GAO-04-34R Foreign Investment in U.S. Airlines 

United States General Accounting Office 

Washington, DC 20548 

October 30, 2003 

The Honorable Trent Lott 

Chairman 

The Honorable John D. Rockefeller 

Ranking Minority Member 

Subcommittee on Aviation 

Committee on Commerce, 

 Science, and Transportation 

United States Senate 

Subject: Issues Relating to Foreign Investment and Control of U.S. Airlines 

In May 2003, the Bush Administration proposed amending the legislation that 

currently restricts foreign ownership of U.S. airlines, raising the allowable percentage 

of total foreign ownership of voting stock in U.S. airlines from 25 to 49 percent. The 

Department of Transportation (DOT) suggested that implementing this amendment 

could provide significant benefits to U.S. consumers and airlines, particularly by 

providing access to additional capital, which would help the financial health of the 

industry. DOT and the Department of State also maintain that these new limitations 

would bring the United States in line with current foreign ownership laws of the 

European Union (EU). 

Concerned about the effect that changes in foreign ownership and control 

requirements might have on the aviation industry, national interests, and 

consumers—and recognizing that we examined this issue in 1992 when DOT earlier 

proposed increasing the level of foreign ownership—you asked us to discuss two 

related topics: (1) current proposals to revise U.S. limits on foreign ownership and 

control, including information on current shareholders and past examples of efforts 

by foreign interests to purchase significant equity in U.S. air carriers and (2) whether 

key analytic issues raised in our 1992 report on foreign ownership and control remain 

relevant.1

 This report summarizes the information we provided to Committee staff 

during our June 25, 2003, briefing pursuant to your request. The briefing slides, 

which provide more details about our analysis, are attached as enclosure I. 

 

1

U.S. General Accounting Office, Airline Competition: Impact of Change Foreign Investment and 

Control Limits on U.S. Airlines, GAO/RCED-93-7 (Washington, D.C.: December, 1992). 
Page 2 GAO-04-34R Foreign Investment in U.S. Airlines 

In summary: 

• Foreign airlines have attempted to invest in and influence the operations of 

U.S. airlines several times since the late 1980s. These foreign airlines have on 

occasion invested significant amounts of capital into U.S. airlines, only to later 

disinvest due in part to U.S. policies concerning airline control. The 

Administration’s proposal does not seek to change U.S. law regarding control 

of air carriers. 

• Our 1992 report identified five key issues relating to raising the limit on foreign 

investment in U.S. airlines. In general, those issues covered the potential 

impact of foreign investment on domestic competition, national security, 

employment, safety, and international competition. Because the current 

economic environment and the state of the aviation industry are similar to that 

in existence at the time of the prior report, we believe that most of these 

issues remain relevant today. 

Background 

Congress first enacted citizenship requirements for U.S. airlines with the Air 

Commerce Act of 1926. That act required that U.S. citizens own at least 51 percent of 

any individual aircraft in order for it to be registered in the United States. Under the 

Civil Aeronautics Act of 1938, Congress required that U.S. citizens own or control at 

least 75 percent of the voting interests of U.S. airlines. This standard has remained 

the same since then.

2

Under current U.S. law, in order to operate as a U.S. airline, an entity must obtain a 

certificate of public convenience and necessity or an exemption from the certification 

requirement from DOT. A prerequisite for obtaining such authority is U.S. 

“citizenship.” Current U.S. law defines a “citizen of the United States” as an 

individual U.S. citizen, a partnership whose members are U.S. citizens, or a 

corporation or association organized under U.S. law where at least 75 percent of the 

voting interest is owned and controlled by U.S. citizens.3

 The law also specifies that 

the President, as well as at least two-thirds of the Board of Directors of the 

corporation, must be U.S. citizens. In practice, DOT has interpreted control to mean 

that day-to-day management decisions must be made by U.S. citizens, even if there is 

substantial foreign investment in the airlines. That is, the law has been construed as 

requiring actual control of the enterprise to rest with U.S. citizens.

In addition to DOT’s initial citizenship evaluation of an airline when it first applies for 

certification, DOT again reviews the airline’s citizenship status following any 

 

2

The United States has restricted ownership and control of U.S. airlines for four primary reasons: (1) 

protection of the then-fledgling U.S. airline industry, (2) regulation of international air service through 

bilateral agreements, (3) concern about allowing foreign aircraft access to U.S. airspace, and (4) 

military reliance on civilian airlines to supplement airlift capacity. See U.S. General Accounting Office, 

Airline Competition: Impact of Changing Foreign Investment and Control Limits on U.S. 

Airlines, GAO/RCED-93-7 (Washington, D.C.: Dec. 9, 1992). 

3

49 U.S.C. 40102. 
Page 3 GAO-04-34R Foreign Investment in U.S. Airlines 

substantial change in an airline’s ownership, management or operations.4 This is 

done on a case-by-case basis. In a March 2003 review of DOT’s citizenship evaluation 

process, the DOT Inspector General found that no single document defines the 

process or criteria to be applied for the review and that DOT examines several 

factors when determining the issue of control.5

 These factors include any significant 

contracts between the airline seeking citizenship and its business partners, voting 

rights held by U.S. and non-U.S. citizens, and the terms of any debt instruments or 

bankruptcy agreements. During its analysis, DOT determines whether a foreign 

entity’s influence over any of these factors shifts the actual, day-to-day control of the 

airline from U.S. citizens to foreign citizens. 

DOT has previously proposed easing the restrictions on foreign investment in U.S. 

airlines. In 1991, the Secretary of Transportation proposed allowing foreign investors 

to own up to 49 percent of a U.S. airline’s voting stock, although no legislative 

proposal was submitted to the Congress. According to DOT officials, the proposal 

was made in response to heavy losses suffered by U.S. airlines in 1990 and 1991, and 

experience gained in structuring foreign investments to maintain U.S. citizen control 

by working with two major U.S. airlines (Northwest Airlines (NW) and Continental 

Airlines) and their foreign investors. Congress did not adopt these proposals. 

Proposed Legislation Would Affect Ownership and Control of U.S. Airlines 

The latest efforts to change U.S. foreign investment and control restrictions were 

submitted as two separate amendments to the Federal Aviation Administration (FAA) 

reauthorization bill (H.R. 2115 and S. 824). 

The Administration proposed an amendment that would relax the restrictions on 

foreign-owned voting stock of U.S. airlines from 25 to 49 percent, while not changing 

the policy that U.S. citizens control U.S. airlines. DOT suggested that increasing 

allowable foreign ownership limits would provide access to additional capital, which 

would provide several benefits that would help the financial health of the industry. 

This includes encouraging more efficient market-driven networks, creating 

opportunities for new airlines to enter the market, and bringing U.S. ownership 

limitations in line with European laws. DOT also sought to find additional tools for 

the airline industry to respond to unforeseen economic conditions, such as the recent 

effects of the Iraqi War or the Sudden Acute Respiratory Syndrome outbreak in Asia. 

A separate but related amendment addressed the issue of control of U.S. airlines. The 

House and Senate conference agreement on the FAA reauthorization bill includes a 

section that would revise the definition of “control.”6

 The bill would amend Section 

40102(a)(15)(C) of title 49 to include in the criteria for meeting the citizenship 

 

4

14 C.F.R. 204.5. 

5

Department of Transportation, Office of Inspector General, Letter to the Honorable Don Young, 

Chairman, Committee on Transportation and Infrastructure, U.S. House of Representatives, March 4, 

2003. 

6

Section 807 of the conference report on H.R. 2115. 
Page 4 GAO-04-34R Foreign Investment in U.S. Airlines 

requirement as “(airlines) which (are) under the actual control of citizens of the 

United States.” In effect, this language would codify DOT’s existing practice. 

There are differing levels of support by various aviation stakeholders for altering 

current foreign ownership and control statutes. Several key aviation stakeholders 

generally support the proposal of raising the allowable level of foreign ownership in 

U.S. airlines. Most major U.S. airlines favor increasing their access to foreign capital, 

and some have called for removing all restrictions regarding foreign ownership. The 

Air Transport Association issued its support in June 2003, citing the potential to 

create greater access to global capital for U.S. airlines, while also bringing U.S. 

foreign ownership laws into line with those of other countries.7

 Certain international 

aviation organizations also support removing barriers to international investment and 

open markets. Both the International Civil Aviation Association and the International 

Air Transport Association support the liberalization of ownership and control. Other 

stakeholders, especially various labor groups, oppose increasing foreign ownership 

levels. For example, the Association of Flight Attendants has a preference that 

foreign ownership be handled on a case-by-case basis and not just as a blanket lifting 

of the limitations. They also support control of U.S. airlines by U.S. citizens. The 

AFL-CIO’s Transport Trade Department also strongly opposes any relaxation of the 

rules on foreign control of domestic airlines, citing both national security and the 

economic welfare of U.S. workers among their concerns. 

Current Status of Foreign Investment in U.S. Airlines

As of July 2003, the amount of foreign investment in U.S. airlines remained limited. 

According to a major international investment bank, as of May 2003 no major 

stockholders—U.S. or foreign—owned more than 20 percent of any major U.S. 

network carrier. 8 American Airlines and Delta Air Lines both had significant blocks 

of stock owned by single shareholders, but these were U.S. financial service firms. 

Both NW (18 percent), and Continental (13 percent) have shares held by Axa 

Financial, a U.S. subsidiary of the French-based Axa Group.9 

Past Examples Show Control Has Been the Central Issue 

Foreign airlines have attempted to invest in and influence the operations of U.S. 

airlines several times since the late 1980s. These foreign airlines have on occasion 

invested significant amounts of capital into U.S. airlines, only to later disinvest due in 

part to U.S. policies concerning airline control. 

 

7

The Air Transport Association is the principal trade organization for large U.S. airlines. 

8

Section 13(d) of the Securities Exchange Act of 1934, as amended, requires that any person who 

obtains beneficial ownership of 5 percent or more of any equity security must provide notice to the 

issuer of the security, to each exchange where the security is traded, and to the Securities and 

Exchange Commission (SEC). The notice must include detailed information on citizenship, the 

number of shares purchased, and other related business arrangements. 

9

We omitted information on ownership for United Airlines and US Airways due to their respective 

ongoing and recent emergence from bankruptcy. 
Page 5 GAO-04-34R Foreign Investment in U.S. Airlines 

In 1989, NW announced that it would be acquired in a leveraged buyout by Wings 

Acquisition, Inc. (Wings). KLM Royal Dutch Airlines (KLM) provided about 57 

percent of the total equity in Wings and owned 5 percent of the voting shares of 

Wings. KLM also proposed to gain the right to appoint one member of Wings’ 12-

member Board of Directors and to form a financial advisory committee to advise 

Wings on the management of NW.10 In its review of the proposed transaction, DOT 

objected to the proposed deal’s structure and issued a consent order, with NW and 

Wings agreeing to (1) place KLM’s interest above 25 percent of the total equity in a 

voting trust, (2) terminate KLM’s right to appoint a financial advisory committee, and 

(3) disqualify KLM’s board member from participating in all decisions on competitive 

and international aviation matters. NW petitioned for reconsideration in 1991. DOT 

then permitted KLM to own 49 percent of the total equity investment in Wings and 

allowed increased representation on Wings’ board, since the United States and the 

Netherlands had an open skies bilateral aviation agreement.11 DOT ordered 

modifications to the original investments and attached conditions to its approval to 

ensure that NW retained its decision-making independence from its foreign airline 

investor. In 1997, KLM decided to disinvest from NW and instead focused on building 

up an alliance without direct financial investment. KLM and NW formed the first 

international code-sharing alliance granted antitrust immunity in 1993.12

 

In 1992, British Airways (BA) proposed investing $750 million in USAir in an 

arrangement that would have created the world’s largest airline alliance.13 In the 

original proposal, BA’s investment would include about 44 percent of USAir’s total 

equity, 21 percent of USAir’s voting stock and representation on USAir’s Board of 

Directors.14 BA included some important conditions to its investment, including one 

that it would have significant influence over major investment and financing 

decisions by USAir. DOT initiated a review of the proposal. BA withdrew its 

proposal before DOT issued a formal decision, in part because of changes being 

 

10In addition, other foreign investors held about 15 percent of Wings’ voting common stock, bringing 

the total voting stock held by foreign investors to about 20 percent of Wings’ voting stock. 

11DOT allowed expansion of KLM’s representation on Wings’ board when the number of directors was 

increased and continued the disqualification provision regards decision on competitive and 

international issues. However, the order stated that appointment of foreign representatives to key 

positions on Wings’ board, especially the position of chairman, would be “cause for us to review the 

citizenship of the affected air carrier.” 

12“Code sharing” refers to the practice of airlines applying their names—and selling tickets via 

reservation systems—to flights operated by other carriers. 

13USAir officially changed its name to the current US Airways on February 27, 1997. 

14In 1992, we reported that the proposed investment included a number of potential benefits for the 

two airlines planning to integrate their services. It would have provided BA a secure partnership that 

could feed U.S. passengers to its international flights and allow USAir to better compete with U.S. 

airlines that have expanded their international routes systems by purchasing international route 

authority from struggling U.S. airlines. See U.S. General Accounting Office, Airline Competition: 

Impact of Changing Foreign Investment and Control Limits on U.S. Airlines, GAO/RCED-93-7

(Washington, D.C.: Dec. 9, 1992).
Page 6 GAO-04-34R Foreign Investment in U.S. Airlines 

sought in the bilateral aviation agreement between the United States and the United 

Kingdom. BA later revised its proposal and invested $300 million, with an option to 

invest an additional $450 million in the future, and eliminated the governance 

condition. The alliance never functioned as the two airlines had hoped, according to 

court motions filed by USAir in 1996, and the BA-USAir alliance ended in 1997. 

Changes in the ownership, management, and operations of DHL Airways illustrate 

that it is sometimes difficult to determine the control of an airline. DHL Airways 

(now ASTAR Air Cargo) holds a certificate of public convenience and necessity from 

DOT, and thus was found to meet U.S. citizenship requirements. In the fall of 2000, 

DHL Airways reported to DOT that it had undergone a substantial change in 

ownership, involving Deutsche Post, the German postal monopoly. DOT conducted 

an informal review of its citizenship, as is standard practice, and in May 2002, 

informed DHL Airways that it met U.S. citizenship requirements. However, Federal 

Express and United Parcel Service petitioned for a public review, alleging that DHL 

no longer met the citizenship requirement. DOT initiated a public proceeding to 

examine the issue. 

In April 2003, P.L. 108-11 directed that DOT use an Administrative Law Judge to assist 

in resolving this issue. The Administrative Law Judge is to issue a recommended 

decision by December 1, 2003. DOT will then review that decision. 

Prior GAO Report Identified Five Key Issues Relating to Changes in Foreign 

Investment Laws 

In 1992, we reported on the potential impact of changing U.S. airline foreign 

investment and control laws and evaluated DOT’s 1991 proposal to allow for 

increased foreign investment in U.S. airlines.15 We found that the five key issues 

identified in the prior report are still relevant today. This proposal, according to DOT 

officials, was in response to the heavy losses suffered by U.S. airlines in 1990 and 

1991, who were hurt by the generally weak economy. The report noted that six large 

U.S. airlines had declared bankruptcy and three of them had ceased operations. The 

report concluded that fewer airlines could mean less competition and higher fares. 

The report addressed five key areas that may be affected by changing ownership and 

control laws: 

 

15U.S. General Accounting Office, Airline Competition: Impact of Changing Foreign Investment and 

Control Limits on U.S. Airlines, GAO/RCED-93-7 (Washington, D.C: December, 1992). 
Page 7 GAO-04-34R Foreign Investment in U.S. Airlines 

• Domestic competition – Allowing greater potential access to foreign capital 

could give U.S airlines, particularly those in financial difficulty, additional 

capital which would allow them to enhance their domestic competitive 

position.16

 

• National security – U.S airlines, through their voluntary participation in the 

Civil Reserve Air Fleet (CRAF) program, provide the Department of Defense 

(DOD) with supplemental airlift capacity in emergencies. 17 DOD was 

concerned that foreign investors might discourage continued participation in 

CRAF. 

• Employment – Increased foreign investment could put jobs at risk—for 

example, those of U.S. pilots and crew on international routes; but it could 

also help stabilize U.S. airline employment by strengthening financially weak 

airlines. 

• Safety - Increased foreign investment could place additional burdens on the 

Federal Aviation Administration’s safety oversight responsibilities if foreign 

aircraft are transferred to U.S. registry. 

• International competition – The impact of increased foreign investment on 

international competition depends, in part, on existing bilateral aviation 

agreements. These agreements set the conditions under which U.S. and 

foreign airlines operate and compete, and can restrict competition by limiting 

the service that can be offered. There may be opportunities for relaxing 

operating restrictions in some bilateral agreements in exchange for relaxing 

restrictions on foreign investment in U.S. airlines. Eligibility to invest in U.S. 

airlines could be restricted to airlines from nations that allow greater access to 

their aviation markets or do not subsidize their airlines. 

Issues Identified in Prior GAO Report Still Relevant Because Current Aviation 

Environment Is Similar to 1992 

Although 11 years have passed since we reported on the potential effect of changing 

foreign investment and control limits on U.S. airlines, most of the issues that we 

identified still appear to be relevant. As in the early 1990s, the U.S. commercial 

airline industry in 2003 faces a weak economy, relatively high fuel prices, and military 

action in the Middle East. These conditions, as in the past, have contributed to weak 

passenger demand, decreased airlines revenues, and some airline bankruptcies. The 

airlines have likewise used some of the same basic strategies to control operating 

costs. For example, major airlines responded to the 1992 economic downturn by 

 

16The 1992 GAO report (GAO/RCED-93-7) noted that while foreign investment had potential benefits 

for U.S. airlines, it was not a panacea for preserving domestic competition, because other factors—

such as airline control over gates and other facilities at major U.S. airports—also affect airline 

competition. 

17Under the CRAF program, U.S. airlines commit and put under contract aircraft and crew for DOD’s 

use during emergencies. The commercial airlines receive no compensation for their participation in 

the program unless they are activated, but they are given an incentive to participate by being made 

eligible to bid for DOD’s peacetime airlift business and General Services Administration’s city pair 

program. Airlines are paid for missions they fly at predetermined rates based on a weighted average of 

their costs plus a return on investment. 
Page 8 GAO-04-34R Foreign Investment in U.S. Airlines 

implementing cost-cutting programs, laying off employees, canceling or delaying 

aircraft deliveries and refocusing service. These same strategies have been 

implemented again since 2001 by major airlines. For example, United and American 

have made huge employee cutbacks, and Continental Airlines announced in July, 

2003 that it plans to defer prior orders for additional Boeing planes until the domestic 

economy recovers. Some airlines also are again expressing interest in acquiring 

capital through foreign investment. Therefore, general issues identified in our prior 

report appear to be still relevant to U.S. interests. 

• Domestic competition – U.S. airlines have made significant reductions in 

service, but continue to have more capacity than passenger demand. Airlines 

are seeking additional capital to provide operating funds to survive the 

reduced passenger traffic and revenues and avoid bankruptcy. The effect that 

airline bankruptcies might have on domestic competition is uncertain. Since 

most U.S. “legacy” airlines’ balance sheets are considerably weaker than in 

1992, DOT believes that the ability to access international capital markets is 

even more valuable to the airlines in the current economic environment.18 

• National security – While DOD has traditionally been concerned about 

increasing foreign ownership due to the belief that any foreign control of U.S. 

airlines would negatively affect CRAF, it presently has no official comment on 

the administration’s latest proposal. Questions already exist regarding the 

effectiveness of DOD's program incentives, and it is unclear if these incentives 

will be affected by changes in foreign ownership restrictions.

• Employment – The impact of increased foreign investment on employment 

remains unclear. There are differing views on how changes in foreign 

investment restrictions could affect employment—would additional 

investment stimulate domestic aviation, thus domestic aviation employment, 

or would foreign investment lead to jobs being transferred to foreign 

workforces? DOT indicated that there is no evidence to suggest that increased 

foreign investment in U.S. airlines would have any effect on labor. DOT 

commented that, due to existing collective bargaining agreements and other 

regulatory requirements governing U.S. airlines and their employees, the 

administration’s proposal would not affect the rights of labor or the obligation 

of airlines with respect to labor.

• International competition – While bilateral “open skies” agreements between 

the United State and many EU member states have improved the access, level 

of integration, and volume of travel across the Atlantic, other aviation 

agreements, such as the Bermuda II Accord, continue to limit airline 

integration and efficiencies.19 As the United States and EU start negotiations 

 

18“Legacy” airlines generally refer to major U.S. airlines that operate network service, including both 

domestic and international operations, such as United, American, and Delta. 

19The “Bermuda II Accord” is the 1977 agreement between the United Kingdom and the United States 

that restricts UK and U.S. flights serving London Heathrow Airport to two airlines from each countries. 
Page 9 GAO-04-34R Foreign Investment in U.S. Airlines 

for a new aviation agreement, one of the primary negotiations points for EU 

officials will be the relaxing of current U.S. foreign investment and control 

restrictions.20 The effect that recent legislative proposals codifying control 

standards could have is unclear. DOT has stated that since 1992, many U.S. 

airlines have formed international alliances. These alliances may find mutual 

investments more desirable, either to sustain a valuable alliance partner 

experiencing financial difficulties or to solidify commercial relationships.

At this time, we do not believe that the FAA safety workload issue raised in the 1992 

report continues to be a significant relevant concern in the current environment. In 

addition to any legal obstacles to transferring foreign aircraft to U.S. registry, it is not 

clear what incentives exist that would encourage a foreign investor to do so. U.S. 

carriers have grounded a significant number of aircraft and have been operating less 

frequency with existing fleets over the past 2 years as a result of the downturn in 

demand. Also, even if such a change were to occur, it is unlikely that aircraft would 

be added in such numbers so as to materially increase FAA's safety oversight 

responsibilities over and above its current workload. 

Scope and Methodology

To address the administration’s current proposal and discuss the potential affect on 

domestic competition, national security, airline employment, airline safety, and 

international competition, we conducted interviews with key stakeholders and 

industry experts. This included representatives from DOT, the European Union, 

various member states, and U.S. airlines. In addition, we reviewed the literature 

regarding foreign ownership regulations and implications, studied transcripts of 

speeches by key U.S. government personnel, and reviewed financial regulations and 

materials. Finally, we examined documents filed with DOT regarding citizenship of 

airlines. 

- - - - 

Agency Comments 

We provided a draft report with briefing slides to DOT for review and formal 

comment. DOT provided technical comments, which we have incorporated into this 

report as appropriate. 

As agreed with your office, unless you publicly announce the contents of this report 

earlier, we plan no further distribution until 30 days from its date. At that time we will 

send copies to the Secretary of Transportation and other interested parties. We will 

also send copies to others upon request. In addition, this report will be available at 

no charge on our Web site at http://www.gao.gov. 

 

20DOT has noted that any U.S.-EU agreement, which includes provisions on foreign investment would 

require implementing legislation. 
Page 10 GAO-04-34R Foreign Investment in U.S. Airlines 

For further information on this report, please contract JayEtta Hecker at (202) 512-

2834. Individuals making key contributions to this report included Steve Martin, 

Emily Pickrell, Tim Schindler, and Matt Zisman. 

JayEtta Z. Hecker 

Director, Physical Infrastructure Issues 

Enclosure 
Page 11 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Commercial Aviation

Issues Relating to Foreign 

Investment and Control of U.S. 

Airlines

Briefing for the Subcommittee on 

Aviation 

Committee on Commerce, Science 

and Transportation

U.S. Senate

U.S. General Accounting Office

June 25, 2003
Page 12 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Overview of GAO Briefing on Foreign 

Investment and Open Skies

• Objectives

• Background 

• Proposed legislation

• Status of foreign investment

• Past examples of foreign investment and control

• Major issues related to changing foreign ownership limits

Contents

1
Page 13 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Objectives

• Discuss the current proposals to revise U.S. limits on foreign 

ownership and control, including information on current 

shareholders and past examples of efforts by foreign interests 

to purchase significant equity in U.S. air carriers 

• Discuss key analytic issues raised in the 1992 GAO report on 

foreign ownership and control, including an assessment of 

whether those issues remain relevant today

2
Page 14 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Background

• Air Commerce Act of 1926 required U.S. citizens own at least 

51 percent of any individual aircraft in order for it to be 

registered in the United States.

• The Civil Aeronautics Act of 1938 provided that U.S. citizens 

own or control 75 percent of the voting stock of U.S. airlines.

• This requirement remains in place today.

Background

3
Page 15 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Definition of U.S. Aviation Citizenship

• To fly in the United States as a U.S. airline, an airline must meet 

aviation “citizenship” criteria.

• “Citizen of the United States” is defined as,

• an individual who is a citizen of the United States,

• a partnership whose members are U.S. citizens, or

• a corporation or association in which at least 75 percent of 

the voting interest is owned or controlled by persons that 

are citizens of the United States (49 U.S.C. 

40102(a)(15)(C)).

Background

4
Page 16 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

U.S. Airline Citizenship Requirements

• Department of Transportation (DOT) has interpreted control 

to mean day-to-day management decisions made by U.S. 

citizens, even with substantial foreign investment in the 

airline.

• DOT evaluates actual control on a case-by-case basis.

• Factors used include,

• the quality and design of any significant contracts;

• voting rights (whether there are disproportionate voting 

rights, power to veto and buy-out clauses); and

• any debt-instrument clauses or agreements.

Background

5
Page 17 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Prior Attempts to Change Ownership 

Laws

• In 1991, the Secretary of Transportation proposed changing 

foreign investment limitations to 49 percent.

• The proposal responded to heavy financial losses by the 

airlines in 1990 and 1991.

• DOT believed that its past experiences with U.S. airlines 

and their foreign investors would allow it to structure 

foreign investment to retain U.S. control.

• Congress did not adopt the proposal.

Background

6
Page 18 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Administration’s Proposal

• The administration has proposed legislation that would relax 

restrictions on foreign-owned voting stock of U.S airlines.

• Maximum percentage of voting stock that could be 

foreign-owned would increase from 25 to 49 percent.

• No change to policy that U.S. airline be controlled by U.S. 

citizens.

• This legislation mirrors DOT’s 1991 proposal.

Proposed Legislation

7
Page 19 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

DOT Rationale for Proposal

• According to DOT, significant benefits arise from increasing limit to 

49 percent, including,

• allowing U.S. airlines greater access to global capital;

• encouraging U.S. airlines to develop more efficient, marketdriven networks;

• creating opportunities for airlines to enter into new markets; and

• consistency with the European Union (EU) and other bilateral 

partner’s foreign investment restrictions.

Proposed Legislation

8
Page 20 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Congressional Action on Foreign 

Control Restrictions

• House and Senate conference agreement on Federal 

Aviation Administration (FAA) reauthorization bill addresses 

the issue of “control.”

• H.R. 2115, Section 807, would change 49 U.S.C. 

40102(a)(15)(C) to define carrier citizenship as: “...

which is under the actual control of citizens of the United 

States.”

• This language codifies the existing practice that airlines be 

under the control of U.S. citizens.

Proposed Legislation

9
Page 21 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Stakeholder Positions on Foreign 

Investment and Control Restrictions 

• Several key stakeholders in the aviation industry support increases 

in foreign investment limits: 

• major U.S. network carriers,

• The International Civil Aviation Organization, and

• The International Air Transport Association.

• Some labor groups do not support relaxing current foreign 

investment restrictions.

Proposed Legislation

10
Page 22 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Current Airline Stock Major Owners

a Lord Abbett and Primecap Management are U.S. companies; Axa Financial is the U.S. subsidiary of a French-based 

conglomerate.

Largest holder (%) Total holders above 5% share Carrier a

5 1 Axa Financial

(17.8%) Northwest

3 0 Primecap Management

(12.5%) Delta

3 1 Axa Financial

(12.6%) Continental

3 0 Lord Abbett

(18.3%) American

U.S. Foreign

Status of Foreign Investment

11
Page 23 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Current Airline Market Capitalizations

(in billions)a

• American: $1.7

• Alaska Airlines: $0.6

• America West: $0.2

• Continental: $1.0 

• Delta: $1.8

aJuly 1, 2003.

• Northwest: $0.9

• Southwest: $13.1

• JetBlue; $2.7

• Air Tran: $0.8

Status of Foreign Investment

12
Page 24 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Determining Ownership and Control: 

KLM and NW

• In 1989, KLM Royal Dutch Airlines (KLM) attempted to 

purchase significant equity in Northwest Airlines (NW) 

through a KLM-owned company (Wings Acquisition, Inc.).

• Original proposal provided KLM with significant governance 

over NW.

• DOT reviewed proposal and ordered modifications, and 

added conditions to ensure NW would remain in control of 

U.S. citizens.

• In 1997, KLM ultimately disinvested in NW and instead 

focused on a stronger international code-share alliance.

Past Examples

13
Page 25 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Determining Ownership and Control: 

British Airways and USAir

• In 1992, British Airways (BA) proposed investing $750 million (44 

percent total equity) in USAir.

• BA investment included purchasing 21 percent of USAir’s voting 

stock and representation on USAir’s board.

• DOT initiated a review of the proposal. BA withdrew its proposal 

before DOT issued a formal decision, in part because of changes 

being sought in the bilateral aviation agreement between the United 

States and the United Kingdom. 

• BA revised proposal invested $300 million while the governance 

requests were dropped.

• The alliance never functioned as planned and ended in1997.

Past Examples

14
Page 26 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Defining U.S. Citizenship: DHL Airways

• In the fall of 2000, DHL Airways (now ASTAR Air Cargo) reported to 

DOT a substantial change in ownership.

• These changes involved Deutsche Post, the German postal monopoly.

• DOT conducted an informal review of DHL Airways’ citizenship and in 

May 2002 determined it met U.S. citizenship requirements.

• Federal Express and United Parcel Service petitioned for public 

review, alleging that DHL no longer met the citizenship requirement.

• In April 2003, Public Law 108-11 directed DOT to use an administrative 

law judge to resolve this issue.

• An administrative law judge is to issue a decision by December 2003, 

which DOT will review.

Past Examples

15
Page 27 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Most Major Issues Identified in 

1992 GAO Report Remain Relevant

• The aviation industry suffered heavy financial losses in 1990 and 1991 due 

to a weak economy.

• In response to these conditions, DOT proposed in 1991 to increased the 

foreign investment restrictions from 25 to 49 percent.

• In 1992, GAO reported on the implications of changing U.S. airline foreign 

investment restrictions.

• This report identified five major issue areas,

• domestic competition,

• national security,

• employment,

• airline safety oversight, and

• international competition.

Major Issues 

16
Page 28 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Relevance of Issues Identified in 1992 

Report Related to Economic Conditions

• Relevance today of issues identified in 1992 report depends on 

similarities in economic environment.

Major Issues 

Jobs losses at majors airlines 19,000 (3.6%) 86,000 (14.7%)

($13.2 billion) ($19.7 billion) Industry profit(loss) –

In 2002 constant dollars

Number of airline bankruptcies 27 6

1990-1992 2001-2002

17
Page 29 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Most Issues From 1992 Report Remain 

Relevant Today

• There are several key issues related to changing foreign investment restrictions 

that are still relevant today:

1. Domestic Competition

• Access to foreign capital seen as beneficial during a period of financial 

difficulty.

• U.S airlines are seeking additional capital to provide operating funds to 

survive the reduced passenger traffic and revenues. 

2. National Security

• DOD has traditionally opposed increasing foreign ownership but has no 

official comment on the current proposal. 

• New questions may exist regarding the efficacy of U.S. airlines’ fleets in 

meeting possible DOD airlift needs.

Major Issues 

18
(544062) Page 30 GAO-04-34R Foreign Investment in U.S. Airlines 

Enclosure I 

Most Issues From 1992 Report Remain 

Relevant Today (cont’d)

3. Employment

• There are questions whether changes in foreign investment 

restrictions would stimulate domestic aviation, thus domestic 

aviation employment, or lead to jobs being transferred to foreign 

workforces .

4. International Competition

• As the United States and European Union (EU) start negotiations 

for a new aviation agreement, one of the primary negotiations 

points for EU officials will be the relaxing of current U.S. foreign 

investment and control restrictions.

• The effect that recent legislative proposals codifying control 

standards could have is unclear.

Major Issues 

19
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