[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
U.S.-E.U. OPEN SKIES AGREEMENT: WITH A FOCUS ON THE U.S. DEPARTMENT OF
TRANSPORTATION'S NOTICE OF PROPOSED RULEMAKING (NPRM) REGARDING ACTUAL
CONTROL OF U.S. AIR CARRIERS
=======================================================================
(109-44)
HEARING
BEFORE THE
SUBCOMMITTEE ON
AVIATION
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
FEBRUARY 8, 2006
__________
Printed for the use of the
Committee on Transportation and Infrastructure
____
U.S. GOVERNMENT PRINTING OFFICE
28-260 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
DON YOUNG, Alaska, Chairman
THOMAS E. PETRI, Wisconsin, Vice- JAMES L. OBERSTAR, Minnesota
Chair NICK J. RAHALL, II, West Virginia
SHERWOOD L. BOEHLERT, New York PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee ELEANOR HOLMES NORTON, District of
WAYNE T. GILCHREST, Maryland Columbia
JOHN L. MICA, Florida JERROLD NADLER, New York
PETER HOEKSTRA, Michigan CORRINE BROWN, Florida
VERNON J. EHLERS, Michigan BOB FILNER, California
SPENCER BACHUS, Alabama EDDIE BERNICE JOHNSON, Texas
STEVEN C. LaTOURETTE, Ohio GENE TAYLOR, Mississippi
SUE W. KELLY, New York JUANITA MILLENDER-McDONALD,
RICHARD H. BAKER, Louisiana California
ROBERT W. NEY, Ohio ELIJAH E. CUMMINGS, Maryland
FRANK A. LoBIONDO, New Jersey EARL BLUMENAUER, Oregon
JERRY MORAN, Kansas ELLEN O. TAUSCHER, California
GARY G. MILLER, California BILL PASCRELL, Jr., New Jersey
ROBIN HAYES, North Carolina LEONARD L. BOSWELL, Iowa
ROB SIMMONS, Connecticut TIM HOLDEN, Pennsylvania
HENRY E. BROWN, Jr., South Carolina BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois SHELLEY BERKLEY, Nevada
TODD RUSSELL PLATTS, Pennsylvania JIM MATHESON, Utah
SAM GRAVES, Missouri MICHAEL M. HONDA, California
MARK R. KENNEDY, Minnesota RICK LARSEN, Washington
BILL SHUSTER, Pennsylvania MICHAEL E. CAPUANO, Massachusetts
JOHN BOOZMAN, Arkansas ANTHONY D. WEINER, New York
JIM GERLACH, Pennsylvania JULIA CARSON, Indiana
MARIO DIAZ-BALART, Florida TIMOTHY H. BISHOP, New York
JON C. PORTER, Nevada MICHAEL H. MICHAUD, Maine
TOM OSBORNE, Nebraska LINCOLN DAVIS, Tennessee
KENNY MARCHANT, Texas BEN CHANDLER, Kentucky
MICHAEL E. SODREL, Indiana BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania RUSS CARNAHAN, Missouri
TED POE, Texas ALLYSON Y. SCHWARTZ, Pennsylvania
DAVID G. REICHERT, Washington JOHN T. SALAZAR, Colorado
CONNIE MACK, Florida JOHN BARROW, Georgia
JOHN R. `RANDY' KUHL, Jr., New York
LUIS G. FORTUNO, Puerto Rico
LYNN A. WESTMORELAND, Georgia
CHARLES W. BOUSTANY, Jr., Louisiana
JEAN SCHMIDT, Ohio
(ii)
SUBCOMMITTEE ON AVIATION
JOHN L. MICA, Florida, Chairman
THOMAS E. PETRI, Wisconsin JERRY F. COSTELLO, Illinois
HOWARD COBLE, North Carolina LEONARD L. BOSWELL, Iowa
JOHN J. DUNCAN, Jr., Tennessee PETER A. DeFAZIO, Oregon
VERNON J. EHLERS, Michigan ELEANOR HOLMES NORTON, District of
SPENCER BACHUS, Alabama Columbia
SUE W. KELLY, New York CORRINE BROWN, Florida
RICHARD H. BAKER, Louisiana EDDIE BERNICE JOHNSON, Texas
ROBERT W. NEY, Ohio JUANITA MILLENDER-McDONALD,
FRANK A. LoBIONDO, New Jersey California
JERRY MORAN, Kansas ELLEN O. TAUSCHER, California
ROBIN HAYES, North Carolina BILL PASCRELL, JR., New Jersey
HENRY E. BROWN, Jr., South Carolina TIM HOLDEN, Pennsylvania
TIMOTHY V. JOHNSON, Illinois SHELLEY BERKLEY, Nevada
SAM GRAVES, Missouri JIM MATHESON, Utah
MARK R. KENNEDY, Minnesota MICHAEL M. HONDA, California
JOHN BOOZMAN, Arkansas RICK LARSEN, Washington
JIM GERLACH, Pennsylvania MICHAEL E. CAPUANO, Massachusetts
MARIO DIAZ-BALART, Florida ANTHONY D. WEINER, New York
JON C. PORTER, Nevada BEN CHANDLER, Kentucky
KENNY MARCHANT, Texas RUSS CARNAHAN, Missouri
CHARLES W. DENT, Pennsylvania JOHN T. SALAZAR, Colorado
TED POE, Texas NICK J. RAHALL II, West Virginia
JOHN R. `RANDY' KUHL, Jr., New BOB FILNER, California
York, Vice-Chair JAMES L. OBERSTAR, Minnesota
LYNN A. WESTMORELAND, Georgia (Ex Officio)
DON YOUNG, Alaska
(Ex Officio)
(iii)
CONTENTS
TESTIMONY
Page
Byerly, Hon. John, Deputy Assistant Secretary for Transportation
Affairs, U.S. Department of State.............................. 15
Dunkerley, Mark B., President and Chief Executive Officer,
Hawaiian Airlines, Inc......................................... 44
O'Keefe, M. Rush, Jr., Senior Vice President and General
Counsel, FEDEX................................................. 44
Shane, Hon. Jeff, Under Secretary for Policy, U.S. Department of
Transportation................................................. 15
Smisek, Jeffrey A., President, Continental Airlines............. 44
Whitaker, Michael G., Vice President, Alliances, International
and Regulatory Affairs, United Airlines World Headquarters..... 44
Woerth, Captain Duane, President, Air Line Pilots Association... 44
Wytkind, Edward, President, Transportation Trades Department,
AFL-CIO........................................................ 44
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois............................. 70
Johnson, Hon. Eddie Bernice, of Texas............................ 77
Oberstar, Hon. James L., of Minnesota............................ 81
Porter, Hon. Jon, of Nevada...................................... 89
Salazar, Hon. John T., of Colorado............................... 90
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Byerly, Hon. John............................................... 60
Dunkerley, Mark B............................................... 73
O'Keefe, M. Rush, Jr............................................ 84
Shane, Hon. Jeff................................................ 92
Smisek, Jeffrey A............................................... 96
Whitaker, Michael G............................................. 147
Woerth, Captain Duane........................................... 158
Wytkind, Edward................................................. 180
U.S.-E.U. OPEN SKIES AGREEMENT: WITH A FOCUS ON DOT'S NPRM REGARDING
ACTUAL CONTROL OF U.S. AIR CARRIERS
----------
Wednesday, February 8, 2006
House of Representatives, Subcommittee Aviation,
Committee on Transportation and Infrastructure,
Washington, D.C.
The subcommittee met, pursuant to call, at 10:00 a.m., in
Room 2167, Rayburn House Office Building, the Hon. John L. Mica
[chairman of the subcommittee] presiding.
Mr. Mica. Good morning. I would like to welcome everyone
this morning. We are getting accustomed to some of the new
electronic and other improvements that have been made here in
the committee room. This is the first time we are doing our
hearing in these renovated facilities.
And we are pleased to see Jimmy Miller back. Where is Mr.
Miller? Everybody wishes him a speedy recovery.
[Applause.]
Mr. Mica. It looks like he is doing well and back at it
again. We do appreciate his many years of service, and it does
take a toll on one's health, but we appreciate all he has done
and wish him a speedy recovery.
Well, this morning, the Aviation Subcommittee's hearing is
going to deal with the United States and European Union Open
Skies Agreement, and also the other subject that is closely
related is the Department of Transportation's Notice of a
Proposed Rule Change relating to actual control dealing with
aviation ownership issues.
The order of business will start with opening statements. I
will start with mine and then yield to members. Then I believe
we have two panels of witnesses today, and we will proceed with
those witnesses.
So, again, I would like to welcome everyone this morning,
and we will go ahead and get started.
I have an opening statement, and I will proceed with that
and then, as I said, will yield to other members.
This morning's hearing, as I said, will focus on two issues
that are both timely, and I believe very important. The
Subcommittee will receive testimony, first about the Department
of Transportation's Actual Control Rulemaking Proposal, and
then secondly, we are going to take a look and review the
status of the tentative Open Skies Agreement between the United
States and the European Union.
There is some urgency to resolving these issues. Several
United States airlines in recent months have announced plans to
expand and in some cases to significantly increase their
international services. This reflects the increasingly common
belief that greater service to foreign locations will be a very
key element in the U.S. airline industry's efforts to recover
from some four years of very difficult financial problems. The
American aviation industry has lost, as we know, some $40
billion since 2001. It does need the freedom today to compete
and succeed anywhere and everywhere.
Some of the best future opportunities for expansion will
really depend on having U.S. cities link with growing markets
that are across the globe. All of us in labor management, U.S.
communities, and government have an important stake in the
removal of barriers that will allow our airlines to pursue
competitive opportunities necessary for future economic success
in that global marketplace. Expanding air transportation
between the United States and foreign countries can indeed hold
the promise of directly improving the well being of our airline
workers, can also benefit our air travelers, and certainly can
also benefit American cities that have this service.
This hearing will permit us to learn more about the status
of the Administration's efforts to secure a new Open Skies
Agreement with the European Union. We have to ask ourselves
today, however: Are the skies between Europe and America
opening, or will the protective self-interests provide enough
thunder and clouds to rain on that prospect?
The growing opportunities that we have seen with Open Skies
Agreements has been a singular achievement for our Nation's
international commercial aviation policy. It began amidst much
skepticism, both in the United States and among our aviation
trading partners overseas. Of course, reality has silenced some
of the initial skeptics. Our Government's perseverance
exhibited by administrations of both parties in pressing for
accepting of Open Skies principles has produced extraordinary
benefits for both passenger and for cargo airlines.
With difficulties, again that the American aviation
industry has had in attracting capital and also in expanding
service and providing better future opportunities, wages, and
benefits for employees, Open Skies, I believe can have many
positive aspects and benefits for the future.
However, one contentious issue that has emerged is the
question of ownership and control of the United States
airlines. Our European counterparts regard this as indeed a
very critical issue. The Department's November 7th Actual
Control Notice of Proposed Rulemaking is an effort to respond
to that concern.
Congress has been involved in the criteria for U.S. airline
and aircraft ownership for nearly eight decades now. The Air
Commerce Act of 1926 included a U.S. ownership requirement.
Most recently, Congress in 2003 revised the longstanding
definition of a citizen in our Federal Aviation Law. That
definition can be traced back to the Civil Aeronautics Act of
1938. This history tells us that Congress has been always
mindful of citizenship and ownership issues. This hearing
continues that tradition.
We look forward to Under Secretary Shane informing us on
how the Department's Proposed New Actual Control Test will
affect labor management relations in the airlines, also its
effect on consumer protection issues and day to day management
of U.S. airlines. Also we need to look at how this affects the
Department of Defense's ability to obtain the civilian airlift
it so critically needs with respect to the Civil Reserve Air
Fleet Program.
Similarly, we look forward to both Deputy Assistant Byerly
and Under Secretary Shane advising us whether a change in the
Actual Control Test language will result, what exactly will be
produced as a result, or do we risk the rejection and
disappointment that we experienced in June of 2004.
Our Subcommittee also will look forward to hearing the
views of the second panel which is composed of airline and
labor leaders from across the Country.
All of us who have a role in the formulation of the United
States Government's Commercial Aviation policies realize the
importance of encouraging U.S. aviation to maintain its
historic preeminence. We hope that today's witnesses will
provide us with some insights to how we can achieve that goal.
I am pleased now to recognize the Ranking Member of the
Subcommittee, the gentleman from Illinois, Mr. Costello.
Mr. Costello. Mr. Chairman, thank you, and Mr. Chairman, I
do have a statement which I will enter into the record.
I first want to thank you for calling this hearing today to
examine the U.S. Open Skies Agreement with a focus on DOT's
NPRM regarding actual control of U.S. carriers. The
Department's proposal would change longstanding policies
prohibiting foreign interests from exercising actual control
over United States airlines.
The question before us today is: Is it beneficial to allow
foreign interests to exert a greater authority or even
operational control over the operations of domestic carriers? I
have serious concerns of allowing greater control, and I
certainly believe that this should not be in the hands of the
Department of Transportation solely, but the Congress of the
United States should have the authority to issue a final
opinion and to legislate on this matter.
For over 65 years, the Civil Aeronautics Board and its
successor, the Department of Transportation, have required U.S.
citizens to have actual control over all management decisions
of U.S. airlines. Congress has repeatedly refused requests from
the Department of Transportation to pass legislation to allow
foreign interests to gain increased control over U.S. airlines.
In fact, in 2003, Congress passed an amendment requiring the
Department of Transportation to continue to prevent foreign
interests from exercising actual control over U.S. airlines.
Yet, despite our strong opposition, the opposition of the
Congress to any change in foreign control, the Department of
Transportation proposed new standards: foreign investors would
be allowed to exercise control over all commercial aspects over
U.S. airline operations. This includes marketing, fleet
composition, routes, branding, alliances, and pricing, just to
name a few. U.S. citizens would be required to control only
decisions affecting the Civil Reserve Air Fleet, transportation
security, safety, and organizational documents.
I don't believe the Department of Transportation has the
legal authority to interpret the statutory requirement that
U.S. citizens must have actual control of a U.S. airline and
limit it to a requirement that U.S. citizens should have
control over only safety, security, and Civil Reserve Air Fleet
and not over economic decisions.
If the new standard is allowed to be implemented, there
could be serious consequences for the Nation's aviation system.
Foreign interests could restructure the route system and fleet
of U.S. airlines so that the U.S. airlines would become, in
effect, a feeder for the international operations of foreign
carriers. Employees of U.S. airlines would lose high quality
jobs to employees of foreign carriers. The service,
particularly service to small communities, the essential air
service program in the United States today serving rural
America in Illinois, in my District, my State, and throughout
the United States could be impacted by any changes in the route
system and fleet decisions.
We should not underestimate the impact of the Department of
Transportation's policy proposal in how it would affect safety.
I am particularly concerned that allowing foreign interests to
control U.S. carriers will accelerate the outsourcing of
critical safety functions, such as maintenance and flight
attendants' jobs.
Paul Gretch, Director of the Office of International
Aviation at DOT on November 29, 2005, stated that if the NPRM
was made final, foreign investors would be able to direct the
airlines to buy foreign aircraft and to have repairs
exclusively done overseas. A policy that eliminates U.S. jobs
and may compromise the safety of the flying public is a policy
that we cannot and should not support.
I strongly support H.R. 4542, which prohibits the
Department of Transportation for one year from issuing any
final decision or final rule that requires the Department of
Transportation within 90 days of enactment to issue a report to
Congress that assesses the impact on all aspects of U.S.
airlines operations including national defense, safety,
security, competition for small communities, air service, and
airline employees. H.R. 4542 will ensure that Congress has
adequate time to review these complex issues, and I urge my
colleagues to co-sponsor and support this legislation. Any
major change in policy on foreign control of U.S. airlines
should be approved by the Congress, not imposed by the
Department of Transportation.
Mr. Chairman, I look forward to hearing from our witnesses
today and yield back the balance of my time.
Mr. Mica. I thank the gentleman, and his entire statement
will be made part of the record without objection.
I am pleased to recognize the distinguished gentleman from
Tennessee, Mr. Duncan, former Chair of the Subcommittee.
Mr. Duncan. Well, thank you, Mr. Chairman. I will be very
brief because both you and Mr. Costello have summarized the
issue very well in your statements, and as both of you have
made clear, this is not a simple issue or as simple as it might
appear on the surface. I agree with Mr. Costello that this is
something that both the Department of Transportation and the
Congress should look at very, very closely to try to find all
the different ramifications. We want to make sure that we don't
lose, in some indirect ways, more American jobs to other
countries. That is very, very important to all of us.
I thank you for calling this hearing, and I am glad that we
are looking into this in a detailed way. We should look before
we leap on this particular matter.
Thank you very much.
Mr. Mica. I thank the gentleman.
I am pleased to recognize the Ranking Member of the full
Committee, Mr. Oberstar.
Mr. Oberstar. Thank you very much, Mr. Chairman. This is a
very important hearing. I am glad you have called it. I am glad
to see the room full. I welcome our witnesses and those in the
audience to our newly refurbished committee hearing room,
although we are missing a few elder statesmen on the wall.
We gather to examine in detail the most important aviation
policy decision since deregulation was enacted by Congress in
1978. The ownership proposal before us is different, however.
The difference is that it was bargained away in an
international trade arena like the much bemoaned Bermuda II
Agreement of the Carter years. Deregulation was enacted by the
Congress.
Had this outcome been negotiated by any previous Assistant
Secretary of Transportation, I would have said, you can shrug
it off as the work of a duped novice, out of his league,
unwittingly trading away the crown jewel of American
transportation, aviation. But this was not the work of
amateurs. This was the work done knowingly, carefully
constructed by the most seasoned negotiator in America's
aviation trade history, a man I love as a friend, Jeff Shane.
He has thousands of hours of experience, Mr. Chairman, at the
international aviation trade bargaining table, dealing with
dozens of wily foreign competitors. He was not duped.
This decision was made with full knowledge of U.S. law, of
historical precedence in the CAB and the Department of
Transportation, and Department of State at the international
bargaining table, and in the domestic area, and in U.S. court
cases on the matter of ownership and control. And the decision
was clearly made with the concurrence of the next most
experienced aviation trade policy authority, the Secretary of
Transportation. The NPRM before us was artfully crafted,
carefully and shrewdly worded, and in the statements that I
have read that Mr. Shane stoutly defended.
But its purpose is to hand over U.S. airlines at their most
vulnerable moment to their international trade competitors, and
that will be the force and effect of this NPRM if it becomes a
rule and is implemented. But I caution that it will not go that
far. If this Congress does not act, if this Congress stands
meekly by and allows the stroke to be carried through, someone
will challenge it in court, and the court will overturn that
decision. But, if not, history will record it as Bermuda III.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
The gentleman from New Jersey, Mr. LoBiondo.
Mr. LoBiondo. Thank you, Mr. Chairman, for holding this
very important meeting.
For over 60 years, it has been the standing policy of this
Country to ensure U.S. citizens control the operation of our
airlines. Requiring U.S. control is critical for a number of
reasons, most importantly, for our homeland and economic
security. I am very, very concerned about the DOT's proposed
rule and that it could severely undermine this critical policy.
Allowing the daily operations of our airlines to be controlled
by competing and potentially unfriendly foreign interests could
undermine our homeland security and national defense and result
in the loss of U.S. jobs.
I appreciate the pressure the Administration is under to
complete an Open Skies Agreement with the European Union, and I
want to see an agreement reached as well. It would benefit our
airlines and our citizens traveling to Europe tremendously, but
it cannot, I repeat, it cannot come at the expense of our
homeland and economic security. And that is why Ranking Member
Oberstar and I introduced legislation to delay the
implementation of this rule. There are too many unanswered
questions on what impact this rule will have on homeland
security, national defense, access to air service, and American
jobs.
Once again, Mr. Chairman, I would like to thank you for
holding this hearing, and I look forward to hearing from our
witnesses.
Mr. Mica. I thank the gentleman.
I would like to recognize the gentlelady from Texas, Ms.
Johnson.
Ms. Johnson. Thank you very much, Mr. Chairman, and I want
to commend you and Ranking Member Costello for holding this
important and timely hearing.
The Administration's most recent proposal to alter policy
regarding the role of foreign ownership in U.S. airlines
carriers is an issue that, without question, warrants the full
attention and oversight of this Committee. Despite the express
consent of Congress in 2003 regarding the actual control of
U.S. carriers by U.S. citizens, the Administration seems intent
on circumventing the will of this body in an effort to fast
track an international air service agreement.
While I wholeheartedly support the notion of our aviation
industry being afforded every opportunity to excel in the
global economy, I do not support the Administration's utter
disregard of this Committee in achieving that objective. Any
modification to laws governing foreign control of domestic
carriers will have enormous implications for industry
stakeholders and jobs here at home.
As a result, such changes should not be hastily promulgated
through a proposed rulemaking introduced in the dead of night
while we were busy over here looking at something else in
emergency. The Congress should be afforded the opportunity to
perform the necessary due diligence, conduct hearings, and
debate any proposed changes to foreign ownership laws.
To characterize DOT's current rulemaking proposal as an
artful maneuver would be an understatement. DOT asserts that in
order for the U.S. air transportation industry to remain a
leader in the global economy, a reinterpretation of actual
control is needed to ensure access to capital afforded by
global financial markets.
Under DOT's proposed rule, foreign investors would be
allowed to exercise decisions over all commercial aspects of
domestic carrier operations. U.S. citizens would be required to
control only decisions related to safety, security,
organizational documents, and the Civil Reserve Air Fleet. To
think that commercial aspects have no implication on security,
safety, and the CRAF Program underscores the shortsightedness
of this proposal.
In closing, I would like to state for the record that I
have added my name to the growing list of bipartisan opposition
against this proposed rule. It is my view that DOT's proposed
changes to the foreign control laws clearly exceed the agency's
legal authority and conflict with the plain meaning of current
law. I support the halting of DOT from issuing any final rule
on actual control and hope that we, as a Committee, continue to
proactively exercise our oversight obligation on this matter.
Thank you, and I yield back.
Mr. Mica. I thank the gentlelady.
Mr. Ney?
Mr. Ney. Thank you, Mr. Chairman.
I think everybody has heard today from our colleagues about
how they feel about this, and it is a bipartisan feeling which
I also add to. I also joined Congressman Oberstar and LoBiondo
in supporting their bill which would prohibit any final
decision.
Also, I think this is a little bit comparable, and it will
as time goes on here in the House, be comparable to when China
attempted to come over here and basically buy an oil company,
and you saw the outpour here in the U.S. House. In this case,
it is not China necessarily, but it is still about foreign
control or American control, and I think you are going to see
the same attitude on a bipartisan basis.
Again, the restrictions date back to 1926, and the Congress
has reaffirmed over and over our intent to keep the control of
airlines in the hands of Americans. I am concerned about the
outsourcing trend all the way around, and in this case I think
it is also an outsourcing issue. Critical safety operations are
being outsourced. It has been reported that major air carriers
are outsourcing 51 percent of their maintenance operations.
Customer service operations are being outsourced.
I can tell you, personally. Usually our office books the
flights here to Washington. I went ahead and called an air
carrier. Booked the flight change myself. Got to Port Columbus,
and then the lady said, where is your--I won't say which
airline it was--but where is your employee badge? I said, why
is that? She said, you are rated an employee rate to fly to
Washington. Well, today, that is all you need--a private travel
controversy to be on the airline's tab as an employee to
Washington D.C. And she said, this is happening all the time.
Well, I found out I was calling, I think it was, India.
That is where I was calling for my reservation. Nothing against
India, but I think that if the airlines, and I understand one
of them has now stopped this practice, if they look at it, I
think they are losing money because people are not booked on
proper flights.
But it is another example, again, of outsourcing. I don't
know that it is to the benefits, frankly, of the airline
industry. I know it is not to the benefit of the American
workers. So now, we may be allowing the airlines to outsource
financial control.
The Department of Transportation assures us that Americans
will still be in charge of safety and security operations, but
I think we have to ask ourselves: Will safety and security be
next? If a foreign company is making the financial decisions,
how can we be sure they are not making vital safety and
security decisions?
The final question I pose, and I don't know if it can be
answered or not, but I would like to ask it: Could this new
rule jeopardize the Pentagon's Civil Reserve Air Fleet Program,
which transported nearly a half million troops to Iraq? So, in
other words, if this does come under the control or the
interests, and the country doesn't agree with maybe what we are
doing in a situation in a time of war, would their influence be
able to say, we will have to find another way to get the troops
over there? And I just throw that out there, I think, as a
vital question.
I thank the Chairman for the hearing, and I look forward to
the witnesses.
Mr. Mica. I thank the gentleman.
Mr. Salazar?
Mr. Salazar. Thank you, Mr. Chairman. Thank you for having
this important hearing today.
Like many of my colleagues, I am concerned about the
current state of the U.S. aviation industry and in particular
how it impacts rural America. The financial instability that
has been plaguing the industry means higher costs and fewer
choices for consumers. It also has a direct impact on jobs in
America. For this reason, I support the need to establish an
Open Skies Agreement between the E.U. and the United States.
However, I believe that there are some areas where we can agree
on what will benefit both markets and consumers.
But I also have some serious concerns about the proposed
rule relating to foreign ownership of U.S. air carriers. This
is a complicated issue and with many competing interests. It is
not a decision that we should make lightly or without
Congressional involvement.
I look forward to hearing today's testimony and ask that
the witnesses touch on the Oberstar-LoBiondo bill and their
opinion on what a one year delay would or would not accomplish.
My number one priority is to determine how this will impact
those living in rural America. To me, an Open Skies Agreement
means nothing if rural America loses air service and cannot
conveniently take advantage of the service routes.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Mr. Poe?
Mr. Poe. Thank you, Mr. Chairman. Thanks for holding this
hearing.
With many airlines in financial trouble, it is important
for us to look at some of the causes that put them there and
solutions we can help resolve here in Congress. The DOT seems
to believe that interpreting the law to allow for further
foreign ownership or foreign control of U.S. airlines is one of
those solutions.
The reason behind this has been to encourage foreign
investment in U.S. carriers and to help the U.S.-E.U. Open
Skies negotiations. However, it seems to me that this is very
flawed reasoning. We do not need foreign investment in U.S. air
carriers. Do we really want foreign countries controlling the
American skies? Do we want foreign countries replacing our
American Boeing fleet, for example, with the Airbus?
I am not sure the DOT even has the unilateral authority to
act without Congress' approval. And as to the Open Skies
Agreement, I don't see that the rule change is providing us
with further access to the E.U. It may help the U.S. get into
foreign airspace, but that doesn't mean they can land anywhere.
It doesn't guarantee that there will be further slots at
international airports, such as Heathrow.
Also, our airlines are committed to transporting American
troops. If a foreign investor, or investors, buys an American
airline, who is to say they will be an ally in case of
international conflict? Why are we bringing this trouble on
ourselves?
So this proposed rule change appears to be bad for America,
and certainly bad for our American airline industry, and
certainly for American security. I look forward to seeing why
we should change this rule at all.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Mr. DeFazio?
Mr. DeFazio. Thank you, Mr. Chairman. I see the spiffy
little lights here, and the numbers go down. Except when the
Chairman was talking, it started at five and stayed there. What
is that?
[Laughter.]
Mr. Mica. A new technical improvement.
Mr. DeFazio. Okay, that is very good.
Thank you, Mr. Chairman. I am really pleased that you
called this hearing. There are some very grave issues before
the Committee.
The Administration has, very much as Mr. Gonzalez has so
ably stated, the inherent powers of the President in a time of
war, even though Congress hasn't declared war, to do virtually
anything to contravene the Constitution of the United States.
And this is yet another example of them using those inherent
powers.
There is no legal authority for this Administration to
reinterpret this law, none. If this ends up in court, they will
lose. They would be best served, and we would be best served if
Congress took up this issue--this is a good start today with
this hearing--and debated it, and legislated in this area. Of
course, they fear they might lose that debate because of some
of the potential problems here that have been mentioned by many
of our colleagues.
This is all about the underlying agreement, a big fight
over how are you going to feed your lucrative international
routes. The foreign carriers want to come here to do that. They
don't want to come here to provide improved domestic service in
the United States. And it would further degrade, Mr. Salazar,
in response to your question, this agreement that underlies,
that this dispute over ownership is embodied in, would degrade
domestic service in the United States of America, no question,
no question about that. Smaller cities will lose service
because they don't provide big feeds to the lucrative
international market.
It is about jobs. Yes, it is about jobs. Well, we need jobs
in America. It is about jobs for pilots and flight attendants.
It is about jobs for people who build airplanes. When you give
up this control to foreign dominated airlines, we will lose
American jobs. We will lose them to France because they have
stronger labor laws. We will lose them to low cost markets,
Eastern European flight attendants and pilots, maybe the
Chinese.
Have you thought about that? Because the WTO agreement
requires reciprocity. If you enter into this agreement and
these conditions with Europe, China can go to the WTO and force
us to give them the same thing. Isn't that a dream? American
airplanes flown by Chinese pilots controlled by the Chinese.
Then maybe they can finally start making all the planes over
there too. This is really unbelievably shortsighted,
ideological claptrap, that is what this Administration is
engaged in here.
Security issues, come on now. Oh, they say, well, don't
worry. The CRAF, well, CRAF is voluntary. So if a foreign
airline voluntarily opts out, what are we going to do about it
when all the wide bodies are opted out of the program?
It seems to me that we have been taken to the cleaners so
many times by the Europeans in protecting their markets, their
manufacturers, and others, and here we are again. You know, it
is like Lucy and the football. This time, it is straight up and
we are just going kick it. No, it is not straight up. It is the
same bad deal that we have gotten every time around.
Let us wake up. Let us serve the interests of the American
traveling public, American security, American jobs, and start
doing the same things that some of our competitors have done so
well, which is protect high value jobs. We are not doing that,
and we are not going to sacrifice them on this ideological
altar.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Mr. Ehlers?
Mr. Ehlers. Thank you, Mr. Chairman.
I will do my best to avoid ideological political claptrap,
but I did just want to make one brief comment. That is that I
appreciate the advances this has made above and beyond the
Bermuda Agreement which we have had with the U.K. which I felt
was a very unfair agreement for the United States and put us at
a major disadvantage. I appreciate the progress made on that
score, and I will be interested in finding out more details
about that and the rest of the topic.
Thank you very much. I yield back the balance of my time.
Mr. Mica. Mr. Pascrell?
Mr. Pascrell. I would really like to know what Mr. DeFazio
thinks about this.
[Laughter.]
Mr. Pascrell. I will tell you right now.
Before I make my opening remarks, I want to preface it by
saying that this proposed rule makes a controversial
fundamental change to U.S. aviation policy through backdoor
channels. Sound familiar? It tries to get around an open debate
in Congressional jurisdiction. That is nothing new around here.
And it is so vague. It leaves so many legitimate questions
and concerns about the Civil Reserve Air Fleet, that program,
national defense, and homeland security. The effect on existing
collective bargaining agreements, purposely left vague. In the
matter of control, foreign capital would be able to dictate
management's policies about labor issues.
Having said that, I want to thank the Chairman and the
Ranking Member. I appreciate their decision to hold a hearing
on this rule which proposes a profound change--that is the
Department of Transportation's own words--to Federal aviation
policy. I would submit that it is actually a radical change.
Altering the foreign control requirement for U.S. airlines does
not belong in rulemaking.
There is a checks and balance system, and the Constitution
of the United States, gentlemen, still means something to us on
this side of the table. In their attempt to complete an Open
Skies Agreement, the Administration has sought to avoid an open
debate in the halls of Congress. That is radical as far as the
Constitution goes but not new for this Administration.
Congress has twice rejected attempts to change foreign
ownership and control requirements. This time should be no
different.
The proposed change is heavy handed and is vague. It leaves
too many legitimate questions. Being a member of both the
Transportation and Homeland Security Committees gives me a
unique perspective on the vital role the U.S. airline industry
plays in the homeland security and national defense of our
Nation, a point which Congressman Ney has pointed out. For
these reasons, unlike most other industries, airlines do not
easily lend themselves to foreign control. I am concerned that
the proposed rule is unclear and does not guarantee that heads
of security and safety would have complete autonomy from their
foreign national leadership.
It is no secret that security costs are one of the
financial challenges facing our domestic industry. In fact,
many additional security measures have been voluntarily
undertaken by U.S. carriers. But under foreign control,
commercial interests may carry more weight when it comes to
cutting costs. Measured foreign investment may be beneficial
for U.S. air carriers, but throwing open the flood gates to
foreign control is not the answer.
At the very least, Congress should have a vigorous, robust
debate on this highly sensitive matter before anything is
finalized. So I applaud this Subcommittee for starting this
discussion. I think we should be confident that most members,
under judicious review, will conclude that this proposed rule
change, as it stands, is not in the best interest of our
Nation, and that will always be the motivating factor on this
side of the table.
Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
I would like to recognize and welcome, he is looking good
and chipper, Mr. Boswell.
Mr. Boswell. Thank you, Mr. Chairman, and it is good to be
back. I don't recommend you do what I have done in the manner I
did it. Just for the record or for your information, my malady
was one in a million, but I got directed to the right person at
the right time, and the lights didn't go out; they are coming
back on bright.
I would like to make a short comment. I think everything
has been said, but everybody hasn't said it yet, so I want to
participate.
[Laughter.]
Mr. Boswell. I am very much in concert with what has been
said by others. And I hope that our panel is listening
carefully. I think it is extremely important, and I trust you
are getting the idea of how we feel. But this is an important
hearing on the tentative Open Skies Agreement between the U.S.
and E.U.
This agreement, if signed, would significantly benefit
consumers, air carriers, and communities on both sides of the
Atlantic. Access for U.S. air carriers into the long protected
London Heathrow Airport would certainly be a welcome and
beneficial change. As you know, this comprehensive agreement
would replace existing bilateral agreements with individual
Member States. By permitting any carrier in the U.S. to operate
from any point in the U.S. to any point in the E.U. and vice
versa would be a tremendous benefit to our constituents.
One aspect of this proposed agreement, which you have heard
about, causes me great concern, and that relates to the
Department of Transportation notice of proposed rulemaking
regarding the definition of what constitutes actual control of
a U.S. airline. As we know, this description has drawn the
interest of several members of this body, including myself and
as a co-sponsor of Congressman Oberstar's legislation, H.R.
4542, to ensure Congress exercises its oversight
responsibility, our Constitutional responsibility, and prevent,
in this case, the DOT from exercising so much authority in
defining what constitutes actual control of an airline.
If we are to make a significant change to the foreign
ownership statute, I believe, and I think it is clear we all
believe Congress should be the origin of such change. We should
not cede this authority to the Executive Branch, this Executive
Branch or any other later Executive Branch. This issue is too
important for a bureaucratic alteration to this long
established provision.
As a strong supporter of our airline industry, I recognize
the hardships these companies and their hardworking employees
have endured in the past few years. The economic difficulties
they have experienced have caused significant financial losses
and a painful reduction in the workforce. The airlines' ability
to attract new business capital is a constant challenge.
However, I would not want to see our trading of foreign
ownership for such capital infusion.
I welcome a full and complete debate on this issue and urge
the DOT to refrain from acting unilaterally. I welcome the
testimony and appreciate the opportunity to be here today.
Although I have a conflict with the Intel Committee and I will
have to leave, I will read this hearing very carefully, these
minutes.
I thank you, Mr. Chairman. I appreciate your doing this.
I might just add something that is totally off the subject
today, but I want us to sit down seriously and talk about what
is happening to general aviation and their suggestions of what
they are wanting to do to fees and so on. We need to talk about
that. We really do.
I thank you for holding this hearing.
Mr. Mica. I thank the gentleman. I can assure you that in
the next 12 months, we will be talking about fees, and general
aviation, and funding our entire aviation system.
Mr. Boswell. You know, I got a new outline now with Mr.
Salazar. Robin Hayes and a few other ones in here are actually
using the new system every time we get a chance.
Mr. Mica. Well, we will get to that at another hearing. We
do have some of that scheduled.
Mr. Holden, do you pass? Okay.
Mr. Honda, you are recognized.
Mr. Honda. Thank you, Mr. Chairman.
I, too, welcome this opportunity to express my concern
about the DOT's NPRM on the term, actual control of U.S.
carriers, and to question the overall value of a proposed U.S.-
E.U. Open Skies Agreement that appears to be contingent upon
this NPRM.
Generally speaking, I support U.S. efforts to strike Open
Skies Agreements. Agreements when properly negotiated lead to
real and tangible benefits for U.S. air carriers, the workers
they employ, and the communities they serve. In this era of
globalization, it is important that we offer new opportunities
for citizens of all countries to travel more freely and more
affordably.
That said, I am surprised and perplexed that the
Department, in order to secure E.U. approval for an Open Skies
Agreement, has issued an NPRM that would allow foreign entities
greater ownership of U.S. airlines, effectively permitting
foreign control over all commercial decisions of a U.S.
airline.
As recently as 2003, the Congress made its views on this
issue crystal clear when it put into law the expectation that
the U.S. airlines be ``under the actual control of U.S.
citizens.'' I fear that this NPRM is the latest example of a
Executive Branch that misinterprets U.S. laws to its own
liking. This NPRM constitutes a major change to current law,
and its potential impacts on U.S. air carriers, communities,
and workers are significant.
This issue demands Congressional involvement and
deliberation, and accordingly, I support H.R. 4542, legislation
introduced by Representatives Oberstar and LoBiondo that would
require the Department of Transportation to give appropriate
deference to Congress.
Once again, I thank the Subcommittee for its attention to
this important issue. I look forward to today's testimony and
ask that the Subcommittee's leadership continue to provide
opportunities to scrutinize this NPRM and to more evaluate its
potential impacts on the U.S. airline industry.
I yield the rest of my time. Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
And now, waiting patiently, Ms. Norton, you are recognized.
Mr. Norton. Thank you very much, Mr. Chairman. I
particularly appreciate this hearing. I particularly appreciate
it being one of your first hearings.
I wanted to say mostly a word about the legal, or shall I
say the illegal, underpinnings of this proposed rulemaking. But
let me just begin by indicating that I think that this
Committee is very sophisticated about the new rules, the new
policies that are necessary in a global economy, especially
with respect to this industry.
But what is proposed here could not be more major. This is
the kind of proposal that can be done only by law; this is not
rulemaking. This is lawmaking, my friends. We are talking about
a perpetually troubled industry and a policy that is the most
radical that has been made in decades concerning that industry.
We are talking about everything from the future of its
employees to the future of service in this Country to the
future of the industry itself.
We are told this is only the commercial side. What other
side is there? I mean I am already nervous that outsourcing of
maintenance has been a practice for some time in this industry
even after 9/11. Is that commercial or not? Safety and
security, we are told is not involved.
But I don't see how this rulemaking got past the General
Council of the Agency because the proposed rule is illegal on
its face. An administrative agency may interpret, must
interpret the text of a statute. In order for the Country to
operate, administrative agencies have very broad discretion.
They do not have the discretion to rewrite a statute.
Now, Congress often is unclear. In my law classes, I teach
a seminar at Georgetown called Lawmaking and Statutory
Interpretation, and it is full of how Congress messes up all
the time. We use ambiguous. Sometimes we use it on purpose
because we couldn't get an agreement; sometimes we do it
because we just don't know what we are doing. And the
administrative agency, according to the Supreme Court, has
great discretion when the Congress has used language that is
not clear on its face, and then the administrative agency can
use its expertise to, in fact, interpret the statute. All that
an agency does, however, is by expressed delegation from the
Congress.
Now nothing could be more express than the words, actual
control. As I look at what the rule cites as the kind of
control that would be left, I find this laughable. A
determination whether U.S. citizens retain actual control
through the airlines organizational documents, such as
certificates of incorporation, shareholders' agreements, and
corporate bylaws. Is that what actual control means in law or
in commerce? Do you have to go to law school to understand that
actual control means what it says and that Congress was
explicit because it understood exactly what was being proposed.
What is being proposed here is indeed not an interpretation
of the law. Administrative agencies have extremely broad
latitude. I not only defend that latitude, that latitude is
absolutely necessary in order for laws to be implemented. But
administrative agencies do not have the authority to
reinterpret the law to put new meaning on the law. This, my
friends, is not rulemaking; this is lawmaking.
If you want this kind of change in law, you have got to go
through the steps that every other change in law requires; you
have got to get it out of this Committee. You have got to get
it out of the House and the Senate on a bipartisan vote. And
all I can say about that is good luck.
Thank you very much.
[Laughter.]
Mr. Mica. Thank you for the well wishes.
[Laughter.]
Mr. Carnahan?
Mr. Carnahan. Thank you. I, too, want to add my thanks to
the Chairman and Ranking Member Costello for holding this
hearing today to determine the Department of Transportation's
proposed changes to rules governing actual control of U.S. air
carriers.
Although I understand the need for our Country's air
carriers, like other U.S. businesses, to be able to evolve into
the international marketplace, the DOT's proposed rule goes too
far. Despite claims to the contrary, this proposed rule does,
in fact, have the potential to cause significant safety and
security problems.
As Mr. DeFazio earlier said so eloquently, this NPRM also
threatens U.S. jobs and is outside the scope of the
Department's legal authority given by Congress. I, too, am
pleased to see the loud chorus of bipartisan voices, demanding
the Administration withdraw this proposal and have co-sponsored
H.R. 4542, the LoBiondo-Oberstar bill.
I look forward to hearing the testimony from the witnesses
here today.
Mr. Mica. I thank the gentleman. Do any other members seek
recognition? If not, we will proceed with our first panel.
Our first panel consists of the Honorable Jeff Shane, Under
Secretary for Policy of the United States Department of
Transportation and the Honorable John Byerly, Deputy Assistant
Secretary for Transportation Affairs at the U.S. Department of
State.
We probably won't go just for the five minute rule. We only
have these two witnesses, and we will give you a little bit of
extra time. If you have lengthy statements or additional
information you would like to have made part of the record,
just request that through the Chair.
So, with that, let me welcome back Jeff Shane, and you are
recognized.
TESTIMONY OF HON. JEFF SHANE, UNDER SECRETARY FOR POLICY, U.S.
DEPARTMENT OF TRANSPORTATION; AND HON. JOHN BYERLY, DEPUTY
ASSISTANT SECRETARY FOR TRANSPORTATION AFFAIRS, U.S. DEPARTMENT
OF STATE
Mr. Shane. Thank you, Mr. Chairman. We appreciate very much
your convening this hearing and having an opportunity to
discuss both the proposed agreement with the European Union
and, of course, the NPRM that the Department issued in November
of last year.
Mr. Chairman and members of the Committee, I would beg your
indulgence to start out with a disclaimer. It is a little
unusual for an Executive Branch representative to testify on a
pending rulemaking. We wanted to do the testimony. We wanted to
engage because there is so much importance attached to the
issue. But because the rulemaking is pending, I am admonished
by our lawyers that what I can talk about is the genesis of the
rulemaking.
What was the thinking of the Department in issuing the
rule? We do not know at the end of the day what the Secretary
of Transportation will decide to do with the notice of proposed
rulemaking. A lot of comments have come in, as you know, and we
are reviewing those comments, and there can be no foregone
conclusion.
Let me just also say, just as a preliminary matter, that
the suggestion that this has been negotiated with the European
Union and that therefore it might be a foregone conclusion
because the United States is interested in having an agreement
with the European Union is, with great respect, mistaken.
Secretary Mineta has been adamant in every conversation he has
had with counterparts from the European Union that, if the
United States decides to make a change in its interpretation of
the ownership statute that is in our Federal aviation laws,
that change will be made in the interest of United States and
for no other reason, and our European counterparts have fully
understood that. It is not on the table for negotiation and has
never been part of the negotiation.
Yes, there is a context that is provided by the fact that
we have a negotiation going on, and indeed there is a
relationship between what the European Union will do with
respect to this agreement and what we do with respect to the
rule. But we have a legal, a statutory obligation to decide the
rulemaking based on statutory considerations in the best
interest of the United States and for no other reason that
that. So I just didn't want to leave any confusion about that.
If you forgive me, I will talk about the genesis of the
rule and not make any predictions as to what will happen at the
end of the process.
I think that, let me say first, Mr. Chairman, I do have a
longer statement. Per request, could it be put on the record?
Mr. Mica. Without objection, the entire statement will be
made part of the record.
Mr. Shane. Thank you, sir.
And it is clear from all of the opening statements that
members are pretty familiar with the rule. So I am going to try
to sum up what we did fairly quickly, so that we can get to
questions. I also want to spend just a moment talking about why
we proposed what we proposed, lest there be any doubt about
that.
What we did: Mr. Chairman, in your opening statement, you
recounted the history of the ownership laws of the United
States. They go back to 1926. They were redone in 1938. It is a
very short provision that simply says that U.S. citizens must
own or control 75 percent of voting shares of an airline
company; two-thirds of the officers and directors of the
company must be U.S. citizens; and the President of the company
must be a U.S. citizen. That is all it says.
A couple of years after the 1938 statute was passed, the
Civil Aeronautics Board added a new layer of interpretation
onto that statutory requirement. The Civil Aeronautics Board
said that there should be no shadow of foreign influence, words
to that effect, in the running of a U.S. airline company. That
wasn't part of the statute; it was an interpretation of the
Civil Aeronautics Board. That interpretation, at a time when
the United States was preparing for war, at a time when most
U.S. airlines were subsidized either by mail rates or in other
ways, was absolutely an appropriate interpretation. That
interpretation informed decisions of the Civil Aeronautics
Board up until the end of its existence in 1985 and continued
to inform all Department of Transportation's decisions after
that.
Sixty-five years later, we felt an absolute obligation,
given the amount of change that has taken place in the airline
industry, both here and abroad, to reexamine that
interpretation and see whether or not, in fact, it continued to
have relevance to today's circumstances. That was the purpose
of the NPRM.
It does, it is not, forgive me, an ownership rule. The NPRM
changes not one iota of the ownership statute. If we were to
finalize the rule exactly as proposed, 75 percent of the voting
shares of an airline company would still have to be owned by
U.S. citizens, and two-thirds of the board would have to be
U.S. citizens, and two-thirds of the officers would have to be
U.S. citizens, and the President of the company would have to
be a U.S. citizen.
If you take a look at any corporation, three-quarters of
whose shares are owned by U.S. citizens and two-thirds of the
board are U.S. citizens, you would probably say that company is
controlled by U.S. citizens. It was never the intention of the
Department of Transportation in proposing this rule that U.S.
citizens not be in actual control of an airline company even
if, in fact, the new interpretation is adopted. Actual control
is what is required by the statute, and actual control is what
the Department of Transportation intends be maintained.
There were references to the 2003 amendment to the law
which actually incorporated the words, actual control, in the
statute. The suggestion, I think implicit in some of those
comments is that this was an interpretation rammed down the
Department of Transportation's throat. Quite the opposite, the
case was being made to the Department and indeed to the United
States Congress that the Department of Transportation did not
have the authority to interpret actual control, and that was
because of a little idiosyncrasy in the language of the 1938
statute. We were determined, and the Congress was determined to
make sure there was no doubt about the importance of actual
control as part of the inquiry that the Department enters into
in reviewing the fitness of airline.
So we welcomed the change when Senator Stevens, who I think
was responsible for the change within the Senate, proposed it,
he said, my amendment will codify the existing standard; it
leaves the interpretation of effective control up to DOT. The
existing standard was precisely what the CAB faced in 1940. It
was a brief statute with the actual content of what actual
control means left to the administrative agency.
We propose a change. The change we propose is simply to
eliminate a lot of confusion about what actual control requires
and to limit the inquiry, at long last, to four quite objective
tests: Are U.S. citizens in control of decisions that relate to
the safety of the operation? Are U.S. citizens in control of
decisions that relate to the security of the operation? Are
U.S. citizens in control of anything that might have to do with
national defense? Are U.S. citizens, finally, in control of the
bylaws, and the charter, and the certificate of incorporation,
the very documents that form and organize the corporation?
The reason for that last requirement, just to be clear
about it, is because, while we envision in the proposed rule
the possibility of greater participation by foreign investors
or foreign citizens of any stripe in the actual operation of
the commercial side of an airline, the essential requirement is
that U.S. citizens remain in actual control of that airline.
So if it turns out that the U.S. majority owners of the
airline, the majority directors of the airline, the majority
officers and the President of the airline are unhappy with the
way in which this airline is, in fact, being run by the foreign
citizens who are given greater scope by our rule, it is up to
them, it is available to them to change the agreement, to kick
the foreigners out if necessary, to take whatever steps they
believe to be in the interest of the company, in the interest
of the company's shareholders, pursuant to their fiduciary
responsibilities. That is not being divested in any way.
That is what actual control is. Congresswoman Norton, that
is the reason why we talk about the charter, and the bylaws,
and the certificate of incorporation, and other organizational
documents remaining in the control of U.S. citizens. That is
all we have done.
We had a report some time ago, it was a report to the
Congress actually from our outgoing Inspector General, Ken
Mead, who was asked about what the tests were within the
Department of Transportation. You will have probably seen that
letter. It said the tests are not very clear. They are not
written down anywhere. It is for the Department of
Transportation to know and for everybody else to find out. We
thought one important reason for putting a proposed rule on the
street and seeking comment was that we needed more objective
tests.
There have been a lot of anomalies in the administration of
this statute over the years. I thank Congressman Oberstar for
his kind words. I have had a long history at the Department of
Transportation, and I can speak personally about a lot of those
anomalies. There are things that we are required to do by the
1940 interpretation that, quite frankly, are not in the
interest of a healthy U.S. airline industry, not in the
interest of competition, not in the interest of jobs, not in
the interest of security, and not in the interest of safety.
What we are seeking to do is to have a change in the rule that
gives us greater clarity about all of that.
The last thing I will say, Mr. Chairman, and then I will
close is that in 1978, the Congress enacted the Airline
Deregulation Act. It was actually a Democratically-controlled
Congress at that time. The act was passed by a Democratic
President. The Airline Deregulation Act was embraced by
subsequent administrations of both political parties. It is one
of the most important economic policy decisions this Country
has ever made.
And, of course, it begot deregulation of our surface
transportation systems; it begot deregulation of
telecommunications; it begot deregulation of energy. It is a
policy forged here in the United States Congress that has been
exported around the world. It has become the default economic
policy for every industrialized nation today.
Our job in the Department of Transportation and the
Executive Branch has to be to see where there is opportunity to
continue this important success. Deregulation is a work in
progress. The NPRM is not intended to be a radical change. It
is intended to be another step along the road to genuine
deregulation, giving the airline industry the scope to find its
own economic level, to tap economic opportunities where they
may be available, to get government out of the way of what the
airline industry is doing.
If our regulations do not add value to the industry, then
we should be pulling those regulations back. The NPRM asks the
question: Does the 1940 policy that has been applied by the CAB
and the Department of Transportation for the last 65 or 66
years continue to add value today? That is what we seek comment
on. That is what we will be reviewing. And the determination
that we make will be in the best interest of the United States
at the end of the day.
Thank you very much, Mr. Chairman. I am sorry to go over.
Mr. Mica. No problem, I thank you for your testimony.
We will now hear from the Deputy Assistant Secretary for
Transportation Affairs at the State Department, John Byerly.
Welcome, and you are recognized.
Mr. Byerly. Thank you very much, Mr. Chairman, Ranking
Member Costello, members of the Subcommittee. I want to express
my appreciation for your inviting me to testify here today. I
have submitted a detailed written statement for the record and
would ask that that be entered into your record.
Mr. Mica. Without objection, the entire statement will be
part of the record. Proceed.
Mr. Byerly. Thank you very much.
As requested, I will focus my comments on the opportunity
America has to achieve a comprehensive air transport agreement
with the European Union, and I will try and keep my remarks to
about five minutes.
I commend the Subcommittee for taking up this very
important subject. Since 1991, with the support of both aisles,
both sides of the aisle in Congress, we have negotiated some 70
plus Open Skies Agreements around the world. Those agreements
have vastly expanded markets for U.S. airlines. They have
0created countless jobs, bolstered the economic well being of
U.S. airports, cities, and communities. They have given U.S.
manufacturers, merchants, and shippers new opportunities to
transport high value cargo. And they have provided America's
travelers new and better air service at affordable prices.
The agreement we have negotiated with the European Union
would take our Open Skies policy to the next level. It would
safeguard the Open Skies rights we have obtained in the past
with 15 E.U. Member States, and it would expand Open Skies to
the remaining 10 countries, including the United Kingdom. It
would enhance the ability of our cargo carriers to build global
networks for a global economy. It would create new
opportunities for passenger airlines, including our network
carriers which have increased their focus on international
markets in recent years. It would establish a joint committee
of European and United States representatives to foster
cooperation and to seek further liberalization.
Indeed, the agreement would alter the essential structure
of transatlantic air service in ways that transcend what we
have accomplished bilaterally. It would set an example for the
rest of the world where protectionist aviation policies still
thrive.
Now my written statement describes in detail the path, a
long path, to the negotiation, stretching back over a decade.
Suffice it to say here that when the Member States granted the
European Commission a negotiating mandate in June, 2003, we saw
an opportunity. Formal negotiations began in October of that
year. The U.S. delegation included representatives from State,
DOT, Commerce, Defense, Justice, Homeland Security, the General
Services Administration, from our airlines, airports, labor,
and CRS providers, and from the committee staffs of both the
House and the Senate.
America and the E.U. brought different perspectives to the
negotiating table. For our part, the United States insisted
that Open Skies principles must extend to the entire European
Union, including unrestricted market entry, unlimited
frequencies, unlimited beyond rights and market based pricing.
The agreement we have negotiated meets all our Open Skies
objectives for all 25 E.U. member states. The agreement we have
negotiated with the E.U. would end the anachronistic
limitations in the notorious Bermuda II Agreement with the
United Kingdom, something we have sought to accomplish for over
a quarter century. That would be an enormous achievement.
For its part, the E.U. entered the negotiations with a
mandate to achieve a fairly radical open aviation area. That
would require repeal of our statutory prohibition on cabotage,
abrogation of the Fly America Act, and new legislation from you
to allow European citizens to own and control U.S. carriers. We
could not agree to those proposals.
We were, however, responsive where we could be to European
requests in other areas. In particular, we agreed to authorize
every European carrier to operate to the United States from any
and all points in the E.U. This is a real plus for U.S. cities
that might like to encourage, for example, Lufthansa to provide
service from Milan or Air France from Madrid.
In addition, we sheared away unnecessary red tape in our
relationship. We agreed on far reaching cooperation on airline
competition matters between the Commission and the Department
of Transportation. We added new provision on State aids, the
environment, consumer protection, leasing, computer reservation
systems, and security cooperation.
The E.U. Transport Council of members, in which each of the
25 Member States is represented, must approve signature of the
agreement. The E.U. has informed us that, in making a decision,
the Council will take into account DOT's rulemaking on actual
control. In practical terms, that means the E.U. will await a
final rule from DOT. Assuming a final rule is issued this
spring, we expect the E.U. Transport Ministers to reach a
decision when they meet on June 8th and 9th. If their decision
is positive, we would aim to sign the agreement soon thereafter
and apply it as of October 29, the start of the winter traffic
season.
Mr. Chairman, members of the Committee, it was a deep honor
when Secretaries Rice and Mineta asked me, gave me the
opportunity and the challenge of leading the U.S. delegation in
these negotiations. I had the advantage of the deep expertise
and commitment of colleagues from throughout the U.S.
Government and U.S. industry. We have sought to keep your
Subcommittee informed of our progress at each step of the way.
That is important to us.
Like any product of tough and extended negotiation, the
agreement is not perfect. It contains elements of compromise.
However, I am convinced, and I hope that you will agree that
this agreement more than meets fundamental American objectives
of securing our existing Open Skies rights, of expanding Open
Skies to all of the European Union, and of establishing a
template of opening markets, encouraging vigorous airline
competition, and forging close aviation cooperation. With this
agreement, we and Europe can send a message to all the world
that the days of protectionist bilateral agreements are drawing
to a close, and that open markets and airline competition
represent the future. I urge you to support this historic
endeavor.
Thank you. I look forward to your questions.
Mr. Mica. Thank you. We will go right into questions, and I
have a couple.
Mr. Byerly, you just mentioned in your testimony that, and
I was always under the understanding that the change in the
rule on the control issue or definition was not a part of the
Open Skies Agreement, that is correct?
Mr. Byerly. Yes, it is absolutely correct.
Mr. Mica. But you did testify, however, that the legal
counsel is awaiting that change, and if we don't make that
change, it will trigger a rejection, is that correct?
Mr. Byerly. We will have to see what the Transport Council,
that is the Transport Ministers of the 25 E.U. Member States
and Transport Commissioner Barrot would decide when they meet.
But from the European perspective, if I could just comment on
how they see it. We don't have to agree but how they see it.
They seek an agreement that, from their perspective, has
balance. When they opened the negotiations, they sought to
achieve a balance, to rectify an imbalance they see. It is not
a view we accept, but the view they take is they are denied by
our law any opportunity to do operations within the United
States, our cabotage laws. We were clear. We are not changing
those. You wouldn't endorse it; the Administration doesn't
endorse it.
They pointed to the opportunity that U.S. carriers have
today with respect to 15 Member States and what this agreement
would have with respect to every Member States to operate
without limitation between E.U. Member States. Our carriers
would have the legal right to operate from the United Kingdom
to France, from Germany to Italy, from Slovenia to Spain. The
European carriers can't do that in what they see as a somewhat
equivalent market, the United States. We said, sorry, it is not
in the cards.
What we said we could listen to was their concern about
obtaining access in some other way. We looked at that
opportunity, and we made the decision that Jeff Shane has just
described. The decision on the control rules, the ownership
rules for U.S. carriers have to be ones we make on their own
merits. They are not items for negotiation.
For that reason, they are going to look at what the balance
in opportunities that may be a sort of light surrogate for
actual access to the U.S. domestic market, that is, greater
cooperation and participation in the management decisions of
U.S. carriers. So they are very interested in this. Before they
make their decision on whether the agreement in the context of
the aviation relation, our laws, their laws, represents a
balance.
But the decision is ours. We are under no obligation to
produce any change in our regulations or in our laws.
Mr. Mica. There is legislation, as you know, pending before
Congress or being proposed that would block implementation of
the rule or delay that process for a year. If that passes,
would you predict that Open Skies would be dead for a year or
until some action is taken?
Mr. Byerly. Mr. Chairman, I think it would be dead for a
year, and an opportunity, a unique opportunity we have right
now to achieve what we have been trying to achieve for so long
with respect to 10 additional countries, including the United
Kingdom. The opportunity to get rid of Bermuda II, an agreement
we should not have signed in the first place, I agree with
those who made that comment. We can get rid of it now.
Will that opportunity be here in a year? There is a
tremendous worry I have that it won't be. Times change,
especially in this volatile industry. The alignment of forces
may be very different in 12 months time. It is a real concern
and something I would urge you to ponder very carefully as you
look at the legislative proposals before you.
Mr. Mica. One of the concerns that has been raised, now
most industries, almost all the industries in the United States
are free to foreign investments. There may be some restrictions
here and there. The aviation industry is one of sort of the
last remaining protected industries.
One of the concerns, and you heard it expressed--Mr. Ney
and some others expressed it--Mr. Shane, was their concern
about the ability to fulfill obligations for military use in a
difficult situation with a Civil Reserve Air Fleet. That is a
distinction that is different than, say, the automobile
industry or the widget industry. How do you respond? How is
that going to be affected, and is this something that should be
of concern?
Mr. Shane. It would be the first question that Secretary
Mineta asked about what would happen if, in fact, we proposed a
rule like this and then adopted something along these lines?
The first agency that we actually discussed this proposal with
was the Department of Defense.
Some may remember that a few years ago we were talking
about a different proposal, a proposal to the Congress which
would have been to raise the 25 percent ceiling on the maximum
amount of foreign owned shares in a U.S. airline to 49 percent.
We did not do a very good job prior to bringing that proposal
to the Congress of consulting with the Department of Defense,
and it ended up delaying the actual transmission to the
Congress such that it was not part of the deliberations on
Vision 100. We didn't want to make that mistake again. So
before we even finished drafting a notice of proposed
rulemaking, we were talking to the Department of Defense.
We would not have proceeded. I want everyone to understand
this because it is a very serious point. We would not have
proceeded with this NPRM if there had been any residual concern
in DOD about the ability of U.S. airlines to fulfill their CRAF
obligations. That was essential.
If I can just offer a personal footnote, I served as the
Chairman of the Military Airlift Committee of the National
Defense Transportation Association for seven years while I was
in the private sector. The CRAF obligations have been a very
important part of what I worked on personally for a long time.
So nothing in this rule was intended to leave any of that to
chance.
Mr. Mica. Thank you.
Just one quick last question of my interest is I have read
that with this rule change, probably the Open Skies Agreement
would move forward, but I have also heard some comments that it
might be necessary to make some legislative changes to
implement Open Skies or as a result of Open Skies. Do either of
you know of anything that would need to come before the
Congress as far as legislative or Federal law changes that you
would anticipate changes being made or needed?
Mr. Byerly. No, sir, no changes would be needed.
Mr. Mica. Okay, okay. Anything, Mr. Shane?
Mr. Shane. No, Mr. Chairman, none that I am aware of. I
think we are required to deposit the agreement with the
Congress under, is it the CASE Act? Yes. But it doesn't require
action on the part of the Congress.
Mr. Mica. All right.
Mr. Costello?
Mr. Costello. Mr. Chairman, thank you.
Mr. Shane, let me ask you, is there any indication that
there would be foreign investors investing in U.S. airlines
other than foreign airlines?
Mr. Shane. I don't have any basis for offering you a very
clear answer on that. Airlines in the United States, they have
unique opportunities in the air transport business. They are, I
think, as efficient as they have become, particularly with the
restructuring that has been going on, probably attractive
investments, attractive investments for investors of any
stripe. So, yes, I think airlines might well be expected to
invest from overseas, but I wouldn't limit necessarily the
expectation to airline investors.
Mr. Costello. And what would be the motivation for foreign
carries to invest in a U.S. airline?
Mr. Shane. Since we established the Open Skies policy in
1992, we have discovered that both U.S. and foreign airlines
have turned the alliance phenomenon into a very important new
competitive tool globally. In fact, it has reshaped the quality
of competition in international aviation, providing far more
seamless opportunities for marketing and for carrying
passengers and freight.
The most important, my guess is the most important
opportunity that a foreign airline might see in investing in a
U.S. carrier would be a way of solidifying an alliance that is
delivering economic benefit to both parties.
Mr. Costello. In what types of economic decisions would a
foreign investor be able to participate if this rule was in
place today?
Mr. Shane. If we finalize the rule as it was proposed, then
foreign investors, again depending upon what agreement they had
with the U.S. owners and the people that are in control of the
airline, they would be able to make the commercial decisions
that define the shape of the product, the quality of the
product, the routes that are flown, all of the commercial
decisions that an airline makes every day.
Mr. Costello. So they would be able to, if not control,
have a large voice in the routes, frequency, service, all of
those decisions, code-sharing?
Mr. Shane. That was the proposal, yes, sir.
Mr. Costello. We are going to hear in the next panel from
the President of Continental. In his testimony, if you are
around, you will hear it, but in his written testimony, he says
that Continental opposes the Department of Transportation's
proposal because it unlawfully places actual control of U.S.
airlines in foreign hands. How would you respond to that?
Mr. Shane. It doesn't. If we adopt the proposal exactly as
we put it into the NPRM, control, actual control would remain
in U.S. hands. That is the intention of the proposal. The
reason we are deliberating right now over those comments is to
take views, like those from Continental and others, into
account.
Mr. Costello. In your discussions with the E.U., was there
ever a representation by you or the Department of
Transportation, specifically on November 15th, that a foreign
minority shareowner could have the ability to determine an
airline's commercial decisions by virtue of a super majority?
In other words, couldn't what you would call a minority foreign
investor or a foreign air carrier, couldn't they, in fact,
negotiate for a larger share in the say-so of the operation of
that U.S. airline?
Mr. Shane. Yes, if they were going to enjoy that ability,
they would almost certainly have to have a super majority
voting opportunity. They would have to negotiate, again, with
the majority owners.
Mr. Costello. So they would be able to come to the table
and negotiate all of those decisions, and it would require, if
in fact they were successful in negotiation, it would require a
super majority to either overturn or not do what the foreign
investor or foreign carrier wanted, is that correct?
Mr. Shane. That would be the nature of the agreement under
those circumstances, yes, sir.
Mr. Costello. Let me ask you, is there a downside? In your
judgement, for both of you gentlemen, is there a downside to
this rule to either U.S. workers, to U.S. airlines, to safety
issues, outsourcing? Of course, outsourcing takes place today
on maintenance, but is there a downside at all?
Mr. Shane. Again, Congressman, forgive me, but let me just
talk about what we thought when we put it on paper as a
proposal. We did not think there was any downside. We thought
there were upsides on every one of those fronts. Again, the
intention is that security, and safety, and defense related be
in the hands exclusively of U.S. citizens as they are today.
Mr. Costello. Now that you have heard from members of
Congress and from others in the industry about their concerns,
about the loss of jobs, about the outsourcing of maintenance,
about safety issues, and all of the things that you have heard
in opening statements and comments here, does that make you go
back and think, well, maybe we didn't consider these issues, or
do you still firmly believe that there is no downside?
Mr. Shane. We have considered all of those issues, and we
continue to consider them. I want to really underscore that. I
don't want anyone to think that there is any foregone
conclusion in this proceeding.
But these will be U.S. airlines by any definition, if we
were to adopt the rule as proposed. They would continue to be
owned, in keeping with the statute. They would continue to
operate under U.S. law. The FAA would continue to regulate
them. U.S. labor laws would apply. There is nothing in the rule
that would have any impact on the shape of the workforce within
an airline. That couldn't change today.
Mr. Costello. You said that U.S. labor laws would apply.
Mr. Shane. Yes.
Mr. Costello. It was represented to me about a union
contract that is in place today that would continue to be in
place if, in fact, the rule was adopted tomorrow. That contract
would continue to exist?
Mr. Shane. Certainly. The contract is with the management
of the airline. The management of the airline would remain in
place. Two-thirds of the managers are U.S. citizens.
Mr. Costello. And the managers of the airline, certainly by
negotiating a super majority from a foreign investor or foreign
carrier, would give that foreign investor or foreign carrier a
large say-so in the operation of the airline, including union
contracts that exist today or that would expire and have to be
renegotiated, is that correct?
Mr. Shane. Sure. Yes, they would be participating in
management.
Mr. Costello. Also, recognizing from the standpoint of the
labor force, from the flight attendants to the pilots to the
mechanics and so on, they have to believe, or isn't it
reasonable to assume that labor in other countries where we may
attract foreign investors, a foreign carrier in particular, is
much cheaper in those countries than the union contracts call
for today in the United States? Isn't it reasonable for them to
assume that if it is cheaper to get labor from a foreign
carrier who now has a large voice, if not total control over
the operation of the U.S. airline, isn't it reasonable to
assume that they are going to bring in the cheap labor?
Mr. Shane. Number one, it is not self-evident that the
labor is cheaper in other places, especially if you are talking
about Europe. Second, U.S. airlines are still required to
comply with FAA regulations in terms of having U.S. airmen,
U.S. licensed crews on board. None of that would change by
virtue of anything that we are doing in the NPRM, even if it
were finalized.
So it is not at all clear to me, sitting here now--again,
we will take all of these comments very seriously--but not at
all clear to me that there would be any change in the labor
picture as a result of anything we are doing in the NPRM.
Mr. Costello. Mr. Chairman, I have other questions, but I
will come back, hopefully, for another round.
Mr. Mica. Mr. LoBiondo?
Mr LoBiondo. Thank you, Mr. Chairman. For our panelists,
thank you very much for being here. I think this is helpful and
informative.
If the DOT rule were implemented, I have a question about
how it would work. For example, when an airline debates whether
or not to participate in the Civil Reserve Aviation Fleet, or
if there is a question about the airline's security policy, how
will foreign executives be handled in that? Will they be asked
to leave the board room, or is there any practical way of truly
separating foreign influence from the decisionmaking process on
the critical issues of safety, security, and defense?
Mr. Shane. Well, we are getting a lot of comment on that
precise question, Congressman. So we are going to be examining
those comments closely. But the concept, at least, built into
the proposal was yes. I don't know if I can tell you precisely
what device each airline company would adopt, but a form of a
Chinese wall would have to be created to ensure that those
decisions that affect defense were made by U.S. citizens and
not influenced in any way, shape, or form by foreigners.
This is something that we do quite commonly with a lot of
other industries. Industries that have national security
implications, which are nevertheless owned and controlled by
foreigners have to, as a result of the Scythias Process, have
to put those kinds of walls in place to ensure that certain
categories of decisions are restricted to U.S. citizen
participation only. This is not an unfamiliar device.
Mr LoBiondo. But as of this time, we do not know what that
process exactly is?
Mr. Shane. We don't know what it is. And again, we will
undoubtedly have a lot of comment on that in the docket. But at
the end of the day, if we were to finalize the rule, we would
create a requirement, not prescribe a device. It would be for
the company's lawyers to ensure that it was complying with
legal restrictions that apply to the airline, and that is what
typically happens.
Mr LoBiondo. I think I speak for a number of my colleagues.
We will be anxiously looking to see what some of those
particulars are.
Can you tell me, has the Department of Defense weighed in
on this proposed rule?
Mr. Shane. Yes, we brought the proposal to the Department
of Defense long before we were even circulating it to other
agencies of the government. Defense, in our minds, loomed
largest as the one agency of the government likely to have the
greatest concern. The Department of Defense, after considering
it for a decent period of time, came back to us and said, no,
as long as U.S. citizens are, in fact, controlling all the
defense related decisions that the airline company can make, we
have no objection to this proposal.
Mr LoBiondo. Mr. Costello talked a little bit about some of
the jobs aspect and how this would work, and I know you have
stated that you have considered the impact of the rule on jobs
that are currently held by Americans. So you feel, without any
hesitation, that jobs currently held by Americans have no
threat, no worry, no concern at all if this were implemented?
Mr. Shane. Again, I have to go back to my disclaimer. Let
me talk about the genesis of the proposal. As we put the
proposal together, we did not believe that there would be a
negative impact on labor of any kind. That is obviously the
subject that a lot of commenters have weighed in on, and so we
are obliged to take those comments seriously and deliberate
about those along with other factors before we come to a
conclusion.
Mr LoBiondo. All right. I thank you very much.
I just know that I feel this way, that we sit through
hearings, and we ask questions, and we get feedback on an
understanding of how someone thinks something is supposed to
work. And then after a period of implementation, we find out
that there was some fine print somewhere along the way that
causes a different result, and I am very concerned. So I
appreciate your being here, and I will continue to look at it
carefully.
Mr. Shane. If I could add one more point, Congressman
LoBiondo. In his opening statement, Congressman DeFazio said
that this was an example of the Executive Branch attempting to,
I guess, arrogate responsibility to itself that might more
properly be shared with the Congress. I really want to take
issue with that, if I may. There is no doubt at the Department
of Transportation that were we to finalize the rule as proposed
or in any other way, and if the Congress didn't like what we
did, the Congress has plenary authority to just repeal that
rule. That is clear.
This is not about the separation of powers. This is not a
challenge to Congressional authority. There is no doubt that
Congress has the statutory, has the ability to write in a
statute whatever it wants about U.S. ownership. If it wants to
have 100 percent ownership by U.S. citizens, and total control,
and no participation by foreign citizens in any commercial
element of the running of the company, it is available to the
Congress to do that. And we would be, we would stand up and
salute if we got that statute.
So I just want to remove that one possible source of
confusion. You have, at the end of the day, complete authority
to do what it is the Congress wants to do.
Mr LoBiondo. Well, I appreciate that. This is an issue that
I don't think is on the radar screen of a lot of people across
the Country, other than those really tuned into transportation
and aviation issues, but the implications are so huge. I really
applaud the Chairman for holding this hearing and thank you
again for being here today.
Mr. Mica. I thank the gentleman.
Mr. Oberstar?
Mr. Oberstar. Thank you, Mr. Chairman.
Mr. Shane and Mr. Byerly, you may recall that in 1989 at an
AOCI, Airport Operators Conference in Munich, I proposed to the
assembled delegates, mostly Europeans, that the European
community establish a single negotiating authority to deal with
the United States on aviation bilaterals. They rejected it. I
proposed to then Secretary Skinner that he initiate a re-
creation of the Chicago Conference, which he politely demurred
and said, we are not quite ready for that, but I agree with
your other proposal.
Well, the Europeans have come around to it. And you spent a
lot of time on this negotiation. How much time have you devoted
personally, hours, weeks, months to this negotiation?
Mr. Shane. Congressman, I graduated from the negotiating
business. I have John Byerly, my esteemed colleague, who is
actually doing the heavy lifting. I basically watch my computer
to see what he reports.
Mr. Oberstar. Mr. Byerly, you have spent a lot of time on
this?
Mr. Byerly. Mr. Chairman, I guess I spend about 60 hours a
week on my job. During the height of the negotiations and the
height lasted for about two years, I would estimate that it was
between 25 and 30 hours a week on average, and sometimes it was
100 hours a week when we had the actual negotiating rounds.
This was a big deal. It was really important.
Mr. Oberstar. It is a big, big issue. And I hope, Mr.
Chairman, we will devote more than just a couple of hours of
committee hearing to examining this subject and let it weigh
extensively upon the public record because it deserves to be
plumbed to its depths.
Now, Mr. Shane, will the U.S.-E.U. pending agreement be
rejected by the E.U. without the ownership provision in it?
Mr. Shane. That is difficult for me to say. You heard Mr.
Byerly's prediction which is that they probably would because
they have decided that without a change along the lines that we
have proposed, there would not be sufficient balance in the
agreement. But that, you know, that is a decision that only
Europeans can make.
Mr. Oberstar. I had a discussion yesterday with Mr. Petri
and the French Minister of Transportation, Tourism, and
Maritime. I don't want it to be characterized totally on the
record here, but I got the very clear impression in our
discussion in French that, well, this is interesting, the
ownership; it is not fundamentally critical, but that an Open
Skies Agreement is important to the French. I am not quite
convinced they would reject it, but then they won't make that
decision alone.
Who, which foreign airline, which foreign corporation, or
non-U.S. financial interest will invest in a U.S. carrier
without the prospect of controlling the decisions and the fate
of their investment?
Mr. Shane. You are asking me, Congressman?
Mr. Oberstar. Yes.
Mr. Shane. Well, history teaches that not many airlines
will invest in other airlines without some means of protecting
their investment. I would redefine the criterion as not needing
to control the airline but simply needing some means of
protecting the investment. We saw with the investment of $400
million into Northwest Airlines that our absolute determination
to enforce the 1940 policy to the hilt--
Mr. Oberstar. And you recall that I labored vigorously to
hold that decision up, the final approval, for about a year
until it was further clarified because at the time I said, KLM
didn't just buy a ticket to the game; they bought a seat on the
bench next to the coach to tell him what to do.
Mr. Shane. They thought they were going to buy a seat to
the game and sit next to the coach, but as it turned out--
Mr. Oberstar. It didn't.
Mr. Shane.--as a result of your efforts and the
Department's own enforcement mechanisms, they didn't have a
seat next to the coach, and they got so frustrated in their
ability to just work with their partners that, as you know,
they withdrew their money. They pulled that investment out.
And so, for those of us sitting there in the Department of
Transportation, we are compelled to ask ourselves: What,
precisely, what public policy objective was furthered by this
determination not to let them have a seat on the bench next to
the coach?
If they weren't going to be controlling the airline, if
they were simply going to be able to protect their investment
to some extent, would we not have been better off? Would
competition in the U.S. aviation market not have been enhanced
to some extent if that working capital had remained available
to KLM? It is that kind of question that serves as the genesis
for an NPRM like the one--
Mr. Oberstar. But then there is a contradiction in what you
say, what you acknowledge in your description of control, and
it is ownership and control in the context of this agreement.
Will the U.K. restrictions, our bilateral Bermuda II
restrictions that remain--Mr. Byerly, I want to get a more
clear answer from you--be immediately rescinded upon E.U.
approval to the bilateral, that is, to pricing and slots at
Heathrow, and gates, or will it be done over a period of years?
Mr. Byerly. Mr. Chairman, as soon as the agreement is, or
Mr. Oberstar, as soon as the agreement is--
Mr. Oberstar. That is all right. I don't mind.
[Laughter.]
Mr. Byerly. Yes, sir. As soon as we apply the agreement,
which we are aiming to do as of next winter season, late
October, 2006, all the legal restrictions in Bermuda II will be
gone. The new rules in the Open Skies Agreement with the E.U.
will apply. Thus, every U.S. carrier, every U.S. carrier will
have the legal right to serve Heathrow.
You have asked about the tough issue of slots, and maybe I
can say a few words about that.
Mr. Oberstar. Sure.
Mr. Byerly. Because I know it is an issue of contention and
an important issue. During the negotiations, we talked about
the issue of slot limitations, not only at Heathrow but
generally at a number of European airports. They haven't done
what this Administration, past administrations, and Congress
have done, which is to encourage the building of airports
sufficient to meet current needs and future needs. We have
language in the agreement that allows us to discuss limits on
infrastructure and how they affect the exercise of rights under
the agreement.
We did not, however, seek in the negotiations to acquire a
special carveout for U.S. carriers to give them free slots at
Heathrow, and I would like to explain why. Such carveouts would
be inconsistent with E.U. legislation. More important, from our
perspective, they would be inconsistent with established
international norms for allocating slots. These are norms we
insist upon with other countries. To have demanded free slots
for U.S. carriers would have meant expropriating slots from
other carriers at Heathrow or any other airport--
Mr. Oberstar. But--
Mr. Byerly.--and would have set a very dangerous precedent.
Mr. Oberstar. I understand what you are saying, Mr. Byerly,
but let me interrupt there. We are not talking about free
slots. In the past, you will recall in our negotiations on Open
Skies Agreements in which you participated and Mr. Shane
participated, when JFK was a slot-controlled airport and
O'Hare, much more a slot-controlled airport than it is today,
U.S. carriers had to give up slots which foreign carriers could
then buy.
But they were required, our carriers were required to give
up slots so the foreign carriers could have access to those
airports. United and American giving up slots at O'Hare, in
some proportionate fashion given their presence at O'Hare, so
that under our bilaterals, foreign carriers could have access
to O'Hare.
So it is not a matter of free. They were required to buy.
Our carriers then had to find some other way to replace those
slots so they could continue to serve out of those airports.
Mr. Byerly. Mr. Chairman, I think that is certainly an
accurate description of the application of the high density
rule as it applied at Kennedy and at O'Hare when it is
applicable. It isn't, to my understanding, it is no longer
applicable there.
The problem with telling the British or the European Union,
as a requirement in this agreement, you are going to have to
cough up slots. You are going to have to take them from
somewhere. You can't just create slots out of thin air. You are
going to have to take them from someone and give them to U.S.
carriers.
Let us take the example, what if the Japanese--
Mr. Oberstar. Okay, go ahead.
Mr. Byerly. What if the Japanese said to the United States,
we are going to take slots from FedEx, from United, Northwest.
We think they have too many. We are going to give those slots
to the Chinese. Maybe there will be some compensation involved,
because we want to reach an agreement with the Chinese which,
in fact, they do.
I think I can assure you that we would jump to the ramparts
in the blink of an eye to defend our carriers from such an
onslaught. We should not create such a precedence of saying
that slots will be expropriated from other carriers, whether
they are British or third country, in order to supply our
needs.
What is important is there is a slot market at Heathrow.
Slots can be bought. They can be leased at Heathrow. They are
available. They don't come cheap. It may take hard work to get
exactly the time you want, but they are available.
In this connection, I would point to a story in The
Financial Times from last November, that story, and I will
quote from it, says, ``The deals for slots that occurred in the
last few months before the story was written in November
undermine claims from some U.S. carriers that it is virtually
impossible to acquire slots at Heathrow.'' This is coming from
a British journalist.
They reported, for example, that Emirates has recently
acquired slots from BMI, the former British Midlands, to allow
it to start a fifth daily service at Heathrow. Jet Airways, the
successful new Indian carrier, it has acquired slots, I think
from United and Air France to start service to Heathrow from
both Delhi and Mumbai. Qantas of Australia, Etihad Airlines of
Abu Dhabi, they have been able to expand or start service at
Heathrow by acquiring slots on the market.
That is the opportunity that will exist for U.S. carriers
if we do this agreement. If we don't do this agreement, they
can't do it at all. They are out of the ball game totally.
Mr. Oberstar. I understand. Mr. Chairman, I know I have run
over the time, but this is key to the agreement here, to the
larger agreement.
If you are really suggesting that we magnanimously agree to
some lesser deal on slots and let U.S. carriers wait some
period of time until the Brits are ready, good and ready to
give us slots, without access to Heathrow. Heathrow is half of
the U.S.-European financial market in aviation. That is a $28
billion, $30 billion market. Heathrow not only is half of that
market but is the access point to the rest of it. Without
access to slots in some effective way, this agreement is not
worth much.
Thank you, Mr. Chairman.
Mr. Mica. Well, thank you.
Let me yield now to Mr. Ehlers.
Mr. Ehlers. Thank you, Mr. Chairman.
I commented earlier I was pleased that you are superceding
the Bermuda Agreement, but there is obviously still some work
to be done on that part.
I have a general question. Because the Open Skies Agreement
includes framework for closer cooperation on competition
issues, can you explain how the agreement would impact the
current international airline agreements, such as the Star, one
world, and SkyTeam alliances. I am not sure which of you would
like to answer that.
Mr. Byerly. Mr. Chairman, there would be no immediate
effect on those alliances at all. What we have had in the past
is ad hoc, case by case, sporadic cooperation, consultation
between, on the one hand, the Department of Transportation
which functions as a competition authority in looking at
alliances, and on the other hand, the Competition Directorate
of the European Commission as well as national competition
authorities. So when AABA was under consideration at various
points in history, their proposed alliance, both sides looked
at it, and there was some informal dialogue. That is not a
really satisfactory solution.
What this agreement does, and it was a proposal from both
sides, is it structures more regular, detailed, focused
conversation, dialogue between the two sides on how to approach
airline competition issues. By listening and talking, we can
learn things, and maybe, through that process, will decrease
the costs to airlines of duplicative remedies. We will see some
light in what the Europeans do or vice versa in what we do, and
we can approach each other in a more cooperative way on these
airline competition issues.
Let me just state for the record very clearly, there is
nothing in this agreement that affects the Sherman Act, that
affects in any way the legislative standards under which the
Department of Transportation or any other U.S. agency addresses
competition issues. This is to get a good discussion going
between us and the European side on airline competition issues.
As alliances grow, this is going to become more important.
That, we think, has real value in this agreement.
Mr. Ehlers. Just following that up then, and perhaps this
should go to Mr. Shane since he was involved in that. Does the
negotiation of this agreement allow you to go back and evaluate
the SkyTeam antitrust immunity application, which I believe,
Mr. Shane, you just recommended not go forward even though the
Department of Justice had said it could? I was very surprised
at your decision, and we may have time to question that. But
does this now mean that can be reopened and would more likely
be approved?
Mr. Shane. I would have to answer that in the most abstract
way, Congressman. First of all, our decision was consistent
with what the Department of Justice recommended. They were
quite adamant that we decide the case in the way we did. There
was no conflict between the Department of Transportation and
the Department of Justice in this case. There had been
conflicts in the past, but not on this one.
It is available to the parties, to the SkyTeam alliance, to
refile their proposal for antitrust immunity if they so wish.
After circumstances have changed, that would be available to
them, and we would be obliged to consider it in light of those
changed circumstances. There is no question about that.
Mr. Ehlers. But how do you deal with it in this particular
case? There is a merger on the Atlantic side, on the European
side which has impacts on two United States Airlines, both of
which incidentally are going through bankruptcy proceedings
now. It seems to me your treatment of that basically took sides
on that because I assume Air France merging with KLM means that
they would continue to work with Delta and send Northwest
packing into the big blue sky beyond and no chance of survival
at that point. How are you going to deal with that and not just
that specific case? I am very concerned about that one because
in view of what we have developed here.
But are you going to then let decisions made by other
countries such as the E.U. allowing Air France and KLM to merge
which has a very negative on one U.S. airline and a good effect
on another one? How are you going to fairly adjudicate that on
this end if we are going to deny them the opportunity to join
that partnership?
Mr. Shane. Well, we haven't, I think we haven't tried to
decide any cases in the abstract before there is an agreement.
Clearly, if there is an agreement with the European Union, we
will have some new correspondence with the E.U. Commission in
Brussels with the competition authorities there. I think you
will have some more coherence in terms of the way both the
United States and the European Union apply their respective
competition laws.
In the context of SkyTeam and Wings, we still have an
immunized alliance between Northwest and KLM; we still have an
immunized alliance between Delta and Air France. Those two
alliances continue to exist.
What was being asked for in the proceeding to which you are
referring is that we allow those two alliances, in effect, to
merge and get antitrust immunity for that additional merger.
The reason, if I can just refer back to that case briefly, that
we came out the way we did, and it is all spelled out very
clearly in the final order, is that the statute made us do it.
The statute is very clear about the importance of demonstrating
benefits from the additional immunity.
We granted code-sharing authority to both alliances, which
we felt, and which we felt their own proposals supported,
delivered 90, 95 percent of the benefits that they were seeking
to get from antitrust immunity. And the way the statute is
written, it makes it awfully difficult for the Department of
Transportation to immunize an agreement from the operation of
an antitrust laws when so many of the benefits that that
agreement would produce are available without immunization from
the antitrust laws. It is all about trying to maintain some
semblance of competition across the Atlantic.
I am sorry to go on about that, but I just wanted to see if
I could clarify to some extent what the rationale of the
Department was and to suggest that it is not, by any means, a
pronouncement about the future of alliances in the
transatlantic market or how we would apply our authority,
competition rules in the U.S. and Europe after they were in
agreement with the European Union.
Mr. Ehlers. Well, thank you very much. I am just very
concerned about this decision because, as I recall, all the
previous decisions have been in the opposite direction in
dealing with this problem. And suddenly, we have two airlines
in bankruptcy, U.S. airlines in bankruptcy, and the decision is
very likely to kill one of them. That strikes me as being a
very poor approach to take.
Thank you. I yield back, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Ms. Johnson?
Ms. Johnson. Thank you very much, Mr. Chairman.
I have listened very intently to the responses, and what I
would like to know is what laws that you review before going
into this negotiation to arrive at the potential change? Would
you review the laws?
Mr. Shane. You are talking about the potential change in
the interpretation of the foreign--
Ms. Johnson. Yes.
Mr. Shane. We looked very hard at the statute, and we
looked at all of the precedence that has come down to us from
the earliest days of the CAB down to the Department of
Transportation when it took over the CAB's functions. And we
examined the number, I would call them, of anomalies of
difficult decisions we have had to make because of the
application of those old interpretations, forcing the
Department to put applicants through a real wringer, in many
cases with no particular benefit that anybody would cite as
being of interest to the United States.
You will hear later on, I believe, from Hawaiian Airlines
who just came through what we call a continuing fitness
investigation. They had to restructure themselves with new
investment. They used some innovative financing. They used
hedge funds, offshore. The strict application of those 1940
precedents that have come down to us made it very difficult to
do something which we very much wanted to do, which was ensure
that Hawaiian Airlines lived on to see a new day.
We finally worked our way through that, but it took many,
many weeks and a great amount of expense on the part of the
applicant in order to get us to that point. They had to
restructure the investment in ways that--and you will hear more
detail from the airline itself--probably didn't produce any net
benefit to the United States in terms of any public policy
objective we are trying to achieve and just drove them crazy
for reasons that have to do with the technical interpretation
that existed from 1940.
So there is a real obligation in an agency like ours to see
whether or not we can make the regulatory framework more user
friendly than it is today. That is its principal objective.
Ms. Johnson. And you went to the Department of Defense. Did
it ever occur to you to talk to anybody on the Transportation
Committee?
Mr. Shane. Yes, we attempt to stay in pretty close touch
with the Transportation Committee. We can, undoubtedly, do a
better job. I understand that we were, that Transportation
Committee members were not pleased, and in fact I think we have
learned a lesson from that.
I will say, in feeble defense of the Department of
Transportation, that members of the Transportation Committee
staff were among the first to know about the rule before it was
published. We came up here and spoke to both Senate and House
staffers, and I met with the Chairman before the rule was
published, so that we attempted to offer previous notice, but
perhaps that is not as much as you were looking for.
Ms. Johnson. Where do you go from here? Are you going to
respect what you heard today, or are you going to be full speed
ahead?
Mr. Shane. Well, both, Congresswoman. We are trying to
bring ourselves to a conclusion in this proceeding. The
comments were all due by January the 6th, so we have had them
for a while. Staff is reviewing them. I have read them. The
Secretary will be looking for recommendations from people like
me.
Ms. Johnson. Thank you.
I have one more question before my time runs out. What, in
your negotiations or discussions, came up that you would ensure
that employees of the industry in the United States be
protected?
Mr. Shane. The rule doesn't really change the situation of
employees in the United States. We have commercial agreements
between airlines today, including agreements by U.S. airlines
with foreign airlines. And some of these alliances, including
some that have antitrust immunity right now, are pretty robust.
To the extent that it would be available to change the
ownership, I sm sorry, the workforce structure of a U.S.
airlines, those opportunities, if they are available, they are
available today. Nothing that we are proposing to do in this
rule would change that picture in any way, shape, or form.
Ms. Johnson. Thank you. I will sit through the next round.
I am about out of time, so I will yield, Mr. Chairman.
Mr. Mica. Mr. Poe?
Mr. Poe. Thank you, Mr. Chairman. I have a few brief
questions.
Mr. Shane, do you believe that the Department of
Transportation may implement this proposal without
Congressional approval?
Mr. Shane. Yes, I do, Congressman.
Mr. Poe. Okay, thank you.
As I understand this proposal, it has to do with Open
Skies. My concern is national security, so let me just be frank
about that. The United States has Open Skies Agreements with
Nigeria and Indonesia, do we not?
Mr. Shane. Correct.
Mr. Poe. And the proposal is to let countries where we have
Open Skies Agreements buy American, buy into American airlines,
isn't that this proposal?
Mr. Shane. It is not about buying into in any way at all.
Mr. Poe. Investing? Investing?
Mr. Shane. No. They can invest today, Congressman. It is
not about investing. It doesn't change any opportunity that
they have to invest today. It is a question of--
Mr. Poe. Doesn't the Department of Transportation have a
travel advisory warning to Indonesia?
Mr. Shane. Bali, yes.
Mr. Poe. That is right.
Mr. Byerly. The State Department keeps travel advisories,
in fact, also for Nigeria.
Mr. Poe. For both of them?
Mr. Byerly. Yes, sir, and for many others.
Mr. Poe. And would it be wise, do you think, for us to
encourage or allow foreign investment into our airline industry
to countries that we don't really recommend that Americans even
travel to? Do you see a problem with that?
Mr. Shane. We are not providing any greater opportunity for
them to invest than they have right now, Congressman, under
existing law. All we are dong is we are saying that, if they do
invest and they wish to protect that investment to some extent,
they are in a position to enter into agreements with management
such that they can participate to some greater extent in the
actual operation of the airline on a commercial basis.
Mr. Poe. So you don't see a problem with--
Mr. Shane. Except with--
Mr. Poe. Let me finish. You don't see a problem with
foreign investment in American airlines to areas where those
countries have a travel advisory warning because of security?
You don't see a problem with that?
Mr. Shane. We have a restriction in the proposed rule that
would say any decision having to do with security, or safety,
or national defense would have to be made exclusively by U.S.
citizens. That is the proposal, so.
Mr. Poe. And if it is run by somebody that is from a
foreign country, they can control the purse strings on this
security department in the airline industry and then cut the
funding. They can give them one person as opposed to a whole
department. I mean that is just semantics to me. It seems
like--
Mr. Shane. It is not semantics.
Mr. Poe. I am not through. It doesn't seem to me that that
is very wise to put our security really under the oversight of
some foreign investors. Now if you can explain that to me so I
can understand it, I will let you talk. Go ahead.
Mr. Shane. Thank you. I don't know how to make it clearer
than to say that the security of a U.S. airline will never,
ever, under our rule be under the oversight of a foreign
investor, period.
Mr. Poe. Even if the supervisor over that department is a
foreign investor?
Mr. Shane. If you are implying that the supervisor is
actually determining the outcome of those decisions, then that
airline is disqualified. It loses its ticket.
Mr. Poe. And once again, you think you can implement you
can implement this proposal without Congressional approval?
Mr. Shane. Yes, sir, I think that the division of labor
between the Congress and the Executive Branch is pretty clear,
and we interpret the law; you write it.
Mr. Poe. Well, we may have to write it so it is clearer to
you.
Thank you very much, Mr. Chairman.
Mr. Mica. I thank the gentleman.
Mr. DeFazio?
Mr. DeFazio. Thank you, Mr. Chairman. The courts, I think,
interpret the law, not the Administration.
Let us get clear what we are talking about. I remember
precedent, and what is actual control, what is control. Under
your definition of control, rates, routes, fleet structure,
marketing, alliances, and branding could be controlled by
foreign interests. Isn't that correct, because those are not in
your precluded categories?
Mr. Shane. If the majority owners of the airline who are
all U.S. citizens think that that is in the best interests of
shareholders, yes.
Mr. DeFazio. But if there is a super majority, voting
majority of this foreign interest, then they would control
those things?
Mr. Shane. Yes.
Mr. DeFazio. Okay, they would control those things.
Now if they control those things, what if they decide that
the domestic operations, and I understand your underlying
agreement you are negotiating would allow international
operations to be conducted for domestic airlines by foreign
operators. So they just decide, well, we don't need any of
those big planes flying around domestically anymore. We are
going to have an all narrow body fleet here for United, or for
American, or for whomever they have chosen to invest in. Now if
they do that, does that fall under the CRAF exemption, national
security exemption, because they are limiting the equipment to
something that won't serve the CRAF needs.
Are you going to delve into the equipment decisions even
though they control the equipment decisions? Are you going to
oversee the equipment decisions to make sure the equipment
decisions don't jeopardize national security? Are you going to
oversee that?
Mr. Shane. Well, to the extent that you are talking about a
commercial decision, I mean any U.S. airline--
Mr. DeFazio. Yes, a commercial decision that happens to
deprive us of the CRAF capabilities?
Mr. Shane. Any U.S. airline could decide right now to take
itself out of the CRAF?
Mr. DeFazio. Yes.
Mr. Shane. It is a volunteer program.
Mr. DeFazio. That is correct. You are just saying--
Mr. Shane. So you can have some other people talking about
the commercial operations--
Mr. DeFazio. You are saying that foreigners won't control
the decision to go into CRAF or not, but they could limit a
domestic carrier so it wouldn't have the capability to
participate in CRAF. I just happen to remember during the Gulf
War that we had a European nation that was very reluctant to
sell us a critical component of cruise missiles which we ran
out of because they didn't support the war. Now this could be a
real problem here. So I have got to agree with Mr. Poe.
But let us go sort of beyond that. You have agreed on the
rates, routes, fleet structure, marketing, alliances, and
branding, foreigners can control it.
Now Mr. Tilton says, when he looked at that in a recent
speech at the U.K. Aviation Club, it would allow foreign
investors in U.S. airlines to effectively control the bulk of
the airlines commercial operations. Do you disagree with that?
Mr. Shane. No.
Mr. DeFazio. Okay, so U.S. in name only. I don't
understand. When you link these two things together, the two
things you are doing together are so destructive to the
potential of the domestic fleet and jobs in this country. They
are extraordinary. I don't think that the ideologues who are
pushing for the Open Skies have thought this through.
So, let us see. We don't see an awful lot of people flying
from these podunk towns in Colorado that Mr. Salazar is
concerned about. He wouldn't call them podunk; I did, but.
[Laughter.]
Mr. Salazar. I would appreciate if you wouldn't call them
podunk as well.
Mr. DeFazio. Yes, yes, but I have some small towns myself
that I am concerned about. And so, the foreign airline, which
is now controlling the routes, decides, we really don't want to
serve those markets anymore because they aren't feeding the
international flights which we now fly with our planes and our
crews. What would preclude that? It is a commercial decision.
What would preclude that?
So is this going to enhance access to the domestic market
for U.S. citizens? Is it going to improve an already truncated
system with failing deregulation and bankrupt airlines? Or is
it just going to benefit the high profit market? That is one
question.
The second question is: Again, I really hope we hold a
hearing on this underlying Open Skies Agreement because I don't
understand. The formerly bankrupt U.S. airline is going to be
able to get a desirable, or let us say they have already got
slots.
But someone else, Continental is not going to be able to
get slots, or financially viable slots at Heathrow. You are
leaving that to a market-based system. They could go in and pay
a billion dollars and maybe get a decent slot, but they don't
have it. Okay, so that is moot. But they are just anxious to
get in there so they can compete with Ryan Air and fly people
from Heathrow to Milan for $32 and make money. Now what are the
benefits of this much smaller aviation market for the U.S.
carriers?
And then, third: You say, well, your question about wages.
Well, what about the Eastern European countries that are now
part of and/or accessing the E.U.? They do have much lower wage
rates. They do have Open Skies Agreements. And this won't have
an impact on U.S. labor?
Could you address those three points? I think they are
problems that really aren't being considered by the
Administration.
Mr. Shane. In the first instance, we have the most
efficient airline industry in the world, and it is the product
of the decision Congress made in 1978.
Mr. DeFazio. They are bankrupt.
Mr. Shane. The U.S. airline industry is a lean, mean
machine. So many of the questions that we have had and so many
of the comments that have come in as a result of the rulemaking
seem to take the view that we are just weak, vulnerable,
sitting ducks, that all these rapacious foreign airlines are
going to come in and just take over the U.S. airline industry,
kick all the U.S. workers out. What made this Country great was
exactly the opposite. It was the strength and the
entrepreneurial spirit of the American industry.
Mr. DeFazio. Okay, I am getting it. Why don't you move on
to a more factual answer to one of the other questions because
my time has expired.
Mr. Shane. Well, the factual answer--did you want to say
something?
Mr. Byerly. Perhaps, I could address the economic value
question under the U.S.-E.U. agreement which I think is what
you are aiming at in the second question. Let me give you some
practical examples of the value to U.S. carriers. It is not
flying from Heathrow to small cities in the United States. No
U.S. carrier today--
Mr. DeFazio. In Europe, you mean.
Mr. Byerly. In Europe, no. Just as European carriers will
have no opportunity to fly between any U.S. cities because of
the cabotage laws which you support and we support. Some
practical examples--
Mr. DeFazio. Thus far, you may reinterpret cabotage, too,
in the future.
[Laughter.]
Mr. Byerly. I promise you, not on my watch, Congressman
DeFazio.
FedEx, for the first time, could connect its major
operations at London Standstedt to--
Mr. DeFazio. I understand. There is a benefit.
Mr. Byerly. There are lots of benefits.
Mr. DeFazio. Yes, we are looking, but we are talking FedEx;
we are not talking passenger carriers.
Mr. Byerly. I can give you some--
Mr. DeFazio. And FedEx isn't going broke.
Mr. Byerly. Let me give you some passenger carrier examples
then. For example, American Airlines and Iberia, which have had
an alliance, the oneworld alliance, would be able, with this
agreement, to apply for antitrust immunity and level the
playing field from their perspective with the SkyTeam and Star
alliances. U.S. carriers would be free for the first time in
history to serve Dublin on a non-stop basis without having to
do a one for one stop at Shannon. Delta Airlines, for example,
estimates that this mandatory Shannon stop requirement--
Mr. DeFazio. Okay.
Mr. Byerly.--costs them $5 million a year, $100 million a
year to--
Mr. DeFazio. But, of course, this isn't going to the whole
issue of who is going to be flying those international routes
which, under this agreement, could be the foreign airlines
flying the international routes for U.S. airlines. Where are
the benefits going to accrue? Who is going to actually get
those benefits? But anyway.
Mr. Byerly. It is the market that would determine that.
Mr. DeFazio. Right, right.
Mr. Byerly. Just as it is today with--
Mr. DeFazio. The market has served us really well recently
with the number of bankrupt airlines we have--
Mr. Byerly. That's exactly the point, Congressman. What is
it about the current system that attracts into it? What is it
that--
Mr. DeFazio. It doesn't. I would like to enter back into
some sort of a regulatory scheme. Mr. Lipinski and I have
discussed this for years, that this system is not going to
provide us a system of universal transport which serves all
size cities in America. You will be able to go to one or two
airports and get a cheap ticket to go somewhere. But for people
in my District, you are driving 200 miles to get to that
airport or 400 miles to get to the airport. It is not working
real well for the majority of the American people, but that is
a discussion for another day.
Thank you, Mr. Chairman. My time is up.
Mr. Mica. Thank you.
Mr. Pascrell?
Mr. Pascrell. Thank you, Mr. Chairman.
Mr. Shane, if the proposed rule is made final, in your
estimation, would foreign investors be able to dictate the
routes, frequency, classes of service, pricing, advertising,
code-share partnerships of a U.S. carrier, and still not be
found by the Department of Transportation to be ``in actual
control'' in your estimation?
Mr. Shane. In my estimation, the answer is yes, provided
that the majority owners of the airline, all of whom are U.S.
citizens and the managers, two-thirds of which have to be U.S.
citizens, agree to allow that participation by foreign
entities.
Mr. Pascrell. So you are not equivocating, but you are
putting out a condition.
Mr. Shane. No. I am saying that U.S. citizens are still in
control. And so the ability of foreign entities to enter into
those kinds of arrangements will depend upon an arm's length
agreement with the people that own and control the airline.
Mr. Pascrell. Now it is my understanding, from both your
oral and written reports, with representatives of the E.U. on
November the 15th, that you told them a foreign minority
shareholder--and correct me if I am quoting you incorrectly--
could have the ability to determine an airline's commercial
decisions by virtue ``a super majority provision embodied in
the contracts that would exist between the airline and the
foreign owner or in the airline's bylaws.'' Would you explain
that?
Mr. Shane. We are really talking about the decisions of the
sort that would be taken by the board of directors. By
definition, by statute, the board of directors must have a
minimum of two-thirds U.S. citizens. So, by definition, any
foreign entity would be relegated to a one-third or less stake.
In order for them to be able to have the sort of influence that
they are looking for over certain commercial decisions, there
would have to be an agreement or a revision in the bylaws of
the company that established that for certain kinds of
decisions, ti would take a super majority vote in order to make
a decision.
Mr. Pascrell. So regardless of the agreement, if they
worked out within the contract that there are certain
provisions that would permit them, even though they needed a
super majority, this could be done. It is possible.
Mr. Shane. Yes, yes it is, as long as it is limited to
purely commercial decisionmaking.
Mr. Pascrell. Then my third question is this. I have looked
at the testimony of Mr. Smisek of Continental Airlines. He
calls the notice of proposed rulemaking unworkable, is what he
says in this. Trust me, that is what he said. This aspect of
the proposed rule, assuming the heads of security of safety
would have complete autonomy from their leadership, he says is
unrealistic and naive.
And my question to you is this: How can you suggest that
these people will function independently? That is the question.
On their own leadership, independent of their own leadership,
leadership that presumably decides their budgets, I would
assume, the size of the staff, their annual goals, and their
priorities, how in God's name are you suggesting that these
people will function independently? That is my final question
to you, but I would like to hear your answer.
Mr. Shane. Well, it implicates in a way my colloquy with
Mr. Poe. If the control of the budget has the effect of
controlling security and safety decisions, then they aren't
complying with the condition, and therefore, they would not be
eligible for a license. They would be violating the actual
control test as it was defined in this rule, again assuming it
were made final.
We have only proposed this rule, and comments like those of
Mr. Smisek and others will have to be considered. I have to say
that, as you know, there are comments on both sides of the
issue, both sides of the question that are in the docket. And
so, it will be important for the Department to consider them
all seriously.
Mr. Pascrell. I want to take issue with some of the things
in your response, but I thank you for your candidness.
I have just one quick question for you, Mr. Byerly, and it
is this. Let us talk about what you consider to be this
``unique opportunity.'' That is how you phrased it. Anything
you talk about really goes back to that, that this is a unique
opportunity, we shouldn't pass it by. Let us take hold of the
situation. I want to know, specifically, why you think this is
so unique, period?
Mr. Byerly. Congressman, we have been trying for a quarter
century to consign the Bermuda II Agreement to the history
books. We have got a chance to do it right now. I can't tell
you with absolute certainty that we won't have a chance to do
it six months from now, or a year from now, or five years from
now, or a decade from now. What I do know is we have got a
chance now. I would hate to see us miss that opportunity.
Mr. Pascrell. And you think this is the solution.
Mr. Byerly. Yes, sir.
Mr. Pascrell. Thank you. Thank you, Mr. Chairman.
Mr. Mica. I thank the gentleman.
We are going into sort of a quick second round, and Mr.
Oberstar has two quick questions.
Mr. Oberstar. Thank you, Mr. Chairman.
We are having this hearing against the backdrop of weeks
and months of negotiations and trying to accomplish in a few
minutes understanding of those negotiations. I want to ask
either or both of you how it can be within the plain meaning of
actual control to say that it means control of only safety,
security, and CRAF, but does not require control of basic
commercial decisions, such as cities to be served and fares to
be charged?
Mr. Shane. Again, Congressman, all I can do is refer back
to the proposal because that is as far as we have gone. We have
proposed this as a means of inviting the kind of comment that
we are hearing today. That is what the process is, and it
shouldn't be defined as more than that.
We felt that Congress, by virtue of its deregulation of the
airline industry, has in effect left only a few equities to the
concern of government, and those are safety, and security, and
defense issues. And, therefore, that the most important
equities that we should be watching out for in terms of the way
in which we review the fitness of airlines, of U.S. airlines
that operate within our system is to limit our concern to those
aspects, those aspects which have expressly not been
deregulated.
The commercial decisionmaking that is being, that would be
allowed by foreign entities if the rule were finalized, would
be allowed by the U.S. owners of the airline. It was the U.S.
owners of the airline or the U.S. managers who remain the
majority who would be allowing that to happen. It is their
decision. They are making the decision. It is their actual
control that facilitates the ability of foreigners to play in
the commercial operations of the airline to this greater
extent.
Mr. Oberstar. Mr. Shane, dear friend, when in reviewing the
Congressional record debate of the amendment offered by Senator
Stevens, there was discussion back and forth between the
Department, and the Senator and Senator McCain, and the
language was proposed that accurately reflects the current
state of law regarding citizenship and did not have any
qualifications on it. It didn't say actual control means only
safety, security, and CRAF. Actual control has a body of
content around it.
You recited the 65 year history of this language and then
sort of said, without saying it this way, stare decisis is good
for the Supreme Court for Judge Alito but not for the
Department in rulemaking. Yes, Mr. Chairman, it is a quick
question, but it is a long answer, and it goes to the heart of
this whole discussion and this whole issue.
Does DOT have the authority, do you assume for DOT, the
authority to make an interpretation of actual control that is
inconsistent with the plain meaning of actual control?
Mr. Shane. The plain meaning of actual control as it
existed in 2003 was a mystery to everyone. That is what Ken
Mead said to the Congress. It is not written down anywhere.
There isn't anybody who can tell you what it means. It is a
case by case determination.
Mr. Oberstar. Yes, but that case by case embodies the law.
Mr. Shane. It is for us to know and people to find out.
What Senator Stevens said, I am looking at Page S7813 of the
Congressional Record.
Mr. Oberstar. So am I.
Mr. Shane. My amendment will codify the existing standard.
The existing standard included the ability of the CAB and/or
the Department of Transportation to interpret actual control
over time. It says, it leaves the interpretation of effective
control, this is Senator Stevens talking, up to DOT. That is
what we understood to be the case.
We were in favor of the amendment. He wanted the amendment
because there was a challenge to whether or not the Department
of Transportation even had the wherewithal to insist on actual
control by U.S. citizens at that time. It was resolved by this
amendment with the concurrence and support of the Department of
Transportation. The Department of Transportation did not intend
to freeze in place for all time an interpretation of the
statute which was issued in 1940. That would not have been our
view.
Mr. Oberstar. There is case, not law, but case practice on
this matter, and Senator McCain said, Senator Stevens changed
the term, effective control to actual control to more
accurately represent the test that DOT uses in these types of
reviews, understanding or intending that the interpretations of
time be included the definition of actual control.
All right, I know I have gone over time. But this is not a
matter that can be decided exclusively by the Executive Branch.
Mr. Shane. Congressman Oberstar, and I mean this sincerely,
I very much welcome the opportunity to continue the
conversation off the record later on. I would like to tell you
some stories about our effort to try to apply the 1940 standard
which we would both agree readily produced cockamamy results.
Mr. Oberstar. We could have had these discussions well
before reaching an agreement and this rather abrupt notice. I
was given a call on a Tuesday night and told that the following
week a decision would be made, and it came out the next
morning. We never had this conversation. It could have helped
you.
Mr. Shane. Nobody in this room wishes we had more than me.
Mr. Mica. I thank the gentleman and one quick question.
Mr. DeFazio. Mr. Chairman, this goes sort of to the crux of
Mr. Shane's argument that don't worry, that ultimately it will
be the executives, U.S. executives of the airline and the U.S.
owners, who will respond to any attempts by the foreign
interests which have control.
My question to Mr. Shane would be: Since I believe the
setting of salaries is probably commercial, who will determine
the compensation of the U.S. executives and/or board of
directors of directors of these airlines if the majority of
commercial control has gone to a foreign interest, and might
that foreign interest reward them very handsomely for allowing
decisions that are not in the best interest of the Nation?
Mr. Shane. I think we are getting into an area of
speculation.
Mr. DeFazio. But isn't that possible? All right, here is
the question. Is setting of salaries a commercial undertaking,
and would that be potentially under the control of the foreign
interests, yes or no? Is setting of salaries commercial?
Mr. Shane. I actually don't know the answer to that
question.
Mr. DeFazio. Oh, okay. Well, boy, I guess they really--
Mr. Shane. What I do know is that we are only talking about
commercial decisionmaking here. We are talking about decisions
that can only be made for one purpose, and that is to make more
money. The majority of the owners of the airlines have a
fiduciary responsibility to shareholders.
Mr. DeFazio. But we hear that the United executives are
getting huge bonuses because they are doing such a great job,
and they are going to make money for the airline. So I think
that you would, salaries do fall within that purview.
Therefore, I would say that the wall we have erected here is
more like the Maginot Line in France.
[Laughter.]
Mr. DeFazio. Thank you very much, Mr. Chairman.
Mr. Mica. I thank the gentleman. I thank the members of the
Subcommittee.
Ms. Johnson, real quick?
Ms. Johnson. Sir, I will be as quick as I can.
Mr. Shane, it is my understanding that both in written and
oral reports of your discussion with the representatives of the
E.U. in November that you told them a foreign minority
shareholder could have the ability to determine an airline's
commercial decisions by virtue of super majority provisions
embodied in contracts between the airline and its foreign owner
or in the airline's bylaws. Could you explain what that meant?
Mr. Shane. Yes, Congresswoman. If we could just imagine a
board of directors that were, by necessity, two-thirds U.S.
citizens because that is what the statute requires, that means
the foreigners are only one-third. The foreigners want to have
some say, at least a veto right over certain kinds of
commercial decisions. What they would say is, look, we don't
want a simple majority to be the way this board decides
anything. We want to have a super majority vote. In other
words, since we only have a third of the vote, we want to make
sure that it takes more than two-thirds in order to make a
decision.
So let us make it 80 percent. If it is an 80 percent
majority requirement for any decision to be made, then the
foreigners know that the decision cannot be made without their
participation. The U.S. citizen majority will not be in a
position to control those kinds of commercial decisions. That
is what is meant by super majority voting in the context of a
corporate board. And that's all I meant. It is just a device.
Ms. Johnson. It gives the minority the majority influence,
is that correct?
Mr. Shane. It is to provide the minority shareholders, the
foreign shareholders, I am sorry, the foreign board members the
ability to participate in decisions which they might be denied
by virtue of a simple majority since they are only allowed to
have a maximum of a one-third of members of the board.
Ms. Johnson. Thank you very much. Thank you, Mr. Chairman.
Mr. Mica. I thank the members of the Subcommittee. No
others have any quick last questions?
Gentlemen, there are additional questions from Mr.
Costello, and I have additional questions which we will submit
for the record. We thank you for your participating in today's
Subcommittee hearing, and we will excuse you at this time.
Mr. Shane. Thank you, Mr. Chairman.
Mr. Byerly. Thank you very much.
Mr. Mica. Next time I will invite you for root canal work.
[Laughter.]
Mr. Mica. The second panel that we have, I will call them
and introduce them as they are being seated. Mr. Rush O'Keefe,
Jr., Senior Vice President and General Counsel of FedEx; Mr.
Michael Whitaker, Vice President, Alliances, International and
Regulatory Affairs for United Airlines; Mr. Mark Dunkerley,
President and CEO of Hawaiian Airlines; Mr. Jeffrey Smisek,
President of Continental Airlines; Captain Duane Woerth,
President of Air Line Pilots Association; and finally, Mr.
Edward Wytkind, President of the Transportation Trades
Department, AFL-CIO.
I would like to welcome all of our panelists. Some are new
participants, and some have been here before. If you do have a
lengthy statement or information you would like to be made part
of the record, just request that through the Chair. I don't
know if you have lights in front of you, but we try to limit
the testimony to five minutes. So if you could summarize, we
would appreciate it. I am sorry you have had to wait so long,
but that is part of the Congressional hearing process.
And with those opening comments, let me first call on Mr.
Rush O'Keefe, Senior Vice President and CEO for FedEx. Go
ahead. You are recognized.
TESTIMONY OF M. RUSH O'KEEFE, JR., SENIOR VICE PRESIDENT AND
GENERAL COUNSEL, FEDEX; MR. MICHAEL G. WHITAKER, VICE
PRESIDENT, ALLIANCES, INTERNATIONAL AND REGULATORY AFFAIRS,
UNITED AIRLINES WORLD HEADQUARTERS; MR. MARK B. DUNKERLEY,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, HAWAIIAN AIRLINES, INC.;
MR. JEFFREY A. SMISEK, PRESIDENT, CONTINENTAL AIRLINES; CAPTAIN
DUANE WOERTH, PRESIDENT, AIR LINE PILOTS ASSOCIATION; AND MR.
EDWARD WYTKIND, PRESIDENT, TRANSPORTATION TRADES DEPARTMENT,
AFL-CIO
Mr. O'Keefe. Thank you, Mr. Chairman. If I could correct
that, I am the Senior Vice President and General Counsel. Mr.
Smith is still the CEO of Federal Express.
Thank you, Chairman Mica, and Ranking Member Costello, and
other members of this distinguished Subcommittee. On behalf of
the more than 260,000 employees and contractors of FedEx
Corporation worldwide, we would like to thank you for the
opportunity to testify on these important matters today. I have
a longer statement that I would appreciate being made part of
the record.
Mr. Mica. Without objection, the entire statement will be
included in the record. Please proceed.
Mr. O'Keefe. Thank you.
Over the years, this Subcommittee has made an invaluable
contribution to U.S. international aviation policy by
steadfastly supporting market opening agreements. FedEx is very
grateful for that unwavering leadership which has significantly
benefitted our customers, our employees, and the U.S. economy.
Please let me convey the regrets of Frederick W. Smith, the
Chairman of FedEx Corporation that he could not be here today
to testify. As you know, Mr. Smith has a great passion for
removing barriers to global competition and permitting the
marketplace and not governments to allocate air service
opportunities. Regardless of the messenger, our message today
is one that is familiar to any observer of FedEx over the
years. Support for opening up global trade and in particular
liberalizing global air transportation services is a bedrock
principle of FedEx.
The subject of this hearing is the opportunity or, perhaps
more accurately, how not to miss an opportunity and to start a
U.S.-E.U. open air service trade agreement is at our
fingertips. The question is whether we step forward and grasp
the future by embracing these opportunities now or instead
stand back and gamble they might be obtained at some other
date.
In November, 2005, the U.S. and E.U. negotiators announced
they had reached an agreed text for a new agreement. When
signed, it would provide for full Open Skies rights for U.S.
and E.U. carriers, completing a network of liberalized rights
among the world's largest two aviation markets. DOT, the State
Department, and the European Commission negotiators should be
applauded for their perseverance, creativity, and hard work in
forging this agreement.
From our point of view, as a global all-cargo carrier, this
agreement will provide great benefits in the form of complete
and unfettered rights to fly to, between, and beyond the Member
States of the E.U. Gaining Fifth Freedom rights with all
European countries has been a long sought goal of FedEx. Such
operational flexibility is vital to the development of a highly
efficient network, permitting us to connect all points in the
E.U. in order to offer the best and most cost effective
services between the U.S. and Europe and beyond.
It would be a serious mistake to put the agreement on hold
because delay could be fatal. Maintaining the optimal political
and policy conditions required for any international aviation
agreement, let alone one of this magnitude, is a gargantuan
task.
Mr. Chairman, let me turn to FedEx's views on the proposed
NPRM. The NPRM offers a policy which should encourage
investment in U.S. carriers and create reciprocal opportunities
for U.S. interests. It does so without changing existing
statutory restrictions on foreign ownership which, of course,
is solely within Congress' jurisdiction. We support DOT's
proposal as both an important public policy advance as well as
an indispensable tool to help open aviation markets through the
E.U. and with other U.S. aviation partners.
This changes does not alter the fact that airlines in the
U.S. and abroad will have a choice about whether to accept or
reject any foreign investment. No U.S. carrier will be required
to take on a new investor, and no foreign investor will be
allowed to exceed the numeric limits on equity board membership
or senior management participation set forth in the statute.
But the NPRM will create opportunities for new ideas and new
dollars to come to those carriers that may want and need them.
In our view, the NPRM respects and safeguards sensitive
U.S. governmental interests. It reserves for U.S. management
all decisions related to areas such as safety, security, and
national defense participation. At the same time, it gives
greater flexibility in other areas and day to day operations
that do not raise similar governmental concerns. The proposal
limits its benefits to countries that have signed Open Skies
Agreements with the U.S. and which offer reciprocal investment
opportunities. We believe this is an important aspect of the
Department's proposal as it creates a policy carrot for
countries which have yet to embrace Open Skies and offers
potential benefits beyond the transatlantic market.
We want the agreement with the E.U. to be finalized. We
also want the success of Open Skies to be repeated in the fast
growing markets of Asia. The FedEx network, which as hubs in
places like Anchorage, Memphis, and Dallas, providing services
to every U.S. address can benefit from expanding Open Skies
opportunities and become an even more valuable tool for U.S.
business competitiveness.
Aviation partners around the world are watching how the
U.S.-E.U. Open Skies initiative progresses. To stop now, with a
number of critical U.S. negotiations scheduled for 2006, will
certainly send a harmful message. To withdraw the policy carrot
of the NPRM would also signal an acquiescence to protectionism
at a time when U.S. carriers want more and not less
international opportunities.
Thank you for the opportunity to share our views today with
this distinguished Subcommittee.
Mr. Mica. He had that perfectly timed. Thank you.
[Laughter.]
Mr. Mica. Mr. Michael Whitaker, Vice President, United
Airline World Headquarters, welcome, and you are recognized.
Mr. Whitaker. Mr. Chairman, members of the Committee, thank
you for the opportunity to present United's view on the U.S.-
E.U. air talks and the issue of foreign ownership. We have
submitted written testimony, and I would ask that that be
entered into the record.
Mr. Mica. Without objection.
Mr. Whitaker. United Airlines supports the Open Skies
Agreement the U.S. government negotiated with Europe. We also
support the proposed rulemaking to clarify the meaning of
actual control in determining the citizenship of U.S. carriers.
Combined, these two initiatives are important steps in the
ongoing work of deregulating the airline industry and moving it
to an independent sustainable business platform. I will briefly
address these two issues separately.
The U.S.-E.U. agreement is a real victory for U.S. aviation
policy, and I think its importance cannot be overstated. It
completes a 15 year effort to bring Open Skies to all countries
of the E.U. The most significant element of this new agreement,
of course, is that it will extend Open Skies to the U.K. after
literally decades of efforts to liberalize that market.
Currently, only two U.S. carriers are permitted to serve
Heathrow, United and American. Those rights will now be
available to all U.S. carriers.
And while it is true that Heathrow is a slots constrained
airport, so are most major international airports outside of
the U.S. Slots are available at Heathrow. In just the last few
years, many airlines have gained access through acquiring slots
in the market. As John Byerly mentioned this morning, Jet
Airways and Emirates have grown from virtually no service to
four or five flights a day by acquiring slots in the market.
Neither of these carriers received slots as a part of a
government negotiation. They either received the slots pursuant
to the IATA Allocation Rules or they bought them in the market.
The U.S.-E.U. agreement will also deliver many other
benefits, as Mr. Byerly outlined this morning, bringing Open
Skies to all 25 nations of the E.U. including important markets
such as Ireland, Spain, and Greece. These are very significant
market openings, and the true winners here will be the U.S.
traveling public as these markets open to new service.
United also supports the proposed rulemaking to clarify
DOT's interpretation of actual control in our foreign ownership
statute. In fact, United would go further. We would support the
complete elimination of statutory restrictions on foreign
ownership of airlines, subject to a requirement of reciprocity
and the normal Exxon-Florio national security safeguards. These
limits on foreign ownership have been in place for nearly 80
years and may have been appropriate at a time when we were a
regulated industry, but now they are merely a hindrance.
In fact, these types of restrictions have been eliminated
within the E.U., much to the benefit of the European airlines.
Since nationality restrictions were eliminated in Europe, we
have seen mergers of Air France with KLM, Lufthansa with Swiss
International Airlines. These mergers have allowed these
carriers to grow in size, strength, and profitability. United
and American are no longer the largest airlines in the world
measured by revenue. That role is now held by Air France and
Lufthansa.
DOT's proposal, obviously, does not eliminate the foreign
ownership restrictions in the U.S. That is an issue for
Congress to consider another day. But it is an important step
in the still unfinished process of deregulating our industry
and allowing it to operate in a more normal business
environment.
United Airlines supports both of these initiatives, the
U.S.-E.U. agreement and the proposed rulemaking because we
believe they create important commercial opportunities for U.S.
carriers. They also create the opportunity for the U.S. to
begin to regain its role as the world's leader in aviation, a
lead that we have lost in recent years.
At United, we have just completed an extensive
restructuring of our company to enable us to compete in the
global marketplace. In fact, almost all the U.S. major carriers
have now gone through or are going through a Chapter 11
restructuring.
As an industry, we are well situated to compete, but the
greatest growth opportunities are abroad. The fastest growing
aviation markets are outside of the U.S., and many of these
markets are more efficiently by our foreign competitors with
hubs in those regions. Foreign ownership restrictions prevent
U.S. carriers from acquiring or building hubs outside the
United States.
As our foreign competitors merge and grow, we will be left
behind if we attempt to protect U.S. carriers from competition
by keeping our borders closed. We are looking for opportunities
to compete more effectively in that world market, not for
regulatory protection against foreign competition or foreign
investment.
I thank you again for the opportunity to testify.
Mr. Mica. Thank you.
Let me recognize now Mr. Mark B. Dunkerley, President and
CEO of Hawaiian Airlines.
Mr. Dunkerley. Good morning. Good afternoon, Mr. Chairman.
Thank you for having me here today to testify. My main purpose
here today is to make two points concerning the U.S.
Government's application of the restriction on foreign
investment in U.S. airlines, and this is from our direct
experience in the last year.
The first is that the larger pool of capital that is
attracted to an airline, the more its employees, its customers,
its creditors, and the communities that it serves will benefit.
Second, the regulatory uncertainty that exists in many
regulatory processes, including the one that we are considering
today, represents a serious deterrent to investors.
Now while neither of these conclusions amounts to a
revelation, the application of the existing law on foreign
ownership has, in our view, limited the pool of available
capital to fund U.S. airlines and has made the prospect of
investing in U.S. airlines that much less attractive. Though we
believe that the current restrictions on foreign ownership
should be changed, we also support DOT's position that
clarifying the limits under the current law and broadening
their interpretation is good public policy.
Hawaiian has firsthand experience regarding the
applications of the restrictions on foreign ownership. Emerging
from bankruptcy is often an obstacle course, and in our case
there were few obstacles as high or as slippery as persuading
DOT that Hawaiian Airlines was owned and controlled by U.S.
citizens. A common sense review of our circumstance would have
confirmed our U.S. citizenship in minutes, but the process that
we were obliged to follow took five months, was fraught with
uncertainty, and was unbelievably costly.
The investors who bought Hawaiian Holdings which is the
parent of Hawaiian Airlines were a group of hedge funds, all
based in the United States, all managed by U.S. citizens, and
having no appreciable concentration of foreign funds. However,
because the source of some of the capital being invested in
Hawaiian was of foreign origin, we faced a daunting regulatory
review.
Explaining to the sophisticated and worldly U.S. investors
that having an insignificant portion of their managed funds
contributed by non-U.S. citizens could lead to the revocation
of our operating certificate was an event not to have been
missed. They were incredulous, having not previously
encountered a regulatory scheme so utterly disconnected with
the nature of today's financial world nor one so seemingly
capricious.
To its great credit, DOT took the opportunity presented by
Hawaiian's case to both fulfill its oversight responsibilities
and to provide clearer guidance to others who may follow in our
footsteps. But it was a long, expensive, cumbersome, and
painful process, poorly suited to encourage investment in our
business.
We were required to submit to the DOT not only the
financing and organizational documents associated with the
airline and the group which directly controlled the company,
but also the financing and organizational documents of each
entity that made up the group which purchased our holding
company. This voluminous, and we would suggest largely
irrelevant, information was reviewed microscopically by DOT in
an attempt to determine if there was an indicia of control.
Had there been, and if that control was in the hands of a
foreign entity, DOT would have found that the airline, despite
being within 100 percent control of U.S. board of directors and
U.S. officers, violated the restriction on foreign ownership in
U.S. airlines. Our operating certificate would have been
revoked, and our company liquidated with the consequent loss of
jobs and service.
In the end, in order to conclude that the U.S. based and
U.S. managed hedge funds which invested in Hawaiian Holdings
were not foreign agents, they had to agree to a new U.S. entity
controlled by the very same people who have controlled the
original funds, the U.S. managers. The hedge funds received
non-voting stock in the new entity while the U.S. managers held
all of the voting stock. This bizarre structure satisfied the
statutory requirements because the foreign interest were
clearly passive. None of the new investors demonstrated any
incentive or ability to exercise any control of the airline.
It is fair to say that the hedge funds involved were
flummoxed as to why they had to arrange this complex structure
to achieve what they had always intended, namely to make a
plain vanilla investment in a publicly held company. The
structure is no great thing of beauty, but at least now
forewarned by our precedent and the proposed NPRM, future hedge
funds interested in making an investment in Hawaiian or, for
that matter, in any other U.S. airline enjoy a measure of
clarity as to what they are getting themselves into.
Having been through the mill, we support any effort to
streamline and demystify citizenship reviews. The NPRM issued
by the Department of Transportation, which is presently
pending, is a good first step and we believe should be
supported.
Thank you very much for taking the time to hear our views
today.
Mr. Mica. I thank you for your testimony.
I will recognize Mr. Jeffrey Smisek, President of
Continental Airlines. Welcome, sir. You are recognized.
Mr. Smisek. Thank you. Good afternoon. On behalf of my
42,000 co-workers, I appreciate the opportunity to express our
opposition to the Department of Transportation's proposed
rulemaking on foreign ownership and control. I also have
written testimony that I have submitted, and I ask that that be
made part of the record.
Mr. Mica. Without objection.
Mr. Smisek. Thank you.
Let me start off by saying that Continental Airlines does
not oppose increasing U.S. airlines' access to foreign capital.
However, Continental is opposed to the Department's proposed
rulemaking for three reasons. First, it is unlawful; second, it
is unworkable; and third, it will not result in increased
access to foreign capital.
Just a few years ago, Congress passed a statute codifying
decades of DOT decisions that required U.S. citizens to not
only own 75 percent of the voting stock of a U.S. airline and
control two-thirds of the airline's board of directors and
managing officers, but also required that U.S. citizens have
actual control of the airline. Through this statute, Congress
made it clear that foreign citizens could not control a U.S.
airline.
In its rush to appease its European Union counterparts, the
DOT has decided to simply interpret the statute away. Simply
put, DOT has no authority or discretion to interpret this law
differently when Congress has already made clear that actual
control of a U.S. airline must be in the hands of U.S.
citizens.
This is not the case of Congress leaving the statute
unclear and DOT filling the gaps with interpretation. This is
the case of arrogant contempt by the DOT of the clear
Congressional language. When Congress has spoken clearly, that
is the end of the matter. Nonetheless, in the Alice in
Wonderland world of the DOT, a statute that says U.S. citizens
must have actual control of a U.S. airline has been interpreted
through this NPRM to mean that foreign citizens may have actual
control of a U.S. airline.
In fact, it has been widely recorded, and Mr. Shane
confirmed it this morning, that the Department has promised
foreign interests that when this NPRM is in place, that DOT
will even allow super majority voting rules to protect and
guarantee foreign domination and control of U.S. airlines and
that foreign citizens will even be able to make decisions on
the U.S. Civil Reserve Air Fleet or the CRAF Program as it is
called, as long as the decisions are made for commercial
reasons.
Second, the DOT's attempt to interpret the statute to mean
that foreign interests can actually control every aspect of
U.S. airlines' operations except in the areas of security,
safety, CRAF, and the control of organizational documents is
simply unworkable. Issues of safety and security permeate an
airline and involve literally thousands of people and cannot be
isolated into one U.S. citizen controlled function.
Let me give you an example. In March of 2001, a U.S.
military aircraft was involved in a midair collision over the
South China Sea and was forced to land in China. The crew was
detained by the Chinese. The U.S. worked hard to obtain their
release but believed that the Chinese would not allow a
military aircraft to land in Hainan to retrieve our soldiers.
With our hub in nearby Guam, we were asked at Continental
by our Government if we would take on that mission. Knowing
that the mission could be dangerous for our crews, knowing that
helping our Country in its time of need meant that we would
have to cancel flights and inconvenience passengers while we
kept a plane available, and fuel, and crews standing by, every
minute of every day until the mission was executed, virtually
all of or senior officers in flight operations, in-flight,
maintenance, scheduling, airport operations, legal, finance,
and other areas had to be involved in making the flight.
Our U.S. citizen officers and our then CEO, himself a
former U.S. Navy mechanic, thought the answer was easy. Our
Country needed us. We had no commercial obligation to accept
the mission, but for us the commercial considerations, which by
the way were 100 percent negative, were irrelevant. But make no
mistake, if we had been controlled by a foreigner, that
commercial decision would have been very different, and that
mission would not have been flown.
Finally, given the fatal flaws of this regulation, it will
most certainly be challenged in court--I guarantee it--and the
years it will take to resolve those challenges will mean that
any foreign investment that might have occurred under today's
rules will be postponed. And in the end, the NPRM will be
thrown out, and we will have made no progress.
This leads me to one last point. The Open Skies Agreement
that generated this NPRM is a triumph of form over substance.
U.S. passenger carriers already have Open Skies for all intents
and purposes to most locations in Europe except to London's
Heathrow Airport, the single most important for business
travelers in the European Union. And while the treaty would
theoretically give us the right to fly to London Heathrow
Airport, that right is meaningless since commercially
competitive slots and facilities are not available to us at
London Heathrow. The right to fly is useless without the right
to land.
The U.S. government has refused to even attempt to get U.S.
carriers the right to land at Heathrow because they say it is
outside the bilateral. But while they are willing to go, while
they are not willing to go outside the bilateral for U.S.
carrier interests, they appear to be completely willing to go
outside the law to appease foreign carrier interests.
We appreciate your holding this hearing, and we urge to let
DOT know that if they want to change the law, they are going to
have to make their case to the Congress and to the people, and
not pervert a clear statute through unlawful, unworkable, and
ineffectual rulemaking. Thank you.
Mr. Mica. I thank the gentleman.
Captain Duane Woerth, President of the Air Line Pilots
Association, I recognize you next. Thank you.
Mr. Woerth. Thank you, Mr. Chairman. I also have a lengthy
written testimony.
Mr. Mica. Without objection, the entire statement will be
made part of the record. Please proceed.
Mr. Woerth. Thank you, Mr. Chairman.
Also, I would like to note that 100 percent of the pilots
represented by the management at this table, I represent, and
only Continental Management and I agreed with what they all
want to do, that is to support Open Skies. We do support Open
Skies. We are very saddened, quite frankly, that the European
Union rejected the good faith agreement we achieved last year.
We worked with our negotiators. We supported that. We worked
with Secretary Mineta. And we are very upset that the deal we
negotiated a year ago was shot down.
We don't think, and I was also pleased to hear the
Honorable Jeffrey Shane say that there is no linkage between
these negotiations. If there is no linkage, then there is no
problem, and we should let the Congress deal with this matter.
And certainly, the Open Skies benefits that will inure to
European citizens and their airlines should be voted up by the
European Union, but that is, of course, their decision.
I want to make sure this Committee understood we support
Open Skies. We absolutely support Open Skies, and this has
nothing to do with trying to undermine Open Skies. We want it
to happen.
I also want to thank this Committee and certainly the House
and Mr. Chairman for holding this hearing. It is very important
that this hearing be held. And H.R. 4542, we support
emphatically. As you probably know by now, we have 126 co-
sponsors for that legislation and a great many are these
Committee members. I want to thank all the Committee for their
attention and concern about this matter.
As our colleague from Continental mentioned, the NPRM is
fatally flawed from many, many respects. The notion that
security and safety can be separated by a Chinese wall or
Maginot Line or any other matter is just ridiculous. The way an
airline works is safety and security are totally intertwined
like marbled meat; there is no way to carve it out. I hope
this, I know the Committee understands that. So the notion that
security and safety can be carved out separately by separate
citizens by some Chinese wall is dangerously naive.
Another thing we must assert here is that this issue,
finally we are having it on the table. This has never been
about foreign capital ever. The debate about foreign ownership
or control has always been about foreign control by foreign
airlines. That is the issue. I am not worried about hedge
funds. I am not worried about pension funds. I am not worried
about French insurance companies. I am extremely worried about
foreign controlled airlines controlling U.S. airlines,
particularly foreign airlines that have a high government
ownership stake.
And anybody who does not think that that proposes extreme
job risk for the United States citizens is not getting it at
all. To those who also worry about it, I am worried about our
pilots being displaced from international operations. I think
that is a very real and understandable threat.
And, Mr. Chairman, ALPA has been studying this issue for
over 10 years. I have all kinds of documentation that show what
is going on already. The growth has been going to our European
airlines. We have mostly been getting the code-share. There is
a song about the gold mine and the shaft, and it kind of
relates to jobs in the code-share. I would like to share that
with the Committee, an in-depth analysis, and if you request
that, I will certainly submit it to you.
Bottom line is there are huge job issues here. There was
also a mention in the testimony, and certainly the statements
by your Committee, that small communities have every reason to
be worried here. As these global alliances go forward, if
members of the Star Alliance, or SkyTeam, or oneworld
controlled our major brands, their interest in anything that
doesn't enhance their companies that they control with
international markets, it is fair to that would be greatly
reduced. So a lot of small communities have reason to worry,
and a lot of carriers that provide fee for departure services
should be worried what that would look like when it was all
over.
Lastly, let me say again about the naiveness about the
capital markets. The capital markets are global already. Every
bank of any consequence is a total global enterprise. Most of
the capital that is in the airline industry is not equity; it
is debt. There is almost no equity in this industry; it is all
debt. It has always been financed that way. Airbus finances all
kinds of airlines. General Electric Credit Corporation may be a
U.S. company, but it is a global corporation. Without GE, there
wouldn't be any financing. How about Emery Air? How about
Bombardia? The capital markets are globalized already.
This is not about capital. It is about foreign airline
control of U.S. airlines.
Thank you, Mr. Chairman. I would like to conclude my
remarks and take any questions you may have later.
Mr. Mica. Thank you.
We will hear now from the last witness on this panel. That
is Mr. Edward Wytkind, President of the Transportation Trades
Department, AFL-CIO. Welcome, and you are recognized, sir.
Mr. Wytkind. Thank you, Mr. Chairman, Mr. Costello, and
members of the Subcommittee for inviting Transportation Labor
to offer our opinions on the NPRM before you. Let me summarize
what I have submitted in detail for you.
After careful examination, we conclude the DOT's proposal
is blatantly contrary to the statute, weakens the aviation
industry and its workforce at the worst possible time, and
denies Congress its historic role in shaping aviation policy.
We would submit that it would directly threaten the jobs
and the rights of workers we represent as these employers
around the world are given yet another tool to seek out the
lowest common denominator in wages and benefits across the
world. It would undermine workers' bargaining rights as I think
the Air Line Pilots Association showed in its submitted
testimony in detail. It would have an adverse impact on
national defense and security. We have heard a lot of that from
members of the Subcommittee. And we believe it would inspire
even more outsourcing in this industry to the detriment of
safety, security, and jobs.
The anger that we have heard today and that we heard
leading up to this Subcommittee hearing by members of the
Transportation Committee are quite warranted. We share your
anger. We were not consulted either, and our view of this NPRM,
in addition to all the comments made by our colleagues at
Continental and by Duane Woerth, this NPRM has to be stopped.
H.R. 4542, which we thank Mr. Oberstar and Mr. LoBiondo--and by
the way, now we have more than half of the Subcommittee and
more than half of the full Committee as co-sponsors of this
legislation--we thank you for your leadership in trying to stop
this NPRM before it harms the airline industry and its
workforce.
We agree with the legislation in that the Administration
has failed to make the case for why foreign entities should be
able to control U.S. airlines. We think that DOT has not met
the burden. In fact, it has made unsupported and very flawed
arguments in favor of their NPRM. Let me point out that the
Administration hasn't always been terribly concerned about
access to capital for American airlines. After all, it is the
same Administration that did everything it could to derail
assistance to the airlines after 9/11. It doled out only 16
percent of the Federal loan guaranties approved by this
Committee and the Congress, and it tried unsuccessfully to
block extended jobless benefits for our members.
The NPRM is plain and simple really about placating the
E.U. It is about making sure that we take care of what the E.U.
needs at the bargaining table instead of what America needs.
America needs good jobs. It needs a strong transportation
system. It doesn't need more giveaways at the bargaining table.
And I find it ridiculous that the witnesses for the
Administration claim that on one hand the U.S.-E.U. is delinked
from the NPRM but then to tell this Committee that the deal
will die if the Oberstar-LoBiondo bill passes. I don't think
that passes the laugh test.
[Laughter.]
Mr. Wytkind. It is fairly clear that the Department's
proposal runs counter to the plain meaning of the statute. I
won't review that again. That has been discussed in detail. But
we think it is pretty ridiculous that you can bifurcate a
carrier the way that they propose: commercial aspects on one
side; safety, security, CRAF, etcetera on the other side.
Nobody believe that will work. I have heard nobody say it will
except the two Administration witnesses.
We think it is creative interpretation of the law, and we
think Congress needs to retrieve this NPRM quickly and stop the
Administration from ignoring the plain meaning of the statute.
On the outsourcing issue, I want to point out a couple
things. We have already seen a very troubling trend of
outsourcing in the airline industry. Fifty-four percent of
maintenance is performed now in outsource facilities. We think
that has a very serious safety and security implication. This
Committee agreed with us, and, in fact, this Committee enacted
in Vision 100 a provision that requires a Transportation
Security Administration in consultation with the FAA to conduct
security audits of foreign repair stations.
Those security audits have been performed. Regulations have
not been issued. And today we still have an old regulatory
regime that doesn't deal with the real world consequences of
allowing outsourcing around the world.
So why does that matter, and why is it related to the NPRM?
It matters because if you allow foreign interests to control,
especially foreign airlines to control decisions having to do
with safety and security and all other operations of a company-
FE I don't care what the witness of the Administration said-FE
you can't separate the two out. So if you are going to make
decisions about what aircraft you buy, who maintains your
planes, whether flight attendance are going to staff the planes
from the United States or from a foreign country, whether
pilots are going to fly the planes, those decisions will rest
in the hands of the foreign interests that control the company.
I don't think that is good for the Country, and I hope that
this Congress does something about it before it is too late.
Let me just conclude by saying the following: There is no
doubt that globalization has changed the airline industry
forever. Our members that we represent understand that. We have
done everything we can do to protect their interests.
But when you have got collective bargaining rights being
potentially attacked under a scenario where foreign interest
control airline companies, when you have outsourcing run amuck,
when you have flight attendant and pilot jobs potentially being
outsourced, and then when you have an NPRM that is so
unworkable as pointed out by Continental and by many others who
are members of this Committee, we think this NPRM needs to be
stopped dead in its tracks, and we hope you will move the
LoBiondo-Oberstar bill as quickly as possible.
Thank you very much.
Mr. Poe. [Presiding] I thank all of you for being here. We
will go to questions.
Mr. Costello?
Mr. Costello. Thank you, Mr. Chairman.
Mr. Wytkind, let me ask you to elaborate a little bit more
on outsourcing, although you covered it pretty well. There is
no question, and I hope that you and everyone else understands
from my opening statement and the concerns that I have
expressed, that if this rule goes through that there will be
more outsourcing. There is no question about that.
So I want to ask. It is interesting to me, in your
testimony, you said that foreign ownership would weaken the
connection between the FAA to the industry. I want you to
explain a little bit about that.
And number two is to talk a little bit about your
experience with the FAA's track record with regard to oversight
of foreign repair stations.
Mr. Wytkind. Well, it is interesting. We have been, I
personally have been working on the FAA's grossly lacking
oversight of foreign repair stations since I first came to work
here in 1991 on behalf of the unions. The FAA's oversight has
always been abysmal, and it has always been recognized that as
you globalize the industry, you also have to figure out a way
to deal with your safety and security challenges.
I think as you allow this globalization trend to continue,
as you allow foreign airlines to exert control over U.S.
operations and potentially make decisions about what planes you
buy and where they are maintained more and more overseas, we
are going to see this continued siphoning not only of good
jobs, but we think that the safety and security problems that
poses are significant.
The FAA openly admits that it doesn't have the resources to
handle the responsibilities overseas yet. They continue to be
apologist for the current regulations. And the Transportation
Security Administration, which shouldn't get a pass here, was
told by Congress to issue security regulations and to audit
foreign based repair stations. They haven't even issued an
NPRM, let alone finalize regulations or perform the audits. So
it is clear to me that the FAA and the TSA have lost all
control over that issue. The GAO has proven that. The DOTIG has
proven that. Yet, they are just ignoring it.
Meanwhile, we have a bad NPRM like this that is going to
exacerbate a problem that clearly is out of control already.
Mr. Costello. Thank you.
Captain Woerth, I have got two or three questions for you
in a limited time, so I would ask you to be brief. You were on
the board at Northwest when KLM had a significant ownership
stake in the airline and then I believe British Airways, of
course, took a significant stake in U.S. Airways. Can you tell
us a little bit about your experience with respect to those two
investments, foreign investments in U.S. airlines?
Mr. Woerth. Yes. Certainly, from my experience, when
ownership stake was large, there was conflict on the board. I
am talking about the Northwest board and KLM. It actually
became that public documents called it the Alliance from Hell,
which was a real shame. It was a great alliance, but the
conflict on the board, the perceived control fights were real.
It entered in litigation. The litigation was resolved. At the
end of the day, the solution was that Northwest decided to buy
out the interest of KLM to preserve a great relationship, but
they invested $400 million and it cost a billion dollars to buy
out KLM.
British Airways and U.S. Airways had the same problem,
conflicts on the board. At the end of the day, the board
decided to buy out British Airways, again at a great profit to
British Airways.
But the notion that there is no conflict on these boards
when one airline is into another airline is dangerously naive.
There is plenty of conflict.
Mr. Costello. On the issue of my concern and the concern
you have heard from many of other Committee members here today,
about the concerns of U.S. workers losing jobs to those
employees working for foreign carriers today and on the issue
of safety, I wonder if you can elaborate just a little bit
about your concerns for our U.S. workers.
Mr. Woerth. Our main concern for U.S. workers is that, even
if we are already cheaper and we are, a lot of foreign
airlines, and their investors, and their governments treat the
airlines as an instrument of foreign policy. And also, it is
extremely expensive, for example in Europe, to lay off a
European worker.
It is a very expensive proposition, three or four times
more expensive and problematic even besides the politics of
France or of Holland to lay off their citizens. It is very easy
to lay off an American. We are used to outsourcing. So I am
very concerned we will be the ones outsourced even if we are
cheaper, and I think that is a big trouble for the United
States.
Mr. Costello. You heard the testimony from the previous
panel that said, well, all of the labor contracts would stay in
effect and basically everything would be fine. I want you to
comment on that.
Mr. Woerth. Well, the labor contracts would be in effect
until they are amendable, and it will be in a couple years. And
already the forces at work, what I showed you by these charts,
that we are mostly becoming a code=share operation, and the
majority of the jobs, about 60 percent now, are already
swinging to Europeans even though they are more expensive.
Their airlines are committed to buying aircraft and operating
those aircraft with their citizens.
Mr. Costello. Finally, your concerns that you expressed,
and those of Mr. Wytkind as well, concerning safety. I wonder
if you would elaborate a little bit.
Mr. Woerth. Ed certainly covered it with the oversight, but
in particular there are so many programs, vital programs, FOQA
and ASAP that are voluntary programs, entered into by our
managements with the FAA. They are not compulsory; they are
voluntary. And these are not something I expect that would
necessarily survive once it goes to transatlantic or
transpacific ownership.
Mr. Costello. Mr. Chairman, I have no further questions.
Mr. Poe. Thank you.
Mr. DeFazio?
Mr. DeFazio. Thank you, Mr. Chairman.
Mr. O'Keefe, if we could get this Open Skies Agreement
without the creative new interpretation of control and the
problems that we have been discussing or potential problems,
would that meet the concerns of your organization? I mean are
you looking at having foreign investors begin to, hopefully,
shape your future?
Mr. O'Keefe. As to your first question, I think the
practical reality is that we will not have U.S.-E.U. agreement
in the absence of this.
Mr. DeFazio. So you are saying, we are being blackmailed by
the E.U. for something that was not negotiated as part of the
Open Skies Agreement.
Mr. O'Keefe. No, sir. I don't think--
Mr. DeFazio. Well, you said we won't get one unless we add
this. I mean, they are not blackmailing us? They are just
telling us we negotiated an agreement, but you can't have it
unless you give us this other operative part which is ownership
control?
Mr. O'Keefe. No. I think it was explained earlier on the
panel before us that from the view of the Europeans, there is
not balance in the agreement. We get Open Skies or we get
rights within and beyond European states; they do not get
cabotage rights per the statutes of the United States. And so,
the Europeans would view this as something that would bring
balance to the agreement.
Mr. DeFazio. Yes, well, the balance with the Europeans is
usually something which tremendously advantages the Europeans
and/or Airbus, historically, and we have been taken to the
cleaners before, but thanks for that.
Mr. Woerth, I have got to say that I am just shocked here.
I mean you are saying that this could have an impact on
domestic service. It could have an impact on jobs. Because the
Administration witnesses denied that there would be any job
impacts, and they seemed to have no concerns about domestic
service and then the Civilian Reserve Air Fleet. You raised all
those issues. Could you just maybe refute a few of the points
they made, why you have those three concerns?
Mr. Woerth. Well, first of all, they said that what we have
been watching so far is that the growth opportunities already
in the current environment are largely inuring to our foreign
competitors and not us, even when we are cheaper. We have got
some modest growth, but the overwhelming growth, after the
German Open Skies Agreement for example, was that the lion's
shares of the new flying opportunities went to Lufthansa.
United had a few; Lufthansa had a great many.
And again, inside, anybody who understand European law
about how expensive it is to lay off a European citizen,
understand if there is a commercial decision to be made, you
lay off the American which is easier to do and you keep the
European. There is just no refuting that.
Mr. DeFazio. I raised a concern as did Mr. Poe. We have
tremendous concerns about the Civilian Reserve Air Fleet. We
were told, well, that is not a commercial decision. Well, I
raised the specter that we may divest the now foreign-dominated
American airline of its international routes, which you raised.
The international routes could be flown with foreign equipment,
with foreign pilots. And then, domestically, they would say,
well, we just don't need these big planes anymore. That would
be a commercial decision. Do you see that as a possibility?
Mr. Woerth. Absolutely, I see that as a very real
possibility.
Mr. DeFazio. So do you think we could get troops to the
Middle East adequately in A320s or 737s?
Mr. Woerth. Absolutely not. You have to have wide body
airplanes, cargo airplanes, passenger airplanes. In the first
Gulf War, where we had great international cooperation, about
99 percent of the lift, 99 percent was provided voluntarily by
U.S. airlines flown by U.S. crews. Right now, all the beans,
and bullets, and troops get there on commercial airplanes.
Incidentally, the CRAF hasn't been exercised recently. It
has been volunteers. The U.S. airlines, and their citizens, and
boards, and management employees volunteer these charters and
volunteer these issues. I think it is an open question how much
that would continue in different conflicts into the future.
Mr. DeFazio. Since you raised the issue of the boards, the
Administration said that, don't worry, they are going to be
U.S. citizens, and they would obviously not allow the stripping
of planes, a commercial decision which would not be under their
control, from the airline. They would certainly want to
continue to participate in CRAF.
But when I raised the issue of whether or not the setting
of their salaries and remuneration was a commercial
undertaking, the Administration seemed not to know. Do you
think, well, your salary, that is commercial as an airline
pilot a commercial salary, right?
Mr. Woerth. Not only that, I served on the board of
directors for Northwest Airlines and was on the Stock and
Compensation Committee. I think Alice in Wonderland was used
here. They don't seem to understand corporate governance in
America.
We can have the CEO, and the Chairman of the Board, and all
these citizens could be U.S. citizens, but if there is a single
serious foreign airline investor who is the big dog at the
table, they will recruit; they will put forward their
nominations for board of directors; they will control the board
whether super majority or not; they will hire a CEO; he will
hire everyone else; and he will do exactly what they want or
they will fire him, and they will get somebody who will. That
is the real world, not the Fantasy Island, Egghead, Ivory Tower
I heard today.
[Laughter.]
Mr. DeFazio. Well, you know, you could be sitting up here.
Thank you. That was a great answer.
[Laughter.]
Mr. DeFazio. Thank you, Mr. Chairman.
Mr. Poe. Thank you. I have a couple comments and then a
couple questions.
I want to thank all of you for being here, Mr. Smisek,
especially coming from Texas up here to testify. I am glad
that, as a lawyer, you were here to learn some new
Constitutional law from the Department of Transportation, that
the Executive Branch interprets law rather than enforces it. As
a judge for 22 years in Houston, trying, hearing about 25,000
criminal cases, I wish I knew that before I became a judge,
that I was not supposed to be interpreting it.
[Laughter.]
Mr. Poe. But be that as it may, that seems to be part of
the problem that has been presented to us, that the Department
of Transportation feels they can proceed without Congressional
approval. I think that Congress disagrees with that, and
certainly the Judiciary Branch probably will.
Can you explain in a way, can you explain the idea of
having the security department of Continental, if you will,
controlled by an American but yet the airline is controlled by
a foreign airline, and when the conflict occurs with security,
and the department of security in Continental disagrees with
the control of the foreign entity, how that would play out in
the real world. What would happen?
Mr. Smisek. Sure. Actually, at Continental Airlines, the
security department actually does report to me. So let us
pretend that I am Indonesian. I can control the person who
reports back. I can control his salary. I can control his
bonus. I can control his stock options. I can control all his
incentives. I can control his staff. I can control his budget.
I can basically have him not blow his nose unless he talks to
me. And I don't do that to him today, but if he weren't doing
what I wanted him to do, I certainly could do all those things.
And if I were Indonesian, and he is in charge of security,
the fact is I could make all of those judgements, and if he
didn't do what I wanted him to do, I would simply replace him
with someone who would. It is just the way the world works.
And I am mystified by the Administration's testimony today
because it makes no sense to me. It is as if it is testimony
from people who never worked ever in their lives in a corporate
job.
Mr. Poe. That sort of explains it. I don't have any more
questions.
I want to thank everybody for being here today. We will
keep the record open for this hearing for another two weeks.
Additional statements can be entered from the witnesses and
members of this Committee.
And so, the Subcommittee is concluded at this time.
[Whereupon, at 1:25 p.m., the subcommittee was adjourned.]
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