Why 100% foreign ownership of the major airlines is on hold (even if it’s a good idea)

It costs a lot of money to be in the airline business. In 2015, it cost Air Canada more than $12.3 billion (or $236 per seat-trip) to keep the airline flying. The smaller WestJet cost a little over $3.4 billion to run, or approximately $213 per seat-trip. Even if half the passengers vanished overnight, most of those multi-billion-dollar costs would still need to be paid as overhead.

When fleets need to be renewed or IT systems need to be modernized, it can be helpful if the airline can turn to investors. But Canada’s major airlines are limited in who they can turn to by something that might seem rather petty in this day and age: where those investors live.

That’s because Canadian law requires that “at least 75 percent of the voting interests, meaning voting securities and the votes assigned to those securities, need to be both owned and controlled by Canadians.” In other words, foreigners are collectively limited to a 25-percent stake.

For years, this cap on foreign ownership has been seen as being of dubious value. Both Australia and New Zealand have allowed up to 49 percent foreign ownership of their international airlines, and 100 percent foreign ownership of strictly domestic airlines, since at least 2002 with no adverse effects. A working paper presented at the International Civil Aviation Organization’s 2013 Montreal conference painted the industry as being still subject to “a framework of restrictions developed in the first half of the 20th century at the end of an age of colonial empires” that are “no longer fit for purpose.” And an International Air Transport Association (IATA) report noted in 2007 that “removing ownership restrictions can also lead to increased investment in the sector . . . and a lower cost of capital as firms have access to wider and more efficient sources of finance.”

At last, momentum is building in Canada to allow foreigners a little more freedom to invest in Canadian airlines. A review of the Canada Transportation Act that concluded this past February recommended allowing up to 49 percent foreign ownership of Canada’s passenger airlines and complete foreign ownership of its cargo airlines.

The idea was met with mixed views in the industry. WestJet is said to favour raising the foreign ownership limit to 49 percent only for countries that allow Canadian investors the same privileges. Porter and Jetlines were said to be all for it, while Air Canada carefully maintained a poker face.

But why stop at 49 percent? Why not raise the passenger airline foreign ownership limit to 100 percent?

A big part of the problem can be found in those restrictions that limit international air traffic. When they fly between countries, airlines need to abide by rules set out by international treaties negotiated between Canada and foreign governments.

Most of those treaties, some of which are decades old, would bar any majority-foreign-owned Canadian airlines from serving foreign cities. For instance:

  • Canada’s agreement with Mexico says that either country has the right “to revoke, suspend or impose conditions” on an airline’s right to fly between the two countries if “they are not satisfied that substantial ownership and effective control of the airline are vested in [the country’s government] or its nationals.”
  • Canada’s agreement with the European Union says that a Canadian airline can only serve the E.U. if “effective control of the airline are vested in nationals of Canada, the airline is licensed as a Canadian airline, and the airline has its principal place of business in Canada.” Similar restrictions apply to E.U. airlines flying to Canada.
  • And Canada’s agreement with China allows China to block any seemingly Canadian airline if “they are not satisfied that substantial ownership and effective control of the airline” rests with Canadian citizens. Again, Canada can apply the same requirement to China’s airlines

It is possible that the basis for those restrictions will eventually be worked around. As the IATA’s 2007 report noted, international safety standards were already taking shape when the report was being written (including an operational safety audit that was to be mandatory for all IATA member-airlines starting in 2008) that would prevent airlines from adopting the flags-of-convenience often used in the cruise ship industry; thus, safety standards are no longer a particularly compelling reason to block foreign ownership among the countries whose airlines already have excellent safety records.

And while there were approximately 3,000 international agreements regulating air travel in 2007, only 200 of them already covered 75 percent of passenger traffic, greatly simplifying the process of revising those treaties to allow full foreign ownership between countries with similarly high standards.

There’s no longer any need to fear American or German or Australian or Japanese or British ownership of Canadian airlines. Indeed, the easier it is for Canadian carriers to get investment from abroad, the more robust the Canadian system will be. Until 100-percent foreign ownership can be allowed without running afoul of decades-old international treaties, raising the foreign ownership limit from 25 percent to 49 percent would be a fine start.

 

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About theviewfromseven
A lone wolf and a bit of a contrarian who sometimes has something to share.

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