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[Federal Register Volume 70, Number 214 (Monday, November 7, 2005)]
[Proposed Rules]
[Pages 67389-67396]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-22056]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Parts 204 and 399

[Docket No. OST-03-15759]
RIN 2105-AD25

Actual Control of U.S. Air Carriers

AGENCY: Office of the Secretary, DOT.

ACTION: Notice of proposed rulemaking (NPRM); request for comments.

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SUMMARY: The Department is seeking comments on a proposal to clarify 
policies that may be used during initial and continuing fitness reviews 
of U.S. carriers when citizenship is at issue. We propose to add a new 
section to 14 CFR part 399 that clarifies how the Department will 
interpret ``actual control'' of a U.S. air carrier during fitness 
reviews. This proposal will affect how we interpret the circumstances 
influencing a determination of ``actual control,'' allowing easier 
access to foreign capital for U.S. airlines. We are also proposing 
minor amendments to 14 CFR part 204 to reference the new section and 
update existing language in part 204.

DATES: Comments are due on or before January 6, 2006.

ADDRESSES: You may send comments identified by DMS Docket No. OST-03-
15759 using any of the following methods:
     Web site: http://dms.dot.gov Follow the instructions for 
submitting comments on the DOT electronic docket site.
     Fax: 1-202-493-2251.
     Federal eRulemaking Portal: http://www.regulations.gov 
Follow the instructions for submitting comments.
     Mail: Docket Operations, U.S. Department of 
Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, 
Washington, DC 20590-0001.
     Hand Delivery: Room PL-401 on the plaza level of the 
Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
    Instructions: All submissions must include the agency name and 
docket number or Regulatory Identification Number for this rulemaking. 
For detailed instructions on submitting comments and additional 
information on the rulemaking process, see the Public Participation 
heading in the Supplementary Information section of this document. Note 
that all comments received will be posted without change to http://dms.dot.gov, including any personal information provided. Please see 
the Privacy Act heading under Supplementary Information for further 
information.
    Docket: For access to the docket to read background documents or 
comments received, go to http://dms.dot.gov at any time or to Room PL-
401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., 
Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, 
except Federal holidays.

FOR FURTHER INFORMATION CONTACT: William M. Bertram, Chief, Air Carrier 
Fitness Division, Department of Transportation, 400 Seventh Street, 
SW., Washington, DC 20590. Telephone: (202) 366-9721.

SUPPLEMENTARY INFORMATION: Comments Invited: The Department invites 
interested persons to participate in this rulemaking by submitting 
written comments, data, or views. We also invite comments relating to 
any economic, environmental, energy, or federalism impacts that might 
result from adopting the proposals in this document. The most helpful 
comments will reference a specific portion of the proposal, explain the 
reason for any recommended change, and include supporting data.

Public Participation

    The DMS is available 24 hours each day, 365 days each year. You can 
get electronic submission and retrieval help and guidelines under the 
``help'' section of the DMS Web site. If you want us to notify you that 
we received your comments, please include a self-addressed, stamped 
envelope or postcard or print the acknowledge page that appears after 
submitting comments on-line.
    Comments received after the comment closing date will be included 
in the docket, and we will consider late comments to the extent 
practicable.
    Privacy Act: Using the search function of our docket Web site, 
anyone can find and read the comments received in any of our dockets, 
including the name of the individual sending the comment (or signing 
the comment on behalf of an association, business, labor union, etc.). 
You may review the Department's complete Privacy Act Statement in the 
Federal Register published on April 11, 2000 (65 FR 19477-78), or you 
may visit http://dms.dot.gov.

Background

    Air carriers must have authority granted to them by the Department 
to operate in the United States as U.S. air carriers. Under 14 CFR 
204.5,

[[Page 67390]]

certificated and commuter air carriers that undergo or propose to 
undergo a substantial change in operations, ownership, or management 
must submit certain updated fitness information to the Department.\1\ 
Section 204.5(c) of our regulations specifies that, if such information 
is being filed in support of an application for new or amended 
certificate authority, it will be filed in the docket as part of a 
public proceeding. For example, a certificated or commuter air carrier 
must apply for new or amended authority if its existing authority is 
not adequate for the performance of its planned service (e.g., if a 
carrier wishes to serve a new city-pair route in foreign scheduled air 
transportation, if a carrier holding all-cargo authority wishes to 
conduct passenger service, or if a carrier currently operating only 
small aircraft wishes to operate large aircraft). If the substantial 
change being proposed does not affect the carrier's authority to 
perform its service under its existing authority, then the information 
is reported directly to the Chief of the Air Carrier Fitness Division, 
and is reviewed without a public proceeding as part of an informal 
continuing fitness investigation. Substantial changes that may not 
require a carrier to apply for new or amended authority include changes 
in the carrier's ownership or management. The purpose of these informal 
reviews is to decide whether a more formal, public proceeding is 
warranted, and whether the carrier's authority should be modified, 
suspended, revoked, or subjected to an enforcement action. During a 
continuing fitness review, the Department's staff may examine the 
carrier's ownership structure, and determine whether the air carrier 
continues to satisfy all statutory citizenship tests and continues to 
be under the actual control of U.S. citizens.
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    \1\ 14 CFR 204.2(l) defines substantial change in operations, 
ownership, or management as including, but not limited to, the 
following events: ``(1) Changes in operations from charter to 
scheduled service, cargo to passenger service, short-haul to long-
haul service, or (for a certificated air carrier) small-aircraft to 
large-aircraft operations; (2) the filing of a petition for 
reorganization or a plan of reorganization under Chapter 11 of the 
federal bankruptcy laws; (3) the acquisition by a new shareholder or 
the accumulation by an existing shareholder of beneficial control of 
10 percent or more of the outstanding voting stock in the 
corporation; and (4) a change in the president, chief executive 
officer or chief operating officer, and/or a change in at least half 
of the other key personnel within any 12-month period or since its 
latest fitness review, whichever is the more recent period.''
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    A citizen of the United States is defined in 49 U.S.C. 40102(a)(15) 
as:
    (A) An individual who is a citizen of the United States;
    (B) A partnership each of whose partners is an individual who is a 
citizen of the United States; or
    (C) A corporation or association organized under the laws of the 
United States or a state, the District of Columbia, or a territory or 
possession of the United States, of which the president and at least 
two-thirds of the board of directors and other managing officers are 
citizens of the United States, which is under the actual control of 
citizens of the United States, and in which at least 75% of the voting 
interest is owned or controlled by persons that are citizens of the 
United States.
    To be licensed, an airline that is, or is owned by, a corporation 
must be under the ``actual control'' of U.S. citizens to meet or 
continue to meet the citizenship standard. For many years, the standard 
and scope was refined through administrative case law dating back to 
1940, first by the Civil Aeronautics Board (CAB) and then, after the 
CAB's sunset in 1984, by the Department of Transportation.\2\ In 2004, 
``actual control'' was specifically codified in the statutory 
definition of a citizen of the United States reflecting Departmental 
precedent, but it remains for the Department to interpret that 
requirement.\3\ As part of the fitness review, the Department reviews 
the totality of circumstances of an airline's organization, including 
its capital structure, management, and contractual relationships, to 
ensure its compliance with the ``actual control'' requirement before 
issuing an air carrier license, and thereafter as its circumstances 
change.
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    \2\ Past cases include In the matter of the citizenship of DHL 
Airways, Inc. n/k/a ASTAR Air Cargo, Inc., Order 2004-5-10, issued 
May 13, 2004 at 8; Acquisition of Northwest Airlines by Wings 
Holdings, Inc., Order 89-9-51, issued September 29, 1989, at 5; 
Application of Discovery Airways, Inc., Order 89-12-41, issued 
December 22, 1989, at 10; In the matter of USAir and British 
Airways, Order 93-3-17, issued March 15, 1993, at 19; and 
Application of North American Airlines, Inc., Order 89-11-8, issued 
November 6, 1989, at 6.
    \3\ See 49 U.S.C. 40102(a)(15), as amended by Vision 100--
Century of Aviation Reauthorization Act, Public Law 108-176, 807, 
117 Stat. 2490 (2004).
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    On March 4, 2003, the Inspector General of the U.S. Department of 
Transportation issued a letter in response to a request by the Chairman 
of the House Transportation and Infrastructure Committee to review the 
Department's procedures for making air carrier citizenship 
determinations in continuing fitness reviews, and to review the 
Department's consideration of a docketed proceeding then-pending before 
the Department (In the matter of the citizenship of DHL Airways, Inc., 
Docket OST-2002-13089-32). In the letter, the Inspector General made 
two recommendations. First, the Department should publicly address the 
factors used to determine whether an air carrier is under the ``actual 
control'' of U.S. citizens. Second, the Department should consider 
modifying its procedures and regulations for reviewing an air carrier's 
citizenship status during a continuing fitness review.

1. Advance Notice of Proposed Rulemaking

    On July 30, 2003, the Department published an ANPRM in the Federal 
Register (68 FR 44675-78) seeking comments on the two recommendations 
contained in the Inspector General's letter not directly related to the 
DHL case.
    The Inspector General stated in his letter, ``There are seven 
factors that frequently recur in past orders of the Department 
addressing the issue of actual control. These factors, while known to 
Department and aviation attorneys, have not been delineated in any one 
public document. Good public policy would suggest that the Department 
address these and other factors in a document that is widely 
available.'' The seven factors cited were: (1) Control via 
supermajority or disproportionate voting rights; (2) negative control/
power to veto; (3) buy-out clauses; (4) equity ownership; (5) 
significant contracts; (6) credit agreements/debt; and (7) family 
relationships/business relationships. We sought comments on whether 
there are other factors or criteria that the Department routinely 
considers in addition to those listed above. In doing so, however, we 
noted that the Department has repeatedly stated in decisions that 
citizenship determinations necessarily are made on a case-by-case basis 
because every case has its own unique set of circumstances, and no 
single list of factors or criteria could be exhaustive, due to the 
changing legal and market circumstances faced by carriers when 
organizing their corporate and financial structures.
    The Inspector General further stated that ``[t]he informal process 
used for citizenship reviews can be beneficial when the issues are not 
complex or contentious by providing for open dialogue between the 
Department and carriers to resolve matters expeditiously.'' The 
Inspector General recommended that: ``for the future, we believe the 
Department should give consideration to a more transparent and formal 
process in complex and contentious cases.''

[[Page 67391]]

    In the ANPRM, we asked for comments on the following questions:
    (1) Is the Department's current informal, undocketed process for 
reviewing the citizenship of certificated and commuter air carriers 
following a substantial change in operations, ownership, or management 
sufficient to meet the statutory goals and requirements of evaluating a 
carrier's continuing fitness prior to any decision to take public 
action?
    (2) Should air carriers proposing a substantial change in 
operations, ownership, or management that may affect their citizenship 
status be subject to a formal, public review of their citizenship, and 
if so, under what circumstances?
    (3) What are the benefits and burdens, including time, effort, or 
financial resources expended, to generate, maintain, or provide 
information that would be subject to such a docketed public review? How 
would an air carrier's ability to obtain timely financing be affected?
    (4) What are the advantages and disadvantages of retaining the 
current rule at 14 CFR 204.5 without revision?
    (5) Should the Department establish separate procedures for handing 
complex, contentious, and controversial citizenship questions that 
arise in the context of continuing fitness reviews? If so, what 
procedures would be appropriate, and what standards should be used to 
designate such cases?
    (6) Should the Department issue a public notice when it initiates 
and/or completes a citizenship determination in the context of a 
continuing fitness review? How would such notice impact an air 
carrier's business? What impact would such notice have on the 
willingness of an air carrier contemplating a future change in 
ownership, operations, and/or management to have candid discussions 
with the Department before formalizing any transaction?
    (7) How should competition issues and business confidentiality 
issues be addressed in any change to the current procedures?
    We have decided to respond to the Inspector General's concerns in 
three ways. First, as he suggested, we are publishing a more complete 
discussion of the citizenship and control factors, as well as a non-
exclusive list of the criteria that have developed over time and that 
the Department has used in making citizenship and control 
determinations. The discussion is now available in the information 
packets How to Become a Certificated Air Carrier and How to Become a 
Commuter Air Carrier that can be downloaded by applicant carriers from 
the Assistant Secretary for Aviation and International Affair's Web 
site at http://ostpxweb.ost.dot.gov/aviation/index.html. Second, we 
are placing a separate discussion in a question and answer format on 
that web site. Third, we are proposing a Policy Statement about how we 
may interpret the actual control standard in application to an 
individual set of circumstances. As noted above, we are acting on a 
recommendation from the Inspector General to place this information in 
a central location, and have incorporated some commenter suggestions as 
mentioned below.

2. Comments to the ANPRM

    Comments to the ANPRM were due by September 29, 2003. We received 
12 total comments to the ANPRM from 11 commenters. We received comments 
from ABX Air, Inc. (``ABX''), Air Line Pilots Association, 
International (``ALPA''), American Airlines, Inc. (``American''), ASTAR 
Air Cargo, Inc. (``ASTAR''), TEM Enterprises, Inc. d/b/a Casino Express 
Airlines and Murray Air, Inc. (joint filing) (``Casino/Murray''), Delta 
Air Lines, Inc. (``Delta''), Federal Express Corporation (``FedEx''), 
United Air Lines, Inc. (``United''), United Parcel Service Co. 
(``UPS''), Dr. Dorothy Robyn and Stephen L. Gelband (joint filing) 
(``Robyn/Gelband''), and Barbara Sachau (``Sachau'').
Criteria for Determining Control
    The commenters addressed the issues of whether the list of criteria 
as described in the Inspector General's letter should be codified in 
some form other than case precedents, and whether there are other 
factors or criteria that the Department routinely considers in making 
citizenship determinations that were not mentioned in the letter. In 
their comments, ABX, American, Delta, FedEx, United, and UPS stated 
that it would not be a good idea to codify the list in the regulations. 
ABX said that any list would hinder the Department's flexibility to 
address unique facts as the cases present themselves, an idea echoed in 
the comments of American and UPS. Delta commented that such a list 
would necessarily be suggestive of the most important factors while 
failing to be sufficiently comprehensive, and United commented that 
such a list could dictate the outcomes of certain investment and 
management structures, thereby limiting innovation and reactions to the 
dynamic aviation industry. FedEx commented that a significant body of 
precedent exists and there is no need to otherwise articulate it. 
Casino/Murray advocated codifying the list of criteria, stating that it 
would be both appropriate and helpful to publish the list in some form 
that would be readily available to the public, such as in a policy 
statement in part 399 of our regulations. ALPA commented that any list 
will serve only as a compilation of factors that have arisen in 
previous cases. Delta commented that it would have no objection to the 
Department publishing the list as advisory on an informal basis, such 
as on a Web site or other suitable location. UPS commented that the 
Department should make clear in any publication it may issue that no 
factor will be dispositive in the determination of a case.
    FedEx, Robyn/Gelband, and UPS commented on other factors that we 
should consider in the preparation of any list for publication. FedEx 
suggested adding the foreign revenue test located in Sec.  2710, Public 
Law 108-11. Applicable to air carriers applying for Department of 
Defense (DoD) airlift contracts, the provision states that a carrier 
would not be eligible for such a contract if more than 50% of its 
revenue came from a foreign source in the previous 3 years, and that 
foreign source, directly or indirectly, either owns a voting interest 
in the carrier or is owned by an agency or instrumentality of a foreign 
state. ABX responded to FedEx's comment in a supplemental filing, 
disputing the need to include the test when it only applies to DoD 
contracts and would break with longstanding Department precedent. 
Robyn/Gelband commented that any list should include the impact on 
competition, specifically the impact of bilateral relations with the 
country of which the foreign investor is a citizen and reciprocal 
market access. UPS suggested that the foreigner's power to cause 
reorganization of the carrier should be included in the list, because 
we already consider as a factor the foreigner's power to prevent 
reorganization.

3. Procedural Changes

    We asked in the ANPRM for input on whether the Department should 
change its current informal, non-public process for evaluating 
citizenship in continuing fitness cases. Four commenters favored 
amending the regulations to allow for more public, formal procedures; 
seven commenters were opposed. Sachau commented that the public must be 
consulted on all matters, and that there should be a full public 
hearing. ALPA commented that the informal review process is 
inconsistent with the public review generally for fitness issues. The 
benefits of a public review of structural

[[Page 67392]]

changes to a carrier's ownership outweigh potential burdens that could 
arise. ALPA suggested that provisions of part 300, subpart B, could be 
revised to accommodate continuing fitness reviews. FedEx believes that 
the process should be open and transparent, and that the Department 
should publish notice of every filing under Sec.  204.5. Because most 
carriers are public companies, the carriers would be required to make 
similar filings with the SEC. Public reviews of the carrier's 
citizenship would begin upon request, and all relevant information 
would be placed in the docket. FedEx commented that third parties 
should be given the opportunity to show a case needs more than notice-
and-comment, including more formal adjudicatory methods. UPS made three 
specific recommendations: (1) There should be public notice of the 
review in the Federal Register; (2) included in the notice would be a 
general summary of the facts omitting any confidential information; and 
(3) third parties should be afforded the opportunity to comment and 
review the materials under the Department's Rule 12 confidentiality 
requirements.
    ABX, opposed to changing the regulations, commented that the 
Department experts were well-qualified to complete reviews without 
formal proceedings involving third parties. More public procedures 
would invite anticompetitive behavior in an effort to thwart market 
forces. American believes that the current approach is adequate 
provided the Department has the discretion to establish more formal 
procedures when the situation arises. ASTAR also opposed changing the 
regulations, and stated that the informal process allows for an open 
exchange of information between the Department and the carrier. Like 
ABX's comment, ASTAR stated that more public proceedings would invite 
``anticompetitive mischief.'' Delta commented that it would be 
unnecessarily burdensome to promulgate a new set of formal procedures, 
and would hamper the Department's flexibility in resolving cases. 
Casino/Murray stated that the continuing fitness review process was not 
a mechanical exercise applying statutory formulas, but is flexible and 
the decisions are made subjectively. They further stated that the 
current system affords the Department the ability to use other 
procedures, and, similar to other commenters, noted that any public 
process could be subject to abuse by competitors. Robyn/Gelband pointed 
to the ASTAR hearing as an example of why the process should not be 
changed. They stated that there is no statutory requirement for public 
reviews of continuing fitness, and many cases may not be appropriate to 
review in a formal setting. Finally, United commented that the current 
process gives the Department the flexibility needed to accurately 
evaluate changes to a carrier's structure, and pointed out that the 
ASTAR case was an anomaly.
    Four commenters also made specific comments regarding applying Rule 
12 confidentiality to continuing fitness reviews if the process were to 
become more public. ABX commented that reviews often involve highly 
sensitive documents, and they should not be made available to third 
parties for potentially ``illegitimate, anticompetitive attacks.'' ABX 
commented that the Department of Justice does not open up Hart-Scott-
Rodino reviews for public commentary. ASTAR commented that permitting 
third parties to review confidential materials would stifle the open 
exchange of information with the Department, because currently carriers 
feel safe in knowing that competitors do not have access to their 
highly confidential documents. Casino/Murray stated that Rule 12 is an 
option, but using it would still create a situation where a carrier's 
business relationships could be dangerously impaired at a time when the 
carrier is vulnerable. UPS commented that the Department should allow 
third parties to review documents under Rule 12 as part of a more 
public process.

Proposed Amendments

Continuing Fitness Procedures

    As many of the commenters noted, the Department has various means 
at its disposal to initiate more formal proceedings when we believe 
such procedures to be appropriate while conducting a continuing fitness 
review. Requiring public notification every time there is a citizenship 
question resulting from a substantial change in ownership will not only 
dampen our ability to obtain confidential information and resolve 
issues informally with the carrier before a proposed transaction is 
finalized, but also may serve to deter investment or ownership changes 
because of the uncertainty surrounding a timely decision by the 
Department. In addition, such procedures could become extremely 
burdensome on the affected air carriers. For these reasons, we propose 
not to expand upon or be more specific as to the process used, but to 
continue to use those means already available. We invite public comment 
on our proposed decision here not to change our current processes in 
these matters.

``Actual Control'' in Fitness Determinations

    We have decided that this proposed rulemaking should consider 
whether the Department's interpretation of ``actual control'' should be 
changed to reflect the substantial structural changes that have taken 
place in global financial markets. This proposal is consistent with our 
obligation to foster a safe, healthy, and competitive airline industry 
that will remain capable of supporting U.S. economic growth by meeting 
the public's transportation needs.\4\
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    \4\ 49 U.S.C. 40101(a), (e).
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    So that the U.S. air transportation industry can continue to 
compete and be a leader in the ever-growing global economy, there needs 
to be enhanced access to worldwide financial resources. Accordingly, we 
propose to adapt our interpretation of how this private foreign 
capitalization affects the ``actual control'' of U.S. airlines to 
reflect these new realties.
    U.S. aviation policy since deregulation has been to continue to 
reduce governmental intrusion in commercial decision-making by 
airlines, and to recognize and accommodate changes in the marketplace. 
This policy has been successful in areas such as pricing, route 
selection, fleet acquisition, and marketing, with positive consequences 
to many aspects of U.S. carrier economic activity. Airlines now provide 
seamless, end-to-end service through global systems that depend upon 
webs of contractual networks among carriers, distribution companies, 
and service providers. These changes have enabled U.S. airlines to 
compete more effectively in domestic and international markets.
    Moreover, capital markets have evolved and now offer pools of 
highly mobile capital on a global basis. Innovations in the use of 
hedge funds, new forms of aircraft financing, and the growing role of 
international aircraft leasing companies have changed the nature of 
airline financing, even within the existing regulatory framework. 
Globalization has redefined the capital marketplace, and driven 
decisions regarding airline operations. Any regulatory impediments to 
this crucial access face a heavy burden of justification.
    With deregulation, the Federal government withdrew restrictions in 
most economic areas of airline operations, including the areas of 
domestic pricing and entry. This policy

[[Page 67393]]

has produced enormous public benefits by helping the aviation industry 
to grow and compete effectively in both domestic and international 
markets. Airlines are now free to enter and exit domestic markets based 
on their own assessment of economic value and are free to adjust fares 
to reflect competitive pressures. The Department has also aggressively 
sought to extend these principles to international markets. Today, the 
U.S. has open-skies aviation relationships with more than 70 other 
countries, permitting airlines of both nations much of the same 
independence from government restrictions in their international 
operations that U.S. carriers have long enjoyed domestically.
    U.S. carriers function in a virtually seamless global environment 
in virtually every aspect of their operations. However, an 
interpretation of ``actual control'' that does not recognize the global 
and structural changes in international finance and thereby take into 
account new avenues for investment, potentially excludes billions of 
dollars of foreign investment from airline capitalization sources. 
Reducing unnecessary regulatory obstacles to the use of cross-border 
investment will allow U.S. carriers to become more efficient 
economically, and allow them to continue to be a major presence in the 
global aviation marketplace. In some cases, foreign citizens have been 
unwilling to invest--either in the form of debt or equity--without 
certain protections commonplace in the financial world. New or 
expansion-seeking U.S. airlines in this situation have been either 
precluded from entering the U.S. market or forced to engage in costly 
and time-consuming restructurings to facilitate the investment.
    These limitations and the related uncertainty also restrict the 
benefits of Open Skies agreements and of statutory deregulation. The 
industry's ongoing financial difficulties highlight the need to ensure 
that our actual control policies do not unnecessarily constrain 
aviation access to capital. Since the year 2000, the U.S. scheduled 
passenger airline industry has lost nearly $30 billion, an amount 
equivalent to roughly one-third of the aviation industry's total annual 
revenue. Since 2000, more than 100,000 airline employees have lost 
their jobs. Four major air carriers and several other national air 
carriers have been operating under Chapter 11 bankruptcy protection and 
have struggled to find the capital necessary to enable them to exit 
Chapter 11 protection. The large network air carriers continue to lose 
hundreds of millions of dollars every quarter. Such circumstances 
result in reductions in benefits that could be brought to travelers 
within the United States, as well as between the U.S. and Open Skies 
countries.
    Any refinement to and our articulation of our interpretation of the 
``actual control'' test as it currently exists in precedent and 
practice, however, must address and satisfy the following issues. 
First, it must provide guidance to the industry on future transactions. 
Second, it must allow globalization to take its course and permit the 
aviation industry to evolve with greater flexibility and more financing 
options. Third, it must foster robust partnerships with other nations, 
removing regulatory obstacles to permit the flourishing of a dynamic 
aviation industry. Fourth, it must come to terms with and adequately 
address anomalous cases that recently have been brought before the 
Department. Finally, it must continue to protect vital U.S. interests, 
such as the Civil Reserve Air Fleet Program, and security and safety 
policies. We are seeking to address these concerns with proposed 
language in 14 CFR part 399. By refining and articulating our 
interpretation of the actual control requirement, we will ensure that 
we are effectively meeting our market-oriented statutory objectives, 
while promoting aviation policies that advance those objectives, and 
the future needs of the aviation industry and its consumers.
    We believe this proposed rulemaking should consider whether the 
Department's interpretation of ``actual control'' should be changed to 
reflect substantial structural changes that have taken place in global 
financial markets, taking into account whether there is reciprocity for 
U.S. investment and an Open Skies agreement governs aviation relations 
between the United States and the home country of a foreign investor, 
or any other relevant international legal obligations. This proposal is 
consistent with our obligation to foster a safe, healthy, and 
competitive airline industry that will remain capable of supporting 
U.S. economic growth by meeting the public's transportation needs, 
while retaining regulatory control over those areas within the 
appropriate realm of government oversight.\5\
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    \5\ 49 U.S.C. 40101(a), (e).
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    We are proposing to place this guidance in 14 CFR part 399, which 
is reserved for general policy statements. This provision is not 
intended to be procedural, but to provide guidance to air carriers when 
submitting information to the Department for a fitness determination.
    We tentatively find that our interpretation of the actual control 
test has failed to keep pace with changes in the global economy and 
evolving financial and operational realities in the airline industry 
itself, to the detriment of U.S. carriers. In view of the increasingly 
global character of finance and transportation, two things need to be 
done: U.S. policy must be more receptive to foreign investment, and 
broad guidelines need to be published to attract that investment, while 
at the same time protecting those areas of airline operations where 
there currently remains significant government involvement or 
regulation. We propose to adapt our interpretation of how foreign 
capitalization affects the ``actual control'' of U.S. airlines to 
reflect the new realities of globalization in the airline and financial 
industries. With this new guidance, we are striving to alleviate 
concerns that air carriers are being barred from a significant source 
of potential capital. In granting greater access to global capital, we 
are continuing our policy of allowing the market to operate with 
minimal regulation. We are proposing to refine and articulate our 
policy in an effort to provide guidance to air carriers with questions 
concerning the Department's interpretation of actual control.
    Carriers require significant capital investments in facilities, 
technology, and a variety of commercial arrangements. In their efforts 
to meet these challenges, U.S. air carriers should have the broadest 
access to the global capital markets permitted by law, so long as such 
access does not impinge on those areas of airline operations where 
there currently remains significant government involvement or 
regulation. Furthermore, new U.S. air carriers seeking to enter the 
market should similarly be able to obtain the financial capital 
necessary to launch their businesses.\6\ We tentatively do not believe 
that ``actual control'' should be interpreted in a way that needlessly 
restricts the commercial opportunities of U.S. air carriers and their 
ability to compete. In the context of several recent cases, where 
carriers have proposed using new cross-border financing vehicles, we 
have reviewed our policy and have begun to revise it to account for the 
ever-changing and increasingly liberalized financial markets. One such 
case is our recent decision regarding the Hawaiian Airlines 
reorganization.\7\ It is

[[Page 67394]]

a responsibility of the Department to ensure that the interpretation 
and application of its statutory obligations do not inadvertently or 
unnecessarily restrict access to the international capital markets by 
U.S. air carriers and prevent them from effectively competing in the 
global marketplace.\8\
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    \6\ See 49 U.S.C. 40101(a)(13) (encouraging new and small 
carriers).
    \7\ See Conclusions of the Department of Transportation 
regarding the citizenship of Hawaiian Airlines, available at Issues 
and Events, at http://ostpxweb.dot.gov/aviation/index.html.
    \8\ See 49 U.S.C. 40101(a)(6)(B) (placing maximum reliance on 
competitive market forces to attract capital); 49 U.S.C. 
40101(a)(12) (encouraging, developing and maintaining an air 
transportation system relying on actual and potential competition); 
49 U.S.C. 40101(a)(13) (encouraging entry by new and existing 
carriers); 49 U.S.C. 40101(a)(14) (promoting, encouraging, and 
developing civil aeronautics as a viable, privately owned industry); 
49 U.S.C. 40101(a)(15) (strengthening competitive position of U.S. 
carriers to ensure parity with foreign carriers).
---------------------------------------------------------------------------

    We have refined the standard used in determining actual control in 
the past by ad hoc adjudications to reflect changing industry and 
financial circumstances. For example, in the Northwest/KLM case we 
said,

    During the course of these [citizenship] assessments, we have 
seen the complexity and international makeup of these arrangements 
increase, new financial instruments emerge, and the 
interrelationships of these new instruments grow. Based on that 
experience, we have reexamined our application of the control test 
in order to reflect more accurately today's complex, global 
corporate and financial environment, consistent with the requirement 
for U.S. citizen control. Specifically, we have reviewed the 
relationship between voting equity, on the one hand, and nonvoting 
equity and debt, on the other.\9\
---------------------------------------------------------------------------

    \9\ In the Matter of the Acquisition of Northwest Airlines, Inc. 
by Wings Holdings, Inc., Order Modifying Conditions, Order 91-1-41 
(Jan. 23, 1991), at 9.

    A key issue in the liberalization of our control standard is 
whether to also consider circumstances that apply to certain foreign 
interests, but not to others. We believe that several considerations 
militate in favor of doing so--specifically, more latitude with respect 
to foreign investment should be allowed for a foreign interest whose 
homeland has both an Open Skies relationship with the U.S. and extends 
reciprocal investment opportunities with respect to its own airlines to 
U.S. sources of capital.\10\ By this proposal, we are proposing to 
reduce substantially the significance, for purposes of determining 
citizenship, of foreign influence over many purely economic decisions, 
such as choice of markets, type of equipment, and rate-setting. We 
think it generally inappropriate to extend such latitude to nationals 
of countries that resist similar openness in access to aviation markets 
and in investment opportunities in their own airlines. Section 
40101(a)(6) of our statute explicitly directs us to emphasize, 
generally, competition and access to capital. Among the policy factors 
we consider is ``placing maximum reliance on competitive market forces 
* * * to encourage efficient and well-managed air carriers to earn 
adequate profits and attract capital * * *.'' \11\ Moreover, just as 
the United States has certain vital interests that we cannot permit to 
be compromised by control by foreign interests, such as national 
security, we also have a basic duty to ensure that our airlines, and 
indirectly consumers, are not placed at an unfair competitive 
disadvantage by extending benefits to foreign interests where such 
benefits are not available to U.S. interests abroad. That would be both 
unwise and contrary to the purpose and spirit of our statutory policy 
goals--to recognize and encourage open international markets. We will, 
of course, also consider any relevant U.S. international legal 
obligations (see 49 U.S.C. 40105(b)).
---------------------------------------------------------------------------

    \10\ See 49 U.S.C. 40101(a)(15)(emphasizing U.S. carriers' 
ability to compete with foreign carriers). The law directs us to 
consider relevant foreign laws and requirements in carrying out our 
regulatory responsibilities. 49 U.S.C. 40105(b)(B).
    \11\ By the approach we are proposing here, we seek to balance 
and promote these considerations. With regard to international 
transportation, we are further exhorted to negotiate arrangements 
that provide for ``strengthening the competitive position of air 
carriers to ensure at least equality with foreign air carriers * * 
*.'' Id., Sec.  40101(e)(1). It is in keeping with our goals here to 
extend the benefits of this liberalization to countries that support 
this policy, but not to those that resist it.
---------------------------------------------------------------------------

    The law requires U.S. control of U.S.-flag airlines. This has not 
changed. We do not propose to allow ``actual control'' to shift to 
foreign hands. We do propose to ensure that the application of an 
``actual control'' standard results in U.S. citizen control being 
exercised in those areas of airline operations where there currently 
remains significant governmental involvement or regulation. Moreover, 
we want to ensure that the test is not applied so broadly so as to 
unnecessarily inhibit U.S. carriers' access to the global capital 
market.
    Our proposal would not affect the objective statutory requirements 
that a corporation must satisfy to qualify as a U.S. citizen, including 
the requirements that it be organized under the law of a U.S. 
jurisdiction; that 75 percent of the voting interest be owned or 
controlled by U.S. citizens; and that the President and two-thirds of 
the managing officers and directors be U.S. citizens. These standards 
are mandated by law and shall continue to be rigorously enforced, 
unless and until Congress changes them.
    In considering what areas of airline structure and finance should 
remain under the existing rubric of ``actual control'' we are mindful 
of certain important objectives. The first is the requirement that any 
U.S. carrier must maintain vigorous compliance with safety and security 
requirements. Similarly, U.S. carriers must be able to continue to 
incur and honor obligations made directly to the U.S. Government, in 
particular the Civil Reserve Air Fleet program administered by the U.S. 
Department of Defense. These are areas in which, despite economic 
deregulation, there continues to be significant Federal government 
regulation and involvement.\12\
---------------------------------------------------------------------------

    \12\ See 49 U.S.C. 40101(a)(1)-(3)(mandating safety as the 
highest priority) and Sec.  40101(a)(7)(mandating regulatory system 
responsive to the needs of the national defense).
---------------------------------------------------------------------------

    This proposal also retains the requirement that U.S. citizens have 
control (i.e., the ability to make decisions that are not subject to 
substantial influence by foreign interests) over the creation and 
amendment of the organizational documents (such as the charter, 
certificate of incorporation and by-laws, and/or membership agreement) 
of the governing entity. This, of course, does not mean that the actual 
draftsman in a law firm or corporate legal department need be a U.S. 
citizen. Rather, such ``organic'' documents must clearly reflect, by 
both genesis and content, initial and continued actual control by U.S. 
citizens. Foreign citizens may hold rights essential to protect their 
financial interests--for example, provisions requiring concurrence 
before a company may enter bankruptcy or be dissolved--but the 
fundamental organization of the company must remain in U.S. citizen 
hands.
    With these considerations in mind, we propose a policy statement 
setting forth the criteria that will be used to determine whether an 
air carrier is under the ``actual control'' of U.S. citizens.
    With this refinement, responsibility for corporate documents and 
for policies and procedures related to safety, to security, and to CRAF 
must still be under the control of U.S. citizens to the extent that 
they are today. This approach will allow U.S. airlines to benefit from 
increased access to the foreign capital markets while ensuring that 
U.S. citizens continue to exert control in areas where significant 
government regulation and oversight remains.
    We recognize that practitioners will need guidance on the 
implementation of

[[Page 67395]]

this policy in the context of actual cases, and we encourage 
consultation with the Department before any irrevocable decisions are 
made, as is customarily done now. We believe, however, that examples of 
how the new policy would apply may be useful. In offering such 
examples, we caution as always that no ``template'' is possible, and 
that each case will continue to be examined on its own unique merits.
    In one case, foreign interest F, a citizen of an Open-Skies 
partner, will own an interest in U.S. air carrier A, including up to 
25% of the voting stock. Two of A's seven directors will represent F, 
and three of A's twelve senior management officials will be nominated 
by F, so that there is compliance with the statute's numerical 
requirements. One of these F nominees will be in charge of the 
airline's day-to-day operations, and another will head a committee 
whose responsibility is setting market entry strategy; both will have 
influence in the purchase of aircraft. In the past, such 
responsibilities would have raised actual control issues. Under the 
proposed policy they would not, absent any other indicia of control, 
such as control over matters having an impact on CRAF participation, 
safety, security, by-laws or organizational documents.
    In a second example, foreign interest X, also a citizen of an Open-
Skies partner, would have similar participation in U.S. air carrier B. 
In contrast to the first example, however, X's homeland declines to 
extend reciprocal investment opportunities to U.S. air carriers and 
other U.S. interests, and there are no other relevant international 
legal obligations. X and B would therefore be subject to our 
traditional control analysis, including the question of unacceptable 
influence by officers nominated by X.
    We invite comments on our proposed policy statement on foreign 
investment in U.S. air carriers. Among the specific issues that we are 
interested in receiving comments on is whether reciprocal access to 
investment in other countries' airlines should be required in order to 
take advantage of the revised interpretation of ``actual control.''

Part 204 Modifications

    In addition to the policy language we are proposing, we are also 
proposing minor changes to Part 204 that will correct typographical 
errors and update sections in compliance with the new statute.
    In Sec.  204.1, we propose to add a sentence that will reference 
the new part 399 language so that air carriers will be directed to the 
new policy. In Sec.  204.2, we propose to amend the definition of 
``citizen of the United States'' to mirror the language that is now 
contained in 49 U.S.C. 40102(a)(15). The definition in the statute was 
amended by Congress in 2004 to include the phrase ``which is under the 
actual control of citizen of the United States'' in the part of the 
definition concerning corporations. We believe that the regulations 
should mirror the text of the statute as it is currently written. 
Finally, we are also proposing minor changes to Sec.  204.5 that will 
clarify language in paragraph (a)(2); delete a typographical error in 
paragraph (b); revise the address in paragraph (c); and add a new 
paragraph (d) that replaces the last sentence of paragraph (c).
    We believe that these amendments to part 204 will make the 
regulations easier understood by air carriers consulting the sections 
while submitting information to the Department.

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory Planning and Review) and DOT 
Regulatory Policies and Procedures

    Executive Order 12866, Regulatory Planning and Review, directs the 
Department to assess both the costs and the benefits of a regulatory 
change. We are not allowed to propose or adopt a regulation unless we 
make a reasoned determination that the benefits of the intended 
regulation justify the costs. Our assessment of this rulemaking 
indicates that its negative economic impact is minimal because the rule 
will not impose any new costs on the affected certificated and commuter 
air carriers. This rulemaking is considered significant under DOT 
Policies and Procedures and E.O. 12866 because of public interest. It 
was reviewed by the Office of Management and Budget under Executive 
Order 12866.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), as amended 
by the Small Business Regulatory Enforcement Fairness Act of 1996, 
requires federal agencies, as part of each proposed rule, to consider 
regulatory alternatives that minimize the impact on small entities 
while achieving the objectives of the rulemaking. This proposed rule 
clarifies and codifies the Department's practice concerning its 
interpretation of ``actual control'' in determining air carrier 
fitness/citizenship to receive or retain a certificate of public 
convenience and necessity or commuter authority. We certify that this 
action will not have a significant economic impact on a substantial 
number of small entities.

Trade Impact Assessments

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

International Compatibility

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

Unfunded Mandates Reform Act of 1995

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

Executive Order 13132, Federalism

    This action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 13132, dated August 4, 1999 (64 
FR 43255). This proposed rule does not have a substantial direct effect 
on, or significant federalism implications for the States, nor would it 
limit the policymaking discretion of the States.
    This proposed rule would not directly preempt any State law or 
regulation, nor impose burdens on the States. This

[[Page 67396]]

action would not have a significant effect on the States' ability to 
execute traditional State governmental functions. The agency has 
therefore determined that this proposal does not have sufficient 
federalism implications to warrant the preparation of a federalism 
summary impact statement.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.) 
requires federal agencies to obtain approval from the Office of 
Management and Budget (OMB) for each collection of information they 
conduct, sponsor, or require through regulation. The agency has 
determined that the proposed rule would not impose any additional 
requirements, but rather serves to codify our existing procedures. 
Thus, there is no change in the paperwork collection as currently 
exists.

List of Subjects

14 CFR Part 204

    Air carriers, Reporting and recordkeeping requirements.

14 CFR Part 399

    Administrative practice and procedure, Air carriers, Air rates and 
fares, Air taxis, Consumer protection, Small businesses.
    For the reasons stated in the preamble, the Department proposes to 
amend 14 CFR part 204 and 14 CFR part 399 as set forth below:

PART 204--DATA TO SUPPORT FITNESS DETERMINATIONS

    1. The authority citation for part 204 continues to read as 
follows:

    Authority: 49 U.S.C. Chapters 401, 411, 417.

    2. Revise Sec.  204.1 to read as follows:

Sec.  204.1  Purpose.

    This part sets forth the fitness data that must be submitted by 
applicants for certificate authority, by applicants for authority to 
provide service as a commuter air carrier to an eligible place, by 
carriers proposing to provide essential air transportation, and by 
certificated air carriers and commuter air carriers proposing a 
substantial change in operations, ownership, or management. This part 
also contains the procedures and filing requirements applicable to 
carriers that hold dormant authority. See Sec.  399.88 for policy 
statements concerning ``actual control'' of air carriers.
    3. Revise Sec.  204.2(c)(3) to read as follows:

Sec.  204.2  Definitions.

* * * * *
    (c) Citizen of the United States means:
* * * * *
    (3) A corporation or association organized under the laws of the 
United States or a State, the District of Columbia, or a territory or 
possession of the United States, of which the president and at least 
two-thirds of the board of directors and other managing officers are 
citizens of the United States, which is under the actual control of 
citizens of the United States, and in which at least 75 percent of the 
voting interest is owned or controlled by persons that are citizens of 
the United States.
* * * * *
    4. Amend Sec.  204.5 as follows:
    A. Revise paragraph (a)(2) to read as set forth below;
    B. Amend paragraph (b) to remove the ``s'' after ``Carrier'' in the 
third sentence in the reference to ``Air Carrier Fitness Division'';
    C. Revise paragraph (c) to read as set forth below; and
    D. Add a new paragraph (d) before the OMB control number to read as 
set forth below.
    The revisions read as follows:

Sec.  204.5  Certificated and commuter air carriers undergoing or 
proposing to undergo a substantial change in operations, ownership, or 
management.

    (a) * * *
    (2) The change substantially alters the factors upon which its 
latest fitness finding is based, even if no new authority is required.
* * * * *
    (c) Information filings pursuant to this section made to support an 
application for new or amended certificate authority shall be filed 
with the application and addressed to Docket Operations, U.S. 
Department of Transportation, 400 Seventh Street, SW., PL-401, 
Washington, DC 20590.
    (d) Information filed in support of a certificated or commuter air 
carrier's continuing fitness to operate under its existing authority in 
light of substantial changes in its operations, management, or 
ownership, including changes that may affect the air carrier's 
citizenship, shall be addressed to the Chief, Air Carrier Fitness 
Division, Office of the Secretary, U.S. Department of Transportation, 
400 Seventh Street, SW., Washington, DC 20590.
* * * * *

PART 399--STATEMENTS OF GENERAL POLICY

    5. The authority citation for Part 399 continues to read as 
follows:

    Authority: 49 U.S.C. 40101 et seq.

    6. Add a new Sec.  399.88 to read as set forth below:

Sec.  399.88  Actual control of U.S. air carriers.

    (a) Applicability. This policy shall apply to all direct air 
carriers submitting information to the Air Carrier Fitness Division 
under part 204 of this title, with respect to its status as a ``Citizen 
of the United States'' as defined in 49 U.S.C. 40102(a)(15), of the 
Act. This policy shall only apply to the interpretation of ``actual 
control'' contained in 49 U.S.C. 40102(a)(15)(C) in determining air 
carrier fitness/citizenship to receive or retain a certificate of 
public convenience and necessity.
    (b) Policy. In cases where there is significant involvement in 
investment by non-U.S. citizens and either where their home country 
does not deny citizens of the United States reciprocal access to 
investment in their carriers and does not deny U.S. carriers full and 
fair access to their air services market, as evidenced by an Open Skies 
agreement, or where it is otherwise appropriate to ensure consistency 
with U.S. international legal obligations, the Department will consider 
the following when determining whether U.S. citizens are in ``actual 
control'' of the carrier:
    (1) All necessary organizational documentation, including such 
documents as charter of incorporation, certificate of incorporation, 
by-laws, membership agreements, stockholder agreements, and other 
documents of similar nature. The documents will be reviewed to 
determine whether U.S. citizens have and will in fact retain actual 
control of the air carrier through such documents.
    (2) The carrier's operational plans and actual operations to 
determine whether U.S. citizens have actual control with respect to:
    (A) Decisions whether to make and or continue Civil Reserve Air 
Fleet (CRAF) commitments, and, once made, the implementation of such 
commitments with the Department of Defense;
    (B) Carrier policies and implementation with respect to 
transportation security requirements specified by the Transportation 
Security Administration; and
    (C) Carrier policies and implementation with respect to safety 
requirements specified by the Federal Aviation Administration.

Michael W. Reynolds,
Acting Assistant Secretary for Aviation and International Affairs.
[FR Doc. 05-22056 Filed 11-3-05; 8:58 am]
BILLING CODE 4910-62-P
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