enacted by Congress in 1978.

The ownership proposal before us is different, however. The difference is that it was bargained away in an international trade

arena like the much bemoaned Bermuda II Agreement of the

Carter years. Deregulation was enacted by the Congress.

Had this outcome been negotiated by any previous Assistant Secretary of Transportation, I would have said, you can shrug it off

as the work of a duped novice, out of his league, unwittingly trading away the crown jewel of American transportation, aviation. But

this was not the work of amateurs. This was the work done knowingly, carefully constructed by the most seasoned negotiator in

America’s aviation trade history, a man I love as a friend, Jeff

Shane. He has thousands of hours of experience, Mr. Chairman, at

the international aviation trade bargaining table, dealing with dozens of wily foreign competitors. He was not duped.

This decision was made with full knowledge of U.S. law, of historical precedence in the CAB and the Department of Transportation, and Department of State at the international bargaining

table, and in the domestic area, and in U.S. court cases on the matter of ownership and control. And the decision was clearly made

with the concurrence of the next most experienced aviation trade

policy authority, the Secretary of Transportation. The NPRM before

us was artfully crafted, carefully and shrewdly worded, and in the

statements that I have read that Mr. Shane stoutly defended.

But its purpose is to hand over U.S. airlines at their most vulnerable moment to their international trade competitors, and that

will be the force and effect of this NPRM if it becomes a rule and

is implemented. But I caution that it will not go that far. If this

Congress does not act, if this Congress stands meekly by and allows the stroke to be carried through, someone will challenge it in

court, and the court will overturn that decision. But, if not, history

will record it as Bermuda III.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

The gentleman from New Jersey, Mr. LoBiondo.

Mr. LOBIONDO. Thank you, Mr. Chairman, for holding this very

important meeting.

For over 60 years, it has been the standing policy of this Country

to ensure U.S. citizens control the operation of our airlines. Requiring U.S. control is critical for a number of reasons, most importantly, for our homeland and economic security. I am very, very
6

concerned about the DOT’s proposed rule and that it could severely

undermine this critical policy. Allowing the daily operations of our

airlines to be controlled by competing and potentially unfriendly

foreign interests could undermine our homeland security and national defense and result in the loss of U.S. jobs.

I appreciate the pressure the Administration is under to complete an Open Skies Agreement with the European Union, and I

want to see an agreement reached as well. It would benefit our airlines and our citizens traveling to Europe tremendously, but it cannot, I repeat, it cannot come at the expense of our homeland and

economic security. And that is why Ranking Member Oberstar and

I introduced legislation to delay the implementation of this rule.

There are too many unanswered questions on what impact this

rule will have on homeland security, national defense, access to air

service, and American jobs.

Once again, Mr. Chairman, I would like to thank you for holding

this hearing, and I look forward to hearing from our witnesses.

Mr. MICA. I thank the gentleman.

I would like to recognize the gentlelady from Texas, Ms. Johnson.

Ms. JOHNSON. Thank you very much, Mr. Chairman, and I want

to commend you and Ranking Member Costello for holding this important and timely hearing.

The Administration’s most recent proposal to alter policy regarding the role of foreign ownership in U.S. airlines carriers is an

issue that, without question, warrants the full attention and oversight of this Committee. Despite the express consent of Congress

in 2003 regarding the actual control of U.S. carriers by U.S. citizens, the Administration seems intent on circumventing the will of

this body in an effort to fast track an international air service

agreement.

While I wholeheartedly support the notion of our aviation industry being afforded every opportunity to excel in the global economy,

I do not support the Administration’s utter disregard of this Committee in achieving that objective. Any modification to laws governing foreign control of domestic carriers will have enormous implications for industry stakeholders and jobs here at home.

As a result, such changes should not be hastily promulgated

through a proposed rulemaking introduced in the dead of night

while we were busy over here looking at something else in emergency. The Congress should be afforded the opportunity to perform

the necessary due diligence, conduct hearings, and debate any proposed changes to foreign ownership laws.

To characterize DOT’s current rulemaking proposal as an artful

maneuver would be an understatement. DOT asserts that in order

for the U.S. air transportation industry to remain a leader in the

global economy, a reinterpretation of actual control is needed to ensure access to capital afforded by global financial markets.

Under DOT’s proposed rule, foreign investors would be allowed

to exercise decisions over all commercial aspects of domestic carrier

operations. U.S. citizens would be required to control only decisions

related to safety, security, organizational documents, and the Civil

Reserve Air Fleet. To think that commercial aspects have no implication on security, safety, and the CRAF Program underscores the

shortsightedness of this proposal.
7

In closing, I would like to state for the record that I have added

my name to the growing list of bipartisan opposition against this

proposed rule. It is my view that DOT’s proposed changes to the

foreign control laws clearly exceed the agency’s legal authority and

conflict with the plain meaning of current law. I support the halting of DOT from issuing any final rule on actual control and hope

that we, as a Committee, continue to proactively exercise our oversight obligation on this matter.

Thank you, and I yield back.

Mr. MICA. I thank the gentlelady.

Mr. Ney?

Mr. NEY. Thank you, Mr. Chairman.

I think everybody has heard today from our colleagues about how

they feel about this, and it is a bipartisan feeling which I also add

to. I also joined Congressman Oberstar and LoBiondo in supporting

their bill which would prohibit any final decision.

Also, I think this is a little bit comparable, and it will as time

goes on here in the House, be comparable to when China attempted

to come over here and basically buy an oil company, and you saw

the outpour here in the U.S. House. In this case, it is not China

necessarily, but it is still about foreign control or American control,

and I think you are going to see the same attitude on a bipartisan

basis.

Again, the restrictions date back to 1926, and the Congress has

reaffirmed over and over our intent to keep the control of airlines

in the hands of Americans. I am concerned about the outsourcing

trend all the way around, and in this case I think it is also an

outsourcing issue. Critical safety operations are being outsourced.

It has been reported that major air carriers are outsourcing 51 percent of their maintenance operations. Customer service operations

are being outsourced.

I can tell you, personally. Usually our office books the flights

here to Washington. I went ahead and called an air carrier. Booked

the flight change myself. Got to Port Columbus, and then the lady

said, where is your—I won’t say which airline it was—but where

is your employee badge? I said, why is that? She said, you are

rated an employee rate to fly to Washington. Well, today, that is

all you need--a private travel controversy to be on the airline’s tab

as an employee to Washington D.C. And she said, this is happening

all the time.

Well, I found out I was calling, I think it was, India. That is

where I was calling for my reservation. Nothing against India, but

I think that if the airlines, and I understand one of them has now

stopped this practice, if they look at it, I think they are losing

money because people are not booked on proper flights.

But it is another example, again, of outsourcing. I don’t know

that it is to the benefits, frankly, of the airline industry. I know

it is not to the benefit of the American workers. So now, we may

be allowing the airlines to outsource financial control.

The Department of Transportation assures us that Americans

will still be in charge of safety and security operations, but I think

we have to ask ourselves: Will safety and security be next? If a foreign company is making the financial decisions, how can we be

sure they are not making vital safety and security decisions?
8

The final question I pose, and I don’t know if it can be answered

or not, but I would like to ask it: Could this new rule jeopardize

the Pentagon’s Civil Reserve Air Fleet Program, which transported

nearly a half million troops to Iraq? So, in other words, if this does

come under the control or the interests, and the country doesn’t

agree with maybe what we are doing in a situation in a time of

war, would their influence be able to say, we will have to find another way to get the troops over there? And I just throw that out

there, I think, as a vital question.

I thank the Chairman for the hearing, and I look forward to the

witnesses.

Mr. MICA. I thank the gentleman.

Mr. Salazar?

Mr. SALAZAR. Thank you, Mr. Chairman. Thank you for having

this important hearing today.

Like many of my colleagues, I am concerned about the current

state of the U.S. aviation industry and in particular how it impacts

rural America. The financial instability that has been plaguing the

industry means higher costs and fewer choices for consumers. It

also has a direct impact on jobs in America. For this reason, I support the need to establish an Open Skies Agreement between the

E.U. and the United States. However, I believe that there are some

areas where we can agree on what will benefit both markets and

consumers.

But I also have some serious concerns about the proposed rule

relating to foreign ownership of U.S. air carriers. This is a complicated issue and with many competing interests. It is not a decision that we should make lightly or without Congressional involvement.

I look forward to hearing today’s testimony and ask that the witnesses touch on the Oberstar-LoBiondo bill and their opinion on

what a one year delay would or would not accomplish.

My number one priority is to determine how this will impact

those living in rural America. To me, an Open Skies Agreement

means nothing if rural America loses air service and cannot conveniently take advantage of the service routes.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. Poe?

Mr. POE. Thank you, Mr. Chairman. Thanks for holding this

hearing.

With many airlines in financial trouble, it is important for us to

look at some of the causes that put them there and solutions we

can help resolve here in Congress. The DOT seems to believe that

interpreting the law to allow for further foreign ownership or foreign control of U.S. airlines is one of those solutions.

The reason behind this has been to encourage foreign investment

in U.S. carriers and to help the U.S.-E.U. Open Skies negotiations.

However, it seems to me that this is very flawed reasoning. We do

not need foreign investment in U.S. air carriers. Do we really want

foreign countries controlling the American skies? Do we want foreign countries replacing our American Boeing fleet, for example,

with the Airbus?
9

I am not sure the DOT even has the unilateral authority to act

without Congress’ approval. And as to the Open Skies Agreement,

I don’t see that the rule change is providing us with further access

to the E.U. It may help the U.S. get into foreign airspace, but that

doesn’t mean they can land anywhere. It doesn’t guarantee that

there will be further slots at international airports, such as

Heathrow.

Also, our airlines are committed to transporting American troops.

If a foreign investor, or investors, buys an American airline, who

is to say they will be an ally in case of international conflict? Why

are we bringing this trouble on ourselves?

So this proposed rule change appears to be bad for America, and

certainly bad for our American airline industry, and certainly for

American security. I look forward to seeing why we should change

this rule at all.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. DeFazio?

Mr. DEFAZIO. Thank you, Mr. Chairman. I see the spiffy little

lights here, and the numbers go down. Except when the Chairman

was talking, it started at five and stayed there. What is that?

[Laughter.]

Mr. MICA. A new technical improvement.

Mr. DEFAZIO. Okay, that is very good.

Thank you, Mr. Chairman. I am really pleased that you called

this hearing. There are some very grave issues before the Committee.

The Administration has, very much as Mr. Gonzalez has so ably

stated, the inherent powers of the President in a time of war, even

though Congress hasn’t declared war, to do virtually anything to

contravene the Constitution of the United States. And this is yet

another example of them using those inherent powers.

There is no legal authority for this Administration to reinterpret

this law, none. If this ends up in court, they will lose. They would

be best served, and we would be best served if Congress took up

this issue—this is a good start today with this hearing—and debated it, and legislated in this area. Of course, they fear they might

lose that debate because of some of the potential problems here

that have been mentioned by many of our colleagues.

This is all about the underlying agreement, a big fight over how

are you going to feed your lucrative international routes. The foreign carriers want to come here to do that. They don’t want to come

here to provide improved domestic service in the United States.

And it would further degrade, Mr. Salazar, in response to your

question, this agreement that underlies, that this dispute over ownership is embodied in, would degrade domestic service in the

United States of America, no question, no question about that.

Smaller cities will lose service because they don’t provide big feeds

to the lucrative international market.

It is about jobs. Yes, it is about jobs. Well, we need jobs in America. It is about jobs for pilots and flight attendants. It is about jobs

for people who build airplanes. When you give up this control to

foreign dominated airlines, we will lose American jobs. We will lose

them to France because they have stronger labor laws. We will lose
10

them to low cost markets, Eastern European flight attendants and

pilots, maybe the Chinese.

Have you thought about that? Because the WTO agreement requires reciprocity. If you enter into this agreement and these conditions with Europe, China can go to the WTO and force us to give

them the same thing. Isn’t that a dream? American airplanes flown

by Chinese pilots controlled by the Chinese. Then maybe they can

finally start making all the planes over there too. This is really unbelievably shortsighted, ideological claptrap, that is what this Administration is engaged in here.

Security issues, come on now. Oh, they say, well, don’t worry.

The CRAF, well, CRAF is voluntary. So if a foreign airline voluntarily opts out, what are we going to do about it when all the wide

bodies are opted out of the program?

It seems to me that we have been taken to the cleaners so many

times by the Europeans in protecting their markets, their manufacturers, and others, and here we are again. You know, it is like

Lucy and the football. This time, it is straight up and we are just

going kick it. No, it is not straight up. It is the same bad deal that

we have gotten every time around.

Let us wake up. Let us serve the interests of the American traveling public, American security, American jobs, and start doing the

same things that some of our competitors have done so well, which

is protect high value jobs. We are not doing that, and we are not

going to sacrifice them on this ideological altar.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. Ehlers?

Mr. EHLERS. Thank you, Mr. Chairman.

I will do my best to avoid ideological political claptrap, but I did

just want to make one brief comment. That is that I appreciate the

advances this has made above and beyond the Bermuda Agreement

which we have had with the U.K. which I felt was a very unfair

agreement for the United States and put us at a major disadvantage. I appreciate the progress made on that score, and I will be

interested in finding out more details about that and the rest of the

topic.

Thank you very much. I yield back the balance of my time.

Mr. MICA. Mr. Pascrell?

Mr. PASCRELL. I would really like to know what Mr. DeFazio

thinks about this.

[Laughter.]

Mr. PASCRELL. I will tell you right now.

Before I make my opening remarks, I want to preface it by saying that this proposed rule makes a controversial fundamental

change to U.S. aviation policy through backdoor channels. Sound

familiar? It tries to get around an open debate in Congressional jurisdiction. That is nothing new around here.

And it is so vague. It leaves so many legitimate questions and

concerns about the Civil Reserve Air Fleet, that program, national

defense, and homeland security. The effect on existing collective

bargaining agreements, purposely left vague. In the matter of control, foreign capital would be able to dictate management’s policies

about labor issues.
11

Having said that, I want to thank the Chairman and the Ranking Member. I appreciate their decision to hold a hearing on this

rule which proposes a profound change—that is the Department of

Transportation’s own words—to Federal aviation policy. I would

submit that it is actually a radical change. Altering the foreign control requirement for U.S. airlines does not belong in rulemaking.

There is a checks and balance system, and the Constitution of

the United States, gentlemen, still means something to us on this

side of the table. In their attempt to complete an Open Skies

Agreement, the Administration has sought to avoid an open debate

in the halls of Congress. That is radical as far as the Constitution

goes but not new for this Administration.

Congress has twice rejected attempts to change foreign ownership and control requirements. This time should be no different.

The proposed change is heavy handed and is vague. It leaves too

many legitimate questions. Being a member of both the Transportation and Homeland Security Committees gives me a unique perspective on the vital role the U.S. airline industry plays in the

homeland security and national defense of our Nation, a point

which Congressman Ney has pointed out. For these reasons, unlike

most other industries, airlines do not easily lend themselves to foreign control. I am concerned that the proposed rule is unclear and

does not guarantee that heads of security and safety would have

complete autonomy from their foreign national leadership.

It is no secret that security costs are one of the financial challenges facing our domestic industry. In fact, many additional security measures have been voluntarily undertaken by U.S. carriers.

But under foreign control, commercial interests may carry more

weight when it comes to cutting costs. Measured foreign investment may be beneficial for U.S. air carriers, but throwing open the

flood gates to foreign control is not the answer.

At the very least, Congress should have a vigorous, robust debate

on this highly sensitive matter before anything is finalized. So I applaud this Subcommittee for starting this discussion. I think we

should be confident that most members, under judicious review,

will conclude that this proposed rule change, as it stands, is not in

the best interest of our Nation, and that will always be the motivating factor on this side of the table.

Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

I would like to recognize and welcome, he is looking good and

chipper, Mr. Boswell.

Mr. BOSWELL. Thank you, Mr. Chairman, and it is good to be

back. I don’t recommend you do what I have done in the manner

I did it. Just for the record or for your information, my malady was

one in a million, but I got directed to the right person at the right

time, and the lights didn’t go out; they are coming back on bright.

I would like to make a short comment. I think everything has

been said, but everybody hasn’t said it yet, so I want to participate.

[Laughter.]

Mr. BOSWELL. I am very much in concert with what has been

said by others. And I hope that our panel is listening carefully. I

think it is extremely important, and I trust you are getting the
12

idea of how we feel. But this is an important hearing on the tentative Open Skies Agreement between the U.S. and E.U.

This agreement, if signed, would significantly benefit consumers,

air carriers, and communities on both sides of the Atlantic. Access

for U.S. air carriers into the long protected London Heathrow Airport would certainly be a welcome and beneficial change. As you

know, this comprehensive agreement would replace existing bilateral agreements with individual Member States. By permitting any

carrier in the U.S. to operate from any point in the U.S. to any

point in the E.U. and vice versa would be a tremendous benefit to

our constituents.

One aspect of this proposed agreement, which you have heard

about, causes me great concern, and that relates to the Department

of Transportation notice of proposed rulemaking regarding the definition of what constitutes actual control of a U.S. airline. As we

know, this description has drawn the interest of several members

of this body, including myself and as a co-sponsor of Congressman

Oberstar’s legislation, H.R. 4542, to ensure Congress exercises its

oversight responsibility, our Constitutional responsibility, and prevent, in this case, the DOT from exercising so much authority in

defining what constitutes actual control of an airline.

If we are to make a significant change to the foreign ownership

statute, I believe, and I think it is clear we all believe Congress

should be the origin of such change. We should not cede this authority to the Executive Branch, this Executive Branch or any

other later Executive Branch. This issue is too important for a bureaucratic alteration to this long established provision.

As a strong supporter of our airline industry, I recognize the

hardships these companies and their hardworking employees have

endured in the past few years. The economic difficulties they have

experienced have caused significant financial losses and a painful

reduction in the workforce. The airlines’ ability to attract new business capital is a constant challenge. However, I would not want to

see our trading of foreign ownership for such capital infusion.

I welcome a full and complete debate on this issue and urge the

DOT to refrain from acting unilaterally. I welcome the testimony

and appreciate the opportunity to be here today. Although I have

a conflict with the Intel Committee and I will have to leave, I will

read this hearing very carefully, these minutes.

I thank you, Mr. Chairman. I appreciate your doing this.

I might just add something that is totally off the subject today,

but I want us to sit down seriously and talk about what is happening to general aviation and their suggestions of what they are

wanting to do to fees and so on. We need to talk about that. We

really do.

I thank you for holding this hearing.

Mr. MICA. I thank the gentleman. I can assure you that in the

next 12 months, we will be talking about fees, and general aviation, and funding our entire aviation system.

Mr. BOSWELL. You know, I got a new outline now with Mr.

Salazar. Robin Hayes and a few other ones in here are actually

using the new system every time we get a chance.

Mr. MICA. Well, we will get to that at another hearing. We do

have some of that scheduled.
13

Mr. Holden, do you pass? Okay.

Mr. Honda, you are recognized.

Mr. HONDA. Thank you, Mr. Chairman.

I, too, welcome this opportunity to express my concern about the

DOT’s NPRM on the term, actual control of U.S. carriers, and to

question the overall value of a proposed U.S.-E.U. Open Skies

Agreement that appears to be contingent upon this NPRM.

Generally speaking, I support U.S. efforts to strike Open Skies

Agreements. Agreements when properly negotiated lead to real and

tangible benefits for U.S. air carriers, the workers they employ,

and the communities they serve. In this era of globalization, it is

important that we offer new opportunities for citizens of all countries to travel more freely and more affordably.

That said, I am surprised and perplexed that the Department, in

order to secure E.U. approval for an Open Skies Agreement, has

issued an NPRM that would allow foreign entities greater ownership of U.S. airlines, effectively permitting foreign control over all

commercial decisions of a U.S. airline.

As recently as 2003, the Congress made its views on this issue

crystal clear when it put into law the expectation that the U.S. airlines be ‘‘under the actual control of U.S. citizens.’’ I fear that this

NPRM is the latest example of a Executive Branch that misinterprets U.S. laws to its own liking. This NPRM constitutes a major

change to current law, and its potential impacts on U.S. air carriers, communities, and workers are significant.

This issue demands Congressional involvement and deliberation,

and accordingly, I support H.R. 4542, legislation introduced by

Representatives Oberstar and LoBiondo that would require the Department of Transportation to give appropriate deference to Congress.

Once again, I thank the Subcommittee for its attention to this

important issue. I look forward to today’s testimony and ask that

the Subcommittee’s leadership continue to provide opportunities to

scrutinize this NPRM and to more evaluate its potential impacts

on the U.S. airline industry.

I yield the rest of my time. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

And now, waiting patiently, Ms. Norton, you are recognized.

Mr. NORTON. Thank you very much, Mr. Chairman. I particularly appreciate this hearing. I particularly appreciate it being one

of your first hearings.

I wanted to say mostly a word about the legal, or shall I say the

illegal, underpinnings of this proposed rulemaking. But let me just

begin by indicating that I think that this Committee is very sophisticated about the new rules, the new policies that are necessary in

a global economy, especially with respect to this industry.

But what is proposed here could not be more major. This is the

kind of proposal that can be done only by law; this is not rulemaking. This is lawmaking, my friends. We are talking about a

perpetually troubled industry and a policy that is the most radical

that has been made in decades concerning that industry. We are

talking about everything from the future of its employees to the future of service in this Country to the future of the industry itself.
14

We are told this is only the commercial side. What other side is

there? I mean I am already nervous that outsourcing of maintenance has been a practice for some time in this industry even after

9/11. Is that commercial or not? Safety and security, we are told

is not involved.

But I don’t see how this rulemaking got past the General Council

of the Agency because the proposed rule is illegal on its face. An

administrative agency may interpret, must interpret the text of a

statute. In order for the Country to operate, administrative agencies have very broad discretion. They do not have the discretion to

rewrite a statute.

Now, Congress often is unclear. In my law classes, I teach a seminar at Georgetown called Lawmaking and Statutory Interpretation, and it is full of how Congress messes up all the time. We use

ambiguous. Sometimes we use it on purpose because we couldn’t

get an agreement; sometimes we do it because we just don’t know

what we are doing. And the administrative agency, according to the

Supreme Court, has great discretion when the Congress has used

language that is not clear on its face, and then the administrative

agency can use its expertise to, in fact, interpret the statute. All

that an agency does, however, is by expressed delegation from the

Congress.

Now nothing could be more express than the words, actual control. As I look at what the rule cites as the kind of control that

would be left, I find this laughable. A determination whether U.S.

citizens retain actual control through the airlines organizational

documents, such as certificates of incorporation, shareholders’

agreements, and corporate bylaws. Is that what actual control

means in law or in commerce? Do you have to go to law school to

understand that actual control means what it says and that Congress was explicit because it understood exactly what was being

proposed.

What is being proposed here is indeed not an interpretation of

the law. Administrative agencies have extremely broad latitude. I

not only defend that latitude, that latitude is absolutely necessary

in order for laws to be implemented. But administrative agencies

do not have the authority to reinterpret the law to put new meaning on the law. This, my friends, is not rulemaking; this is lawmaking.

If you want this kind of change in law, you have got to go

through the steps that every other change in law requires; you

have got to get it out of this Committee. You have got to get it out

of the House and the Senate on a bipartisan vote. And all I can

say about that is good luck.

Thank you very much.

[Laughter.]

Mr. MICA. Thank you for the well wishes.

[Laughter.]

Mr. Carnahan?

Mr. CARNAHAN. Thank you. I, too, want to add my thanks to the

Chairman and Ranking Member Costello for holding this hearing

today to determine the Department of Transportation’s proposed

changes to rules governing actual control of U.S. air carriers.
15

Although I understand the need for our Country’s air carriers,

like other U.S. businesses, to be able to evolve into the international marketplace, the DOT’s proposed rule goes too far. Despite

claims to the contrary, this proposed rule does, in fact, have the potential to cause significant safety and security problems.

As Mr. DeFazio earlier said so eloquently, this NPRM also

threatens U.S. jobs and is outside the scope of the Department’s

legal authority given by Congress. I, too, am pleased to see the loud

chorus of bipartisan voices, demanding the Administration withdraw this proposal and have co-sponsored H.R. 4542, the LoBiondoOberstar bill.

I look forward to hearing the testimony from the witnesses here

today.

Mr. MICA. I thank the gentleman. Do any other members seek

recognition? If not, we will proceed with our first panel.

Our first panel consists of the Honorable Jeff Shane, Under Secretary for Policy of the United States Department of Transportation and the Honorable John Byerly, Deputy Assistant Secretary

for Transportation Affairs at the U.S. Department of State.

We probably won’t go just for the five minute rule. We only have

these two witnesses, and we will give you a little bit of extra time.

If you have lengthy statements or additional information you would

like to have made part of the record, just request that through the

Chair.

So, with that, let me welcome back Jeff Shane, and you are recognized.

TESTIMONY OF HON. JEFF SHANE, UNDER SECRETARY FOR

POLICY, U.S. DEPARTMENT OF TRANSPORTATION; AND HON.

JOHN BYERLY, DEPUTY ASSISTANT SECRETARY FOR TRANSPORTATION AFFAIRS, U.S. DEPARTMENT OF STATE

Mr. SHANE. Thank you, Mr. Chairman. We appreciate very much

your convening this hearing and having an opportunity to discuss

both the proposed agreement with the European Union and, of

course, the NPRM that the Department issued in November of last

year.

Mr. Chairman and members of the Committee, I would beg your

indulgence to start out with a disclaimer. It is a little unusual for

an Executive Branch representative to testify on a pending rulemaking. We wanted to do the testimony. We wanted to engage because there is so much importance attached to the issue. But because the rulemaking is pending, I am admonished by our lawyers

that what I can talk about is the genesis of the rulemaking.

What was the thinking of the Department in issuing the rule?

We do not know at the end of the day what the Secretary of Transportation will decide to do with the notice of proposed rulemaking.

A lot of comments have come in, as you know, and we are reviewing those comments, and there can be no foregone conclusion.

Let me just also say, just as a preliminary matter, that the suggestion that this has been negotiated with the European Union and

that therefore it might be a foregone conclusion because the United

States is interested in having an agreement with the European

Union is, with great respect, mistaken. Secretary Mineta has been

adamant in every conversation he has had with counterparts from
16

the European Union that, if the United States decides to make a

change in its interpretation of the ownership statute that is in our

Federal aviation laws, that change will be made in the interest of

United States and for no other reason, and our European counterparts have fully understood that. It is not on the table for negotiation and has never been part of the negotiation.

Yes, there is a context that is provided by the fact that we have

a negotiation going on, and indeed there is a relationship between

what the European Union will do with respect to this agreement

and what we do with respect to the rule. But we have a legal, a

statutory obligation to decide the rulemaking based on statutory

considerations in the best interest of the United States and for no

other reason that that. So I just didn’t want to leave any confusion

about that.

If you forgive me, I will talk about the genesis of the rule and

not make any predictions as to what will happen at the end of the

process.

I think that, let me say first, Mr. Chairman, I do have a longer

statement. Per request, could it be put on the record?

Mr. MICA. Without objection, the entire statement will be made

part of the record.

Mr. SHANE. Thank you, sir.

And it is clear from all of the opening statements that members

are pretty familiar with the rule. So I am going to try to sum up

what we did fairly quickly, so that we can get to questions. I also

want to spend just a moment talking about why we proposed what

we proposed, lest there be any doubt about that.

What we did: Mr. Chairman, in your opening statement, you recounted the history of the ownership laws of the United States.

They go back to 1926. They were redone in 1938. It is a very short

provision that simply says that U.S. citizens must own or control

75 percent of voting shares of an airline company; two-thirds of the

officers and directors of the company must be U.S. citizens; and the

President of the company must be a U.S. citizen. That is all it says.

A couple of years after the 1938 statute was passed, the Civil

Aeronautics Board added a new layer of interpretation onto that

statutory requirement. The Civil Aeronautics Board said that there

should be no shadow of foreign influence, words to that effect, in

the running of a U.S. airline company. That wasn’t part of the statute; it was an interpretation of the Civil Aeronautics Board. That

interpretation, at a time when the United States was preparing for

war, at a time when most U.S. airlines were subsidized either by

mail rates or in other ways, was absolutely an appropriate interpretation. That interpretation informed decisions of the Civil Aeronautics Board up until the end of its existence in 1985 and continued to inform all Department of Transportation’s decisions after

that.

Sixty-five years later, we felt an absolute obligation, given the

amount of change that has taken place in the airline industry, both

here and abroad, to reexamine that interpretation and see whether

or not, in fact, it continued to have relevance to today’s circumstances. That was the purpose of the NPRM.

It does, it is not, forgive me, an ownership rule. The NPRM

changes not one iota of the ownership statute. If we were to final-
17

ize the rule exactly as proposed, 75 percent of the voting shares of

an airline company would still have to be owned by U.S. citizens,

and two-thirds of the board would have to be U.S. citizens, and

two-thirds of the officers would have to be U.S. citizens, and the

President of the company would have to be a U.S. citizen.

If you take a look at any corporation, three-quarters of whose

shares are owned by U.S. citizens and two-thirds of the board are

U.S. citizens, you would probably say that company is controlled by

U.S. citizens. It was never the intention of the Department of

Transportation in proposing this rule that U.S. citizens not be in

actual control of an airline company even if, in fact, the new interpretation is adopted. Actual control is what is required by the statute, and actual control is what the Department of Transportation

intends be maintained.

There were references to the 2003 amendment to the law which

actually incorporated the words, actual control, in the statute. The

suggestion, I think implicit in some of those comments is that this

was an interpretation rammed down the Department of Transportation’s throat. Quite the opposite, the case was being made to the

Department and indeed to the United States Congress that the Department of Transportation did not have the authority to interpret

actual control, and that was because of a little idiosyncrasy in the

language of the 1938 statute. We were determined, and the Congress was determined to make sure there was no doubt about the

importance of actual control as part of the inquiry that the Department enters into in reviewing the fitness of airline.

So we welcomed the change when Senator Stevens, who I think

was responsible for the change within the Senate, proposed it, he

said, my amendment will codify the existing standard; it leaves the

interpretation of effective control up to DOT. The existing standard

was precisely what the CAB faced in 1940. It was a brief statute

with the actual content of what actual control means left to the administrative agency.

We propose a change. The change we propose is simply to eliminate a lot of confusion about what actual control requires and to

limit the inquiry, at long last, to four quite objective tests: Are U.S.

citizens in control of decisions that relate to the safety of the operation? Are U.S. citizens in control of decisions that relate to the security of the operation? Are U.S. citizens in control of anything that

might have to do with national defense? Are U.S. citizens, finally,

in control of the bylaws, and the charter, and the certificate of incorporation, the very documents that form and organize the corporation?

The reason for that last requirement, just to be clear about it,

is because, while we envision in the proposed rule the possibility

of greater participation by foreign investors or foreign citizens of

any stripe in the actual operation of the commercial side of an airline, the essential requirement is that U.S. citizens remain in actual control of that airline.

So if it turns out that the U.S. majority owners of the airline, the

majority directors of the airline, the majority officers and the President of the airline are unhappy with the way in which this airline

is, in fact, being run by the foreign citizens who are given greater

scope by our rule, it is up to them, it is available to them to change
18

the agreement, to kick the foreigners out if necessary, to take

whatever steps they believe to be in the interest of the company,

in the interest of the company’s shareholders, pursuant to their fiduciary responsibilities. That is not being divested in any way.

That is what actual control is. Congresswoman Norton, that is

the reason why we talk about the charter, and the bylaws, and the

certificate of incorporation, and other organizational documents remaining in the control of U.S. citizens. That is all we have done.

We had a report some time ago, it was a report to the Congress

actually from our outgoing Inspector General, Ken Mead, who was

asked about what the tests were within the Department of Transportation. You will have probably seen that letter. It said the tests

are not very clear. They are not written down anywhere. It is for

the Department of Transportation to know and for everybody else

to find out. We thought one important reason for putting a proposed rule on the street and seeking comment was that we needed

more objective tests.

There have been a lot of anomalies in the administration of this

statute over the years. I thank Congressman Oberstar for his kind

words. I have had a long history at the Department of Transportation, and I can speak personally about a lot of those anomalies.

There are things that we are required to do by the 1940 interpretation that, quite frankly, are not in the interest of a healthy U.S.

airline industry, not in the interest of competition, not in the interest of jobs, not in the interest of security, and not in the interest

of safety. What we are seeking to do is to have a change in the rule

that gives us greater clarity about all of that.

The last thing I will say, Mr. Chairman, and then I will close is

that in 1978, the Congress enacted the Airline Deregulation Act. It

was actually a Democratically-controlled Congress at that time.

The act was passed by a Democratic President. The Airline Deregulation Act was embraced by subsequent administrations of both political parties. It is one of the most important economic policy decisions this Country has ever made.

And, of course, it begot deregulation of our surface transportation

systems; it begot deregulation of telecommunications; it begot deregulation of energy. It is a policy forged here in the United States

Congress that has been exported around the world. It has become

the default economic policy for every industrialized nation today.

Our job in the Department of Transportation and the Executive

Branch has to be to see where there is opportunity to continue this

important success. Deregulation is a work in progress. The NPRM

is not intended to be a radical change. It is intended to be another

step along the road to genuine deregulation, giving the airline industry the scope to find its own economic level, to tap economic opportunities where they may be available, to get government out of

the way of what the airline industry is doing.

If our regulations do not add value to the industry, then we

should be pulling those regulations back. The NPRM asks the question: Does the 1940 policy that has been applied by the CAB and

the Department of Transportation for the last 65 or 66 years continue to add value today? That is what we seek comment on. That

is what we will be reviewing. And the determination that we make
19

will be in the best interest of the United States at the end of the

day.

Thank you very much, Mr. Chairman. I am sorry to go over.

Mr. MICA. No problem, I thank you for your testimony.

We will now hear from the Deputy Assistant Secretary for Transportation Affairs at the State Department, John Byerly. Welcome,

and you are recognized.

Mr. BYERLY. Thank you very much, Mr. Chairman, Ranking

Member Costello, members of the Subcommittee. I want to express

my appreciation for your inviting me to testify here today. I have

submitted a detailed written statement for the record and would

ask that that be entered into your record.

Mr. MICA. Without objection, the entire statement will be part of

the record. Proceed.

Mr. BYERLY. Thank you very much.

As requested, I will focus my comments on the opportunity

America has to achieve a comprehensive air transport agreement

with the European Union, and I will try and keep my remarks to

about five minutes.

I commend the Subcommittee for taking up this very important

subject. Since 1991, with the support of both aisles, both sides of

the aisle in Congress, we have negotiated some 70 plus Open Skies

Agreements around the world. Those agreements have vastly expanded markets for U.S. airlines. They have created countless jobs,

bolstered the economic well being of U.S. airports, cities, and communities. They have given U.S. manufacturers, merchants, and

shippers new opportunities to transport high value cargo. And they

have provided America’s travelers new and better air service at affordable prices.

The agreement we have negotiated with the European Union

would take our Open Skies policy to the next level. It would safeguard the Open Skies rights we have obtained in the past with 15

E.U. Member States, and it would expand Open Skies to the remaining 10 countries, including the United Kingdom. It would enhance the ability of our cargo carriers to build global networks for

a global economy. It would create new opportunities for passenger

airlines, including our network carriers which have increased their

focus on international markets in recent years. It would establish

a joint committee of European and United States representatives

to foster cooperation and to seek further liberalization.

Indeed, the agreement would alter the essential structure of

transatlantic air service in ways that transcend what we have accomplished bilaterally. It would set an example for the rest of the

world where protectionist aviation policies still thrive.

Now my written statement describes in detail the path, a long

path, to the negotiation, stretching back over a decade. Suffice it

to say here that when the Member States granted the European

Commission a negotiating mandate in June, 2003, we saw an opportunity. Formal negotiations began in October of that year. The

U.S. delegation included representatives from State, DOT, Commerce, Defense, Justice, Homeland Security, the General Services

Administration, from our airlines, airports, labor, and CRS providers, and from the committee staffs of both the House and the Senate.
20

America and the E.U. brought different perspectives to the negotiating table. For our part, the United States insisted that Open

Skies principles must extend to the entire European Union, including unrestricted market entry, unlimited frequencies, unlimited beyond rights and market based pricing. The agreement we have negotiated meets all our Open Skies objectives for all 25 E.U. member

states. The agreement we have negotiated with the E.U. would end

the anachronistic limitations in the notorious Bermuda II Agreement with the United Kingdom, something we have sought to accomplish for over a quarter century. That would be an enormous

achievement.

For its part, the E.U. entered the negotiations with a mandate

to achieve a fairly radical open aviation area. That would require

repeal of our statutory prohibition on cabotage, abrogation of the

Fly America Act, and new legislation from you to allow European

citizens to own and control U.S. carriers. We could not agree to

those proposals.

We were, however, responsive where we could be to European requests in other areas. In particular, we agreed to authorize every

European carrier to operate to the United States from any and all

points in the E.U. This is a real plus for U.S. cities that might like

to encourage, for example, Lufthansa to provide service from Milan

or Air France from Madrid.

In addition, we sheared away unnecessary red tape in our relationship. We agreed on far reaching cooperation on airline competition matters between the Commission and the Department of

Transportation. We added new provision on State aids, the environment, consumer protection, leasing, computer reservation systems,

and security cooperation.

The E.U. Transport Council of members, in which each of the 25

Member States is represented, must approve signature of the

agreement. The E.U. has informed us that, in making a decision,

the Council will take into account DOT’s rulemaking on actual control. In practical terms, that means the E.U. will await a final rule

from DOT. Assuming a final rule is issued this spring, we expect

the E.U. Transport Ministers to reach a decision when they meet

on June 8th and 9th. If their decision is positive, we would aim to

sign the agreement soon thereafter and apply it as of October 29,

the start of the winter traffic season.

Mr. Chairman, members of the Committee, it was a deep honor

when Secretaries Rice and Mineta asked me, gave me the opportunity and the challenge of leading the U.S. delegation in these negotiations. I had the advantage of the deep expertise and commitment of colleagues from throughout the U.S. Government and U.S.

industry. We have sought to keep your Subcommittee informed of

our progress at each step of the way. That is important to us.

Like any product of tough and extended negotiation, the agreement is not perfect. It contains elements of compromise. However,

I am convinced, and I hope that you will agree that this agreement

more than meets fundamental American objectives of securing our

existing Open Skies rights, of expanding Open Skies to all of the

European Union, and of establishing a template of opening markets, encouraging vigorous airline competition, and forging close

aviation cooperation. With this agreement, we and Europe can send
21

a message to all the world that the days of protectionist bilateral

agreements are drawing to a close, and that open markets and airline competition represent the future. I urge you to support this

historic endeavor.

Thank you. I look forward to your questions.

Mr. MICA. Thank you. We will go right into questions, and I have

a couple.

Mr. Byerly, you just mentioned in your testimony that, and I was

always under the understanding that the change in the rule on the

control issue or definition was not a part of the Open Skies Agreement, that is correct?

Mr. BYERLY. Yes, it is absolutely correct.

Mr. MICA. But you did testify, however, that the legal counsel is

awaiting that change, and if we don’t make that change, it will

trigger a rejection, is that correct?

Mr. BYERLY. We will have to see what the Transport Council,

that is the Transport Ministers of the 25 E.U. Member States and

Transport Commissioner Barrot would decide when they meet. But

from the European perspective, if I could just comment on how

they see it. We don’t have to agree but how they see it.

They seek an agreement that, from their perspective, has balance. When they opened the negotiations, they sought to achieve a

balance, to rectify an imbalance they see. It is not a view we accept, but the view they take is they are denied by our law any opportunity to do operations within the United States, our cabotage

laws. We were clear. We are not changing those. You wouldn’t endorse it; the Administration doesn’t endorse it.

They pointed to the opportunity that U.S. carriers have today

with respect to 15 Member States and what this agreement would

have with respect to every Member States to operate without limitation between E.U. Member States. Our carriers would have the

legal right to operate from the United Kingdom to France, from

Germany to Italy, from Slovenia to Spain. The European carriers

can’t do that in what they see as a somewhat equivalent market,

the United States. We said, sorry, it is not in the cards.

What we said we could listen to was their concern about obtaining access in some other way. We looked at that opportunity, and

we made the decision that Jeff Shane has just described. The decision on the control rules, the ownership rules for U.S. carriers have

to be ones we make on their own merits. They are not items for

negotiation.

For that reason, they are going to look at what the balance in

opportunities that may be a sort of light surrogate for actual access

to the U.S. domestic market, that is, greater cooperation and participation in the management decisions of U.S. carriers. So they are

very interested in this. Before they make their decision on whether

the agreement in the context of the aviation relation, our laws,

their laws, represents a balance.

But the decision is ours. We are under no obligation to produce

any change in our regulations or in our laws.

Mr. MICA. There is legislation, as you know, pending before Congress or being proposed that would block implementation of the

rule or delay that process for a year. If that passes, would you pre-
22

dict that Open Skies would be dead for a year or until some action

is taken?

Mr. BYERLY. Mr. Chairman, I think it would be dead for a year,

and an opportunity, a unique opportunity we have right now to

achieve what we have been trying to achieve for so long with respect to 10 additional countries, including the United Kingdom.

The opportunity to get rid of Bermuda II, an agreement we should

not have signed in the first place, I agree with those who made

that comment. We can get rid of it now.

Will that opportunity be here in a year? There is a tremendous

worry I have that it won’t be. Times change, especially in this volatile industry. The alignment of forces may be very different in 12

months time. It is a real concern and something I would urge you

to ponder very carefully as you look at the legislative proposals before you.

Mr. MICA. One of the concerns that has been raised, now most

industries, almost all the industries in the United States are free

to foreign investments. There may be some restrictions here and

there. The aviation industry is one of sort of the last remaining

protected industries.

One of the concerns, and you heard it expressed—Mr. Ney and

some others expressed it—Mr. Shane, was their concern about the

ability to fulfill obligations for military use in a difficult situation

with a Civil Reserve Air Fleet. That is a distinction that is different than, say, the automobile industry or the widget industry.

How do you respond? How is that going to be affected, and is this

something that should be of concern?

Mr. SHANE. It would be the first question that Secretary Mineta

asked about what would happen if, in fact, we proposed a rule like

this and then adopted something along these lines? The first agency that we actually discussed this proposal with was the Department of Defense.

Some may remember that a few years ago we were talking about

a different proposal, a proposal to the Congress which would have

been to raise the 25 percent ceiling on the maximum amount of foreign owned shares in a U.S. airline to 49 percent. We did not do

a very good job prior to bringing that proposal to the Congress of

consulting with the Department of Defense, and it ended up delaying the actual transmission to the Congress such that it was not

part of the deliberations on Vision 100. We didn’t want to make

that mistake again. So before we even finished drafting a notice of

proposed rulemaking, we were talking to the Department of Defense.

We would not have proceeded. I want everyone to understand

this because it is a very serious point. We would not have proceeded with this NPRM if there had been any residual concern in

DOD about the ability of U.S. airlines to fulfill their CRAF obligations. That was essential.

If I can just offer a personal footnote, I served as the Chairman

of the Military Airlift Committee of the National Defense Transportation Association for seven years while I was in the private sector.

The CRAF obligations have been a very important part of what I

worked on personally for a long time. So nothing in this rule was

intended to leave any of that to chance.
23

Mr. MICA. Thank you.

Just one quick last question of my interest is I have read that

with this rule change, probably the Open Skies Agreement would

move forward, but I have also heard some comments that it might

be necessary to make some legislative changes to implement Open

Skies or as a result of Open Skies. Do either of you know of anything that would need to come before the Congress as far as legislative or Federal law changes that you would anticipate changes

being made or needed?

Mr. BYERLY. No, sir, no changes would be needed.

Mr. MICA. Okay, okay. Anything, Mr. Shane?

Mr. SHANE. No, Mr. Chairman, none that I am aware of. I think

we are required to deposit the agreement with the Congress under,

is it the CASE Act? Yes. But it doesn’t require action on the part

of the Congress.

Mr. MICA. All right.

Mr. Costello?

Mr. COSTELLO. Mr. Chairman, thank you.

Mr. Shane, let me ask you, is there any indication that there

would be foreign investors investing in U.S. airlines other than foreign airlines?

Mr. SHANE. I don’t have any basis for offering you a very clear

answer on that. Airlines in the United States, they have unique opportunities in the air transport business. They are, I think, as efficient as they have become, particularly with the restructuring that

has been going on, probably attractive investments, attractive investments for investors of any stripe. So, yes, I think airlines might

well be expected to invest from overseas, but I wouldn’t limit necessarily the expectation to airline investors.

Mr. COSTELLO. And what would be the motivation for foreign carries to invest in a U.S. airline?

Mr. SHANE. Since we established the Open Skies policy in 1992,

we have discovered that both U.S. and foreign airlines have turned

the alliance phenomenon into a very important new competitive

tool globally. In fact, it has reshaped the quality of competition in

international aviation, providing far more seamless opportunities

for marketing and for carrying passengers and freight.

The most important, my guess is the most important opportunity

that a foreign airline might see in investing in a U.S. carrier would

be a way of solidifying an alliance that is delivering economic benefit to both parties.

Mr. COSTELLO. In what types of economic decisions would a foreign investor be able to participate if this rule was in place today?

Mr. SHANE. If we finalize the rule as it was proposed, then foreign investors, again depending upon what agreement they had

with the U.S. owners and the people that are in control of the airline, they would be able to make the commercial decisions that define the shape of the product, the quality of the product, the routes

that are flown, all of the commercial decisions that an airline

makes every day.

Mr. COSTELLO. So they would be able to, if not control, have a

large voice in the routes, frequency, service, all of those decisions,

code-sharing?

Mr. SHANE. That was the proposal, yes, sir.
24

Mr. COSTELLO. We are going to hear in the next panel from the

President of Continental. In his testimony, if you are around, you

will hear it, but in his written testimony, he says that Continental

opposes the Department of Transportation’s proposal because it unlawfully places actual control of U.S. airlines in foreign hands. How

would you respond to that?

Mr. SHANE. It doesn’t. If we adopt the proposal exactly as we put

it into the NPRM, control, actual control would remain in U.S.

hands. That is the intention of the proposal. The reason we are deliberating right now over those comments is to take views, like

those from Continental and others, into account.

Mr. COSTELLO. In your discussions with the E.U., was there ever

a representation by you or the Department of Transportation, specifically on November 15th, that a foreign minority shareowner

could have the ability to determine an airline’s commercial decisions by virtue of a super majority? In other words, couldn’t what

you would call a minority foreign investor or a foreign air carrier,

couldn’t they, in fact, negotiate for a larger share in the say-so of

the operation of that U.S. airline?

Mr. SHANE. Yes, if they were going to enjoy that ability, they

would almost certainly have to have a super majority voting opportunity. They would have to negotiate, again, with the majority owners.

Mr. COSTELLO. So they would be able to come to the table and

negotiate all of those decisions, and it would require, if in fact they

were successful in negotiation, it would require a super majority to

either overturn or not do what the foreign investor or foreign carrier wanted, is that correct?

Mr. SHANE. That would be the nature of the agreement under

those circumstances, yes, sir.

Mr. COSTELLO. Let me ask you, is there a downside? In your

judgement, for both of you gentlemen, is there a downside to this

rule to either U.S. workers, to U.S. airlines, to safety issues,

outsourcing? Of course, outsourcing takes place today on maintenance, but is there a downside at all?

Mr. SHANE. Again, Congressman, forgive me, but let me just talk

about what we thought when we put it on paper as a proposal. We

did not think there was any downside. We thought there were upsides on every one of those fronts. Again, the intention is that security, and safety, and defense related be in the hands exclusively of

U.S. citizens as they are today.

Mr. COSTELLO. Now that you have heard from members of Congress and from others in the industry about their concerns, about

the loss of jobs, about the outsourcing of maintenance, about safety

issues, and all of the things that you have heard in opening statements and comments here, does that make you go back and think,

well, maybe we didn’t consider these issues, or do you still firmly

believe that there is no downside?

Mr. SHANE. We have considered all of those issues, and we continue to consider them. I want to really underscore that. I don’t

want anyone to think that there is any foregone conclusion in this

proceeding.

But these will be U.S. airlines by any definition, if we were to

adopt the rule as proposed. They would continue to be owned, in
25

keeping with the statute. They would continue to operate under

U.S. law. The FAA would continue to regulate them. U.S. labor

laws would apply. There is nothing in the rule that would have any

impact on the shape of the workforce within an airline. That

couldn’t change today.

Mr. COSTELLO. You said that U.S. labor laws would apply.

Mr. SHANE. Yes.

Mr. COSTELLO. It was represented to me about a union contract

that is in place today that would continue to be in place if, in fact,

the rule was adopted tomorrow. That contract would continue to

exist?

Mr. SHANE. Certainly. The contract is with the management of

the airline. The management of the airline would remain in place.

Two-thirds of the managers are U.S. citizens.

Mr. COSTELLO. And the managers of the airline, certainly by negotiating a super majority from a foreign investor or foreign carrier, would give that foreign investor or foreign carrier a large sayso in the operation of the airline, including union contracts that

exist today or that would expire and have to be renegotiated, is

that correct?

Mr. SHANE. Sure. Yes, they would be participating in management.

Mr. COSTELLO. Also, recognizing from the standpoint of the labor

force, from the flight attendants to the pilots to the mechanics and

so on, they have to believe, or isn’t it reasonable to assume that

labor in other countries where we may attract foreign investors, a

foreign carrier in particular, is much cheaper in those countries

than the union contracts call for today in the United States? Isn’t

it reasonable for them to assume that if it is cheaper to get labor

from a foreign carrier who now has a large voice, if not total control

over the operation of the U.S. airline, isn’t it reasonable to assume

that they are going to bring in the cheap labor?

Mr. SHANE. Number one, it is not self-evident that the labor is

cheaper in other places, especially if you are talking about Europe.

Second, U.S. airlines are still required to comply with FAA regulations in terms of having U.S. airmen, U.S. licensed crews on board.

None of that would change by virtue of anything that we are doing

in the NPRM, even if it were finalized.

So it is not at all clear to me, sitting here now—again, we will

take all of these comments very seriously—but not at all clear to

me that there would be any change in the labor picture as a result

of anything we are doing in the NPRM.

Mr. COSTELLO. Mr. Chairman, I have other questions, but I will

come back, hopefully, for another round.

Mr. MICA. Mr. LoBiondo?

Mr LOBIONDO. Thank you, Mr. Chairman. For our panelists,

thank you very much for being here. I think this is helpful and informative.

If the DOT rule were implemented, I have a question about how

it would work. For example, when an airline debates whether or

not to participate in the Civil Reserve Aviation Fleet, or if there

is a question about the airline’s security policy, how will foreign executives be handled in that? Will they be asked to leave the board

room, or is there any practical way of truly separating foreign in-
26

fluence from the decisionmaking process on the critical issues of

safety, security, and defense?

Mr. SHANE. Well, we are getting a lot of comment on that precise

question, Congressman. So we are going to be examining those

comments closely. But the concept, at least, built into the proposal

was yes. I don’t know if I can tell you precisely what device each

airline company would adopt, but a form of a Chinese wall would

have to be created to ensure that those decisions that affect defense

were made by U.S. citizens and not influenced in any way, shape,

or form by foreigners.

This is something that we do quite commonly with a lot of other

industries. Industries that have national security implications,

which are nevertheless owned and controlled by foreigners have to,

as a result of the Scythias Process, have to put those kinds of walls

in place to ensure that certain categories of decisions are restricted

to U.S. citizen participation only. This is not an unfamiliar device.

Mr LOBIONDO. But as of this time, we do not know what that

process exactly is?

Mr. SHANE. We don’t know what it is. And again, we will undoubtedly have a lot of comment on that in the docket. But at the

end of the day, if we were to finalize the rule, we would create a

requirement, not prescribe a device. It would be for the company’s

lawyers to ensure that it was complying with legal restrictions that

apply to the airline, and that is what typically happens.

Mr LOBIONDO. I think I speak for a number of my colleagues. We

will be anxiously looking to see what some of those particulars are.

Can you tell me, has the Department of Defense weighed in on

this proposed rule?

Mr. SHANE. Yes, we brought the proposal to the Department of

Defense long before we were even circulating it to other agencies

of the government. Defense, in our minds, loomed largest as the

one agency of the government likely to have the greatest concern.

The Department of Defense, after considering it for a decent period

of time, came back to us and said, no, as long as U.S. citizens are,

in fact, controlling all the defense related decisions that the airline

company can make, we have no objection to this proposal.

Mr LOBIONDO. Mr. Costello talked a little bit about some of the

jobs aspect and how this would work, and I know you have stated

that you have considered the impact of the rule on jobs that are

currently held by Americans. So you feel, without any hesitation,

that jobs currently held by Americans have no threat, no worry, no

concern at all if this were implemented?

Mr. SHANE. Again, I have to go back to my disclaimer. Let me

talk about the genesis of the proposal. As we put the proposal together, we did not believe that there would be a negative impact

on labor of any kind. That is obviously the subject that a lot of commenters have weighed in on, and so we are obliged to take those

comments seriously and deliberate about those along with other

factors before we come to a conclusion.

Mr LOBIONDO. All right. I thank you very much.

I just know that I feel this way, that we sit through hearings,

and we ask questions, and we get feedback on an understanding

of how someone thinks something is supposed to work. And then

after a period of implementation, we find out that there was some
27

fine print somewhere along the way that causes a different result,

and I am very concerned. So I appreciate your being here, and I

will continue to look at it carefully.

Mr. SHANE. If I could add one more point, Congressman

LoBiondo. In his opening statement, Congressman DeFazio said

that this was an example of the Executive Branch attempting to,

I guess, arrogate responsibility to itself that might more properly

be shared with the Congress. I really want to take issue with that,

if I may. There is no doubt at the Department of Transportation

that were we to finalize the rule as proposed or in any other way,

and if the Congress didn’t like what we did, the Congress has plenary authority to just repeal that rule. That is clear.

This is not about the separation of powers. This is not a challenge to Congressional authority. There is no doubt that Congress

has the statutory, has the ability to write in a statute whatever it

wants about U.S. ownership. If it wants to have 100 percent ownership by U.S. citizens, and total control, and no participation by foreign citizens in any commercial element of the running of the company, it is available to the Congress to do that. And we would be,

we would stand up and salute if we got that statute.

So I just want to remove that one possible source of confusion.

You have, at the end of the day, complete authority to do what it

is the Congress wants to do.

Mr LOBIONDO. Well, I appreciate that. This is an issue that I

don’t think is on the radar screen of a lot of people across the

Country, other than those really tuned into transportation and

aviation issues, but the implications are so huge. I really applaud

the Chairman for holding this hearing and thank you again for

being here today.

Mr. MICA. I thank the gentleman.

Mr. Oberstar?

Mr. OBERSTAR. Thank you, Mr. Chairman.

Mr. Shane and Mr. Byerly, you may recall that in 1989 at an

AOCI, Airport Operators Conference in Munich, I proposed to the

assembled delegates, mostly Europeans, that the European community establish a single negotiating authority to deal with the

United States on aviation bilaterals. They rejected it. I proposed to

then Secretary Skinner that he initiate a re-creation of the Chicago

Conference, which he politely demurred and said, we are not quite

ready for that, but I agree with your other proposal.

Well, the Europeans have come around to it. And you spent a lot

of time on this negotiation. How much time have you devoted personally, hours, weeks, months to this negotiation?

Mr. SHANE. Congressman, I graduated from the negotiating business. I have John Byerly, my esteemed colleague, who is actually

doing the heavy lifting. I basically watch my computer to see what

he reports.

Mr. OBERSTAR. Mr. Byerly, you have spent a lot of time on this?

Mr. BYERLY. Mr. Chairman, I guess I spend about 60 hours a

week on my job. During the height of the negotiations and the

height lasted for about two years, I would estimate that it was between 25 and 30 hours a week on average, and sometimes it was

100 hours a week when we had the actual negotiating rounds. This

was a big deal. It was really important.
28

Mr. OBERSTAR. It is a big, big issue. And I hope, Mr. Chairman,

we will devote more than just a couple of hours of committee hearing to examining this subject and let it weigh extensively upon the

public record because it deserves to be plumbed to its depths.

Now, Mr. Shane, will the U.S.-E.U. pending agreement be rejected by the E.U. without the ownership provision in it?

Mr. SHANE. That is difficult for me to say. You heard Mr.

Byerly’s prediction which is that they probably would because they

have decided that without a change along the lines that we have

proposed, there would not be sufficient balance in the agreement.

But that, you know, that is a decision that only Europeans can

make.

Mr. OBERSTAR. I had a discussion yesterday with Mr. Petri and

the French Minister of Transportation, Tourism, and Maritime. I

don’t want it to be characterized totally on the record here, but I

got the very clear impression in our discussion in French that, well,

this is interesting, the ownership; it is not fundamentally critical,

but that an Open Skies Agreement is important to the French. I

am not quite convinced they would reject it, but then they won’t

make that decision alone.

Who, which foreign airline, which foreign corporation, or nonU.S. financial interest will invest in a U.S. carrier without the

prospect of controlling the decisions and the fate of their investment?

Mr. SHANE. You are asking me, Congressman?

Mr. OBERSTAR. Yes.

Mr. SHANE. Well, history teaches that not many airlines will invest in other airlines without some means of protecting their investment. I would redefine the criterion as not needing to control

the airline but simply needing some means of protecting the investment. We saw with the investment of $400 million into Northwest

Airlines that our absolute determination to enforce the 1940 policy

to the hilt—

Mr. OBERSTAR. And you recall that I labored vigorously to hold

that decision up, the final approval, for about a year until it was

further clarified because at the time I said, KLM didn’t just buy

a ticket to the game; they bought a seat on the bench next to the

coach to tell him what to do.

Mr. SHANE. They thought they were going to buy a seat to the

game and sit next to the coach, but as it turned out—

Mr. OBERSTAR. It didn’t.

Mr. SHANE.—as a result of your efforts and the Department’s

own enforcement mechanisms, they didn’t have a seat next to the

coach, and they got so frustrated in their ability to just work with

their partners that, as you know, they withdrew their money. They

pulled that investment out.

And so, for those of us sitting there in the Department of Transportation, we are compelled to ask ourselves: What, precisely, what

public policy objective was furthered by this determination not to

let them have a seat on the bench next to the coach?

If they weren’t going to be controlling the airline, if they were

simply going to be able to protect their investment to some extent,

would we not have been better off? Would competition in the U.S.

aviation market not have been enhanced to some extent if that
29

working capital had remained available to KLM? It is that kind of

question that serves as the genesis for an NPRM like the one—

Mr. OBERSTAR. But then there is a contradiction in what you say,

what you acknowledge in your description of control, and it is ownership and control in the context of this agreement.

Will the U.K. restrictions, our bilateral Bermuda II restrictions

that remain—Mr. Byerly, I want to get a more clear answer from

you—be immediately rescinded upon E.U. approval to the bilateral,

that is, to pricing and slots at Heathrow, and gates, or will it be

done over a period of years?

Mr. BYERLY. Mr. Chairman, as soon as the agreement is, or Mr.

Oberstar, as soon as the agreement is—

Mr. OBERSTAR. That is all right. I don’t mind.

[Laughter.]

Mr. BYERLY. Yes, sir. As soon as we apply the agreement, which

we are aiming to do as of next winter season, late October, 2006,

all the legal restrictions in Bermuda II will be gone. The new rules

in the Open Skies Agreement with the E.U. will apply. Thus, every

U.S. carrier, every U.S. carrier will have the legal right to serve

Heathrow.

You have asked about the tough issue of slots, and maybe I can

say a few words about that.

Mr. OBERSTAR. Sure.

Mr. BYERLY. Because I know it is an issue of contention and an

important issue. During the negotiations, we talked about the issue

of slot limitations, not only at Heathrow but generally at a number

of European airports. They haven’t done what this Administration,

past administrations, and Congress have done, which is to encourage the building of airports sufficient to meet current needs and future needs. We have language in the agreement that allows us to

discuss limits on infrastructure and how they affect the exercise of

rights under the agreement.

We did not, however, seek in the negotiations to acquire a special

carveout for U.S. carriers to give them free slots at Heathrow, and

I would like to explain why. Such carveouts would be inconsistent

with E.U. legislation. More important, from our perspective, they

would be inconsistent with established international norms for allocating slots. These are norms we insist upon with other countries.

To have demanded free slots for U.S. carriers would have meant

expropriating slots from other carriers at Heathrow or any other

airport—

Mr. OBERSTAR. But—

Mr. BYERLY.—and would have set a very dangerous precedent.

Mr. OBERSTAR. I understand what you are saying, Mr. Byerly,

but let me interrupt there. We are not talking about free slots. In

the past, you will recall in our negotiations on Open Skies Agreements in which you participated and Mr. Shane participated, when

JFK was a slot-controlled airport and O’Hare, much more a slotcontrolled airport than it is today, U.S. carriers had to give up slots

which foreign carriers could then buy.

But they were required, our carriers were required to give up

slots so the foreign carriers could have access to those airports.

United and American giving up slots at O’Hare, in some propor-
30

tionate fashion given their presence at O’Hare, so that under our

bilaterals, foreign carriers could have access to O’Hare.

So it is not a matter of free. They were required to buy. Our carriers then had to find some other way to replace those slots so they

could continue to serve out of those airports.

Mr. BYERLY. Mr. Chairman, I think that is certainly an accurate

description of the application of the high density rule as it applied

at Kennedy and at O’Hare when it is applicable. It isn’t, to my understanding, it is no longer applicable there.

The problem with telling the British or the European Union, as

a requirement in this agreement, you are going to have to cough

up slots. You are going to have to take them from somewhere. You

can’t just create slots out of thin air. You are going to have to take

them from someone and give them to U.S. carriers.

Let us take the example, what if the Japanese—

Mr. OBERSTAR. Okay, go ahead.

Mr. BYERLY. What if the Japanese said to the United States, we

are going to take slots from FedEx, from United, Northwest. We

think they have too many. We are going to give those slots to the

Chinese. Maybe there will be some compensation involved, because

we want to reach an agreement with the Chinese which, in fact,

they do.

I think I can assure you that we would jump to the ramparts in

the blink of an eye to defend our carriers from such an onslaught.

We should not create such a precedence of saying that slots will be

expropriated from other carriers, whether they are British or third

country, in order to supply our needs.

What is important is there is a slot market at Heathrow. Slots

can be bought. They can be leased at Heathrow. They are available.

They don’t come cheap. It may take hard work to get exactly the

time you want, but they are available.

In this connection, I would point to a story in The Financial

Times from last November, that story, and I will quote from it,

says, ‘‘The deals for slots that occurred in the last few months before the story was written in November undermine claims from

some U.S. carriers that it is virtually impossible to acquire slots at

Heathrow.’’ This is coming from a British journalist.

They reported, for example, that Emirates has recently acquired

slots from BMI, the former British Midlands, to allow it to start a

fifth daily service at Heathrow. Jet Airways, the successful new Indian carrier, it has acquired slots, I think from United and Air

France to start service to Heathrow from both Delhi and Mumbai.

Qantas of Australia, Etihad Airlines of Abu Dhabi, they have been

able to expand or start service at Heathrow by acquiring slots on

the market.

That is the opportunity that will exist for U.S. carriers if we do

this agreement. If we don’t do this agreement, they can’t do it at

all. They are out of the ball game totally.

Mr. OBERSTAR. I understand. Mr. Chairman, I know I have run

over the time, but this is key to the agreement here, to the larger

agreement.

If you are really suggesting that we magnanimously agree to

some lesser deal on slots and let U.S. carriers wait some period of

time until the Brits are ready, good and ready to give us slots,
31

without access to Heathrow. Heathrow is half of the U.S.-European

financial market in aviation. That is a $28 billion, $30 billion market. Heathrow not only is half of that market but is the access

point to the rest of it. Without access to slots in some effective way,

this agreement is not worth much.

Thank you, Mr. Chairman.

Mr. MICA. Well, thank you.

Let me yield now to Mr. Ehlers.

Mr. EHLERS. Thank you, Mr. Chairman.

I commented earlier I was pleased that you are superceding the

Bermuda Agreement, but there is obviously still some work to be

done on that part.

I have a general question. Because the Open Skies Agreement includes framework for closer cooperation on competition issues, can

you explain how the agreement would impact the current international airline agreements, such as the Star, one world, and

SkyTeam alliances. I am not sure which of you would like to answer that.

Mr. BYERLY. Mr. Chairman, there would be no immediate effect

on those alliances at all. What we have had in the past is ad hoc,

case by case, sporadic cooperation, consultation between, on the one

hand, the Department of Transportation which functions as a competition authority in looking at alliances, and on the other hand,

the Competition Directorate of the European Commission as well

as national competition authorities. So when AABA was under consideration at various points in history, their proposed alliance, both

sides looked at it, and there was some informal dialogue. That is

not a really satisfactory solution.

What this agreement does, and it was a proposal from both sides,

is it structures more regular, detailed, focused conversation, dialogue between the two sides on how to approach airline competition

issues. By listening and talking, we can learn things, and maybe,

through that process, will decrease the costs to airlines of duplicative remedies. We will see some light in what the Europeans do or

vice versa in what we do, and we can approach each other in a

more cooperative way on these airline competition issues.

Let me just state for the record very clearly, there is nothing in

this agreement that affects the Sherman Act, that affects in any

way the legislative standards under which the Department of

Transportation or any other U.S. agency addresses competition

issues. This is to get a good discussion going between us and the

European side on airline competition issues. As alliances grow, this

is going to become more important. That, we think, has real value

in this agreement.

Mr. EHLERS. Just following that up then, and perhaps this

should go to Mr. Shane since he was involved in that. Does the negotiation of this agreement allow you to go back and evaluate the

SkyTeam antitrust immunity application, which I believe, Mr.

Shane, you just recommended not go forward even though the Department of Justice had said it could? I was very surprised at your

decision, and we may have time to question that. But does this now

mean that can be reopened and would more likely be approved?

Mr. SHANE. I would have to answer that in the most abstract

way, Congressman. First of all, our decision was consistent with
32

what the Department of Justice recommended. They were quite adamant that we decide the case in the way we did. There was no

conflict between the Department of Transportation and the Department of Justice in this case. There had been conflicts in the past,

but not on this one.

It is available to the parties, to the SkyTeam alliance, to refile

their proposal for antitrust immunity if they so wish. After circumstances have changed, that would be available to them, and we

would be obliged to consider it in light of those changed circumstances. There is no question about that.

Mr. EHLERS. But how do you deal with it in this particular case?

There is a merger on the Atlantic side, on the European side which

has impacts on two United States Airlines, both of which incidentally are going through bankruptcy proceedings now. It seems to

me your treatment of that basically took sides on that because I assume Air France merging with KLM means that they would continue to work with Delta and send Northwest packing into the big

blue sky beyond and no chance of survival at that point. How are

you going to deal with that and not just that specific case? I am

very concerned about that one because in view of what we have developed here.

But are you going to then let decisions made by other countries

such as the E.U. allowing Air France and KLM to merge which has

a very negative on one U.S. airline and a good effect on another

one? How are you going to fairly adjudicate that on this end if we

are going to deny them the opportunity to join that partnership?

Mr. SHANE. Well, we haven’t, I think we haven’t tried to decide

any cases in the abstract before there is an agreement. Clearly, if

there is an agreement with the European Union, we will have some

new correspondence with the E.U. Commission in Brussels with

the competition authorities there. I think you will have some more

coherence in terms of the way both the United States and the European Union apply their respective competition laws.

In the context of SkyTeam and Wings, we still have an immunized alliance between Northwest and KLM; we still have an immunized alliance between Delta and Air France. Those two alliances continue to exist.

What was being asked for in the proceeding to which you are referring is that we allow those two alliances, in effect, to merge and

get antitrust immunity for that additional merger. The reason, if

I can just refer back to that case briefly, that we came out the way

we did, and it is all spelled out very clearly in the final order, is

that the statute made us do it. The statute is very clear about the

importance of demonstrating benefits from the additional immunity.

We granted code-sharing authority to both alliances, which we

felt, and which we felt their own proposals supported, delivered 90,

95 percent of the benefits that they were seeking to get from antitrust immunity. And the way the statute is written, it makes it awfully difficult for the Department of Transportation to immunize an

agreement from the operation of an antitrust laws when so many

of the benefits that that agreement would produce are available

without immunization from the antitrust laws. It is all about trying

to maintain some semblance of competition across the Atlantic.
33

I am sorry to go on about that, but I just wanted to see if I could

clarify to some extent what the rationale of the Department was

and to suggest that it is not, by any means, a pronouncement about

the future of alliances in the transatlantic market or how we would

apply our authority, competition rules in the U.S. and Europe after

they were in agreement with the European Union.

Mr. EHLERS. Well, thank you very much. I am just very concerned about this decision because, as I recall, all the previous decisions have been in the opposite direction in dealing with this problem. And suddenly, we have two airlines in bankruptcy, U.S. airlines in bankruptcy, and the decision is very likely to kill one of

them. That strikes me as being a very poor approach to take.

Thank you. I yield back, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Ms. Johnson?

Ms. JOHNSON. Thank you very much, Mr. Chairman.

I have listened very intently to the responses, and what I would

like to know is what laws that you review before going into this

negotiation to arrive at the potential change? Would you review the

laws?

Mr. SHANE. You are talking about the potential change in the interpretation of the foreign—

Ms. JOHNSON. Yes.

Mr. SHANE. We looked very hard at the statute, and we looked

at all of the precedence that has come down to us from the earliest

days of the CAB down to the Department of Transportation when

it took over the CAB’s functions. And we examined the number, I

would call them, of anomalies of difficult decisions we have had to

make because of the application of those old interpretations, forcing

the Department to put applicants through a real wringer, in many

cases with no particular benefit that anybody would cite as being

of interest to the United States.

You will hear later on, I believe, from Hawaiian Airlines who just

came through what we call a continuing fitness investigation. They

had to restructure themselves with new investment. They used

some innovative financing. They used hedge funds, offshore. The

strict application of those 1940 precedents that have come down to

us made it very difficult to do something which we very much

wanted to do, which was ensure that Hawaiian Airlines lived on to

see a new day.

We finally worked our way through that, but it took many, many

weeks and a great amount of expense on the part of the applicant

in order to get us to that point. They had to restructure the investment in ways that—and you will hear more detail from the airline

itself—probably didn’t produce any net benefit to the United States

in terms of any public policy objective we are trying to achieve and

just drove them crazy for reasons that have to do with the technical interpretation that existed from 1940.

So there is a real obligation in an agency like ours to see whether or not we can make the regulatory framework more user friendly

than it is today. That is its principal objective.

Ms. JOHNSON. And you went to the Department of Defense. Did

it ever occur to you to talk to anybody on the Transportation Committee?
34

Mr. SHANE. Yes, we attempt to stay in pretty close touch with

the Transportation Committee. We can, undoubtedly, do a better

job. I understand that we were, that Transportation Committee

members were not pleased, and in fact I think we have learned a

lesson from that.

I will say, in feeble defense of the Department of Transportation,

that members of the Transportation Committee staff were among

the first to know about the rule before it was published. We came

up here and spoke to both Senate and House staffers, and I met

with the Chairman before the rule was published, so that we attempted to offer previous notice, but perhaps that is not as much

as you were looking for.

Ms. JOHNSON. Where do you go from here? Are you going to respect what you heard today, or are you going to be full speed

ahead?

Mr. SHANE. Well, both, Congresswoman. We are trying to bring

ourselves to a conclusion in this proceeding. The comments were all

due by January the 6th, so we have had them for a while. Staff

is reviewing them. I have read them. The Secretary will be looking

for recommendations from people like me.

Ms. JOHNSON. Thank you.

I have one more question before my time runs out. What, in your

negotiations or discussions, came up that you would ensure that

employees of the industry in the United States be protected?

Mr. SHANE. The rule doesn’t really change the situation of employees in the United States. We have commercial agreements between airlines today, including agreements by U.S. airlines with

foreign airlines. And some of these alliances, including some that

have antitrust immunity right now, are pretty robust. To the extent that it would be available to change the ownership, I sm sorry,

the workforce structure of a U.S. airlines, those opportunities, if

they are available, they are available today. Nothing that we are

proposing to do in this rule would change that picture in any way,

shape, or form.

Ms. JOHNSON. Thank you. I will sit through the next round. I am

about out of time, so I will yield, Mr. Chairman.

Mr. MICA. Mr. Poe?

Mr. POE. THANK YOU, MR. CHAIRMAN. I have a few brief questions.

Mr. Shane, do you believe that the Department of Transportation

may implement this proposal without Congressional approval?

Mr. SHANE. Yes, I do, Congressman.

Mr. POE. Okay, thank you.

As I understand this proposal, it has to do with Open Skies. My

concern is national security, so let me just be frank about that. The

United States has Open Skies Agreements with Nigeria and Indonesia, do we not?

Mr. SHANE. Correct.

Mr. POE. And the proposal is to let countries where we have

Open Skies Agreements buy American, buy into American airlines,

isn’t that this proposal?

Mr. SHANE. It is not about buying into in any way at all.

Mr. POE. Investing? Investing?
35

Mr. SHANE. No. They can invest today, Congressman. It is not

about investing. It doesn’t change any opportunity that they have

to invest today. It is a question of—

Mr. POE. Doesn’t the Department of Transportation have a travel

advisory warning to Indonesia?

Mr. SHANE. Bali, yes.

Mr. POE. That is right.

Mr. BYERLY. The State Department keeps travel advisories, in

fact, also for Nigeria.

Mr. POE. For both of them?

Mr. BYERLY. Yes, sir, and for many others.

Mr. POE. And would it be wise, do you think, for us to encourage

or allow foreign investment into our airline industry to countries

that we don’t really recommend that Americans even travel to? Do

you see a problem with that?

Mr. SHANE. We are not providing any greater opportunity for

them to invest than they have right now, Congressman, under existing law. All we are dong is we are saying that, if they do invest

and they wish to protect that investment to some extent, they are

in a position to enter into agreements with management such that

they can participate to some greater extent in the actual operation

of the airline on a commercial basis.

Mr. POE. So you don’t see a problem with—

Mr. SHANE. Except with—

Mr. POE. Let me finish. You don’t see a problem with foreign investment in American airlines to areas where those countries have

a travel advisory warning because of security? You don’t see a

problem with that?

Mr. SHANE. We have a restriction in the proposed rule that

would say any decision having to do with security, or safety, or national defense would have to be made exclusively by U.S. citizens.

That is the proposal, so.

Mr. POE. And if it is run by somebody that is from a foreign

country, they can control the purse strings on this security department in the airline industry and then cut the funding. They can

give them one person as opposed to a whole department. I mean

that is just semantics to me. It seems like—

Mr. SHANE. It is not semantics.

Mr. POE. I am not through. It doesn’t seem to me that that is

very wise to put our security really under the oversight of some foreign investors. Now if you can explain that to me so I can understand it, I will let you talk. Go ahead.

Mr. SHANE. Thank you. I don’t know how to make it clearer than

to say that the security of a U.S. airline will never, ever, under our

rule be under the oversight of a foreign investor, period.

Mr. POE. Even if the supervisor over that department is a foreign

investor?

Mr. SHANE. If you are implying that the supervisor is actually

determining the outcome of those decisions, then that airline is disqualified. It loses its ticket.

Mr. POE. And once again, you think you can implement you can

implement this proposal without Congressional approval?
36

Mr. SHANE. Yes, sir, I think that the division of labor between

the Congress and the Executive Branch is pretty clear, and we interpret the law; you write it.

Mr. POE. Well, we may have to write it so it is clearer to you.

Thank you very much, Mr. Chairman.

Mr. MICA. I thank the gentleman.

Mr. DeFazio?

Mr. DEFAZIO. Thank you, Mr. Chairman. The courts, I think, interpret the law, not the Administration.

Let us get clear what we are talking about. I remember precedent, and what is actual control, what is control. Under your definition of control, rates, routes, fleet structure, marketing, alliances,

and branding could be controlled by foreign interests. Isn’t that correct, because those are not in your precluded categories?

Mr. SHANE. If the majority owners of the airline who are all U.S.

citizens think that that is in the best interests of shareholders, yes.

Mr. DEFAZIO. But if there is a super majority, voting majority of

this foreign interest, then they would control those things?

Mr. SHANE. Yes.

Mr. DEFAZIO. Okay, they would control those things.

Now if they control those things, what if they decide that the domestic operations, and I understand your underlying agreement

you are negotiating would allow international operations to be conducted for domestic airlines by foreign operators. So they just decide, well, we don’t need any of those big planes flying around domestically anymore. We are going to have an all narrow body fleet

here for United, or for American, or for whomever they have chosen

to invest in. Now if they do that, does that fall under the CRAF

exemption, national security exemption, because they are limiting

the equipment to something that won’t serve the CRAF needs.

Are you going to delve into the equipment decisions even though

they control the equipment decisions? Are you going to oversee the

equipment decisions to make sure the equipment decisions don’t

jeopardize national security? Are you going to oversee that?

Mr. SHANE. Well, to the extent that you are talking about a commercial decision, I mean any U.S. airline—

Mr. DEFAZIO. Yes, a commercial decision that happens to deprive

us of the CRAF capabilities?

Mr. SHANE. Any U.S. airline could decide right now to take itself

out of the CRAF?

Mr. DEFAZIO. Yes.

Mr. SHANE. It is a volunteer program.

Mr. DEFAZIO. That is correct. You are just saying—

Mr. SHANE. So you can have some other people talking about the

commercial operations—

Mr. DEFAZIO. You are saying that foreigners won’t control the decision to go into CRAF or not, but they could limit a domestic carrier so it wouldn’t have the capability to participate in CRAF. I just

happen to remember during the Gulf War that we had a European

nation that was very reluctant to sell us a critical component of

cruise missiles which we ran out of because they didn’t support the

war. Now this could be a real problem here. So I have got to agree

with Mr. Poe.
37

But let us go sort of beyond that. You have agreed on the rates,

routes, fleet structure, marketing, alliances, and branding, foreigners can control it.

Now Mr. Tilton says, when he looked at that in a recent speech

at the U.K. Aviation Club, it would allow foreign investors in U.S.

airlines to effectively control the bulk of the airlines commercial operations. Do you disagree with that?

Mr. SHANE. No.

Mr. DEFAZIO. Okay, so U.S. in name only. I don’t understand.

When you link these two things together, the two things you are

doing together are so destructive to the potential of the domestic

fleet and jobs in this country. They are extraordinary. I don’t think

that the ideologues who are pushing for the Open Skies have

thought this through.

So, let us see. We don’t see an awful lot of people flying from

these podunk towns in Colorado that Mr. Salazar is concerned

about. He wouldn’t call them podunk; I did, but.

[Laughter.]

Mr. SALAZAR. I would appreciate if you wouldn’t call them podunk as well.

Mr. DEFAZIO. Yes, yes, but I have some small towns myself that

I am concerned about. And so, the foreign airline, which is now

controlling the routes, decides, we really don’t want to serve those

markets anymore because they aren’t feeding the international

flights which we now fly with our planes and our crews. What

would preclude that? It is a commercial decision. What would preclude that?

So is this going to enhance access to the domestic market for

U.S. citizens? Is it going to improve an already truncated system

with failing deregulation and bankrupt airlines? Or is it just going

to benefit the high profit market? That is one question.

The second question is: Again, I really hope we hold a hearing

on this underlying Open Skies Agreement because I don’t understand. The formerly bankrupt U.S. airline is going to be able to get

a desirable, or let us say they have already got slots.

But someone else, Continental is not going to be able to get slots,

or financially viable slots at Heathrow. You are leaving that to a

market-based system. They could go in and pay a billion dollars

and maybe get a decent slot, but they don’t have it. Okay, so that

is moot. But they are just anxious to get in there so they can compete with Ryan Air and fly people from Heathrow to Milan for $32

and make money. Now what are the benefits of this much smaller

aviation market for the U.S. carriers?

And then, third: You say, well, your question about wages. Well,

what about the Eastern European countries that are now part of

and/or accessing the E.U.? They do have much lower wage rates.

They do have Open Skies Agreements. And this won’t have an impact on U.S. labor?

Could you address those three points? I think they are problems

that really aren’t being considered by the Administration.

Mr. SHANE. In the first instance, we have the most efficient airline industry in the world, and it is the product of the decision Congress made in 1978.

Mr. DEFAZIO. They are bankrupt.
38

Mr. SHANE. The U.S. airline industry is a lean, mean machine.

So many of the questions that we have had and so many of the

comments that have come in as a result of the rulemaking seem

to take the view that we are just weak, vulnerable, sitting ducks,

that all these rapacious foreign airlines are going to come in and

just take over the U.S. airline industry, kick all the U.S. workers

out. What made this Country great was exactly the opposite. It was

the strength and the entrepreneurial spirit of the American industry.

Mr. DEFAZIO. Okay, I am getting it. Why don’t you move on to

a more factual answer to one of the other questions because my

time has expired.

Mr. SHANE. Well, the factual answer—did you want to say something?

Mr. BYERLY. Perhaps, I could address the economic value question under the U.S.-E.U. agreement which I think is what you are

aiming at in the second question. Let me give you some practical

examples of the value to U.S. carriers. It is not flying from

Heathrow to small cities in the United States. No U.S. carrier

today—

Mr. DEFAZIO. In Europe, you mean.

Mr. BYERLY. In Europe, no. Just as European carriers will have

no opportunity to fly between any U.S. cities because of the cabotage laws which you support and we support. Some practical

examples—

Mr. DEFAZIO. Thus far, you may reinterpret cabotage, too, in the

future.

[Laughter.]

Mr. BYERLY. I promise you, not on my watch, Congressman

DeFazio.

FedEx, for the first time, could connect its major operations at

London Standstedt to—

Mr. DEFAZIO. I understand. There is a benefit.

Mr. BYERLY. There are lots of benefits.

Mr. DEFAZIO. Yes, we are looking, but we are talking FedEx; we

are not talking passenger carriers.

Mr. BYERLY. I can give you some—

Mr. DEFAZIO. And FedEx isn’t going broke.

Mr. BYERLY. Let me give you some passenger carrier examples

then. For example, American Airlines and Iberia, which have had

an alliance, the oneworld alliance, would be able, with this agreement, to apply for antitrust immunity and level the playing field

from their perspective with the SkyTeam and Star alliances. U.S.

carriers would be free for the first time in history to serve Dublin

on a non-stop basis without having to do a one for one stop at

Shannon. Delta Airlines, for example, estimates that this mandatory Shannon stop requirement—

Mr. DEFAZIO. Okay.

Mr. BYERLY.—costs them $5 million a year, $100 million a year

to—

Mr. DEFAZIO. But, of course, this isn’t going to the whole issue

of who is going to be flying those international routes which, under

this agreement, could be the foreign airlines flying the inter-
39

national routes for U.S. airlines. Where are the benefits going to

accrue? Who is going to actually get those benefits? But anyway.

Mr. BYERLY. It is the market that would determine that.

Mr. DEFAZIO. Right, right.

Mr. BYERLY. Just as it is today with—

Mr. DEFAZIO. The market has served us really well recently with

the number of bankrupt airlines we have—

Mr. BYERLY. That’s exactly the point, Congressman. What is it

about the current system that attracts into it? What is it that—

Mr. DEFAZIO. It doesn’t. I would like to enter back into some sort

of a regulatory scheme. Mr. Lipinski and I have discussed this for

years, that this system is not going to provide us a system of universal transport which serves all size cities in America. You will be

able to go to one or two airports and get a cheap ticket to go somewhere. But for people in my District, you are driving 200 miles to

get to that airport or 400 miles to get to the airport. It is not working real well for the majority of the American people, but that is

a discussion for another day.

Thank you, Mr. Chairman. My time is up.

Mr. MICA. Thank you.

Mr. Pascrell?

Mr. PASCRELL. Thank you, Mr. Chairman.

Mr. Shane, if the proposed rule is made final, in your estimation,

would foreign investors be able to dictate the routes, frequency,

classes of service, pricing, advertising, code-share partnerships of a

U.S. carrier, and still not be found by the Department of Transportation to be ‘‘in actual control’’ in your estimation?

Mr. SHANE. In my estimation, the answer is yes, provided that

the majority owners of the airline, all of whom are U.S. citizens

and the managers, two-thirds of which have to be U.S. citizens,

agree to allow that participation by foreign entities.

Mr. PASCRELL. So you are not equivocating, but you are putting

out a condition.

Mr. SHANE. No. I am saying that U.S. citizens are still in control.

And so the ability of foreign entities to enter into those kinds of

arrangements will depend upon an arm’s length agreement with

the people that own and control the airline.

Mr. PASCRELL. Now it is my understanding, from both your oral

and written reports, with representatives of the E.U. on November

the 15th, that you told them a foreign minority shareholder—and

correct me if I am quoting you incorrectly—could have the ability

to determine an airline’s commercial decisions by virtue ‘‘a super

majority provision embodied in the contracts that would exist between the airline and the foreign owner or in the airline’s bylaws.’’

Would you explain that?

Mr. SHANE. We are really talking about the decisions of the sort

that would be taken by the board of directors. By definition, by

statute, the board of directors must have a minimum of two-thirds

U.S. citizens. So, by definition, any foreign entity would be relegated to a one-third or less stake. In order for them to be able to

have the sort of influence that they are looking for over certain

commercial decisions, there would have to be an agreement or a revision in the bylaws of the company that established that for cer-
40

tain kinds of decisions, ti would take a super majority vote in order

to make a decision.

Mr. PASCRELL. So regardless of the agreement, if they worked

out within the contract that there are certain provisions that would

permit them, even though they needed a super majority, this could

be done. It is possible.

Mr. SHANE. Yes, yes it is, as long as it is limited to purely commercial decisionmaking.

Mr. PASCRELL. Then my third question is this. I have looked at

the testimony of Mr. Smisek of Continental Airlines. He calls the

notice of proposed rulemaking unworkable, is what he says in this.

Trust me, that is what he said. This aspect of the proposed rule,

assuming the heads of security of safety would have complete autonomy from their leadership, he says is unrealistic and naive.

And my question to you is this: How can you suggest that these

people will function independently? That is the question. On their

own leadership, independent of their own leadership, leadership

that presumably decides their budgets, I would assume, the size of

the staff, their annual goals, and their priorities, how in God’s

name are you suggesting that these people will function independently? That is my final question to you, but I would like to hear

your answer.

Mr. SHANE. Well, it implicates in a way my colloquy with Mr.

Poe. If the control of the budget has the effect of controlling security and safety decisions, then they aren’t complying with the condition, and therefore, they would not be eligible for a license. They

would be violating the actual control test as it was defined in this

rule, again assuming it were made final.

We have only proposed this rule, and comments like those of Mr.

Smisek and others will have to be considered. I have to say that,

as you know, there are comments on both sides of the issue, both

sides of the question that are in the docket. And so, it will be important for the Department to consider them all seriously.

Mr. PASCRELL. I want to take issue with some of the things in

your response, but I thank you for your candidness.

I have just one quick question for you, Mr. Byerly, and it is this.

Let us talk about what you consider to be this ‘‘unique opportunity.’’ That is how you phrased it. Anything you talk about really

goes back to that, that this is a unique opportunity, we shouldn’t

pass it by. Let us take hold of the situation. I want to know, specifically, why you think this is so unique, period?

Mr. BYERLY. Congressman, we have been trying for a quarter

century to consign the Bermuda II Agreement to the history books.

We have got a chance to do it right now. I can’t tell you with absolute certainty that we won’t have a chance to do it six months from

now, or a year from now, or five years from now, or a decade from

now. What I do know is we have got a chance now. I would hate

to see us miss that opportunity.

Mr. PASCRELL. And you think this is the solution.

Mr. BYERLY. Yes, sir.

Mr. PASCRELL. Thank you. Thank you, Mr. Chairman.

Mr. MICA. I thank the gentleman.

We are going into sort of a quick second round, and Mr. Oberstar

has two quick questions.
41

Mr. OBERSTAR. Thank you, Mr. Chairman.

We are having this hearing against the backdrop of weeks and

months of negotiations and trying to accomplish in a few minutes

understanding of those negotiations. I want to ask either or both

of you how it can be within the plain meaning of actual control to

say that it means control of only safety, security, and CRAF, but

does not require control of basic commercial decisions, such as cities to be served and fares to be charged?

Mr. SHANE. Again, Congressman, all I can do is refer back to the

proposal because that is as far as we have gone. We have proposed

this as a means of inviting the kind of comment that we are hearing today. That is what the process is, and it shouldn’t be defined

as more than that.

We felt that Congress, by virtue of its deregulation of the airline

industry, has in effect left only a few equities to the concern of government, and those are safety, and security, and defense issues.

And, therefore, that the most important equities that we should be

watching out for in terms of the way in which we review the fitness

of airlines, of U.S. airlines that operate within our system is to

limit our concern to those aspects, those aspects which have expressly not been deregulated.

The commercial decisionmaking that is being, that would be allowed by foreign entities if the rule were finalized, would be allowed by the U.S. owners of the airline. It was the U.S. owners of

the airline or the U.S. managers who remain the majority who

would be allowing that to happen. It is their decision. They are

making the decision. It is their actual control that facilitates the

ability of foreigners to play in the commercial operations of the airline to this greater extent.

Mr. OBERSTAR. Mr. Shane, dear friend, when in reviewing the

Congressional record debate of the amendment offered by Senator

Stevens, there was discussion back and forth between the Department, and the Senator and Senator McCain, and the language was

proposed that accurately reflects the current state of law regarding

citizenship and did not have any qualifications on it. It didn’t say

actual control means only safety, security, and CRAF. Actual control has a body of content around it.

You recited the 65 year history of this language and then sort of

said, without saying it this way, stare decisis is good for the Supreme Court for Judge Alito but not for the Department in rulemaking. Yes, Mr. Chairman, it is a quick question, but it is a long

answer, and it goes to the heart of this whole discussion and this

whole issue.

Does DOT have the authority, do you assume for DOT, the authority to make an interpretation of actual control that is inconsistent with the plain meaning of actual control?

Mr. SHANE. The plain meaning of actual control as it existed in

2003 was a mystery to everyone. That is what Ken Mead said to

the Congress. It is not written down anywhere. There isn’t anybody

who can tell you what it means. It is a case by case determination.

Mr. OBERSTAR. Yes, but that case by case embodies the law.

Mr. SHANE. It is for us to know and people to find out. What Senator Stevens said, I am looking at Page S7813 of the Congressional

Record.
42

Mr. OBERSTAR. So am I.

Mr. SHANE. My amendment will codify the existing standard.

The existing standard included the ability of the CAB and/or the

Department of Transportation to interpret actual control over time.

It says, it leaves the interpretation of effective control, this is Senator Stevens talking, up to DOT. That is what we understood to be

the case.

We were in favor of the amendment. He wanted the amendment

because there was a challenge to whether or not the Department

of Transportation even had the wherewithal to insist on actual control by U.S. citizens at that time. It was resolved by this amendment with the concurrence and support of the Department of

Transportation. The Department of Transportation did not intend

to freeze in place for all time an interpretation of the statute which

was issued in 1940. That would not have been our view.

Mr. OBERSTAR. There is case, not law, but case practice on this

matter, and Senator McCain said, Senator Stevens changed the

term, effective control to actual control to more accurately represent the test that DOT uses in these types of reviews, understanding or intending that the interpretations of time be included

the definition of actual control.

All right, I know I have gone over time. But this is not a matter

that can be decided exclusively by the Executive Branch.

Mr. SHANE. Congressman Oberstar, and I mean this sincerely, I

very much welcome the opportunity to continue the conversation

off the record later on. I would like to tell you some stories about

our effort to try to apply the 1940 standard which we would both

agree readily produced cockamamy results.

Mr. OBERSTAR. We could have had these discussions well before

reaching an agreement and this rather abrupt notice. I was given

a call on a Tuesday night and told that the following week a decision would be made, and it came out the next morning. We never

had this conversation. It could have helped you.

Mr. SHANE. Nobody in this room wishes we had more than me.

Mr. MICA. I thank the gentleman and one quick question.

Mr. DEFAZIO. Mr. Chairman, this goes sort of to the crux of Mr.

Shane’s argument that don’t worry, that ultimately it will be the

executives, U.S. executives of the airline and the U.S. owners, who

will respond to any attempts by the foreign interests which have

control.

My question to Mr. Shane would be: Since I believe the setting

of salaries is probably commercial, who will determine the compensation of the U.S. executives and/or board of directors of directors of these airlines if the majority of commercial control has gone

to a foreign interest, and might that foreign interest reward them

very handsomely for allowing decisions that are not in the best interest of the Nation?

Mr. SHANE. I think we are getting into an area of speculation.

Mr. DEFAZIO. But isn’t that possible? All right, here is the question. Is setting of salaries a commercial undertaking, and would

that be potentially under the control of the foreign interests, yes

or no? Is setting of salaries commercial?

Mr. SHANE. I actually don’t know the answer to that question.

Mr. DEFAZIO. Oh, okay. Well, boy, I guess they really—
43

Mr. SHANE. What I do know is that we are only talking about

commercial decisionmaking here. We are talking about decisions

that can only be made for one purpose, and that is to make more

money. The majority of the owners of the airlines have a fiduciary

responsibility to shareholders.

Mr. DEFAZIO. But we hear that the United executives are getting

huge bonuses because they are doing such a great job, and they are

going to make money for the airline. So I think that you would, salaries do fall within that purview. Therefore, I would say that the

wall we have erected here is more like the Maginot Line in France.

[Laughter.]

Mr. DEFAZIO. Thank you very much, Mr. Chairman.

Mr. MICA. I thank the gentleman. I thank the members of the

Subcommittee.

Ms. Johnson, real quick?

Ms. JOHNSON. Sir, I will be as quick as I can.

Mr. Shane, it is my understanding that both in written and oral

reports of your discussion with the representatives of the E.U. in

November that you told them a foreign minority shareholder could

have the ability to determine an airline’s commercial decisions by

virtue of super majority provisions embodied in contracts between

the airline and its foreign owner or in the airline’s bylaws. Could

you explain what that meant?

Mr. SHANE. Yes, Congresswoman. If we could just imagine a

board of directors that were, by necessity, two-thirds U.S. citizens

because that is what the statute requires, that means the foreigners are only one-third. The foreigners want to have some say, at

least a veto right over certain kinds of commercial decisions. What

they would say is, look, we don’t want a simple majority to be the

way this board decides anything. We want to have a super majority

vote. In other words, since we only have a third of the vote, we

want to make sure that it takes more than two-thirds in order to

make a decision.

So let us make it 80 percent. If it is an 80 percent majority requirement for any decision to be made, then the foreigners know

that the decision cannot be made without their participation. The

U.S. citizen majority will not be in a position to control those kinds

of commercial decisions. That is what is meant by super majority

voting in the context of a corporate board. And that’s all I meant.

It is just a device.

Ms. JOHNSON. It gives the minority the majority influence, is

that correct?

Mr. SHANE. It is to provide the minority shareholders, the foreign

shareholders, I am sorry, the foreign board members the ability to

participate in decisions which they might be denied by virtue of a

simple majority since they are only allowed to have a maximum of

a one-third of members of the board.

Ms. JOHNSON. Thank you very much. Thank you, Mr. Chairman.

Mr. MICA. I thank the members of the Subcommittee. No others

have any quick last questions?

Gentlemen, there are additional questions from Mr. Costello, and

I have additional questions which we will submit for the record. We

thank you for your participating in today’s Subcommittee hearing,

and we will excuse you at this time.
44

Mr. SHANE. Thank you, Mr. Chairman.

Mr. BYERLY. Thank you very much.

Mr. MICA. Next time I will invite you for root canal work.

[Laughter.]

Mr. MICA. The second panel that we have, I will call them and

introduce them as they are being seated. Mr. Rush O’Keefe, Jr.,

Senior Vice President and General Counsel of FedEx; Mr. Michael

Whitaker, Vice President, Alliances, International and Regulatory

Affairs for United Airlines; Mr. Mark Dunkerley, President and

CEO of Hawaiian Airlines; Mr. Jeffrey Smisek, President of Continental Airlines; Captain Duane Woerth, President of Air Line Pilots Association; and finally, Mr. Edward Wytkind, President of the

Transportation Trades Department, AFL-CIO.

I would like to welcome all of our panelists. Some are new participants, and some have been here before. If you do have a lengthy

statement or information you would like to be made part of the

record, just request that through the Chair. I don’t know if you

have lights in front of you, but we try to limit the testimony to five

minutes. So if you could summarize, we would appreciate it. I am

sorry you have had to wait so long, but that is part of the Congressional hearing process.

And with those opening comments, let me first call on Mr. Rush

O’Keefe, Senior Vice President and CEO for FedEx. Go ahead. You

are recognized.

TESTIMONY OF M. RUSH O’KEEFE, JR., SENIOR VICE PRESIDENT AND GENERAL COUNSEL, FEDEX; MR. MICHAEL G.

WHITAKER, VICE PRESIDENT, ALLIANCES, INTERNATIONAL

AND REGULATORY AFFAIRS, UNITED AIRLINES WORLD

HEADQUARTERS; MR. MARK B. DUNKERLEY, PRESIDENT

AND CHIEF EXECUTIVE OFFICER, HAWAIIAN AIRLINES, INC.;

MR. JEFFREY A. SMISEK, PRESIDENT, CONTINENTAL AIRLINES; CAPTAIN DUANE WOERTH, PRESIDENT, AIR LINE PILOTS ASSOCIATION; AND MR. EDWARD WYTKIND, PRESIDENT, TRANSPORTATION TRADES DEPARTMENT, AFL-CIO

Mr. O’KEEFE. Thank you, Mr. Chairman. If I could correct that,

I am the Senior Vice President and General Counsel. Mr. Smith is

still the CEO of Federal Express.

Thank you, Chairman Mica, and Ranking Member Costello, and

other members of this distinguished Subcommittee. On behalf of

the more than 260,000 employees and contractors of FedEx Corporation worldwide, we would like to thank you for the opportunity

to testify on these important matters today. I have a longer statement that I would appreciate being made part of the record.

Mr. MICA. Without objection, the entire statement will be included in the record. Please proceed.

Mr. O’KEEFE. Thank you.

Over the years, this Subcommittee has made an invaluable contribution to U.S. international aviation policy by steadfastly supporting market opening agreements. FedEx is very grateful for that

unwavering leadership which has significantly benefitted our customers, our employees, and the U.S. economy.

Please let me convey the regrets of Frederick W. Smith, the

Chairman of FedEx Corporation that he could not be here today to
45

testify. As you know, Mr. Smith has a great passion for removing

barriers to global competition and permitting the marketplace and

not governments to allocate air service opportunities. Regardless of

the messenger, our message today is one that is familiar to any observer of FedEx over the years. Support for opening up global trade

and in particular liberalizing global air transportation services is

a bedrock principle of FedEx.

The subject of this hearing is the opportunity or, perhaps more

accurately, how not to miss an opportunity and to start a U.S.-E.U.

open air service trade agreement is at our fingertips. The question

is whether we step forward and grasp the future by embracing

these opportunities now or instead stand back and gamble they

might be obtained at some other date.

In November, 2005, the U.S. and E.U. negotiators announced

they had reached an agreed text for a new agreement. When

signed, it would provide for full Open Skies rights for U.S. and

E.U. carriers, completing a network of liberalized rights among the

world’s largest two aviation markets. DOT, the State Department,

and the European Commission negotiators should be applauded for

their perseverance, creativity, and hard work in forging this agreement.

From our point of view, as a global all-cargo carrier, this agreement will provide great benefits in the form of complete and unfettered rights to fly to, between, and beyond the Member States of

the E.U. Gaining Fifth Freedom rights with all European countries

has been a long sought goal of FedEx. Such operational flexibility

is vital to the development of a highly efficient network, permitting

us to connect all points in the E.U. in order to offer the best and

most cost effective services between the U.S. and Europe and beyond.

It would be a serious mistake to put the agreement on hold because delay could be fatal. Maintaining the optimal political and

policy conditions required for any international aviation agreement,

let alone one of this magnitude, is a gargantuan task.

Mr. Chairman, let me turn to FedEx’s views on the proposed

NPRM. The NPRM offers a policy which should encourage investment in U.S. carriers and create reciprocal opportunities for U.S.

interests. It does so without changing existing statutory restrictions on foreign ownership which, of course, is solely within Congress’ jurisdiction. We support DOT’s proposal as both an important public policy advance as well as an indispensable tool to help

open aviation markets through the E.U. and with other U.S. aviation partners.

This changes does not alter the fact that airlines in the U.S. and

abroad will have a choice about whether to accept or reject any foreign investment. No U.S. carrier will be required to take on a new

investor, and no foreign investor will be allowed to exceed the numeric limits on equity board membership or senior management

participation set forth in the statute. But the NPRM will create opportunities for new ideas and new dollars to come to those carriers

that may want and need them.

In our view, the NPRM respects and safeguards sensitive U.S.

governmental interests. It reserves for U.S. management all decisions related to areas such as safety, security, and national defense
46

participation. At the same time, it gives greater flexibility in other

areas and day to day operations that do not raise similar governmental concerns. The proposal limits its benefits to countries that

have signed Open Skies Agreements with the U.S. and which offer

reciprocal investment opportunities. We believe this is an important aspect of the Department’s proposal as it creates a policy carrot for countries which have yet to embrace Open Skies and offers

potential benefits beyond the transatlantic market.

We want the agreement with the E.U. to be finalized. We also

want the success of Open Skies to be repeated in the fast growing

markets of Asia. The FedEx network, which as hubs in places like

Anchorage, Memphis, and Dallas, providing services to every U.S.

address can benefit from expanding Open Skies opportunities and

become an even more valuable tool for U.S. business competitiveness.

Aviation partners around the world are watching how the U.S.-

E.U. Open Skies initiative progresses. To stop now, with a number

of critical U.S. negotiations scheduled for 2006, will certainly send

a harmful message. To withdraw the policy carrot of the NPRM

would also signal an acquiescence to protectionism at a time when

U.S. carriers want more and not less international opportunities.

Thank you for the opportunity to share our views today with this

distinguished Subcommittee.

Mr. MICA. He had that perfectly timed. Thank you.

[Laughter.]

Mr. MICA. Mr. Michael Whitaker, Vice President, United Airline

World Headquarters, welcome, and you are recognized.

Mr. WHITAKER. Mr. Chairman, members of the Committee, thank

you for the opportunity to present United’s view on the U.S.-E.U.

air talks and the issue of foreign ownership. We have submitted

written testimony, and I would ask that that be entered into the

record.

Mr. MICA. Without objection.

Mr. WHITAKER. United Airlines supports the Open Skies Agreement the U.S. government negotiated with Europe. We also support the proposed rulemaking to clarify the meaning of actual control in determining the citizenship of U.S. carriers. Combined,

these two initiatives are important steps in the ongoing work of deregulating the airline industry and moving it to an independent

sustainable business platform. I will briefly address these two

issues separately.

The U.S.-E.U. agreement is a real victory for U.S. aviation policy,

and I think its importance cannot be overstated. It completes a 15

year effort to bring Open Skies to all countries of the E.U. The

most significant element of this new agreement, of course, is that

it will extend Open Skies to the U.K. after literally decades of efforts to liberalize that market. Currently, only two U.S. carriers are

permitted to serve Heathrow, United and American. Those rights

will now be available to all U.S. carriers.

And while it is true that Heathrow is a slots constrained airport,

so are most major international airports outside of the U.S. Slots

are available at Heathrow. In just the last few years, many airlines

have gained access through acquiring slots in the market. As John

Byerly mentioned this morning, Jet Airways and Emirates have
47

grown from virtually no service to four or five flights a day by acquiring slots in the market. Neither of these carriers received slots

as a part of a government negotiation. They either received the

slots pursuant to the IATA Allocation Rules or they bought them

in the market.

The U.S.-E.U. agreement will also deliver many other benefits,

as Mr. Byerly outlined this morning, bringing Open Skies to all 25

nations of the E.U. including important markets such as Ireland,

Spain, and Greece. These are very significant market openings, and

the true winners here will be the U.S. traveling public as these

markets open to new service.

United also supports the proposed rulemaking to clarify DOT’s

interpretation of actual control in our foreign ownership statute. In

fact, United would go further. We would support the complete

elimination of statutory restrictions on foreign ownership of airlines, subject to a requirement of reciprocity and the normal ExxonFlorio national security safeguards. These limits on foreign ownership have been in place for nearly 80 years and may have been appropriate at a time when we were a regulated industry, but now

they are merely a hindrance.

In fact, these types of restrictions have been eliminated within

the E.U., much to the benefit of the European airlines. Since nationality restrictions were eliminated in Europe, we have seen

mergers of Air France with KLM, Lufthansa with Swiss International Airlines. These mergers have allowed these carriers to

grow in size, strength, and profitability. United and American are

no longer the largest airlines in the world measured by revenue.

That role is now held by Air France and Lufthansa.

DOT’s proposal, obviously, does not eliminate the foreign ownership restrictions in the U.S. That is an issue for Congress to consider another day. But it is an important step in the still unfinished process of deregulating our industry and allowing it to operate in a more normal business environment.

United Airlines supports both of these initiatives, the U.S.-E.U.

agreement and the proposed rulemaking because we believe they

create important commercial opportunities for U.S. carriers. They

also create the opportunity for the U.S. to begin to regain its role

as the world’s leader in aviation, a lead that we have lost in recent

years.

At United, we have just completed an extensive restructuring of

our company to enable us to compete in the global marketplace. In

fact, almost all the U.S. major carriers have now gone through or

are going through a Chapter 11 restructuring.

As an industry, we are well situated to compete, but the greatest

growth opportunities are abroad. The fastest growing aviation markets are outside of the U.S., and many of these markets are more

efficiently by our foreign competitors with hubs in those regions.

Foreign ownership restrictions prevent U.S. carriers from acquiring

or building hubs outside the United States.

As our foreign competitors merge and grow, we will be left behind if we attempt to protect U.S. carriers from competition by

keeping our borders closed. We are looking for opportunities to

compete more effectively in that world market, not for regulatory

protection against foreign competition or foreign investment.
48

I thank you again for the opportunity to testify.

Mr. MICA. Thank you.

Let me recognize now Mr. Mark B. Dunkerley, President and

CEO of Hawaiian Airlines.

Mr. DUNKERLEY. Good morning. Good afternoon, Mr. Chairman.

Thank you for having me here today to testify. My main purpose

here today is to make two points concerning the U.S. Government’s

application of the restriction on foreign investment in U.S. airlines,

and this is from our direct experience in the last year.

The first is that the larger pool of capital that is attracted to an

airline, the more its employees, its customers, its creditors, and the

communities that it serves will benefit. Second, the regulatory uncertainty that exists in many regulatory processes, including the

one that we are considering today, represents a serious deterrent

to investors.

Now while neither of these conclusions amounts to a revelation,

the application of the existing law on foreign ownership has, in our

view, limited the pool of available capital to fund U.S. airlines and

has made the prospect of investing in U.S. airlines that much less

attractive. Though we believe that the current restrictions on foreign ownership should be changed, we also support DOT’s position

that clarifying the limits under the current law and broadening

their interpretation is good public policy.

Hawaiian has firsthand experience regarding the applications of

the restrictions on foreign ownership. Emerging from bankruptcy is

often an obstacle course, and in our case there were few obstacles

as high or as slippery as persuading DOT that Hawaiian Airlines

was owned and controlled by U.S. citizens. A common sense review

of our circumstance would have confirmed our U.S. citizenship in

minutes, but the process that we were obliged to follow took five

months, was fraught with uncertainty, and was unbelievably costly.

The investors who bought Hawaiian Holdings which is the parent of Hawaiian Airlines were a group of hedge funds, all based in

the United States, all managed by U.S. citizens, and having no appreciable concentration of foreign funds. However, because the

source of some of the capital being invested in Hawaiian was of foreign origin, we faced a daunting regulatory review.

Explaining to the sophisticated and worldly U.S. investors that

having an insignificant portion of their managed funds contributed

by non-U.S. citizens could lead to the revocation of our operating

certificate was an event not to have been missed. They were incredulous, having not previously encountered a regulatory scheme so

utterly disconnected with the nature of today’s financial world nor

one so seemingly capricious.

To its great credit, DOT took the opportunity presented by Hawaiian’s case to both fulfill its oversight responsibilities and to provide clearer guidance to others who may follow in our footsteps.

But it was a long, expensive, cumbersome, and painful process,

poorly suited to encourage investment in our business.

We were required to submit to the DOT not only the financing

and organizational documents associated with the airline and the

group which directly controlled the company, but also the financing

and organizational documents of each entity that made up the
49

group which purchased our holding company. This voluminous, and

we would suggest largely irrelevant, information was reviewed microscopically by DOT in an attempt to determine if there was an

indicia of control.

Had there been, and if that control was in the hands of a foreign

entity, DOT would have found that the airline, despite being within

100 percent control of U.S. board of directors and U.S. officers, violated the restriction on foreign ownership in U.S. airlines. Our operating certificate would have been revoked, and our company liquidated with the consequent loss of jobs and service.

In the end, in order to conclude that the U.S. based and U.S.

managed hedge funds which invested in Hawaiian Holdings were

not foreign agents, they had to agree to a new U.S. entity controlled by the very same people who have controlled the original

funds, the U.S. managers. The hedge funds received non-voting

stock in the new entity while the U.S. managers held all of the voting stock. This bizarre structure satisfied the statutory requirements because the foreign interest were clearly passive. None of

the new investors demonstrated any incentive or ability to exercise

any control of the airline.

It is fair to say that the hedge funds involved were flummoxed

as to why they had to arrange this complex structure to achieve

what they had always intended, namely to make a plain vanilla investment in a publicly held company. The structure is no great

thing of beauty, but at least now forewarned by our precedent and

the proposed NPRM, future hedge funds interested in making an

investment in Hawaiian or, for that matter, in any other U.S. airline enjoy a measure of clarity as to what they are getting themselves into.

Having been through the mill, we support any effort to streamline and demystify citizenship reviews. The NPRM issued by the

Department of Transportation, which is presently pending, is a

good first step and we believe should be supported.

Thank you very much for taking the time to hear our views

today.

Mr. MICA. I thank you for your testimony.

I will recognize Mr. Jeffrey Smisek, President of Continental Airlines. Welcome, sir. You are recognized.

Mr. SMISEK. Thank you. Good afternoon. On behalf of my 42,000

co-workers, I appreciate the opportunity to express our opposition

to the Department of Transportation’s proposed rulemaking on foreign ownership and control. I also have written testimony that I

have submitted, and I ask that that be made part of the record.

Mr. MICA. Without objection.

Mr. SMISEK. Thank you.

Let me start off by saying that Continental Airlines does not oppose increasing U.S. airlines’ access to foreign capital. However,

Continental is opposed to 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.

Just a few years ago, Congress passed a statute codifying decades of DOT decisions that required U.S. citizens to not only own

75 percent of the voting stock of a U.S. airline and control twothirds of the airline’s board of directors and managing officers, but
50

also required that U.S. citizens have actual control of the airline.

Through this statute, Congress made it clear that foreign citizens

could not control a U.S. airline.

In its rush to appease its European Union counterparts, the DOT

has decided to simply interpret the statute away. Simply put, DOT

has no authority or discretion to interpret this law differently when

Congress has already made clear that actual control of a U.S. airline must be in the hands of U.S. citizens.

This is not the case of Congress leaving the statute unclear and

DOT filling the gaps with interpretation. This is the case of arrogant contempt by the DOT of the clear Congressional language.

When Congress has spoken clearly, that is the end of the matter.

Nonetheless, in the Alice in Wonderland world of the DOT, a statute that says U.S. citizens must have actual control of a U.S. airline has been interpreted through this NPRM to mean that foreign

citizens may have actual control of a U.S. airline.

In fact, it has been widely recorded, and Mr. Shane confirmed it

this morning, that the Department has promised foreign interests

that when this NPRM is in place, that DOT will even allow super

majority voting rules to protect and guarantee foreign domination

and control of U.S. airlines and that foreign citizens will even be

able to make decisions on the U.S. Civil Reserve Air Fleet or the

CRAF Program as it is called, as long as the decisions are made

for commercial reasons.

Second, the DOT’s attempt to interpret the statute to mean that

foreign interests can actually control every aspect of U.S. airlines’

operations except in the areas of security, safety, CRAF, and the

control of organizational documents is simply unworkable. Issues of

safety and security permeate an airline and involve literally thousands of people and cannot be isolated into one U.S. citizen controlled function.

Let me give you an example. In March of 2001, a U.S. military

aircraft was involved in a midair collision over the South China

Sea and was forced to land in China. The crew was detained by the

Chinese. The U.S. worked hard to obtain their release but believed

that the Chinese would not allow a military aircraft to land in Hainan to retrieve our soldiers.

With our hub in nearby Guam, we were asked at Continental by

our Government if we would take on that mission. Knowing that

the mission could be dangerous for our crews, knowing that helping

our Country in its time of need meant that we would have to cancel

flights and inconvenience passengers while we kept a plane available, and fuel, and crews standing by, every minute of every day

until the mission was executed, virtually all of or senior officers in

flight operations, in-flight, maintenance, scheduling, airport operations, legal, finance, and other areas had to be involved in making

the flight.

Our U.S. citizen officers and our then CEO, himself a former

U.S. Navy mechanic, thought the answer was easy. Our Country

needed us. We had no commercial obligation to accept the mission,

but for us the commercial considerations, which by the way were

100 percent negative, were irrelevant. But make no mistake, if we

had been controlled by a foreigner, that commercial decision would
51

have been very different, and that mission would not have been

flown.

Finally, given the fatal flaws of this regulation, it will most certainly be challenged in court—I guarantee it—and the years it will

take to resolve those challenges will mean that any foreign investment that might have occurred under today’s rules will be postponed. And in the end, the NPRM will be thrown out, and we will

have made no progress.

This leads me to one last point. The Open Skies Agreement that

generated this NPRM is a triumph of form over substance. U.S.

passenger carriers already have Open Skies for all intents and purposes to most locations in Europe except to London’s Heathrow Airport, the single most important for business travelers in the European Union. And while the treaty would theoretically give us the

right to fly to London Heathrow Airport, that right is meaningless

since commercially competitive slots and facilities are not available

to us at London Heathrow. The right to fly is useless without the

right to land.

The U.S. government has refused to even attempt to get U.S. carriers the right to land at Heathrow because they say it is outside

the bilateral. But while they are willing to go, while they are not

willing to go outside the bilateral for U.S. carrier interests, they

appear to be completely willing to go outside the law to appease

foreign carrier interests.

We appreciate your holding this hearing, and we urge to let DOT

know that if they want to change the law, they are going to have

to make their case to the Congress and to the people, and not pervert a clear statute through unlawful, unworkable, and ineffectual

rulemaking. Thank you.

Mr. MICA. I thank the gentleman.

Captain Duane Woerth, President of the Air Line Pilots Association, I recognize you next. Thank you.

Mr. WOERTH. Thank you, Mr. Chairman. I also have a lengthy

written testimony.

Mr. MICA. Without objection, the entire statement will be made

part of the record. Please proceed.

Mr. WOERTH. Thank you, Mr. Chairman.

Also, I would like to note that 100 percent of the pilots represented by the management at this table, I represent, and only

Continental Management and I agreed with what they all want to

do, that is to support Open Skies. We do support Open Skies. We

are very saddened, quite frankly, that the European Union rejected

the good faith agreement we achieved last year. We worked with

our negotiators. We supported that. We worked with Secretary Mineta. And we are very upset that the deal we negotiated a year ago

was shot down.

We don’t think, and I was also pleased to hear the Honorable

Jeffrey Shane say that there is no linkage between these negotiations. If there is no linkage, then there is no problem, and we

should let the Congress deal with this matter. And certainly, the

Open Skies benefits that will inure to European citizens and their

airlines should be voted up by the European Union, but that is, of

course, their decision.
52

I want to make sure this Committee understood we support

Open Skies. We absolutely support Open Skies, and this has nothing to do with trying to undermine Open Skies. We want it to happen.

I also want to thank this Committee and certainly the House and

Mr. Chairman for holding this hearing. It is very important that

this hearing be held. And H.R. 4542, we support emphatically. As

you probably know by now, we have 126 co-sponsors for that legislation and a great many are these Committee members. I want to

thank all the Committee for their attention and concern about this

matter.

As our colleague from Continental mentioned, the NPRM is fatally flawed from many, many respects. The notion that security

and safety can be separated by a Chinese wall or Maginot Line or

any other matter is just ridiculous. The way an airline works is

safety and security are totally intertwined like marbled meat; there

is no way to carve it out. I hope this, I know the Committee understands that. So the notion that security and safety can be carved

out separately by separate citizens by some Chinese wall is dangerously naive.

Another thing we must assert here is that this issue, finally we

are having it on the table. This has never been about foreign capital ever. The debate about foreign ownership or control has always

been about foreign control by foreign airlines. That is the issue. I

am not worried about hedge funds. I am not worried about pension

funds. I am not worried about French insurance companies. I am

extremely worried about foreign controlled airlines controlling U.S.

airlines, particularly foreign airlines that have a high government

ownership stake.

And anybody who does not think that that proposes extreme job

risk for the United States citizens is not getting it at all. To those

who also worry about it, I am worried about our pilots being displaced from international operations. I think that is a very real and

understandable threat.

And, Mr. Chairman, ALPA has been studying this issue for over

10 years. I have all kinds of documentation that show what is

going on already. The growth has been going to our European airlines. We have mostly been getting the code-share. There is a song

about the gold mine and the shaft, and it kind of relates to jobs

in the code-share. I would like to share that with the Committee,

an in-depth analysis, and if you request that, I will certainly submit it to you.

Bottom line is there are huge job issues here. There was also a

mention in the testimony, and certainly the statements by your

Committee, that small communities have every reason to be worried here. As these global alliances go forward, if members of the

Star Alliance, or SkyTeam, or oneworld controlled our major

brands, their interest in anything that doesn’t enhance their companies that they control with international markets, it is fair to

that would be greatly reduced. So a lot of small communities have

reason to worry, and a lot of carriers that provide fee for departure

services should be worried what that would look like when it was

all over.
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Lastly, let me say again about the naiveness about the capital

markets. The capital markets are global already. Every bank of

any consequence is a total global enterprise. Most of the capital

that is in the airline industry is not equity; it is debt. There is almost no equity in this industry; it is all debt. It has always been

financed that way. Airbus finances all kinds of airlines. General

Electric Credit Corporation may be a U.S. company, but it is a

global corporation. Without GE, there wouldn’t be any financing.

How about Emery Air? How about Bombardia? The capital markets

are globalized already.

This is not about capital. It is about foreign airline control of

U.S. airlines.

Thank you, Mr. Chairman. I would like to conclude my remarks

and take any questions you may have later.

Mr. MICA. Thank you.

We will hear now from the last witness on this panel. That is Mr.

Edward Wytkind, President of the Transportation Trades Department, AFL-CIO. Welcome, and you are recognized, sir.

Mr. WYTKIND. Thank you, Mr. Chairman, Mr. Costello, and

members of the Subcommittee for inviting Transportation Labor to

offer our opinions on the NPRM before you. Let me summarize

what I have submitted in detail for you.

After careful examination, we conclude the DOT’s proposal is blatantly contrary to the statute, weakens the aviation industry and

its workforce at the worst possible time, and denies Congress its

historic role in shaping aviation policy.

We would submit that it would directly threaten the jobs and the

rights of workers we represent as these employers around the

world are given yet another tool to seek out the lowest common denominator in wages and benefits across the world. It would undermine workers’ bargaining rights as I think the Air Line Pilots Association showed in its submitted testimony in detail. It would

have an adverse impact on national defense and security. We have

heard a lot of that from members of the Subcommittee. And we believe it would inspire even more outsourcing in this industry to the

detriment of safety, security, and jobs.

The anger that we have heard today and that we heard leading

up to this Subcommittee hearing by members of the Transportation

Committee are quite warranted. We share your anger. We were not

consulted either, and our view of this NPRM, in addition to all the

comments made by our colleagues at Continental and by Duane

Woerth, this NPRM has to be stopped. H.R. 4542, which we thank

Mr. Oberstar and Mr. LoBiondo—and by the way, now we have

more than half of the Subcommittee and more than half of the full

Committee as co-sponsors of this legislation—we thank you for

your leadership in trying to stop this NPRM before it harms the

airline industry and its workforce.

We agree with the legislation in that the Administration has

failed to make the case for why foreign entities should be able to

control U.S. airlines. We think that DOT has not met the burden.

In fact, it has made unsupported and very flawed arguments in

favor of their NPRM. Let me point out that the Administration

hasn’t always been terribly concerned about access to capital for

American airlines. After all, it is the same Administration that did
54

everything it could to derail assistance to the airlines after 9/11. It

doled out only 16 percent of the Federal loan guaranties approved

by this Committee and the Congress, and it tried unsuccessfully to

block extended jobless benefits for our members.

The NPRM is plain and simple really about placating the E.U.

It is about making sure that we take care of what the E.U. needs

at the bargaining table instead of what America needs. America

needs good jobs. It needs a strong transportation system. It doesn’t

need more giveaways at the bargaining table.

And I find it ridiculous that the witnesses for the Administration

claim that on one hand the U.S.-E.U. is delinked from the NPRM

but then to tell this Committee that the deal will die if the Oberstar-LoBiondo bill passes. I don’t think that passes the laugh test.

[Laughter.]

Mr. WYTKIND. It is fairly clear that the Department’s proposal

runs counter to the plain meaning of the statute. I won’t review

that again. That has been discussed in detail. But we think it is

pretty ridiculous that you can bifurcate a carrier the way that they

propose: commercial aspects on one side; safety, security, CRAF,

etcetera on the other side. Nobody believe that will work. I have

heard nobody say it will except the two Administration witnesses.

We think it is creative interpretation of the law, and we think

Congress needs to retrieve this NPRM quickly and stop the Administration from ignoring the plain meaning of the statute.

On the outsourcing issue, I want to point out a couple things. We

have already seen a very troubling trend of outsourcing in the airline industry. Fifty-four percent of maintenance is performed now

in outsource facilities. We think that has a very serious safety and

security implication. This Committee agreed with us, and, in fact,

this Committee enacted in Vision 100 a provision that requires a

Transportation Security Administration in consultation with the

FAA to conduct security audits of foreign repair stations.

Those security audits have been performed. Regulations have not

been issued. And today we still have an old regulatory regime that

doesn’t deal with the real world consequences of allowing

outsourcing around the world.

So why does that matter, and why is it related to the NPRM?

It matters because if you allow foreign interests to control, especially foreign airlines to control decisions having to do with safety

and security and all other operations of a company-FE I don’t care

what the witness of the Administration said-FE you can’t separate

the two out. So if you are going to make decisions about what aircraft you buy, who maintains your planes, whether flight attendance are going to staff the planes from the United States or from

a foreign country, whether pilots are going to fly the planes, those

decisions will rest in the hands of the foreign interests that control

the company.

I don’t think that is good for the Country, and I hope that this

Congress does something about it before it is too late.

Let me just conclude by saying the following: There is no doubt

that globalization has changed the airline industry forever. Our

members that we represent understand that. We have done everything we can do to protect their interests.
55

But when you have got collective bargaining rights being potentially attacked under a scenario where foreign interest control airline companies, when you have outsourcing run amuck, when you

have flight attendant and pilot jobs potentially being outsourced,

and then when you have an NPRM that is so unworkable as pointed out by Continental and by many others who are members of this

Committee, we think this NPRM needs to be stopped dead in its

tracks, and we hope you will move the LoBiondo-Oberstar bill as

quickly as possible.

Thank you very much.

Mr. POE. [Presiding] I thank all of you for being here. We will

go to questions.

Mr. Costello?

Mr. COSTELLO. Thank you, Mr. Chairman.

Mr. Wytkind, let me ask you to elaborate a little bit more on

outsourcing, although you covered it pretty well. There is no question, and I hope that you and everyone else understands from my

opening statement and the concerns that I have expressed, that if

this rule goes through that there will be more outsourcing. There

is no question about that.

So I want to ask. It is interesting to me, in your testimony, you

said that foreign ownership would weaken the connection between

the FAA to the industry. I want you to explain a little bit about

that.

And number two is to talk a little bit about your experience with

the FAA’s track record with regard to oversight of foreign repair

stations.

Mr. WYTKIND. Well, it is interesting. We have been, I personally

have been working on the FAA’s grossly lacking oversight of foreign repair stations since I first came to work here in 1991 on behalf of the unions. The FAA’s oversight has always been abysmal,

and it has always been recognized that as you globalize the industry, you also have to figure out a way to deal with your safety and

security challenges.

I think as you allow this globalization trend to continue, as you

allow foreign airlines to exert control over U.S. operations and potentially make decisions about what planes you buy and where

they are maintained more and more overseas, we are going to see

this continued siphoning not only of good jobs, but we think that

the safety and security problems that poses are significant.

The FAA openly admits that it doesn’t have the resources to handle the responsibilities overseas yet. They continue to be apologist

for the current regulations. And the Transportation Security Administration, which shouldn’t get a pass here, was told by Congress

to issue security regulations and to audit foreign based repair stations. They haven’t even issued an NPRM, let alone finalize regulations or perform the audits. So it is clear to me that the FAA and

the TSA have lost all control over that issue. The GAO has proven

that. The DOTIG has proven that. Yet, they are just ignoring it.

Meanwhile, we have a bad NPRM like this that is going to exacerbate a problem that clearly is out of control already.

Mr. COSTELLO. Thank you.

Captain Woerth, I have got two or three questions for you in a

limited time, so I would ask you to be brief. You were on the board
56

at Northwest when KLM had a significant ownership stake in the

airline and then I believe British Airways, of course, took a significant stake in U.S. Airways. Can you tell us a little bit about your

experience with respect to those two investments, foreign investments in U.S. airlines?

Mr. WOERTH. Yes. Certainly, from my experience, when ownership stake was large, there was conflict on the board. I am talking

about the Northwest board and KLM. It actually became that public documents called it the Alliance from Hell, which was a real

shame. It was a great alliance, but the conflict on the board, the

perceived control fights were real. It entered in litigation. The litigation was resolved. At the end of the day, the solution was that

Northwest decided to buy out the interest of KLM to preserve a

great relationship, but they invested $400 million and it cost a billion dollars to buy out KLM.

British Airways and U.S. Airways had the same problem, conflicts on the board. At the end of the day, the board decided to buy

out British Airways, again at a great profit to British Airways.

But the notion that there is no conflict on these boards when one

airline is into another airline is dangerously naive. There is plenty

of conflict.

Mr. COSTELLO. On the issue of my concern and the concern you

have heard from many of other Committee members here today,

about the concerns of U.S. workers losing jobs to those employees

working for foreign carriers today and on the issue of safety, I wonder if you can elaborate just a little bit about your concerns for our

U.S. workers.

Mr. WOERTH. Our main concern for U.S. workers is that, even if

we are already cheaper and we are, a lot of foreign airlines, and

their investors, and their governments treat the airlines as an instrument of foreign policy. And also, it is extremely expensive, for

example in Europe, to lay off a European worker.

It is a very expensive proposition, three or four times more expensive and problematic even besides the politics of France or of

Holland to lay off their citizens. It is very easy to lay off an American. We are used to outsourcing. So I am very concerned we will

be the ones outsourced even if we are cheaper, and I think that is

a big trouble for the United States.

Mr. COSTELLO. You heard the testimony from the previous panel

that said, well, all of the labor contracts would stay in effect and

basically everything would be fine. I want you to comment on that.

Mr. WOERTH. Well, the labor contracts would be in effect until

they are amendable, and it will be in a couple years. And already

the forces at work, what I showed you by these charts, that we are

mostly becoming a code=share operation, and the majority of the

jobs, about 60 percent now, are already swinging to Europeans

even though they are more expensive. Their airlines are committed

to buying aircraft and operating those aircraft with their citizens.

Mr. COSTELLO. Finally, your concerns that you expressed, and

those of Mr. Wytkind as well, concerning safety. I wonder if you

would elaborate a little bit.

Mr. WOERTH. Ed certainly covered it with the oversight, but in

particular there are so many programs, vital programs, FOQA and

ASAP that are voluntary programs, entered into by our manage-
57

ments with the FAA. They are not compulsory; they are voluntary.

And these are not something I expect that would necessarily survive once it goes to transatlantic or transpacific ownership.

Mr. COSTELLO. Mr. Chairman, I have no further questions.

Mr. POE. Thank you.

Mr. DeFazio?

Mr. DEFAZIO. Thank you, Mr. Chairman.

Mr. O’Keefe, if we could get this Open Skies Agreement without

the creative new interpretation of control and the problems that we

have been discussing or potential problems, would that meet the

concerns of your organization? I mean are you looking at having

foreign investors begin to, hopefully, shape your future?

Mr. O’KEEFE. As to your first question, I think the practical reality is that we will not have U.S.-E.U. agreement in the absence

of this.

Mr. DEFAZIO. So you are saying, we are being blackmailed by the

E.U. for something that was not negotiated as part of the Open

Skies Agreement.

Mr. O’KEEFE. No, sir. I don’t think—

Mr. DEFAZIO. Well, you said we won’t get one unless we add this.

I mean, they are not blackmailing us? They are just telling us we

negotiated an agreement, but you can’t have it unless you give us

this other operative part which is ownership control?

Mr. O’KEEFE. No. I think it was explained earlier on the panel

before us that from the view of the Europeans, there is not balance

in the agreement. We get Open Skies or we get rights within and

beyond European states; they do not get cabotage rights per the

statutes of the United States. And so, the Europeans would view

this as something that would bring balance to the agreement.

Mr. DEFAZIO. Yes, well, the balance with the Europeans is usually something which tremendously advantages the Europeans and/

or Airbus, historically, and we have been taken to the cleaners before, but thanks for that.

Mr. Woerth, I have got to say that I am just shocked here. I

mean you are saying that this could have an impact on domestic

service. It could have an impact on jobs. Because the Administration witnesses denied that there would be any job impacts, and

they seemed to have no concerns about domestic service and then

the Civilian Reserve Air Fleet. You raised all those issues. Could

you just maybe refute a few of the points they made, why you have

those three concerns?

Mr. WOERTH. Well, first of all, they said that what we have been

watching so far is that the growth opportunities already in the current environment are largely inuring to our foreign competitors and

not us, even when we are cheaper. We have got some modest

growth, but the overwhelming growth, after the German Open

Skies Agreement for example, was that the lion’s shares of the new

flying opportunities went to Lufthansa. United had a few; Lufthansa had a great many.

And again, inside, anybody who understand European law about

how expensive it is to lay off a European citizen, understand if

there is a commercial decision to be made, you lay off the American

which is easier to do and you keep the European. There is just no

refuting that.
58

Mr. DEFAZIO. I raised a concern as did Mr. Poe. We have tremendous concerns about the Civilian Reserve Air Fleet. We were told,

well, that is not a commercial decision. Well, I raised the specter

that we may divest the now foreign-dominated American airline of

its international routes, which you raised. The international routes

could be flown with foreign equipment, with foreign pilots. And

then, domestically, they would say, well, we just don’t need these

big planes anymore. That would be a commercial decision. Do you

see that as a possibility?

Mr. WOERTH. Absolutely, I see that as a very real possibility.

Mr. DEFAZIO. So do you think we could get troops to the Middle

East adequately in A320s or 737s?

Mr. WOERTH. Absolutely not. You have to have wide body airplanes, cargo airplanes, passenger airplanes. In the first Gulf War,

where we had great international cooperation, about 99 percent of

the lift, 99 percent was provided voluntarily by U.S. airlines flown

by U.S. crews. Right now, all the beans, and bullets, and troops get

there on commercial airplanes.

Incidentally, the CRAF hasn’t been exercised recently. It has

been volunteers. The U.S. airlines, and their citizens, and boards,

and management employees volunteer these charters and volunteer

these issues. I think it is an open question how much that would

continue in different conflicts into the future.

Mr. DEFAZIO. Since you raised the issue of the boards, the Administration said that, don’t worry, they are going to be U.S. citizens, and they would obviously not allow the stripping of planes,

a commercial decision which would not be under their control, from

the airline. They would certainly want to continue to participate in

CRAF.

But when I raised the issue of whether or not the setting of their

salaries and remuneration was a commercial undertaking, the Administration seemed not to know. Do you think, well, your salary,

that is commercial as an airline pilot a commercial salary, right?

Mr. WOERTH. Not only that, I served on the board of directors for

Northwest Airlines and was on the Stock and Compensation Committee. I think Alice in Wonderland was used here. They don’t

seem to understand corporate governance in America.

We can have the CEO, and the Chairman of the Board, and all

these citizens could be U.S. citizens, but if there is a single serious

foreign airline investor who is the big dog at the table, they will

recruit; they will put forward their nominations for board of directors; they will control the board whether super majority or not;

they will hire a CEO; he will hire everyone else; and he will do exactly what they want or they will fire him, and they will get somebody who will. That is the real world, not the Fantasy Island, Egghead, Ivory Tower I heard today.

[Laughter.]

Mr. DEFAZIO. Well, you know, you could be sitting up here.

Thank you. That was a great answer.

[Laughter.]

Mr. DEFAZIO. Thank you, Mr. Chairman.

Mr. POE. Thank you. I have a couple comments and then a couple questions.
59

I want to thank all of you for being here, Mr. Smisek, especially

coming from Texas up here to testify. I am glad that, as a lawyer,

you were here to learn some new Constitutional law from the Department of Transportation, that the Executive Branch interprets

law rather than enforces it. As a judge for 22 years in Houston, trying, hearing about 25,000 criminal cases, I wish I knew that before

I became a judge, that I was not supposed to be interpreting it.

[Laughter.]

Mr. POE. But be that as it may, that seems to be part of the

problem that has been presented to us, that the Department of

Transportation feels they can proceed without Congressional approval. I think that Congress disagrees with that, and certainly the

Judiciary Branch probably will.

Can you explain in a way, can you explain the idea of having the

security department of Continental, if you will, controlled by an

American but yet the airline is controlled by a foreign airline, and

when the conflict occurs with security, and the department of security in Continental disagrees with the control of the foreign entity,

how that would play out in the real world. What would happen?

Mr. SMISEK. Sure. Actually, at Continental Airlines, the security

department actually does report to me. So let us pretend that I am

Indonesian. I can control the person who reports back. I can control

his salary. I can control his bonus. I can control his stock options.

I can control all his incentives. I can control his staff. I can control

his budget. I can basically have him not blow his nose unless he

talks to me. And I don’t do that to him today, but if he weren’t

doing what I wanted him to do, I certainly could do all those

things.

And if I were Indonesian, and he is in charge of security, the fact

is I could make all of those judgements, and if he didn’t do what

I wanted him to do, I would simply replace him with someone who

would. It is just the way the world works.

And I am mystified by the Administration’s testimony today because it makes no sense to me. It is as if it is testimony from people who never worked ever in their lives in a corporate job.

Mr. POE. That sort of explains it. I don’t have any more questions.

I want to thank everybody for being here today. We will keep the

record open for this hearing for another two weeks. Additional

statements can be entered from the witnesses and members of this

Committee.

And so, the Subcommittee is concluded at this time.

[Whereupon, at 1:25 p.m., the subcommittee was adjourned.]
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