5 May 2006

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[Federal Register: May 5, 2006 (Volume 71, Number 87)]
[Proposed Rules]               
[Page 26425-26444]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05my06-11]                         

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Parts 204 and 399

[Docket No. OST-2003-15759]
RIN 2105-AD25

 
Actual Control of U.S. Air Carriers

AGENCY: Office of the Secretary, DOT.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: The Department is seeking additional comments on our proposal 
to clarify policies that it may use to evaluate air carriers' 
citizenship during initial and continuing fitness reviews. Our proposal 
would affect how we determine ``actual control'' of the carrier in 
situations where the foreign investor's home country has an open skies 
air services agreement with the United States, and permits reciprocal 
investment opportunities in its own national air carriers for U.S. 
investors. We continue to believe that our proposed policy would remove 
unnecessary restrictions on U.S. air carriers' access to the global 
capital market without compromising the statutory requirement that U.S. 
citizens remain in actual control of such carriers.
    We are issuing a supplemental notice of proposed rulemaking (SNPRM) 
because, after reviewing comments submitted on the NPRM and in 
consultation with other Executive Branch agencies, we have decided to 
strengthen the proposal in several areas. We have revised the proposed 
rule further to ensure that U.S. citizens will have actual control of 
the air carrier. We are also mindful of the strong interest in this 
proposal expressed by members of Congress. This SNPRM will furnish 
Congress the opportunity to review the proposal in its refined form, 
and to undertake a more informed assessment of its likely consequences.
    Our NPRM proposal would allow for delegation to foreign investors 
of decision-making authority regarding commercial issues, but in the 
areas of organizational documents, safety, security, and the Civil 
Reserve Air Fleet (CRAF) program the NPRM would not permit these 
delegations. In a key refinement of our original proposal, we now 
propose in this SNPRM to require that any such delegation of authority 
to foreign interests by the U.S. citizen majority owners be revocable. 
We are proposing this change to ensure that, notwithstanding their 
ability to delegate decision-making authority over certain commercial 
matters (as described in the NPRM) to foreign investor interests, the 
U.S. voting shareholders of a U.S. airline will retain actual control 
of the airline.
    We originally proposed to reserve exclusively to U.S. citizens 
decisions relating to organizational documents, safety, security, and 
CRAF. In another refinement, in keeping with suggestions received from 
the Departments of Homeland Security and Defense as well as the Federal 
Aviation Administration, we are now proposing to broaden the scope of 
the decision-making that must remain under the actual control of U.S. 
citizens. The aspects of control of safety and security decisions would 
no longer be limited to those implementing FAA and TSA safety and 
security regulations, but would cover safety and security decisions 
generally. Similarly, the proposed control of CRAF decisions would be 
expanded to cover all national defense airlift commitments. Our 
proposed expansion of the coverage of these three areas will ensure 
that all critical elements of a carrier's decision-making that could 
impact safety, security, and national defense airlift are fully 
covered, and that our review of a carrier's compliance with these 
requirements will not be unduly narrow.
    We tentatively conclude that, as modified, this proposal will 
eliminate unnecessary and anachronistic limitations on the ability of 
eligible foreign minority investors to participate in the commercial 
decision-making at a U.S. airline in which they have made an otherwise 
statutorily-permitted investment. At the same time, it should eliminate 
any doubt that the voting stockholders (75 percent of whom are U.S. 
citizens) and the board of directors (two-thirds of whom are U.S. 
citizens) will retain full control over decisions regarding safety, 
security, and contributions to our national defense airlift capability, 
and that those U.S. citizens also retain ``actual control'' of the 
carrier as a whole as required by statute.

DATES: Comments must be submitted on or before July 5, 2006.

ADDRESSES: You may submit comments identified by DMS Docket Number OST-
2003-15759 using any of the following methods:
     Web site: http://dms.dot.gov. Follow the instructions for 

submitting comments on the DOT electronic docket site.
     Fax: 1-202-493-2251.
     Mail: Docket Operations; U.S. Department of 
Transportation, 400 Seventh Street, SW., Nassif Building, Room PL-401, 
Washington, DC 20590-001.
     Hand Delivery: Room PL-401 on the plaza level of the 
Nassif Building, 400 Seventh Street, SW., Washington, DC, between 9 
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
     Federal eRulemaking Portal: Go to http://www.regulations.gov.
 Follow the online instructions for submitting 

comments.
    Instructions: All submissions must include the agency name and 
docket number or Regulatory Identification Number (RIN) for this 
rulemaking. For detailed instructions on submitting comments and 
additional information on the rulemaking process, see the Public 
Participation heading of the Supplementary Information section of this 
document. Note that all comments received will be posted without change 
to http://dms.dot.gov, including any personal information provided. 

Please see the Privacy Act heading under Regulatory Notices. We will 
consider late filed comments to the extent possible.
    Docket: For access to the docket to read background documents or 
comments received, go to http://dms.dot.gov at any time or to Room PL-

401 on the plaza level of the Nassif Building, 400 Seventh Street, SW., 
Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, 
except Federal holidays.

FOR FURTHER INFORMATION CONTACT: William M. Bertram, Chief, Air Carrier 
Fitness Division (X-56), Office of Aviation Analysis, U.S. Department 
of Transportation, 400 Seventh Street, SW., Washington, DC 20590; (202) 
366-9721.

[[Page 26426]]


SUPPLEMENTARY INFORMATION: Our proposed rule would refine the 
Department's interpretation of the term ``actual control,'' an element 
in the statutory definition of a citizen of the United States, 49 
U.S.C. 40102(a)(15). Only citizens of the United States may obtain 
certificate authority under 49 U.S.C. 41102 or 41103 authorizing them 
to provide air transportation within the United States or operate as a 
U.S. carrier on international routes. The Department's proposal does 
not change the statutory requirements that at least 75 percent of the 
voting shares of a U.S. airline be owned and controlled by U.S. 
citizens and that two-thirds of the board of directors and officers be 
U.S. citizens. Moreover, the Department's proposal would not alter the 
statutory requirement that U.S. airlines be subject to the actual 
control of U.S. citizens. The Department will continue to enforce these 
statutory requirements vigorously. Our proposal would eliminate only 
certain additional citizenship restrictions established by case law 
precedent and imposed on U.S. carriers by current policy that, we 
conclude, have become unduly burdensome. It would thus eliminate the 
requirement that foreign investors not be able to exert any substantial 
influence on carrier commercial decisions (outside of organizational 
documents, safety, security, and national defense). It would eliminate 
that requirement, however, only in the case of investments made by 
foreign citizens whose home countries are willing to be comparably 
flexible.
    Our proposal would grant U.S. carriers new flexibility to attract 
foreign investment. Subject to the proposed open-skies and investment 
reciprocity conditions, or as otherwise required by U.S. international 
obligations, a U.S. carrier could choose to involve foreign investors 
in the commercial decision-making and management of its business only 
provided that U.S. citizens retain actual control of the carrier. We 
tentatively conclude that the proposal would enable U.S. carriers to 
improve their financial condition and enhance their ability to respond 
to the demands of the global market for air transportation. Our 
proposed open-skies and investment reciprocity conditions, moreover, 
may well encourage foreign governments to liberalize their own rules, 
which would give U.S. carriers and investors additional opportunities 
to participate more comprehensively in foreign air transportation 
markets.
    Our proposal would not affect existing requirements or policies in 
regard to the safety and security of U.S. carriers or foreign carriers 
operating in U.S. air space. All carriers would remain subject to the 
safety requirements issued by the Federal Aviation Administration 
(FAA), and the security requirements issued by the Department of 
Homeland Security (DHS) and the Transportation Security Administration 
(TSA). We will continue to work with FAA, DHS, TSA, and other agencies 
and departments to ensure the safety and security of U.S. air carriers 
and air travel within the United States. Similarly, this proposal will 
not affect existing relationships that U.S. carriers have with the 
Department of Defense (DOD) regarding CRAF and other national defense 
airlift commitments, and we will continue to work with DOD in that 
regard.
    We are issuing this supplemental notice because we have revised our 
proposal in certain ways in response to our review of the comments. 
Moreover, in the interest of ensuring that the proposal would not 
inadvertently compromise aviation safety, aviation security, or the 
airlines' relationships with the DOD, we have engaged in productive 
consultations with our FAA, the DHS, and the DOD. Those conversations 
have led us to refinements that we believe enhance the rule further 
with respect to ensuring that safety, security, and national defense 
airlift commitments are not compromised. Given these refinements, we 
believe it is in the public interest to furnish interested parties with 
further clarity regarding the changes we propose and regarding our 
implementation of those changes consistent with the statutory 
citizenship requirements, and to entertain further comments on the 
proposal as clarified.

Background

    Our proposed rule would establish the interpretation of the term 
``actual control'' that would be used in fitness reviews when 
citizenship is at issue. An airline that is a corporation must be under 
the ``actual control'' of U.S. citizens to meet the citizenship 
standard. For many years, the meanings of ``actual control'' and 
``citizen of the United States'' evolved through administrative case 
law dating back to 1940, first by the Civil Aeronautics Board (CAB or 
the Board) and then, after the CAB's sunset at the end of 1984, by the 
Department of Transportation. The controlling statute originally 
defined a corporation's citizenship exclusively in terms of the 
proportion of directors and officers who were U.S. citizens and the 
share of the voting interest held by U.S. citizens. Indeed, the CAB 
itself created the ``actual control'' requirement in its enforcement of 
the citizenship requirements. Willye Peter Daetwyler, d.b.a. 
Interamerican Air Freight Co., Foreign Permit, 58 CAB 118, 120-121 
(1971).
    In 2003, Congress incorporated the ``actual control'' requirement 
into the statutory definition of a citizen of the United States. A 
citizen of the United States is now defined in 49 U.S.C. 40102(a)(15) 
as:
    (A) An individual who is a citizen of the United States;
    (B) A partnership each of whose partners is an individual who is a 
citizen of the United States; or
    (C) A corporation or association organized under the laws of the 
United States or a state, the District of Columbia, or a territory or 
possession of the United States, of which the president and at least 
two-thirds of the board of directors and other managing officers are 
citizens of the United States, which is under the actual control of 
citizens of the United States, and in which at least 75 percent of the 
voting interest is owned or controlled by persons that are citizens of 
the United States (emphasis added).
    For purposes of this proposal, the relevant definition in the 
statute is the one found in 49 U.S.C. 40102(a)(15)(C), governing 
corporations and associations.
    In its 2003 legislative amendment, Congress eliminated any claim 
that the Department lacked authority to require ``actual control,'' but 
it neither defined ``actual control'' nor required the Department to 
follow our past interpretations of the term. Vision 100--Century of 
Aviation Reauthorization Act, Pub. L. 108-176, Sec.  807, 117 Stat. 
2490 (2003). In our cases, we have not applied a fixed interpretation 
of ``actual control;'' instead, we have considered the totality of 
circumstances of an airline's organization, including its capital 
structure, management, and contractual relationships, in determining 
whether a carrier is actually controlled by U.S. citizens.
    Normally, the Department examines a carrier's citizenship in the 
context of an initial fitness review, which is the process by which a 
firm becomes licensed as a U.S. carrier. Citizenship issues may also 
arise in a different context: The continuing fitness review. Under 14 
CFR 204.5, certificated and commuter air carriers that undergo or 
propose to undergo a substantial change in operations, ownership, or 
management must submit certain updated fitness information to the 
Department. The carrier reports the information directly to the Chief 
of the Air Carrier Fitness Division, and the Department reviews it 
without a public

[[Page 26427]]

proceeding as part of an informal continuing fitness investigation. 
These reviews, both of initial applications and of carriers' continuing 
fitness, are composed of an evaluation of the following: Managerial 
competence, citizenship, financial condition, and compliance 
disposition. We also work with the FAA on all related safety matters 
and with the TSA on security matters. In some continuing fitness 
investigations, the Department may decide that a more formal, public 
proceeding is warranted, and that the carrier's authority should be 
modified, suspended, revoked, or subjected to an enforcement action if 
it no longer continues to satisfy all statutory citizenship tests, 
including the actual control test.

The Notice of Proposed Rulemaking

    Last year, the Department issued a Notice of Proposed Rulemaking 
(NPRM) concerning its citizenship policies and procedures. 70 FR 67389, 
November 7, 2005. Regarding the fitness process, we evaluated our 
procedures for addressing citizenship issues that arise during fitness 
reviews, particularly in continuing fitness reviews. We proposed not to 
change our continuing fitness procedures by conducting public 
investigations whenever citizenship issues arose under 14 CFR 204.5. 
Regarding the ``actual control'' standard, we proposed to adopt a new 
interpretation refining Department practice. We wished to ensure that 
U.S. citizens control the carrier's organizational documents and those 
areas of airline operations currently requiring significant government 
involvement. Our proposed rule therefore provided that responsibility 
for a carrier's organizational documents and for safety, security, and 
Civil Reserve Air Fleet (CRAF) participation must remain under the 
control of U.S. citizens. On the other hand, we tentatively determined 
to eliminate other restrictions on foreign involvement that had become 
burdensome and unnecessarily interfered with the ability of U.S. 
carriers to obtain capital from foreign sources and to compete 
effectively in the global marketplace. These additional restrictions, 
developed through decisions in past administrative cases, appeared to 
be unnecessary for ensuring that U.S. citizens controlled each U.S. 
carrier when foreign governments provide comparable treatment for U.S. 
carriers and investors.
    Furthermore, in order to foster greater liberalization that will 
provide greater economic opportunities to U.S. carriers and investors, 
we proposed to limit the application of the refined actual control 
standard to foreign investors whose homelands have an open-skies 
agreement with the United States and extend comparable investment 
opportunities in their airline industry to U.S. investors or where the 
United States' international obligations otherwise require the same 
approach.

Comments

    The Department invited comments on the proposal. We received 
approximately 30 comments collectively from carriers, labor parties, 
and industry associations. We received over 3,000 other comments from 
state legislators, local government officials, airline employees, and 
other individuals. See Summary of Comments, below.
    The Department received support for its proposed changes from the 
Air Carrier Association of America (ACAA), Airports Council 
International-Europe (ACI-Europe), Airports Council International-North 
America (ACI-North America), the Association of European Airlines 
(AEA), Airline Professionals Association, Asociaci[oacute]n 
Internacional de Transporte A[eacute]reo Latinoamericano (AITAL), Atlas 
and Polar, bmi, Boeing, Delta, Federal Express (FedEx), Hawaiian, the 
International Air Transport Association (IATA), United, USA-BIAS, and 
the Washington Airports Task Force. They generally argue that the 
proposal's adoption will give U.S. carriers a better ability to obtain 
capital, especially from strategic investors, will eliminate 
unnecessary restrictions on airline activities, will lead to further 
liberalization of airline and airline finance markets, and is within 
our statutory authority.
    Other commenters--Alaska, Continental, U.S. Airways, the National 
Air Carrier Association (NACA), the Association of Flight Attendants 
(AFA), the Air Line Pilots Association (ALPA), the Aircraft Mechanics 
Fraternal Association (AMFA), the Allied Pilots Association (APA), the 
International Association of Machinists (IAM), the Independent Pilots 
Association (IPA), and the Transportation Trades Department--AFL-CIO 
(AFL-CIO TTD)--oppose our proposed change to the actual control 
standard. They generally argue that the proposed change is unnecessary 
and contrary to Congress' alleged intent to maintain the traditional 
interpretation of ``actual control,'' and will reduce the safety of 
airline operations, adversely affect the U.S. Department of Defense's 
(DOD) ability to operate CRAF, and harm airline labor.
    Below, we address the concerns of commenters and further explain 
our proposed rule.

Discussion of Comments

Need for a Change in Policy

    The Department has carefully reviewed the comments and continues to 
believe that our proposal to refine our interpretation of actual 
control would be beneficial. Nevertheless, because we have refined our 
proposal in a number of ways in response to comments received, we 
believe that it is in the public interest to furnish interested persons 
an additional opportunity to review and comment on the proposed change. 
The statute allows global investors to own up to 25 percent of the 
voting interest in a U.S. airline. We believe that our traditional 
approach may have unreasonably deterred some global investment, thereby 
thwarting the intent of the statute. Based on our experience, foreign 
investors often wish to have a more active role in the carrier, and/or 
various safeguards designed to protect their investment. Our refusal to 
permit this has, we believe, discouraged foreign investment, thereby 
effectively closing the global capital market to U.S. airlines.
    We are tentatively persuaded that adopting our proposed 
interpretation would enhance the access of U.S. carriers to global 
capital markets by expanding the pool of potential investors, 
introducing new competition in capital markets to provide U.S. carriers 
with better terms of investment, and facilitating strategic and long-
term investment in the U.S. airline industry--all potentially lowering 
the cost of capital and ensuring that U.S. airline asset values are not 
depressed by artificial and unnecessary constraints on competition 
among potential investors. These enhancements would enable U.S. 
carriers to respond better to the challenges and opportunities 
presented by the changing global air transportation marketplace and to 
pursue whatever strategies they believe will enhance their ubiquity, 
competitiveness, and profitability in the global airline industry. By 
providing favorable terms for capital-intensive projects to facilitate 
greater alliance integration, our proposed rule would potentially 
promote inter-alliance competition and allow U.S. carriers to continue 
their leadership role in the development of global alliances.
    The NPRM cited three crucial characteristics of airline 
competition. First, airlines require significant capital investments in 
facilities, technology, and a variety of commercial

[[Page 26428]]

arrangements. 70 FR 67393. Second, airlines function in a virtually 
seamless global environment in virtually every aspect of their 
operations. 70 FR 67393. Third, the structure of global financial 
markets has changed, now offering pools of highly mobile capital. 
Innovations in the use of investment funds, new forms of aircraft 
financing, and the growing role of international aircraft leasing 
companies have changed the nature of airline financing. 70 FR 67392. In 
view of those characteristics, the NPRM proposed that U.S. air carriers 
should have the broadest access to the global capital markets permitted 
by law, so long as such access does not impinge on those areas of 
airline operations currently requiring significant government 
oversight. We tentatively found that our historical interpretation of 
``actual control'' has failed to keep pace with changes in the global 
economy and evolving financial and operational realities in the airline 
industry itself, to the detriment of U.S. carriers. Our proposal sought 
to eliminate U.S. policies that unnecessarily restrict the operational 
and financial flexibility of U.S. carriers. The proposal also sought to 
continue our policy of allowing the market to operate with minimal 
regulation, and was consistent with our obligation to foster a safe, 
healthy, efficient, and competitive airline industry.
    After reviewing the comments, we have tentatively concluded that 
our prior interpretation of actual control imposes unnecessary 
restrictions on participation in U.S. carrier operations by certain 
foreign investors which, in and of itself, limits U.S. carriers' access 
to foreign sources of capital and their ability to benefit from 
competition in the capital markets. We would apply our updated 
interpretation only in cases where the foreign investors' home 
countries have an open-skies agreement with the United States and offer 
U.S. carriers and other U.S. investors a comparable ability to invest 
in their own airline industries, or where it is otherwise appropriate 
to ensure consistency with U.S. legal obligations.
    The limitations in our traditional interpretation appear to have a 
negative effect on U.S. carriers' access to strategic investment 
capital. Our proposed updated interpretation of the ``actual control'' 
test would eliminate restrictions on business activity that have unduly 
and unnecessarily limited airline access to foreign investment. 
Furthermore, the proposed rule's reciprocity condition should encourage 
market liberalization that would create new opportunities for U.S. 
airlines and other U.S. investors to take advantage of similar 
opportunities overseas. We also tentatively find that the benefits 
likely to result from our modified interpretation will substantially 
outweigh any hypothetical drawbacks that some commenters allege could 
occur. In this connection, we do not believe that our proposal would 
adversely affect U.S. carrier safety, security, and CRAF participation 
or harm U.S. airline employees. In addition, we believe that our 
existing authority to interpret the statutory citizenship requirements 
in the context of enforcement should allow us to update our 
interpretation of actual control in light of changing circumstances.
    We should not maintain an interpretation that is more restrictive 
than necessary to meet statutory requirements. We believe that we 
should interpret the ``actual control'' requirement in light of the 
continuing globalization of the airline industry and Congress' decision 
that the airline industry should largely be deregulated (except, of 
course, for safety and security regulation). To be sure, deregulation 
is a work in progress. When industry developments make it unnecessary 
or counterproductive to maintain rules or policies that restrict 
airline business decisions, we should terminate them. We recently did 
so when we eliminated all of our rules governing computer reservations 
systems. 69 FR 976, January 7, 2004. The record in this proceeding thus 
far suggests that our past interpretations of the ``actual control'' 
standard have similarly become burdensome without providing significant 
benefits.
    We are proposing this rule because we have tentatively concluded 
that the Department has in certain circumstances construed the 
citizenship requirement in a more restrictive manner than necessary, 
particularly in cases where the foreign investors' home countries have 
entered into open-skies bilaterals with the U.S. and are following more 
flexible foreign investment policies for their airline industries. We 
have long operated under the premise that relying on competition to 
solve regulatory problems is in part a reliance on managers and 
investors to act rationally in searching for opportunities to provide 
profitable air service. But competition itself will be thwarted, and 
thus the public interest disserved, if we were to restrict capital and 
management from flowing to the airline industry. There is 
correspondingly less justification for second-guessing investment 
decisions that bring fresh capital and management to the industry 
without threatening sound air transportation or antitrust objectives.
    We believe that our past interpretations of the citizenship 
requirement have imposed unnecessary and harmful burdens on U.S. 
carrier access to investment capital. Indeed, we have recognized that 
by-product of our policy by informally liberalizing our past 
interpretation in some cases. For example, Hawaiian Airlines has 
benefited from a recent modification of our citizenship standards which 
enabled the carrier to successfully reorganize and obtain new 
financing. Hawaiian Comments at 1. However, in order to do so, Hawaiian 
had to satisfy significant regulatory concerns and undergo a 
substantial delay in its ability to obtain the new financing. Hawaiian 
maintains that our modified interpretation here ``will help ensure the 
economic viability of U.S. airlines by providing for unfettered access 
to worldwide capital markets'' without the need for these undue 
burdens. Hawaiian Comments at 2.
    Adopting our proposed rule would make new sources of capital 
available to U.S. carriers, which has the potential to strengthen the 
U.S. airline industry. As United Air Lines notes:

    To remain competitive with these ever-strengthening foreign 
carriers, U.S. carriers must continue to expand and improve their 
own global networks rather than simply relying on their alliance 
partners. Such growth, however, is extremely capital intensive. 
Unfortunately, given the industry's historic economic performance, 
and continued governmental barriers to global integration, domestic 
carriers' ability to raise long-term equity capital is constrained. 
As a result, although capital continues to be available, it has 
generally been limited to speculative investments from venture 
capital funds, hedge funds, and other private investors looking to 
take advantage of the industry's depressed valuations. If the U.S. 
airline industry is to regain its global leadership position, 
artificial limitations on the ability of long-term strategic 
investors, regardless of nationality, to participate in the industry 
and earn adequate returns on their investment need to be removed.

United Comments at 4.
    As United observes, strategic investors would likely be more 
concerned about a U.S. airline's product quality, market strategy, and 
its capital reinvestment plans than short-term investors who view 
airlines merely as trading vehicles. Foreign airline investors, for 
example, would be likely to take a long-term, strategic view of their 
capital investments and thereby provide additional economic benefits 
that support the long-term viability of the U.S. airlines in which they 
invest, such as network expansion, access to

[[Page 26429]]

new technology, and management and market experience in new markets.
    As United and Hawaiian point out, the elimination of unnecessary 
barriers to the flow of capital from foreign investors to U.S. airlines 
should further ensure the competitive position of U.S. airlines in a 
globalizing economy. See also IATA Comments at 3. We have tentatively 
concluded that arguments made by some commenters (See, e.g., U.S. 
Airways Comments at 4-5; AFL-CIO TTD Comments at 2) that it is 
unnecessary for U.S. airlines to have enhanced access to capital from 
foreign sources are not persuasive because, even if adequate capital 
were otherwise available, we expect that increasing the competitive 
sources of capital accessible by U.S. carriers should enable them to 
obtain better terms from investors. Such lower capital costs would 
benefit U.S. consumers, as well as the carriers' employees and 
shareholders.
    Our proposed modified interpretation of ``actual control,'' 
moreover, would reflect the globalization of the international airline 
business and the increasing role of market forces in determining what 
services and fares will be offered in international airline markets. 
U.S. airlines are increasingly integrating their operations and 
services with the operations and services of foreign airlines. All U.S. 
passenger airlines with significant international operations have 
formed marketing alliances with several foreign airlines in order to 
offer more integrated worldwide services sought by many consumers--the 
arrangements between American Airlines and LAN Airlines, Continental 
and Emirates, and Delta and Air France are a few of many examples. We 
have found that these airline marketing alliances can benefit consumers 
by creating worldwide networks and strengthening the competitive 
position of the U.S. airline partners. See, e.g., Order 2005-12-12 
(Dec. 22, 2005) at 28. In order to remain competitive in the global 
marketplace, alliance partners seek to integrate their operations and 
increase the scale and scope of their respective networks. We believe 
that maintaining unnecessary limitations on the ability of U.S. 
airlines to quickly adapt to industry changes--particularly in 
international markets--would only serve to inhibit U.S. carriers from 
receiving increased revenues from alliance cooperation and deprive U.S. 
consumers of the potential economic benefits of global alliances. 
Enabling U.S. airlines to invest more readily in their strategic 
partners, and vice versa, should potentially promote the development of 
pro-competitive alliance relationships.

Labor Issues

    We have carefully considered our proposal's impact on U.S. airline 
workers. We recognize that the financial challenges affecting U.S. 
carriers have had a severe impact on their employees. The airlines' 
struggle to reduce their costs has led to job losses, lower pay, and 
fewer benefits. Airline employees nonetheless have continued to provide 
safe and reliable transportation to airline customers. The labor 
parties, including AFA, AFL-CIO TTD, ALPA, AMFA, IAM, and IPA, 
generally oppose our proposal in the belief that it will lead to fewer 
and less desirable jobs at U.S. carriers. After carefully considering 
their comments and the record, we tentatively conclude that our 
proposed rule would not cause such harm.
    First, U.S. carriers must comply with U.S. labor law whether or not 
we change our interpretation of actual control. All employees at any 
U.S. carrier would retain all of the protections created by the United 
States' labor laws. Further, the unionized employees of every U.S. 
airline would continue to enjoy their rights under their collective 
bargaining agreements.
    Second, our proposed modified interpretation is designed to improve 
the financial position of U.S. carriers by giving them access to 
additional sources of capital. This enhancement would strengthen the 
carriers' competitive position overall, which should increase jobs for 
U.S. workers.
    Third, by applying our proposed updated interpretation only in 
cases where the foreign investors' home countries have an open-skies 
agreement with the United States and offer U.S. carriers and investors 
a comparable ability to invest in their own airline industry, or where 
it is otherwise appropriate to ensure consistency with U.S. legal 
obligations, our modified interpretation would enable U.S. carriers to 
strengthen their competitive position by investing in foreign airlines 
(alone or as part of a group of investors), and forming enhanced 
business relationships with them that would be mutually beneficial. 
U.S. air carriers, and their employees, also benefit from open-skies 
agreements, in that the opportunities to expand and serve more 
countries without the impediment of restrictive bilateral agreements 
may lead to additional service by U.S. carriers providing additional 
revenue for the carrier and more job opportunities for its employees.
    Fourth, we are not persuaded that foreign investment will lead to 
fewer desirable jobs at U.S. carriers. Under our proposal, just as now, 
U.S. carriers would be controlled by their shareholders and boards of 
directors, most of whom must be U.S. citizens, and those shareholders 
and directors would have every incentive to maximize the U.S. carrier's 
performance. Were a foreign carrier-investor to attempt to shift long-
haul services to itself from a U.S. carrier in which it had invested, 
that could be contrary to the economic interest of the U.S. citizen 
shareholders who, even under this modified interpretation, will 
continue to retain actual control of the carrier. We tentatively 
conclude that the U.S. investors would withdraw their delegation of 
authority over commercial decisions were the foreign investor to 
exercise that authority contrary to the interest of the U.S. carrier 
and its U.S. citizen investors.
    Several labor parties contend, however, that U.S. carriers have 
already chosen to outsource large parts of their operations, including 
much of their maintenance work. These commenters believe that any 
significant foreign citizen involvement in the management of any 
carrier operations will inevitably lead to the transfer of additional 
work overseas. See, e.g., ALPA Comments at 8-9. We do not believe that 
this proposal will impact a carrier's incentive to outsource.

European Union Air Services Agreement

    Negotiations between the United States and the European Union have 
produced a draft comprehensive air services agreement that will 
transform the framework for transatlantic air services if implemented. 
The European Union negotiators have made it clear that the European 
Union will consider the outcome of this proceeding in determining 
whether it will sign the draft agreement. See Statement of John R. 
Byerly, Deputy Assistant Secretary of State, before the Aviation 
Subcommittee of the House Committee on Transportation and 
Infrastructure (February 8, 2006), at 9. However, we have proposed our 
updated interpretation of the ``actual control'' standard because we 
tentatively determined that a reinterpretation of that standard would 
eliminate unnecessary restrictions on U.S. carrier business decisions, 
not because of its impact on an agreement with the European Union.
    A number of commenters, including Delta, FedEx, United, and parties 
representing major airports in the United States and Europe, urge us to 
make our proposal final because, in addition to the proposal's own 
benefits, they believe that the European Union will then sign the 
agreement with the

[[Page 26430]]

United States. Other commenters, including many of the individual 
commenters, allege that we are planning to adopt the proposal only in 
order to secure the agreement with the European Union, which they 
assert will harm the United States and its airline industry. 
Continental, for example, alleges that the agreement fails to provide 
adequate access for U.S. carriers at London's Heathrow airport, and 
U.S. Airways contends that the agreement would not create a level 
playing field for U.S. carriers in transatlantic markets. Continental 
Comments at 34-38; U.S. Airways Comments at 6-9.
    This rulemaking was initiated, and is being pursued, based on its 
own merits. The goal of this proceeding is to realize the commercial 
and public benefits obtained by providing the airline industry with 
greater access to global capital markets, while ensuring that U.S. 
citizens remain in actual control. We are proposing to modify our 
interpretation of ``actual control'' because a change in the historic 
interpretation appears to be long overdue and in the best interests of 
the U.S. airline industry and the American public.

New Interpretation of ``Actual Control'

    We are therefore proposing, as explained above, to further refine 
our proposed new interpretation of ``actual control.'' If we adopt our 
proposed rule, we would use the new interpretation of the ``actual 
control'' requirement in our future continuing fitness cases and our 
review of applications for initial certificate or commuter authority. 
We would ensure that each U.S. carrier remains under the actual control 
of U.S. citizens, as required by the statute. We would also continue to 
enforce the explicit statutory requirements that U.S. citizens hold at 
least seventy-five percent of the voting interest of each U.S. carrier, 
and that the president and at least two-thirds of the directors and of 
the managing officers be U.S. citizens.

Our Overall Application of the Rule

    In this section, we explain in more detail the anticipated 
practical impact of our proposed rule, including its limits on foreign 
involvement, and respond to the requests for clarification. We would 
use our modified ``actual control'' standard only where the foreign 
investors' home countries offer reciprocal treatment to U.S. investors 
in their airline industry and have open-skies air service agreements 
with the United States, or where using the revised standard would 
otherwise be appropriate to ensure consistency with the United States' 
international legal obligations. This supplemental notice is designed 
to give interested parties an additional opportunity to comment on our 
proposed change in policy and our proposed implementation thereof.
    Under our further modified interpretation, we would specifically 
require that U.S. citizens control the adoption of, and any changes to, 
the carrier's organizational documents (documents such as the articles 
of incorporation and by-laws that define the carrier's structure and 
governance). If the carrier met that requirement, we would only look to 
see whether U.S. citizens control the carrier's decisions in three 
operational areas: safety, security, and the provision of airlift to 
the Department of Defense, whether through CRAF or other arrangements. 
If these areas were controlled by U.S. citizens, the requirements of 
our citizenship review would have been met. We would not consider 
whether other relationships between a carrier and foreign investors or 
other foreign citizens give the latter influence at the carrier or 
management authority over some parts of the carrier's operations. Every 
U.S. carrier would be actually controlled by U.S. citizens because, 
under our further refined interpretation, we would be requiring all 
delegations to foreign interests ultimately to be revocable by the 
board of directors or the voting shareholders.
    Our proposed updated interpretation of actual control would allow 
foreign firms and individuals to manage parts of a U.S. carrier's 
operations and business, but only when so authorized by the board of 
directors, two-thirds of whom must be U.S. citizens, and subject to the 
ultimate control of the shareholders, whose votes would be dominated by 
U.S. citizens. We would ensure, moreover, that the board of directors 
or the voting shareholders could ultimately revoke delegations of 
managerial responsibilities, as discussed below.
    Furthermore, this rulemaking would not affect our policy that a 
U.S. citizen who acts as president, as a director, or as another 
managing officer would be treated as a foreign citizen for carrier 
citizenship purposes if our evaluation determined that the U.S. citizen 
was appointed or designated for that position by foreign citizens. 
Similarly, we would not view a U.S. citizen acting as president, 
director, or managing officer as being a U.S. citizen if, as a 
practical matter, the citizen's financial and business relationships 
with foreign citizens mean that the U.S. citizen is not likely to carry 
out his or her responsibilities independently.
    Because our policy would ensure that U.S. citizens would continue 
to have actual control of each U.S. carrier under our proposal, every 
U.S. carrier would continue to be eligible to hold any route authority 
available to U.S. carriers under the United States' air services 
agreements with other countries. We have tentatively concluded that 
arguments made by some commenters (See, e.g., Continental Comments at 
13; ALPA Comments at 16) that the bilateral rights of U.S. carriers who 
took advantage of this proposal might be compromised are not persuasive 
because, under the Department's proposed rule U.S. citizens would 
continue to have substantial ownership and effective control of each 
U.S. carrier, consistent with the terms of the bilateral air services 
agreements, and therefore would clearly retain their authority to 
exercise international route rights enshrined in air services 
agreements to which the United States is a party.
    While we would be requiring U.S. citizens to maintain control over 
core corporate decisions and the operational areas still subject to 
significant government oversight, a U.S. carrier's board (two-thirds of 
whom must be U.S. citizens) or the voting shareholders (in whom 75 
percent of the voting interests are vested in U.S. citizens) could 
choose to delegate the management of other parts of the carrier's 
operations to foreign investors. AEA has asked whether a foreign 
investor could control such elements as ``definition and quality of the 
product, branding, fleet mix, origins and destinations, network issues 
defin[ing] the business of the company.'' AEA Comments, Annex at 1. Our 
proposal would allow a U.S. carrier to delegate management or decision-
making regarding various commercial aspects of its business to foreign 
investors, or otherwise involve those foreign investors in its 
operations.
    Of course, as noted above, these delegations could only occur with 
the continuing approval of the carrier's board of directors or voting 
shareholders. In addition, two-thirds of the directors must be U.S. 
citizens and seventy-five percent of the shareholders' voting interest 
must be vested in U.S. citizens. Under our proposed rule, a carrier 
could delegate the decision-making authority over the areas listed by 
AEA, or otherwise involve foreign investors in its operations, if the 
voting shareholders or directors first determined that doing so was in 
the carrier's best interests. Additionally, the board or voting 
shareholders would retain the ultimate power to revoke delegations of 
managerial responsibilities to foreign investors. The board's or 
shareholders' ability to

[[Page 26431]]

revoke the delegation under this proposal could not be conditioned on 
terms that would make revocation impracticable.
    A number of commenters are requesting us to clarify our proposed 
rule in various respects and provide illustrative examples. We are 
providing as much information as practicable in this notice, and this 
notice's rationale for our proposed future interpretation of the 
statutory ``actual control'' requirement should provide substantial 
guidance to foreign citizens planning to invest in a U.S. carrier on 
the operation of our proposal. Some questions regarding the 
implementation of our modified interpretation can be resolved only 
through our review of specific transactions. Determining whether U.S. 
citizens control a carrier necessarily depends on each carrier's 
specific facts. We would also encourage carriers and investors to 
consult with us before making final decisions on the terms of any 
substantial foreign involvement in a carrier, as often occurs now, and 
as we noted in our proposal. 70 FR 67395.
    British Airways asks whether our proposal would allow a carrier's 
board of directors to delegate to foreign investors the authority to 
hire and fire officers up to and including the carrier's president and 
executives in charge of safety, security, and CRAF participation 
matters. British Airways Comments at 9. We answer in the negative. By 
statute the president must be a U.S. citizen. By longstanding policy, 
we have construed this position as any corporate officer who 
effectively functions as president regardless of title. In addition to 
the president, two-thirds of managing officers must also be U.S. 
citizens, and neither the president nor those managing officers may be 
appointed by or otherwise beholden to foreign interests. Our proposed 
rule would not affect that policy. Under our proposal, the managing 
officers with direct, day-to-day responsibility for safety and security 
matters and contributions to military airlift requirements must be 
clearly and demonstrably subject to control by U.S. citizens. That 
would mean, among other things, that decisions involving the 
appointment of these managing officers, and involving their 
supervision, budgets, and compensation, must remain under the control 
of U.S. interests in accordance with current policy and therefore could 
not be delegated to foreign investors or managing officers in a 
management group appointed by foreign investors, if there were 
significant foreign investment and involvement in a U.S. carrier under 
this proposed rule. As indicated, however, our updated interpretation 
would allow a carrier to delegate to foreign investors a greater role 
in the carrier's commercial decision-making, if the carrier's board 
members or voting shareholders approved doing so. We accordingly would 
allow the foreign investors to hire and fire the managers responsible 
for day-to-day operations in those delegated areas (other than safety, 
security, and military airlift operations), so long as the delegations 
were ultimately revocable by the board of directors or the voting 
shareholders.
    Commenters request information on whether we would maintain the 
limit on foreign ownership of a carrier's non-voting equity stock 
established in Northwest Airlines Acquisition by Wings Holdings, Order 
91-1-41 (Jan. 23, 1991). Delta Comments at 13; Hawaiian Comments at 5. 
Neither our NPRM nor this supplemental notice propose any changes to 
our policy with regard to equity ownership requirements as established 
by the Northwest/Wings line of precedent, but only to the 
interpretation of ``actual control'' of the carrier. Consequently, this 
rulemaking would not alter that line of precedent.
    Commenters ask what kinds of super-majority voting clauses could be 
obtained by foreign investors without placing the U.S. carrier's 
citizenship at risk. See, e.g., AEA Comments, Annex at 1. Our notice of 
proposed rulemaking stated with respect to U.S. citizen control of the 
organizational documents, ``Foreign citizens may hold rights essential 
to protect their financial interests--for example, provisions requiring 
concurrence before a company may enter bankruptcy or be dissolved--but 
the fundamental organization of the company must remain in U.S. citizen 
hands.'' 70 FR 67394. Super-majority clauses are designed to protect 
minority shareholders, but do not give any affirmative rights to make 
decisions absent board members' or shareholders' consent. We cannot now 
further define which kinds of super-majority voting requirements 
obtained by foreign investors in a U.S. carrier would not violate the 
statutory ``actual control'' standard. The appropriateness of any 
particular super-majority voting clause under our proposed rule would 
depend on the precise terms of the clause, and the nature of the 
foreign investors' involvement in the carrier.
    Continental asserts that our proposed revised interpretation of 
``actual control'' would be unfair to U.S. shareholders by encouraging 
U.S. carriers to establish dual-class share structures to accommodate 
foreign investors: ``A class of shares with lesser control rights'' 
held by U.S. shareholders, and ``shares with greater control rights'' 
``vested in foreign nationals.'' Continental Comments at 22. We do not 
anticipate such a result. Under our proposal, the U.S. shareholders, 
not the foreign shareholders, would have the shares with the greater 
rights by virtue of the statutory requirement that U.S. citizens hold 
75 percent of the U.S. carrier's voting interest; U.S. shareholders 
will control the carrier, the board of directors, and any shareholder 
vote. The U.S. citizens controlling the carrier could decide to give 
foreign investors some voting rights for protecting their interests, 
but only if those U.S. citizens determined that doing so was in the 
carrier's best interests. Furthermore, Continental's argument assumes 
different classes of stock and voting rights are inherently unfair. A 
U.S. carrier's creation of different classes of stock for foreign 
investors and other investors with different needs instead would only 
duplicate a common U.S. practice. Many other U.S. corporations have 
created several classes of common and preferred stock in order to 
accommodate the interests of different types of investors, give the 
company more flexibility in obtaining capital, and lower its overall 
cost of capital.
    We also wish to clarify our intent on our proposed requirement that 
U.S. citizens must control four specific matters at each U.S. carrier: 
The organizational documents, safety, security, and military airlift 
participation.

Organizational Documents

    Under our proposed interpretation of the ``actual control'' 
requirement, U.S. citizens would control the carrier's structure, 
governance, and organization because they would control the carrier's 
organizational documents. Their control of those documents would ensure 
that U.S. citizens controlled any decisions affecting the fundamental 
nature of the carrier's overall structure, including its authorized 
capital structure, the rights and voting powers of its equity owners, 
the structure and selection of the board of directors, and the role and 
responsibilities of its senior officers. The governance of the carrier 
embodied in its core documents would remain under the actual control of 
U.S. citizens. 70 FR at 67394.
    This proposed requirement that U.S. citizens must control the 
carrier's organizational documents would allow them, either directly or 
through their directors, to revoke delegations of management authority 
to foreign investors, and thus would ensure that U.S. citizens 
controlled the carrier's

[[Page 26432]]

fundamental decisions related to its corporate and organizational 
structure. As we stated in the NPRM, however, we are proposing that 
foreign investors could hold rights essential to protect their 
financial interests, such as provisions requiring their approval before 
a carrier may enter bankruptcy or be dissolved. 70 FR at 67394. The 
fundamental organization of the company must be in U.S. hands, even 
though foreign investors could in some cases have veto authority over 
certain types of corporate decisions.
    British Airways' assertions that the proposed requirement relating 
to organizational documents would be unnecessary or counterproductive 
are not persuasive. British Airways fears that foreign investors would 
be unable to obtain super-majority voting provisions and similar 
contract provisions that would provide the foreign investors reasonable 
protection against actions by the majority of the carrier's 
shareholders or directors that would substantially prejudice the 
foreign citizens' investment interests. British Airways Comments at 5-
6. British Airways' concern appears to be unjustified. As discussed 
above and in the notice of proposed rulemaking, we recognize that 
foreign investors, like other minority investors, may have a legitimate 
need for super-majority clauses that will protect their essential 
investment interests. We would not expect to block such clauses when 
they are similar to standard provisions obtained by minority 
shareholders and do not affect U.S. citizen control of safety, 
security, and military airlift matters. Whether such super-majority 
clauses would in fact be adopted and remain in place would be up to the 
board of directors or the voting shareholders.
    Hawaiian asked us to identify which documents will be considered 
organizational documents that must be controlled by U.S. citizens. 
Hawaiian Comments at 3. Organizational documents would include the 
carrier's articles of incorporation (or corporate charter) and by-laws, 
and comparable documents (for example, shareholder agreements) as 
reflected in the text of the proposal. We wish to ensure that U.S. 
citizens control the adoption and amendment of the documents that 
determine the corporate structure, such as the classes of stock, the 
shareholders' voting rights, the structure and membership of the board 
of directors, and the selection, responsibilities, and powers of the 
president and other principal officers. We would consider as 
organizational documents any related agreements that modify the 
provisions set forth in the articles of incorporation or by-laws or 
that dictate the fundamental operational and capital structure of the 
airline.
    Hawaiian further requested that we announce that any review of a 
carrier's citizenship would be limited to these documents. Hawaiian 
Comments at 3. We doubt that we could state in this proceeding which 
other documents we would need to review as part of a citizenship 
investigation, but we expect that our review would not necessarily be 
limited to the organizational documents identified above. For example, 
to ensure that U.S. citizens actually control the carrier's corporate 
structure and the selection of the board of directors, we would need to 
review any contractual agreement between U.S. shareholders and a 
foreign investor.

Safety

    The FAA is responsible for determining that every U.S. air carrier 
meets appropriate safety standards. Because safety is one of our 
highest priorities, however, we wish to make certain that U.S. carrier 
decisions on safety policies are made by U.S. citizen interests, even 
if a U.S. carrier has chosen to delegate the management of other parts 
of its operations to foreign investors. Security and military airlift 
participation are also matters of great concern to us. Our proposed 
interpretation of the ``actual control'' requirement therefore would 
require that U.S. citizens control decision-making on safety and, as 
discussed in the next sections, security and defense-related matters.
    We traditionally review issues related to safety in our broader 
fitness review. We work closely with the FAA in a variety of contexts, 
including determining the competence of key safety officials, and 
whether the carrier currently meets and complies with the Federal 
Aviation Regulations. We review where and with whom the key safety 
officials work, and are alerted by the FAA when that agency discovers a 
potential problem.
    In our review of the air carrier's operations to ensure U.S. 
citizen control over safety decisions, we would consider whether 
deviations from current industry practices and staffing at key business 
locations might adversely affect the FAA's ability to oversee the air 
carrier's operational safety. To determine whether U.S. citizens 
control safety decisions under the proposed rule, we would evaluate the 
accessibility of required safety managers and required safety records 
to the FAA. For example, today the key safety officials of U.S. 
carriers are located within the United States at one of the carriers' 
key business locations. They are available for frequent, regular 
meetings with FAA inspectors responsible for oversight of the carrier. 
Records that are necessary to determine regulatory compliance are also 
accessible at these same key locations. To meet our definition of 
actual control, we would expect key safety officials and necessary 
records to be as easily accessible as they are today. Should the 
Department become aware of any unusual circumstances, we would reserve 
the right to initiate a continuing fitness review to address these 
safety issues.
    Several commenters expressed opinions on our safety proposal. FedEx 
and NACA agree with the proposal requiring that U.S. citizens retain 
actual control over safety decisions, and none of the airlines that 
submitted comments suggested that our proposal would compromise the 
safety of its operations. ALPA, AMFA, AFL-CIO TTD, and IAM, however, 
argue that the proposal would allow foreign investors to make decisions 
on economic and operational issues that affect safety.
    Several commenters seek clarification about the chain of command 
for safety matters. They ask, for example, whether every manager in the 
chain of command for safety matters must be a U.S. citizen. Polar & 
Atlas Comments at 7; AEA Comments at 4. That would not be required by 
our proposal. In cases where there would be significant foreign 
investment and involvement under this proposed new rule, we would 
require only that decisions relating to safety be clearly and 
demonstrably subject to actual control by U.S. citizens. Our past 
decisions under the ``actual control'' standard have never required 
every manager and executive to be a U.S. citizen. The statute defining 
citizenship similarly requires that at least two-thirds of the 
carrier's managing officers must be a U.S. citizen, not that every such 
officer must be a U.S. citizen. As stated above, decisions involving 
the appointment of managing officers with direct, day-to-day 
responsibility for safety, and involving their supervision, budgets, 
and compensation, would remain under the control of U.S. interests in 
accordance with current policy and therefore cannot be delegated to 
foreign investors or managing officers in a management group appointed 
by foreign investors.
    Furthermore, because the statute requires that the president and 
two-thirds of the board of directors and the managing officers must 
also be U.S. citizens, the persons with ultimate responsibility for the 
carriers operations

[[Page 26433]]

would be U.S. citizens, not foreign investors. This would further 
guarantee that U.S. citizens control the decision-making on safety 
matters. ALPA itself recognizes that those officers and the directors 
control safety: ``It is thus inevitable that whoever controls the 
operation of the airline as a whole will also ultimately control its 
safety policies and their implementation.'' ALPA Comments at 15. We 
therefore are not convinced by the contention by some commenters that 
our proposal would be ineffective, because many operational issues, not 
just those directly related to safety requirements, affect safety. ALPA 
Comments at 11-14; Virgin Atlantic Comments at 6-7.
    We tentatively do not accept the related contention that our 
proposal would be impracticable because safety matters cannot be 
separated from other operational matters. See, e.g., AFL-CIO TTD 
Comments at 3; ALPA Comments at 15. Different executives at every 
carrier already have responsibilities that overlap to some extent, but 
that does not make efficient operations impossible. The officers 
responsible for marketing and route development, for example, make 
decisions that affect each other's responsibilities. Our experience in 
examining U.S. corporate organizational and financial structures 
suggests that decision-making authority for various airline functions 
within the corporate structure, despite their interrelationships, can 
be explicitly and satisfactorily tied to U.S. citizen interests within 
the company to ensure compliance with the fundamental application of 
our ``actual control'' test. For example, in cases where the Department 
has granted antitrust immunity for alliance agreements between a U.S. 
airline and its foreign airline partner, both airlines have been able 
to comply with Department conditions that exclude cooperation on very 
specific overlap routes while still cooperating on all other routes 
throughout their combined networks. Ultimately, the carrier's 
controlling U.S. shareholders, board and principal officers are 
responsible for ensuring that safety is the highest priority of the 
carrier and that it remains so, no matter what the nature of the 
foreign investment in the carrier.
    In response to ALPA's comments, we propose to further revise the 
rule's text to better reflect our intent. The preamble suggested that 
U.S. citizens must control all safety and security matters, not just 
compliance with FAA and Transportation Security Administration (TSA) 
requirements (``responsibility for * * * policies and procedures 
related to safety''). 70 FR 67394. The original text of our proposed 
rule, however, stated that U.S. citizens must control each U.S. 
carrier's compliance with FAA safety requirements. 70 FR 67396. We 
agree with ALPA that the wording of the proposed rule was unduly 
narrow. ALPA asserts that safety programs created by the FAA include 
voluntary programs and that our proposal could allow foreign citizens 
to determine whether a carrier would participate in such programs. ALPA 
Comments at 12-14. We are revising the language of the proposed rule to 
clarify that U.S. citizens must control the carrier's overall safety 
and security programs and policies, not just the carrier's compliance 
with the requirements of the FAA and the TSA.
    Finally, the contentions of AMFA and IAM that carriers already rely 
too much on domestic and foreign repair stations for maintenance work 
have not persuaded us that our rule would harm safety. The FAA is 
responsible for overseeing the carriers' use of repair stations and 
other maintenance operations not handled directly by a carrier's own 
personnel and must ensure that any such facility's operations will not 
impair safety.
    In sum, we have tentatively concluded that prohibiting delegation 
of decision-making authority for safety policies and requirements and 
their implementation to foreign investors, together with the other 
requirements for U.S. citizen control prescribed by our ``actual 
control'' policy and the statute, and the FAA's continuing oversight of 
U.S. carrier safety, would ensure the safety of every U.S. carrier's 
operations.

Security

    Security issues, especially since September 11, are a paramount 
concern. The Department of Homeland Security, through the 
Transportation Security Administration (TSA), is responsible for 
determining that U.S. and foreign carriers meet appropriate security 
standards and policies. Because security, like safety, is one of our 
highest priorities, our proposed interpretation would require that U.S. 
carrier decisions on security matters not be delegated to foreign 
investors, if there were significant foreign investment and involvement 
under this new rule.
    Moreover, establishing aviation security standards and enforcing 
those standards is essentially a government function. Aviation security 
is overseen and administered, both operationally and with respect to 
the protection of physical infrastructure, by TSA and other U.S. 
Government agencies. These agencies set and enforce security standards 
for passenger, cargo, baggage and employee screening, as well as for 
the physical protection of aircraft and airport infrastructure within 
the parameters of their legislative authority, and as directed by law. 
Also by law, TSA and other U.S. agencies are obligated to ensure that 
all airlines operating in U.S. airspace, regardless of ownership and 
whether U.S. or foreign, must comply with U.S. security standards. 
These current roles and responsibilities of the U.S. Government to 
maintain security would continue completely unaffected and unchanged by 
the provisions of our proposal.
    As with safety, this Department traditionally reviews issues 
related to security in our broader fitness review. The Department works 
closely with the TSA in a variety of contexts, including whether the 
carrier meets and complies with security laws and regulations. We 
review where and with whom the key security officials work, and are 
alerted by the TSA when that agency discovers a potential problem. It 
is important to note once more that TSA's authority and practices would 
be unchanged by this proposal. For example, TSA would continue its 
practice of reviewing and approving the security plans of every U.S. 
and foreign carrier that serves the United States.
    We recognize that access to key security officials is essential. In 
our review of the air carrier's operations to ensure U.S. citizen 
control over security decisions, we would consider whether deviations 
from current industry practices and staffing at key business locations 
may adversely affect the TSA's ability to oversee the air carrier's 
security operations and plans. To determine whether U.S. citizens 
control security decisions under this proposed rule, we would evaluate 
the accessibility of required security managers and required security 
records to the TSA. For example, today the key security officials of 
U.S. carriers are located within the United States at one of the 
carriers' key business locations. They are available for frequent, 
regular meetings with TSA inspectors responsible for oversight of the 
carrier. Records that are necessary to determine regulatory compliance 
are also accessible at these same key locations. To meet our definition 
of actual control, we would expect key security officials and necessary 
records to be as easily accessible as they are today. Just as now, TSA 
may raise access or other security-related issues by communicating 
directly with us. Should we become aware of any unusual circumstances, 
we would reserve the right to initiate a continuing fitness review to 
address these security issues.

[[Page 26434]]

    Our response to the requests by several commenters for 
clarification on the chain of command for safety matters covers the 
management of security matters as well. Thus, we answer that question 
again in the negative, with the same explanation. In cases where there 
would be significant foreign investment and involvement under this 
proposed new rule, we would require only that decisions relating to 
security be clearly and demonstrably subject to actual control by U.S. 
citizens.
    Continental wrongly implies that our proposal would undermine 
security by allowing foreign investors from countries whose security 
measures may not be adequate to operate U.S. airlines. Continental thus 
suggests that ``an Indonesian airline serving the one airport in the 
world for which security risk notices are currently required for 
passengers could claim the right, as a carrier of an open-skies 
country, to start an Indonesian-controlled airline in the U.S.'' 
Continental Comments at 15-16. Our proposed rule would not allow any 
foreign investors to operate a foreign-controlled airline in the United 
States. In addition, the president and two-thirds of the board and 
other managing officers must be U.S. citizens, and 75 percent of the 
shareholders' voting interests must be vested in U.S. citizens.
    We have tentatively determined that our interpretation's 
requirements would ensure U.S. citizen control of security matters. 
That, together with the U.S. government's, and in particular TSA's, 
continuing oversight of the security of carrier operations to/from and 
over the United States, would ensure security for every U.S. carrier, 
whether or not it had foreign investors or managers. TSA, after all, 
imposes extensive security requirements on foreign carriers using U.S. 
airspace and flying to U.S. gateways, not just U.S. carriers. TSA would 
continue to enforce these requirements on both U.S. and foreign 
carriers regardless of whether foreign investors or managers were 
allowed a role at a U.S. carrier in other areas.

CRAF and Other Contributions to Military Airlift

    The Department of Defense relies on U.S. commercial air carriers to 
meet a great many of its airlift requirements. Our proposed updated 
interpretation would not diminish in any way the availability to DOD of 
U.S. carrier airlift capacity. As in the case of safety and security, 
however, we have tentatively concluded that our definition of what is 
required in the area of defense airlift should also be broadened.
    Our proposal would have required that U.S. citizens retain actual 
control of all decisions relating to the Civil Reserve Air Fleet 
program. The vital national defense airlift provided by U.S. carriers, 
however, occurs in a broader context than just the CRAF program. U.S. 
airlines furnish essential airlift capacity to our military through a 
variety of contractual arrangements. We are therefore proposing to 
revise the language of the proposed rule to clarify that U.S. citizens 
must control the carrier's overall participation in national defense 
airlift operations, not only the carrier's participation in CRAF.
    Nothing in the comments received in response to the NPRM has 
persuaded us that our proposal, even in its original form, would have 
any negative implications for CRAF. The CRAF program is a voluntary, 
quid pro quo arrangement by which airlines agree to commit aircraft for 
military airlift, and in return, gain access to U.S. Government 
business. DOD can adjust the economic incentives of the program in 
order to better ensure sufficient military airlift capacity. Because 
each carrier's participation in CRAF and other national defense airlift 
operations is voluntary, we wished to ensure that U.S. citizens control 
each U.S. carrier's decision on whether to participate. In formulating 
this position of protecting national defense airlift, we consulted with 
DOD, and DOD expressed no concern about our proposal. See December 21, 
2005, Letters from Secretary Mineta to Chairmen Don Young and John 
Mica.
    Nor would our proposal have any negative effect on the 
participation of U.S. airlines in military airlift operations 
generally. As we stated in our NPRM, our rule would not permit foreign 
investors to control U.S. carrier decisions on CRAF or other national 
defense airlift participation, even if the foreign investors became 
more involved in other areas of the carrier's operations under our 
proposal. We would require such decisions to be clearly and 
demonstrably subject to actual control by U.S. citizens. This would 
mean that the carrier could not allow foreign investors to make 
decisions that would make participation in CRAF or other national 
defense airlift operations impossible as a practical matter. Because 
participation in military airlift operations has been and will continue 
to be voluntary, each carrier will continue to choose whether it would 
participate in CRAF or other national defense airlift operations. In 
making those decisions, carriers take into account the economic 
incentives offered by DOD. Our proposed interpretation would require 
that U.S. citizens control those decisions because each carrier's 
participation in these programs remains a matter of great importance to 
the United States. We conclude that our rule would not hinder the DOD's 
ability to obtain sufficient aircraft from U.S. carriers.
    Because our rule thus would bar foreign investors from controlling 
decisions regarding if and when any U.S. carrier can participate in 
CRAF or other national defense airlift operations, Continental's 
assertion that ``[f]oreign-controlled airlines may not be so willing to 
participate in U.S. military ventures or agree with U.S. security and 
terrorist efforts,'' Continental Comments at 12, is irrelevant. Our 
proposal would not result in U.S. carriers becoming ``foreign-
controlled airlines,'' and the views of foreign investors would play no 
part in U.S. carriers' decisions relating to military airlift 
operations.
    Some commenters assert that our proposed interpretation would not 
adequately guarantee that U.S. citizens would control decisions on 
military airlift participation, because the proposal would allow 
foreign investors to make decisions on operational matters that could 
preclude the carrier's participation in such flying. They contend that 
foreign citizens can undermine a U.S. carrier's ability to participate 
effectively in the CRAF program. For example, because CRAF primarily 
needs long-haul aircraft, commercial decisions by foreign citizens to 
divest such aircraft could render the carrier useless to CRAF. 
Continental Comments at 12; Delta Comments at 10. We disagree. First, 
we would expect each carrier to continue to make its fleet decisions 
based on its perceptions of the fleet mix best suited to a successful 
commercial operation. Foreign investors, if permitted by the airline's 
U.S. citizen majority owners to affect fleet decisions, would be 
motivated by the same commercial incentives. Moreover, if a U.S. 
carrier's ability to contribute to CRAF or other national defense 
airlift operations were precluded by decisions made or significantly 
influenced by foreign investors, we would likely investigate whether 
the carrier is living up to its obligation under our revised rule to 
ensure that decisions relating to military airlift participation are 
wholly controlled by U.S. citizens. Because a failure to comply with 
that obligation would call into question the carrier's eligibility to 
retain its operating certificate, airline management can be expected to 
take those obligations very seriously.

[[Page 26435]]

Open Skies and Reciprocity

    An important element of our proposal is our goal of reciprocal 
market access and investment opportunity. In order to foster greater 
liberalization that would provide greater economic opportunities to 
U.S. carriers and investors, we propose to limit the application of the 
refined actual control standard to foreign investors whose homelands 
have an open-skies agreement with the United States and extend 
comparable investment opportunities in their airline industry to U.S. 
investors, or where the United States' international obligations 
otherwise require the same approach. We explained, 70 FR 67394:

    [M]ore latitude with respect to foreign investment should be 
allowed for a foreign interest whose homeland has both an Open Skies 
relationship with the U.S. and extends reciprocal investment 
opportunities with respect to its own airlines to U.S. sources of 
capital'' We think it generally inappropriate to extend such 
latitude to nationals of countries that resist similar openness in 
access to aviation markets and in investment opportunities in their 
own airlines.

    The comments that addressed the open-skies and reciprocity 
conditions generally supported our proposal. Some commenters asked us 
to define what we meant by reciprocity, and other commenters asked that 
we use public proceedings to decide whether a foreign country's 
investment restrictions satisfied our reciprocity condition. See, e.g., 
Delta Comments at 11; ALPA Comments at 21. U.S. Airways urges us to 
additionally restrict the availability of the liberalized actual 
control standard as a means of obtaining commercially-meaningful access 
to European markets. U.S. Airways Comments at 6-7.
    We have tentatively concluded that our proposal should include the 
open-skies and investment reciprocity conditions. The two conditions 
would foster greater liberalization, and would provide additional 
opportunities for U.S. carriers and U.S. investors. The Department 
anticipates that U.S. airlines would identify new opportunities to 
invest capital and expand further into international markets, to the 
ultimate benefit of the traveling public. In addition, the reciprocity 
condition would ensure that foreign airlines and investors did not 
obtain additional access into United States markets unless U.S. 
carriers and investors have equivalent access into the markets of 
foreign countries.
    The comments submitted by some parties suggest that we should 
clarify what evidence and standards would be used to determine whether 
a foreign country meets the conditions. The existence of the open-skies 
agreement is objectively verifiable. The Department maintains a list of 
open-skies partners based on our established definition of the ``open 
skies'' label. See http://ostpxweb.dot.gov/aviation/X-40%20Role_Files/bilatosagreement.htm
.

    As for the reciprocity condition, the Department has a long history 
of regulatory practice on administering reciprocity standards. Our 
approach typically has not been to demand ``mirror image'' reciprocity 
or ``economically equivalent'' reciprocity. Rather, we have adopted a 
flexible approach that focuses on whether U.S. carriers or parties that 
might want to pursue opportunities abroad comparable to those being 
pursued by a foreign carrier or party here would be prevented by the 
foreign government in question from doing so. Evidence that a foreign 
government had turned down a U.S. carrier's request for comparable 
authority typically would carry compelling weight that adequate 
reciprocity was lacking. Similarly, evidence that foreign laws or 
regulations would be applied to bar U.S. carriers from securing 
approval for comparable activities usually would lead us to find 
inadequate reciprocity.
    On the other hand, where we have no evidence before us--whether in 
the form of past practice or of laws and regulations--specifically 
pointing to the likelihood that a foreign party's homeland would 
preclude comparable activities on the part of a U.S. party, and where, 
furthermore, we also have a current statement from a responsible 
official of that government certifying that the government will give 
U.S. parties reciprocal treatment, we normally regard our reciprocity 
standard as being satisfied. We accordingly have seen no need in such 
circumstances to further pursue the matter. We tentatively plan to 
implement this proposal by applying the same approach to reciprocity 
determinations that we typically follow in other contexts.
    In terms of process, again we would intend to do no more than apply 
longstanding Department practice. The process for meeting the 
investment reciprocity condition would be the same as it is for all 
other fitness requirements. Applicants and holders of existing 
authority would have the burden of submitting evidence to establish 
reciprocity. See 14 CFR 204.3 (requiring applicants for new authority 
to file certain data and any additional data necessary for the 
Department to reach an informed judgment about the applicant's 
fitness); 14 CFR 204.5 (requiring carriers that propose a substantial 
change in ownership to file the data set forth in 204.3). We are 
confident that applicants would be aware of our established practices 
in resolving reciprocity issues and of the type of evidence that we 
have typically relied upon and that they would know which materials 
would be most likely to advance their interests in the proceeding. To 
the extent that they need additional guidance, we would be fully 
prepared to provide it in response to specific inquiries.
    Some commenters have raised the question of this reciprocity 
policy's applicability to an investment made by several foreign 
citizens if not all of those investors come from countries that meet 
the open-skies and reciprocity conditions. See, e.g., Hawaiian Comments 
at 5. We have faced similar questions in applying the 49 percent total 
equity for open-skies country nationals/25 percent for non-open skies 
policy of the Northwest/Wings line of cases. Generally, we have allowed 
a mixed group to hold up to 49 percent of total equity so long as the 
non-open skies investors did not exceed 25 percent of voting or total 
equity. Similarly, under this proposal, we might allow the open-skies 
and investment reciprocity foreign investors in a mixed group to 
influence commercial decisions outside of the safety/security/national 
defense airlift areas, but not those from countries that did not have 
open-skies agreements and investment reciprocity.
    We tentatively do not agree with ALPA that our reciprocity inquiry 
should be routinely subject to notice and comment. If an applicant 
submits evidence in the course of an initial fitness review, qualified 
interested parties would be able to review that evidence either in the 
public docket or pursuant to the Department's confidentiality 
procedures (Rule 12). If the submission was part of a continuing 
fitness investigation, and in the event that the Department's 
determination did not become public information, we believe that ALPA 
and other prospective parties have other sufficient means to air their 
potential concerns. For example, in other failure of reciprocity 
contexts, adversely affected airlines or other U.S. parties have shown 
no reluctance to keep DOT apprised of incidents of a failure of 
reciprocity even in the absence of a pending application, and we would 
expect to be kept informed of such failures in this new arena as well 
if we adopt our proposal. Further, if ALPA has evidence that an air 
carrier is not complying with the citizenship requirement, it would 
have the right to submit that material and request an investigation.

[[Page 26436]]

Procedures for Fitness Reviews

    Citizenship matters arising in continuing fitness reviews are 
usually adjudicated informally by Department staff on a case-by-case 
basis, pursuant to 49 U.S.C. 41102 and 14 CFR 204.5 of the Department's 
procedural regulations. In the NPRM, we invited comment on our proposal 
to maintain these established procedures. 70 FR 67392. We tentatively 
concluded that we have various means at our disposal to initiate more 
formal proceedings when we believe such procedures to be appropriate. 
We stated that requiring public notification every time there is a 
citizenship question resulting from a substantial change of ownership 
will not only hinder our ability to obtain confidential information and 
resolve issues informally with the carrier before a proposed 
transaction is finalized, but also may serve to deter investment or 
ownership changes because of the uncertainty surrounding a timely 
decision by the Department. We stated further that such procedures 
could become extremely burdensome on the affected air carriers. 70 FR 
67392.
    We received few comments on this procedural issue. Atlas and Polar, 
Delta, and the Airline Professionals Association support the current 
procedures. AEA, bmi, and Hawaiian suggest that the Department should 
further explain the process and estimate the time required for a 
continuing fitness review where the liberalized actual control standard 
is applied. ALPA and the Airline Professionals Association argue that 
we should subject all substantial foreign investment cases to public 
notice and comment. Atlas and Polar suggest that we could maintain the 
current informal, confidential procedures, while placing significant 
decisions into the public realm, as we did in the recent substantial 
change of ownership case involving Hawaiian.
    In line with most of the comments we received, we have tentatively 
decided to make no changes to our continuing review procedures, for the 
reasons expressed in the NPRM. We believe significant potential harm 
could occur if we subjected all substantial foreign investment cases to 
public notice and comment, as ALPA and the Airline Professionals 
Association request. The potential chilling effect to foreign 
investment, and to cooperation with the Department, would be 
counterproductive. On the other hand, requiring public notice and 
comment in all significant cases appears to be unnecessary for the 
protection of interested persons. If a carrier's pilots, for example, 
became aware of significant changes in their employer's ownership and 
management structure, they would have the right to submit evidence 
showing that the U.S. air carrier might not be complying with the 
citizenship requirement, as do other interested persons. Where a public 
proceeding might be beneficial, however, we would retain the option of 
using it.

Part 204 Modifications

    Consistent with the NPRM, the Department would make minor changes 
to Part 204 that correct typographical errors and update sections in 
compliance with the prevailing statutory language. In 204.1, we would 
add a sentence to reference the new Part 399 language so that air 
carriers would be directed to the new rule. In 204.2, we would amend 
the definition of ``citizen of the United States'' to mirror the 
language that is now contained in 49 U.S.C. 40102(a)(15). We believe 
that the regulations should mirror the text of the statute as it is 
currently written. Finally, we would include minor changes to 204.5 to 
clarify language in paragraph (a)(2); delete a typographical error in 
paragraph (b); revise the address in paragraph (c); and add a new 
paragraph, (d), that would replace the last sentence of paragraph (c). 
These amendments to Part 204 should make the regulations easier to 
understand for carriers consulting the sections.

Legal Authority

Summary

    We have tentatively determined that we may adopt our modified 
interpretation of the statutory ``actual control'' requirement. We 
believe that we have the authority to interpret the statute, because we 
are responsible for administering it; that we have the authority to 
modify our past interpretation when changing industry conditions and 
policies require such modifications because Congress has not prescribed 
a definition of ``actual control''; and that our proposed modified 
interpretation would be consistent with the language and purpose of the 
statute. We think that we have an obligation to change our 
interpretation with commercial developments and the public policy goals 
set by our statute, 49 U.S.C. 40101(a). See 70 FR 67394. As shown by 
the legislative history of our statute, Congress never intended to 
freeze for all time our earlier interpretation of actual control.

Authority To Interpret the Statute

    Our responsibility for enforcing the statutory citizenship 
requirement gives us the authority to interpret that requirement to the 
extent that it is not specifically defined. As the Supreme Court has 
stated, ``The power of an administrative agency to administer a 
congressionally created * * * program necessarily requires the 
formulation of policy and the making of rules to fill any gap left, 
implicitly or explicitly, by Congress.'' Chevron U.S.A. v. Natural Res. 
Def. Council, 467 U.S. 837, 843 (1984), quoting Morton v. Ruiz, 415 
U.S. 199, 231 (1974). In a case involving our interpretation of another 
aviation statute, the Court of Appeals similarly stated, ``Naturally, 
the administration and enforcement of a statute call upon the agency 
charged with its execution to interpret it.'' Continental Air Lines v. 
DOT, 843 F.2d 1444, 1449 (D.C. Cir. 1988).
    Congress has given the Secretary the responsibility for 
administering and enforcing the statutory provisions governing the 
economic regulation of the airline industry, including the citizenship 
requirement. 49 U.S.C. 40113(a) See also Northwest Airlines v. County 
of Kent, 510 U.S. 355, 366-367 (1994).
    In carrying out these responsibilities, we routinely interpret the 
statutory provisions governing air transportation, and the courts defer 
to our interpretations when deemed reasonable. See, e.g., Sabre, Inc. 
v. DOT, 429 F.3d 1113 (D.C. Cir. 2005); Federal Express Corp. v. 
Mineta, 373 F.3d 112 (D.C. Cir. 2004); American Airlines v. DOT, 202 
F.3d 788 (5th Cir. 2000); Continental Air Lines v. DOT, 843 F.2d 1444 
(D.C. Cir. 1988).
    Administering the statute defining citizenship has long required us 
to interpret its provisions. The Board itself originally created the 
actual control requirement--a requirement not then set out in express 
statutory language--due to its judgment that the express statutory 
requirements required supplementation in order to prevent evasion of 
the congressional policy. Willye Peter Daetwyler, d.b.a. Interamerican 
Air Freight Co., Foreign Permit, 58 CAB 118, 120-121 (1971).
    While eliminating uncertainty about whether the ``actual control'' 
test was lawful, Congress itself recognized that we would need to 
interpret the applicability of the ``actual control'' standard in 
specific cases. Congress made the ``actual control'' test part of the 
statute when it enacted Vision 100--Century of Aviation Reauthorization 
Act, Pub. L. 108-176, 117 Stat. 2490

[[Page 26437]]

(2003). The sponsor of the amendment incorporating the actual control 
test into the statute stated that his amendment ``leaves the 
interpretation of effective control up to DOT, but the department can 
draw upon its decades of precedents to reach these conclusions.'' 
Congressional Record, S7813 (June 12, 2003). The amendment's sponsor 
thus understood that his amendment necessarily would require us 
continue to interpret ``actual control.''

Authority To Modify Our Interpretation

    We are proposing to modify our past interpretation of the ``actual 
control'' standard, as we have done in the past. Some commenters 
contend, however, that we must strictly follow our past interpretation 
unless and until Congress amends the statute. See, e.g., Alaska 
Comments; Continental Comments at 30-34; ALPA Comments at 5. Many of 
the individual commenters similarly argue that Congress has codified 
that interpretation. We tentatively disagree.
    The courts have long recognized that agencies whose 
responsibilities require them to interpret their governing statutes 
necessarily have the authority to change their interpretations over 
time. In American Trucking Ass'ns v. Atchison, Topeka & Santa Fe Ry., 
387 U.S. 397, 416 (1967), for example, the Supreme Court explained,

    [T]he Commission, faced with new developments or in light of 
reconsideration of the relevant facts and its mandate, may alter its 
past interpretation and overturn past administrative rulings and 
practice. * * . [T]his kind of flexibility and adaptability to 
changing needs and patterns of transportation is an essential part 
of the office of a regulatory agency. Regulatory agencies do not 
establish rules of conduct to last forever; they are supposed, 
within the limits of the law and of fair and prudent administration, 
to adapt their rules and practices to the Nation's needs in a 
volatile, changing economy. They are neither required nor supposed 
to regulate the present and the future within the inflexible limits 
of yesterday.

Accord, Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. at 863-
864; Nat'l Cable & Telecomm. Ass'n v. Brand X Internet Serv., 125 S.Ct. 
2688, 2699-2700 (2005).
    Just recently, moreover, the Court of Appeals affirmed a Department 
interpretation of a longstanding statutory provision that took into 
account industry changes and therefore went beyond our past 
interpretation of that provision. Sabre, Inc. v. DOT, 429 F.3d 1113 
(D.C. Cir. 2005). The Court held that we had acted reasonably in 
updating our interpretation of the statutory term at issue in light of 
changes in the airline distribution industry. 429 F.3d at 1124.
    Furthermore, when Congress amended the statute to add the ``actual 
control'' test originally developed by the Board, in our view Congress 
did not direct us to follow the past interpretations. A Senator 
introduced the amendment in the context of a pending citizenship case 
involving a U.S. carrier that depended on a foreign firm for almost all 
of its business. At that time, the statute did not expressly require 
U.S. carriers to be under the actual control of U.S. citizens, even 
though we and the Board had long read such a requirement into the 
statute, and the carrier was defending its citizenship in part by 
arguing that the ``actual control'' requirement was invalid because it 
was not in the statute. The amendment ensured that the carrier's 
citizenship would be judged under the ``actual control'' requirement 
and that no carrier could challenge the legality of that requirement. 
Congressional Record, S7813 (June 12, 2003).
    That Congress did not seek to end the Secretary's discretion to 
modify as appropriate the traditional interpretation of actual control 
is suggested by the colloquy between the amendment's sponsor and the 
floor manager of the underlying Senate bill. The amendment's sponsor 
specifically stated that his amendment ``leaves the interpretation of 
effective control up to DOT, but the department can draw upon its 
decades of precedents to reach these conclusions.'' Congressional 
Record, S7813 (June 12, 2003). He thus recognized that his amendment 
would not compel us to maintain our past interpretation of the statute. 
In response, the floor manager stated his understanding that the 
amendment ``was simply a reflection of existing law'' and that the 
amendment ``will not in any way affect [the Department's] determination 
of what constitutes a citizen of the United States.'' Congressional 
Record, S7813 (June 12, 2003).
    Our proposed reinterpretation of the ``actual control'' standard 
would be consistent with our past willingness to revise the standard in 
light of changing conditions. We thus determined in the Northwest 
Airlines/Wings Holdings case that Northwest would remain a U.S. citizen 
if no more than 49 percent of its equity was held by foreigners. That 
determination substantially liberalized the original decision on the 
Northwest/Wings Holdings transaction, which had held that no more than 
25 percent of the equity could be held by foreigners. Northwest 
Airlines Acquisition by Wings Holdings, Order 91-1-41 (Jan. 23, 1991). 
And a year ago we modified our implementation of the citizenship 
standard in a way that allowed Hawaiian to complete its reorganization 
with some foreign investment. See 70 FR 67393; Hawaiian Comments at 1.
    Furthermore, we were not following a rigid and unchanging 
interpretation of ``actual control'' when Congress adopted the 
amendment. We have not had a fixed definition of ``actual control.'' 
Instead we based each citizenship determination on the facts of each 
individual case, as we explained when we began this proceeding. 68 FR 
44675, 44676, July 30, 2003. See also Alas de Transporte Int'l, S.A. v. 
Challenge Air Cargo, Order 93-7-25 (July 15, 1993) at 6.
    Even if we had established a fixed interpretation of ``actual 
control,'' Continental's claim that Congress' adoption of the phrase 
``actual control'' meant that it was adopting our interpretation of 
that phrase and that our interpretation could never change appears to 
be incorrect. Continental Comments at 32-33. The colloquy on the Senate 
floor when the amendment was introduced, as shown, does not support 
Continental's position. The three cases cited by Continental in support 
of its argument also appear to be inapplicable. Both Duckworth v. Pratt 
& Whitney, 152 F.3d 1, 6, n. 6 (1st Cir. 1998), and Ward v. Comm'r of 
Internal Revenue, 784 F.2d 1424, 1430 (9th Cir. 1986), stated as a 
general principle that a longstanding agency statutory interpretation 
could be incorporated by Congress into a statute, but neither held that 
an agency was in fact bound by a past statutory interpretation. In 
Bragdon v. Abbott, 524 U.S. 624, 631 (1998), the Court stated that a 
statute using a term that had been defined by a regulatory agency 
implied that Congress wished to adopt the agency's definition. Here, 
however, we had never precisely defined ``actual control.''
    Our proposed modified interpretation, moreover, would not affect 
other elements of the traditional ``actual control'' standard. For 
example, when we review whether the statutory numerical tests are 
satisfied (e.g., the requirement that at least two-thirds of the 
directors must be U.S. citizens), we consider a U.S. citizen as a 
foreign citizen if the U.S. citizen as a practical matter has financial 
or business relationships with foreign citizens that will enable the 
foreign citizens to control the U.S. citizen's actions as shareholder, 
officer, or director. We have also held that U.S. carriers met the 
``actual control'' test when it was argued that foreign citizens 
potentially had

[[Page 26438]]

significant influence over the U.S. carrier. See, e.g., Acquisition of 
Northwest Airlines by Wings Holdings, Inc., Order 92-11-27 (Nov. 16, 
1992) at 1, 20-22 (an alliance relationship between a U.S. and foreign 
carrier does not constitute foreign control).
    We believe that we may modify our interpretation of ``actual 
control'' even though Congress did not act on our earlier request for 
legislation changing the percentage of voting stock that non-U.S. 
citizens could own. See, e.g., Alaska Comments at 2. Neither our 
request nor Congress' failure to act on that request suggest that we do 
not have the authority to reexamine our interpretation or that Congress 
wished to maintain the past interpretation without change. See, e.g., 
American Trucking Ass'ns v. Atchison, Topeka & Santa Fe Ry., 387 U.S. 
at 417-419.
    We appreciate the statements made by a number of members of 
Congress stating their belief that we should not change our 
interpretation without express congressional approval. See, e.g., 
Continental Comments at 30-31; AFL-CIO TTD Comments at 5-6. However, as 
shown, we have an obligation to administer the citizenship 
requirements, and we have tentatively concluded that maintaining the 
old interpretation in all circumstances would not be in the best 
interests of U.S. carriers, their employees and shareholders, and U.S. 
consumers. We believe that to do so would unnecessarily prevent 
potentially beneficial foreign investment in U.S. airlines and deny us 
the opportunity to modify our interpretation in ways that should give 
U.S. airlines and other U.S. investors attractive investment 
opportunities in foreign countries. At the same time, on balance we 
have not been persuaded that our modified interpretation would cause 
significant harm to any U.S. interests. Finally, as shown, in our view 
Congress did not compel us to follow specific interpretations of 
``actual control'' when it adopted the amendment adding the test to the 
statute.

Lawfulness of Our Modified Interpretation

    Any interpretation of our governing statute, of course, must be 
consistent with the statutory language and congressional intent. We 
have considered the arguments made by several commenters that our 
proposed updated interpretation of actual control would be contrary to 
the statute. As discussed below, we tentatively find that our modified 
interpretation of the actual control test would meet this consistency 
test. The statute, as indicated, states that the carrier must be 
``under the actual control of citizens of the United States.'' 49 
U.S.C. 40102(a)(15)(C). In most cases, a carrier's compliance with the 
numerical requirements for the board of directors and managing officers 
and ownership of the voting interest would ensure that the carrier 
meets these requirements. However, in certain cases, we may require 
more to ensure strict compliance with the statutory standard. The Board 
originally developed the actual control test because in some cases 
foreign citizens had business ties with the carrier or its officers or 
shareholders that as a practical matter would enable the foreign 
citizens to make key decisions, even though the U.S. members of the 
board of directors and the U.S. shareholders nominally controlled the 
carrier. Current policy, which would be unaffected by this rulemaking, 
continues the Board's efforts by treating U.S. citizens as non-U.S. 
citizens if they were appointed to positions as directors or managing 
officers by foreign citizens, and treating U.S. citizens as non-U.S. 
citizens if foreign citizens have the ability to control their actions 
as shareholders, directors, or officers.
    Because U.S. citizens would control the adoption and amendment of 
any U.S. carrier's organizational documents, U.S. citizens, not foreign 
citizens, would control the carrier's structure and the rights and 
powers of its shareholders. We would also require that U.S. citizens 
control the three other operational areas subject to significant 
government involvement: safety, security, and the carrier's 
participation in CRAF and other national defense airlift operations.
    We think that our interpretation would be consistent with the 
statutory language. As amended, the citizenship definition states that 
a carrier will be a U.S. citizen if it is ``a corporation or 
association * * * which is under the actual control of citizens of the 
United States.'' 49 U.S.C. 40102(a)(15)(C). Our modified interpretation 
would continue to ensure that, as urged by Continental, U.S. citizens 
``control the air carrier entity itself,'' Continental Comments at 11, 
because U.S. citizens would control core carrier decisions on its 
organizational structure.
    Our modified interpretation of the ``actual control'' requirement 
would reflect the standard definitions of ``control.'' ``Control'' 
means ``power or authority to guide or manage: directing or restraining 
domination.'' Webster's Third New International Dictionary (1971). 
Under our proposal, no foreign citizen would have dominating power--the 
board of directors (two-thirds of whom must be U.S. citizens) or the 
voting shareholders (in whom 75 percent of the voting interest must be 
vested in U.S. citizens) would have the power to run the carrier, 
including the power to decide whether to delegate any management 
authority over parts of the air carrier's business to someone else (and 
to revoke any such delegation). We conclude that our interpretation 
would match the statutory text.
    British Airways argues that our proposed interpretation should not 
impose any requirements beyond the objective tests established by the 
statute, that is, the requirements that the president be a U.S. 
citizen, that U.S. citizens make up at least two-thirds of the board of 
directors and the other managing officers, and that U.S. citizens hold 
at least three-quarters of the voting interest. British Airways 
Comments at 3-4. This argument misconstrues the statute, because 
``actual control'' is also required.
    Continental argues that our revised interpretation of the ``actual 
control'' standard is necessarily incorrect because it is allegedly 
inconsistent with the definitions of ``control'' adopted by such other 
agencies as the U.S. Department of the Interior, the Securities and 
Exchange Commission, the Federal Communications Commission, and the 
Small Business Administration. Continental Comments at 16-19. But see 
IATA Comments at 5, alleging that our proposal is consistent with the 
FCC's interpretation of a similar citizenship requirement.
    We think any differences between our revised interpretation and the 
interpretations followed by other agencies should be irrelevant. 
Congress has enacted citizenship requirements and control tests for 
different industries at different times for different purposes. The 
control provisions enacted for one industry thus should not dictate the 
implementation of a control provision applicable to a different 
industry.

Lawfulness of Reciprocity and Open-Skies Conditions

    Our liberalization of our ``actual control'' standard would cover 
only investors from countries that provide reciprocal airline 
investment opportunities for U.S. investors and that have an open-skies 
agreement with the United States (or where appropriate to meet the 
United States' international legal obligations). This proposed 
condition should encourage market liberalization that would create 
investment and management opportunities for U.S. carriers and 
investors.

[[Page 26439]]

    Adopting a revised interpretation that would apply in the context 
of our policy of seeking to open markets for U.S. carriers would 
reflect the changing environment in which citizenship is assessed. The 
Government Accountability Office, then the General Accounting Office, 
suggested that Congress established the initial citizenship requirement 
for U.S. carriers in order to protect the heavily subsidized domestic 
airline industry, to enforce the limits on foreign carrier rights 
created by bilateral air services agreements, to restrict access by 
foreign aircraft to U.S. airspace, and to promote the military's 
ability to use aircraft from U.S. carriers to supplement its airlift 
capability. United States General Accounting Office, Airline 
Competition: Impact of Changing Foreign Investment and Control Limits 
on U.S. Airlines, GAO/RCED-93-7 (Dec. 1992), at 12-13. Some of these 
reasons are no longer valid--U.S. carriers no longer receive routine 
subsidy mail rate payments for their operations, and the growth in 
international airline flights by foreign carriers means that foreign-
owned aircraft are flying over all regions of the United States every 
day.
    However, the need to ensure that U.S. carriers obtain comparable 
treatment with foreign carriers remains an important policy 
consideration, and our proposal to adopt the reciprocity condition as 
part of our rule seems reasonable. As we stated in our proposal, ``[W]e 
also have a basic duty to ensure that our airlines, and indirectly 
consumers, are not placed at an unfair competitive disadvantage by 
extending benefits to foreign interests where such benefits are not 
available to U.S. interests abroad.'' 70 FR 67394. The reciprocity 
condition would allow greater investment and involvement by foreign 
investors in U.S. carriers only when U.S. investors can obtain 
comparable treatment in the airline industry of the foreign investors' 
home countries and when those countries have open-skies agreements with 
the United States. Our use of this reciprocity condition should 
encourage foreign countries to eliminate restrictions on U.S. 
investment and involvement in their airline industries and to sign 
open-skies agreements with the United States.
    Our proposed application of somewhat different ``actual control'' 
standards based on the openness of the foreign investors' home 
countries would be consistent with our statute and past practice, 
because it would reflect the statute's public interest goals and 
provisions requiring us to consider foreign government policies. One of 
the public interest goals established by the statute is the goal of 
``strengthening the competitive position of air carriers to at least 
ensure equality with foreign air carriers * * *'' 49 U.S.C. 
40101(a)(15). This provision would support a policy of creating 
investment opportunities for foreign citizens only if U.S. airlines are 
entitled to reciprocal treatment.
    Our proposed approach of allowing more liberal standards when U.S. 
investors are given reciprocal treatment and U.S. airlines operate 
under an open-skies agreement would build on past practice. We modified 
our original restrictions on Wings Holdings' investment in Northwest in 
part because the principal foreign investors came from the Netherlands, 
which had a relatively liberal air services agreement with the United 
States. Northwest Airlines Acquisition by Wings Holdings, Order 91-1-41 
(Jan. 23, 1991) at 4, 6. And in Intera Arctic Serv., Inc., we examined 
the alleged U.S. firm's citizenship with great care because of the lack 
of reciprocity for comparable U.S. firms in Canada. Order 87-8-43 (Aug. 
24, 1987), at 6. See also Alas de Transporte Int'l, S.A. v. Challenge 
Air Cargo, Order 91-4-32 (Apr. 22, 1991), at 5.

Procedural Issues

    We would be adopting our proposed modified interpretation of the 
``actual control'' requirement after publishing our initial and 
supplemental proposals and giving all interested persons an opportunity 
to comment on those proposals.
    Continental, however, complains that our proposal departed 
``radically'' from the issues raised in the advance notice of proposed 
rulemaking that initiated this proceeding. Continental Comments at 39, 
citing 68 FR 44675, July 30, 2003. Our advance notice of proposed 
rulemaking, however, asked for comments on whether we should change our 
criteria for determining whether a U.S. carrier was controlled by U.S. 
citizens. 68 FR 44677. While the proposal did represent a change in 
direction from the advance notice of proposed rulemaking's focus, that 
does not matter. We acted reasonably by thereafter issuing a notice of 
proposed rulemaking asking for comments on whether we should relax to 
some extent our interpretation of the ``actual control'' standard, 
because our further consideration of the issue made us tentatively 
believe that we should modify our traditional interpretation of 
``actual control.'' Continental submitted comments opposing that 
proposal, we are now issuing this supplemental notice of proposed 
rulemaking which will enable Continental to comment again on our 
proposal, and we will decide whether to adopt the proposal only after 
considering the arguments made by all commenters.
    The Airline Professionals Association, Teamsters Local 1224, 
suggests that a one-day public hearing would be useful. Airline 
Professionals Association Comments at 6. We believe that the notice-
and-comment process used in this proceeding will give all interested 
persons ample opportunity to present their views. No hearing should be 
needed to protect their right to comment on our proposal. By reviewing 
all of the written comments, we conclude that we will understand their 
position on the issues.
    ALPA asserts that the FAA career staff was not consulted on the 
preparation of the notice of proposed rulemaking and that we should ask 
the FAA to submit its own views to the docket on the safety issues. 
ALPA Comments at 16. We did consult with FAA officials before issuing 
our notice of proposed rulemaking, and we have continued to consult 
with them on the proposal's safety issues. The FAA is an agency within 
DOT, so we see no reason to ask the FAA to formally submit comments.
    Noting that we are proposing to place the proposed rule in the 
policy statement section of our regulations, 14 CFR part 399, and that 
the Administrative Procedure Act allows agencies to change policy 
statements without advance notice to the public, British Airways urges 
us to make a commitment that we will not amend this policy statement in 
the future without first providing an opportunity for notice and 
comment. British Airways Comments at 2. But see bmi Comments at 2.
    We do not believe that we could make a binding commitment that this 
Department would not change the interpretation in the future, or that 
any future change in this interpretive rule would be made only after an 
opportunity for public comment. We doubt that the Department would 
reverse this interpretation, because our proposal would be consistent 
with the ongoing process of deregulation and with the globalization 
trends that will continue to reshape the international airline 
business.

Rulemaking Analyses and Notices

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

    Executive Order 12866, Regulatory Planning and Review, directs the 
Department to assess both the costs and

[[Page 26440]]

the benefits of a significant regulatory change. This rulemaking is 
considered significant under DOT Policies and Procedures and E.O. 12866 
because of public interest. In the NPRM, we made an assessment of this 
rulemaking indicating that its economic impact would be minimal because 
the rule would not impose any new costs on the affected certificated 
and commuter air carriers. 70 FR 67389, 67395. Commenters had an 
opportunity to submit comments on our assessment. We received no 
comments.
    The Department tentatively concludes that the benefits of our 
proposed rule would be important, although non-quantifiable, and that 
those benefits would outweigh the costs, which should be minimal. We 
believe that the proposed rule would not impose any new costs on the 
affected certificated and commuter air carriers. We are clarifying our 
plans to implement the proposed policy if we adopt it, for example, by 
stating that the shareholders or board of directors must be able to 
revoke any delegation to foreign citizens of management authority over 
some parts of the carrier's operations and by providing more detail on 
our proposal that U.S. citizens must control the organizational 
documents, safety and security matters, and decisions on CRAF and other 
national defense airlift programs. Our clarification of our proposal 
should not materially affect the proposal's costs and benefits.
    We request interested persons to provide us with information on our 
tentative regulatory evaluation, including the potential benefits and 
costs of this proposal.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612), as amended 
by the Small Business Regulatory Enforcement Fairness Act of 1996, 
requires federal agencies, as part of each rulemaking, to consider 
regulatory alternatives that minimize the impact on small entities 
while achieving the objectives of the rulemaking. Our proposed rule 
would modify the Department's interpretation of ``actual control'' in 
determining air carrier fitness/citizenship to receive or retain a 
certificate of public convenience and necessity or commuter authority. 
In our NPRM we tentatively concluded that it would reduce the burden of 
compliance with citizenship requirements for small entities that are 
air carriers. The revisions to our proposal do not affect that 
conclusion. We certify that this proposed action would not have a 
significant economic impact on a substantial number of small entities.

Trade Impact Assessments

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

International Compatibility

    In keeping with U.S. obligations under the Convention on 
International Civil Aviation, it is the Department's policy to comply 
with International Civil Aviation Organization (ICAO) Standards and 
Recommended Practices to the maximum extent practicable. In the NPRM 
the Department has determined that there are no ICAO Standards and 
Recommended Practices that correspond to these proposed regulations. 
The revisions to our proposal do not affect that determination.

Unfunded Mandates Reform Act of 1995

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

Executive Order 13132, Federalism

    This action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 13132, dated August 4, 1999 (64 
FR 43255). Our proposed rule would not have a substantial direct effect 
on, or significant federalism implications for the States, nor would it 
limit the policymaking discretion of the States.
    Our proposed rule would not directly preempt any State law or 
regulation, nor impose burdens on the States. It would have not a 
significant effect on the States' ability to execute traditional State 
governmental functions. In the NPRM the agency therefore determined 
that this proposal would not have sufficient federalism implications to 
warrant the preparation of a federalism summary impact statement. The 
revisions proposed by this notice do not affect that determination.

Paperwork Reduction Act

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

Summary of Comments

    The Department invited comments on the proposal. We received 
approximately 30 comments collectively from carriers, labor parties, 
and industry associations. We received over 3,000 other comments from 
state legislators, local government officials, airline employees, and 
other individuals.
    Commenters were divided on the need for and the desirability of a 
policy change. The Department received general support for its proposed 
changes from Air Carrier Association of America (ACAA), Airports 
Council International-Europe (ACI-Europe), Airports Council 
International-North America (ACI-NA), the Association of European 
Airlines (AEA), Airline Professionals Association (APA, Teamsters), 
Asociaci[oacute]n Internacional de Transporte A[eacute]reo 
Latinoamericano (AITAL), Atlas/Polar, bmi, Boeing, Federal Express 
(FedEx), Greater Orlando Aviation Authority, Hawaiian, the 
International Air Transport Association (IATA), United, United States 
Airports for Better International Air Service (USA-BIAS), and the 
Washington Airports Task Force. Atlas/Polar, Hawaiian, and United 
voiced support for the proposal as a way of obtaining additional 
capital for the U.S. airline industry on more attractive terms. 
Hawaiian and United--recently in bankruptcy proceedings--

[[Page 26441]]

and Atlas/Polar point out that the Department's proposal will help 
attract strategic investors. Hawaiian noted that the airline industry 
currently operates at a disadvantage compared to other industrial 
sectors that carriers compete against for financial resources. United 
added that the current policy limits U.S. carriers to speculative 
investments from venture capital funds, hedge funds, and other private 
investors looking to take advantage of the industry's depressed 
valuations. Both USA-BIAS and Washington Airports Task Force believe 
that the proposal will help to preserve the low fares passengers enjoy 
today.
    Other commenters--notably the Association of Flight Attendants 
(AFA), the Air Line Pilots Association (ALPA), the Aircraft Mechanics 
Fraternal Association (AMFA), the Allied Pilots Association (APA), the 
International Association of Machinists (IAM), the National Air Carrier 
Association (NACA), the Independent Pilots Association (IPA), the 
Transportation Trades Department--AFL-CIO (AFL-CIO TTD), British 
Airways, Virgin Atlantic, Alaska Airlines, Continental Airlines, and 
U.S. Airways--do not support the proposal. Continental and U.S. Airways 
support the liberalization of foreign investment rules, but disagree 
with the Department's approach in the proposal. U.S. Airways--also 
recently emerged from bankruptcy--sees no urgent and immediate need to 
attract more global capital to the industry. AFA, ALPA, APA, IAM, and 
AFL-CIO TTD agree.
    Delta supports liberalization policies and the proposal's 
objectives but believes that more explanation and guidance are needed 
from the Department. British Airways and Virgin Atlantic favor greater 
liberalization policies than those set forth in our proposal.
    Other concerns raised by the commenters include the legal 
uncertainty of the bifurcated activities and of the Department's 
statutory authority, the reciprocal market access standards and what is 
considered to be investment reciprocity, and the impact of the NPRM on 
foreign control and governance. Many commenters, including a large 
number of the individuals who submitted comments, assert that only 
Congress, not the Department, may modify the interpretation of the 
Department's aviation investment rules. Various state leaders and 
associations from New Jersey, Ohio, and Texas agree with Alaska 
Airlines, and view the reciprocal benefits deriving from the NPRM as 
disfavoring the U.S. Continental claims that our proposal will be 
unfair to U.S. shareholders by encouraging U.S. carriers to establish 
dual-class share structures to accommodate foreign investors, thereby 
creating ``a class of shares with lesser control rights'' held by U.S. 
shareholders, and ``shares with greater control rights'' ``vested in 
foreign nationals.''
    Many commenters request clarification of matters raised in the 
NPRM. ALPA questions whether U.S. carriers actually require additional 
capital sources. British Airways asks whether the carrier's board of 
directors could delegate to foreign investors the authority to hire and 
fire officers up to and including the carrier's president and directors 
of safety, security, and CRAF participation matters. Delta, Hawaiian, 
and NACA request information on whether we plan to maintain the limit 
on foreign ownership of a carrier's non-voting equity stock established 
in Northwest Airlines Acquisition by Wings Holdings, Order 91-1-41 
(Jan. 23, 1991). NACA also asks what kinds of super-majority voting 
clauses could be obtained by foreign investors without placing the U.S. 
carrier's citizenship at risk.

Comments on Need for a Change in Policy

    Hawaiian noted that it has benefited from a recent modification of 
the actual control test, which enabled the airline to successfully 
reorganize and obtain new financing. According to Hawaiian, the NPRM 
``will help ensure the economic viability of U.S. airlines by providing 
for unfettered access to worldwide capital markets.'' United similarly 
contended that modifying the actual control test is essential for 
strengthening the competitive position of U.S. carriers in global 
markets.
    ALPA expressed the concern that the Department has failed to 
substantiate its claim that the U.S. airline industry is in need of 
foreign investment. AFA, APA, IAM, and AFL-CIO TTD also assert that the 
proposal failed to support that claim. ALPA noted that United and U.S. 
Airways were able to obtain exit financing after restructuring. 
Similarly, U.S. Airways does not see an immediate need for additional 
global capital for the U.S. airline industry. It believes that the 
journey towards ``a single, unified international aviation 
marketplace'' should move forward, but believes that the proposal moves 
the U.S airline industry forward too fast at what it views as a fragile 
time. U.S. Airways points to its own recent reorganization experience 
of obtaining domestic and foreign funds, United's ability to emerge 
from bankruptcy, the ability of newcomers like MaxJet and Eos to 
successfully access the global capital market for funds, and proposed 
new entrant Virgin America's claim to have obtained adequate capital 
from U.S. sources. AFL-CIO TTD states that the DOT has not met the 
burden of showing that allowing foreign interests to control U.S. 
airlines is in the best interest of the U.S. aviation industry.
    FedEx believes that the timing of the NPRM is good, because the 
market needs ``a fresh wind of competition.'' According to United, the 
aftermath of 9/11 left the industry in a difficult financial 
environment and the U.S. has lost its hold as the leader in 
international aviation. Foreign governments, such as the European 
Union, have been deregulating their own domestic airline industries, 
and the United States now has many open-skies agreements with other 
countries that have essentially eliminated route and rate regulation. 
In addition, globalization has had a major impact on the structure and 
operations of the airline industry. IATA mentions that the European 
Union, Australia, and New Zealand have begun liberalizing their foreign 
ownership and control rules. United also points to carriers in India 
and China that are also expanding rapidly to take advantage of the 
local deregulation policies that previously limited their opportunity 
to participate in the global aviation market. In order for the U.S. to 
regain its leadership position, United says ``artificial limitations on 
the ability of long-term strategic investors, regardless of 
nationality, to participate in the industry and earn adequate returns 
on their investment need to be removed.''

Comments on Labor Issues

    AFA, AFL-CIO TTD, ALPA, AMFA, IAM, and IPA oppose our proposed 
policy in part because of labor protection concerns. Of concern to ALPA 
is that foreign airlines are not subject to the same labor laws as the 
U.S carriers, thereby putting U.S. employees ``at a severe 
disadvantage.'' AMFA states that over fifty percent of aircraft 
maintenance is already outsourced to both foreign and domestic repair 
stations. AFA alleges that foreign investors are likely to be foreign 
airlines that will seek to convert U.S. carriers into feeder carriers 
that will support the foreign carriers' long-haul operations. AFL-CIO 
TTD raises a similar concern. A reduction or elimination of long-haul 
flights operated by U.S. carriers would deny U.S. employees the 
opportunity to work on long-haul services, which can offer the most 
desirable jobs, especially for pilots.

[[Page 26442]]

    APA, Teamsters has a differing view from the other labor 
organizations. ``At a time when thousands of airline employees have 
been furloughed, and thousands more are employed by airlines that are 
in bankruptcy, it is crucial for the economic well-being of the U.S. 
airline industry that impediments to international investment be 
removed.''

Comments on European Union Agreement

    Many commenters, including Delta, FedEx, United, and USA-BIAS, 
believe that the Department's efforts to liberalize the actual control 
standard complement multilateral liberalization efforts. Other 
commenters, including Virgin Atlantic, Continental, U.S. Airways, ACAA, 
and AFL-CIO TTD, said that the Department is liberalizing its actual 
control standard in order to secure a U.S.-EU agreement. AFL-CIO TTD 
urges us to clarify whether the NPRM is a component of a U.S.-EU deal, 
and if so, to encourage a broader debate on citizenship issues. 
Continental argued that the Department seeks to reinterpret the actual 
control standard in order to secure a U.S.-EU agreement that, 
Continental believes, fails to provide ``commercially-viable slots and 
facilities at London Heathrow to bring effective competition to U.S.-
London travelers.'' U.S. Airways expressed similar concern about 
practical access to slot and facility-constrained European airports.

Comments on Overall Application of the Policy

    Several of the opposing commenters believe that our proposal fails 
to retain control in the hands of U.S. citizens. Continental argues 
that the proposed redefinition of ``actual control'' defies common 
sense and ignores the definitions followed by several other agencies.
    Other commenters, including Virgin Atlantic, FedEx, bmi, 
Continental, APA Teamsters, ACI-Europe and ACI-NA ask for clarification 
of when the Department will apply the new policy when evaluating the 
citizenship of a U.S. carrier.
    ALPA notes that the control prong of the citizenship test is 
applied to the carrier as a whole, not in certain discrete elements. 
AFL-CIO TTD asserts that the ``actual control'' requirement would not 
be met ``if U.S. citizens only controlled four specific areas of the 
carrier's operation.'' IPA believes the proposal indicated that U.S. 
citizens would only need to be in actual control of safety, security 
and CRAF. Continental predicts that the proposal would place in 
jeopardy the international operations of an air carrier whose economic 
decisions could be controlled by foreign citizens because our bilateral 
agreements require that airlines the Department designates for U.S. 
service be owned and controlled by U.S. citizens.
    The AEA asks whether a foreign investor could control such elements 
as ``definition and quality of the product, branding, fleet mix, 
origins and destinations, network issues defin[ing] the business of the 
company.''

Comments on Organizational Documents

    British Airways states that our requirement on organizational 
documents is unnecessary and will be counterproductive. It views the 
criterion for organizational documents as replacing ``one uncertainty 
for another,'' and believes that foreign investors will be unable to 
obtain supermajority voting provisions and similar contract provisions 
that would provide the foreign investors reasonable protection against 
actions by the majority of the carrier's shareholders or directors that 
would substantially prejudice the foreign citizens' investment 
interests.
    Hawaiian asks us to identify specifically the documents to be 
considered organizational documents that must continue to be controlled 
by U.S. citizens. It further requests that we state in the final rule 
that any review of a carrier's citizenship would be limited to these 
documents.

Comments on Safety and Security Issues

    AFL-CIO TTD comments that safety and security concerns are not 
areas that can be separated and singled out in day-to-day operations. 
Several commenters seek clarification about how to identify the chain 
of command for safety matters. Atlas/Polar and AEA, for example, ask 
whether every manager in the chain of command for safety matters must 
be a U.S. citizen. ACI-Europe asks whether ``a U.S. carrier controlled 
by non-U.S. citizens might be subject to greater security and safety 
scrutiny than would a U.S. carrier owned and controlled by U.S. 
citizens.''
    APA, Teamsters believes that safety and security concerns are 
adequately addressed by the Federal Aviation Administration (``FAA'') 
and the Department. It does not see a negative impact on safety. FedEx 
and NACA both agree with the Department's approach to ensure that U.S. 
citizens retain actual control over safety decisions.
    Alaska believes that the modified tests apply only to safety and 
security laws and the proposal is a substantial change from the 
Department's longstanding aviation policy. ALPA and Virgin Atlantic 
assert that our proposal will be ineffective, because many operational 
issues, not just those directly related to safety and security 
requirements, affect any carrier's ability to operate safely. ALPA 
stated, for example, that issues of safety exist throughout all aspects 
of operational decisionmaking. ALPA, AFL-CIO TTD, and Virgin Atlantic 
believe that the bifurcated approach will be ineffective because many 
operational issues, directly and indirectly, relate to safety and 
security requirements. ALPA hypothesizes that, under the NPRM, the 
economic and operational decisions made by airline management to enter 
voluntary FAA programs may not be under U.S. control. ALPA also 
expressed concern that the FAA staff was not consulted as preparation 
of the proposal evolved in the Department. Virgin Atlantic requested 
that the Department clarify how the bifurcation of operations will 
apply in practice.
    ALPA, AMFA, and IAM argue that the proposal could harm safety 
enforcement. ALPA stated that the proposed rule would not preserve U.S. 
citizen control over safety matters because an airline's safety depends 
upon more than compliance with government requirements. ALPA believes 
that nothing in the proposal would prevent foreign investors from 
controlling safety-related decisions because those decisions may be 
interrelated with economic and operational decisions. ALPA and AFL-CIO 
TTD stated that responsibility for safety must be shared across the 
entire airline, and not relegated to a specific safety department or 
official, as ALPA believes the NPRM would do.
    Echoing similar concerns, AMFA argues that increased foreign 
investment in U.S. airlines could place additional burdens on the 
safety oversight system. Both AMFA and IAM believe that the NPRM could 
increase the use of foreign repair stations, which raises a safety 
issue insofar as employees of the foreign repair stations may not have 
the same training or substance abuse testing requirements, and the FAA 
may not have the resources to inspect all foreign facilities. AMFA, 
IPA, and IAM view the proposal to liberalize the actual control 
standard as affecting the safety of operations conducted by U.S. 
carriers who utilize foreign repair stations.

Comments on CRAF

    Continental believes that a foreign air carrier may be less willing 
to participate in the U.S. military program, because the foreign 
investors' home countries may not support the United States'

[[Page 26443]]

foreign policy. ACI-Europe asks whether foreign-controlled U.S. 
carriers could choose not to participate in the CRAF program. 
Continental and Delta express concern that our proposal may enable 
foreign citizens to undermine a U.S. carrier's ability to participate 
effectively in the CRAF program, because CRAF primarily needs long-haul 
aircraft and decisions by foreign citizens on aircraft acquisitions and 
dispositions could make a carrier's participation in CRAF meaningless, 
if they disposed of the carrier's long-range aircraft. ALPA and NACA 
express concern that our proposal will cause a reduction in the use of 
long-haul aircraft by U.S. carriers, potentially weakening the 
military's long-haul airlift capability and reducing CRAF commitments. 
AEA seeks clarification that participation in CRAF will remain 
voluntary after issuance of this rule.

Comments on Open Skies and Reciprocity

    We received comments concerning our open-skies condition from 
Continental, FedEx, Delta, Virgin Atlantic, and U.S. Airways. FedEx 
supports the open-skies condition and believes that the proposal ``will 
create new opportunities for U.S. airlines [and] aviation workers and 
will greatly benefit travelers, shippers and consumers.'' The AEA 
strongly supports open aviation area (OAA) agreements, and the goal 
that airlines ``in the territories of parties to the OAA should be 
owned and controlled by parties to the OAA or nationals of parties to 
the OAA.'' It states that the proposal falls short of this goal.
    Virgin Atlantic does not support the open-skies requirement, 
suggesting that a more relevant inquiry is whether the foreign 
investor's homeland would allow U.S. interests to invest in that 
country's airlines.
    We received many comments concerning our investment reciprocity 
condition. FedEx supports the condition. ALPA, bmi, and Delta requested 
that the Department clarify the process for verifying reciprocity, 
including details about any substantive measure that would be used to 
determine whether a foreign country accords reciprocal treatment in 
airline ownership and control matters. Delta asked for a definition of 
``open commercial access'' and a standard for rendering decisions 
regarding market access reciprocity. US Airways urges the Department to 
use the liberalized actual control standard to insist upon practical, 
commercially-meaningful access to European markets and key 
international airports, including facility-constrained and slot-
constrained airports such as London Heathrow.
    Atlas/Polar believe that the reciprocity requirement should be 
applied flexibly to ensure that a foreign entity does not obtain 
greater ability to influence U.S. airline decisions than U.S. interests 
have with respect to decisions of airlines of that foreign entity's 
homeland. ALPA believes that any substantial foreign investment in a 
U.S. carrier should be subject to notice and comment, including the 
question of whether U.S. investors would have reciprocal access to 
investment opportunities in foreign airlines. British Airways believes 
that the DOT should ensure that ``any future modifications would be 
subject to notice and comment procedures.''
    British Airways, Continental, Delta, and FedEx raised the question 
of this reciprocity policy's applicability to an investment made by 
several foreign citizens if not all of those investors come from 
countries that meet the open-skies and reciprocity conditions. Hawaiian 
and AEA also wanted clarification on the Department's policy on U.S. 
carriers having third-country traffic rights, and the impact that 
having U.S. carriers with foreign participation will have on the 
carriers' ability to exercise those traffic rights.

Comments on Congressional Authority

    Nearly all of the commenters who oppose the proposal assert that 
Congress, not the Department, has the legal authority to make such a 
change. They assert that, under the existing statute, the Department 
lacks the requisite authority to interpret ``actual control.'' APA, 
Teamsters, bmi, Atlas/Polar, FedEx. IATA, and United--all who support 
the proposal--believe that the Department's interpretation is 
consistent with U.S. legislation, congressional intent, and/or the 
direction of previous policy changes. Atlas/Polar, FedEx, and United 
cite court cases that provide legal support for their belief that the 
DOT may reinterpret ``actual control.'' British Airways, Continental, 
Virgin Atlantic, and Delta all fear that the NPRM is legally uncertain, 
and potentially may be subject to reversal or modification by the 
courts or Congress. Virgin Atlantic states that the NPRM offers little 
protection for foreign investors, given this legal uncertainty.

List of Subjects

14 CFR Part 204

    Air carriers, Reporting and recordkeeping requirements.

14 CFR Part 399

    Administrative practice and procedure, Air carriers, Air rates and 
fares, Air taxis, Consumer protection, Small businesses.

    For the reasons stated in the preamble, the Department of 
Transportation proposes to amend 14 CFR part 204 and 14 CFR part 399 as 
set forth below:

PART 204--DATA TO SUPPORT FITNESS DETERMINATIONS

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

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

    2. Revise Sec.  204.1 to read as follows:


Sec.  204.1  Purpose.

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


Sec.  204.2  Definitions.

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

[[Page 26444]]

    D. Add a new paragraph (d) to read as set forth below.
    The revisions read as follows:


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

    (a) * * *
    (2) The change substantially alters the factors upon which its 
latest fitness finding is based, even if no new authority is required.
* * * * *
    (c) Information filings pursuant to this section made to support an 
application for new or amended certificate authority shall be filed 
with the application and addressed to Docket Operations, M-30, U.S. 
Department of Transportation, 400 Seventh Street, SW., PL-401, 
Washington, DC 20590, or by electronic submission at [http://dms.dot.gov
].

    (d) Information filed in support of a certificated or commuter air 
carrier's continuing fitness to operate under its existing authority in 
light of substantial changes in its operations, management, or 
ownership, including changes that may affect the air carrier's 
citizenship, shall be addressed to the Chief, Air Carrier Fitness 
Division, Office of the Secretary, U.S. Department of Transportation, 
400 Seventh Street, SW., Washington, DC 20590.
* * * * *

PART 399--STATEMENTS OF GENERAL POLICY

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

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

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


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

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

    Issued in Washington, DC, on May 1, 2006.
Michael W. Reynolds,
Acting Assistant Secretary for Aviation and International Affairs.
[FR Doc. 06-4227 Filed 5-3-06; 1 pm]

BILLING CODE 4910-62-P