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Source link: http://archive.mises.org/6067/open-skies/

Open Skies?

December 28, 2006 by

Virgin America’s Bid to Start Flights Denied by U.S.

From Mike Shedlock comes this analysis:

The US department of transportation (DOT) ruled on Dec 27th that the UK is a security risk and therefore British owned Virgin America Airlines is not allowed to fly within the US between San Francisco and New York. How flights originating in the US to other US destinations in the US posed security risks to the US was of course not explained (probably because the idea is ridiculous). They did not actually say “security risk” but what else could a law requiring 75% US ownership to fly within the US mean? The expressed concern was over “foreign ownership”.

I sure wish they would let me toss out a few questions on these interviews.
It would go something like this.

Mish: Are you saying the UK poses a security risk to the US?
DOT: No that is not what we mean to imply.
Mish: Is Branson, the CEO of Virgin America, a security risk to the US?
DOT: Uh… No we are not saying that either.
Mish: Does the fact that Virgin America is British owned make it easier for contraband or weapons to be smuggled aboard flights originating in the US?
DOT: No
Mish: Are all international flights into the US majority owned by US citizens?
DOT: No. Many countries have plane flights into the US.
Mish: Is that a bigger security risk than Virgin America wanting to fly from San Francisco to New York?
DOT: Uh… I have to go now.

This is not a victory for US airlines, organized labor, free trade, taxpayers, or anyone else other than ISOH (International Society of Hypocrites), led by none other than the USA and EU. The stunning irony is impossible to miss. The U.S. is pressing for an “Open Skies” agreement with the EU to lift decades-old curbs on where carriers can fly.

Presumably Continental, Delta, American, etc and organized labor benefited from this action. That is the “seen” perceived benefit. The “unseen” consequence is hundreds of people who are denied a job, restaurants and hotels that do not benefit from increased travel, customers denied the benefits of increased competition, and fuel services and mechanics that do not benefit from servicing another airline. It would not surprise me in the least to see the EU to use this as an excuse to continue to fight “Open Skies”. The odd thing is, the first to allow “Open Skies” would benefit even if the other didn’t.

{ 4 comments }

Boris Lvin December 28, 2006 at 1:53 pm

It seems that Mike Shedlock is wrong. The DOT ruling has nothing to do with security risks. The ruling is freely available at http://dmses.dot.gov/docimages/pdf99/434510_web.pdf and the whole huge dossier (declassified part, to be precise) at http://dms.dot.gov/search/searchResultsSimple.cfm?numberValue=23307&searchType=docket

It is clear from the ruling that:

1) There is a protectionist law which prevents non-US owned carriers to operate flights within the US;

2) Virgin was very well aware of this law and tried to circumvent it by constructing a complicated web of offshore trusts and partnerships;

3) US air companies tried very hard to expose the Virgin’s trick, to the extent that their efforts were called by Virgin as “redundant, late, lengthy, unauthorized, and vexatious” (http://dmses.dot.gov/docimages/pdf97/413022_web.pdf). Still, they collectively exposed the ownership trick by Virgin.

4) The US DOT had no other choice but to apply the existing law and deny Virgin’s application.

The law in question:
http://caselaw.lp.findlaw.com/casecode/uscodes/49/subtitles/vii/parts/a/subparts/i/chapters/401/sections/section_40102.html
http://caselaw.lp.findlaw.com/casecode/uscodes/49/subtitles/vii/parts/a/subparts/ii/chapters/411/sections/section_41102.html
http://caselaw.lp.findlaw.com/casecode/uscodes/49/subtitles/vii/parts/a/subparts/ii/chapters/411/sections/section_41108.html

Conclusions: the law is obviously protectionist and economically harmful; US companies strongly rely on this law and collectively protect their turf; the Department of Transportation has simply fulfilled its duties as defined by the law; Mike Shedlock failed to do the simplest internet search and misunderstood the case.

Mike December 28, 2006 at 2:48 pm

More detail from an industry publication…
Protectionism. Plain and simple.

http://www.americanshipper.com/SNWS_story.asp?news=45552
Source: American Shipper+ Shippers’ NewsWire Date Posted: 12/28/2006 10:26:40 AM

DOT blocks launch of Virgin America airline
In another setback for globalization of the airline industry, the U.S. Department of Transportation on Wednesday tentatively denied start-up airline Virgin America’s application for an operating certificate because it determined that foreign ownership and control of the airline exceeded U.S. limits.
Virgin America is backed by Sir Richard Branson, the billionaire founder of Virgin Atlantic airlines based in the United Kingdom, and two U.S. private equity firms, Black Canyon Capital and Cyrus Capital Partners.
Under U.S. citizenship requirements, foreigners can only own 25 percent of an airline’s voting stock, and Americans must constitute two-thirds of upper management and the board, and control company operations.
The DOT order said the low-cost carrier is closely tied to the Virgin Group and would have to revise its corporate structure and associated agreements to be actually 75 percent controlled by U.S. citizens.
“The order cites the Virgin Group’s and its executives’ pervasive involvement in the creation of Virgin America, the funding Virgin Group provided to the carrier, various interlocking financial agreements, and the Virgin Group’s ability to influence decisions of the carrier’s board,” the DOT said in a news release announcing the decision. The department also said that “the restrictive name-brand licensing agreement between Virgin Group and the airline impedes the carrier’s independent decision-making authority.”
Branson’s Virgin conglomerate contributed about a quarter of the equity to the venture. A Virgin America spokesman told several news outlets that the company intends to address the DOT’s concerns during the upcoming 14-day appeal period and move ahead with plans to launch the airline.
Earlier this month, the DOT pulled its proposal to increase foreign minority owners’ level of operational control of U.S. airlines under heavy congressional pressure. The proposal was seen as a way to increase access to capital for the U.S. airline industry.
Continental Airlines has been the most vocal opponent within the airline industry of rules that open up domestic carriage to foreign competition. The airline pressed the DOT to block Virgin America’s application.

Bill December 28, 2006 at 5:36 pm

Another lesson in protectionists cutting off their noses despite their faces.

I will not go into the stupidity of screwing the flying customers and focus on the airlines themselves.

The amazing thing to me about this “American” ownership is that foreign ownership could of easily saved every airline from bankruptcy. Think about the BILLIONS in capital the owners of Pan AM, Eastern, US-Air, United and now Delta could have saved had they sold the airlines to foreigners

Furthermore, it would have saved the unions thousands of jobs.

Instead, with this stupid protectionist law, we have had thousands of layoffs, billions in losses piled up by owners and debts that have gone unpaid.

Makes you want to invest in an Airline, doesn’t it?

Sudha Shenoy December 28, 2006 at 9:49 pm

Americans don’t know what they’re missing. Without these stupid regulations, such superb airlines as Singapore Airlines would expand, & hopeless American companies like United, would disappear. For less money, people would get _far_ superior service & amenities.

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