US Carrier Foreign Ownership Rules

US air carriers desiring to provide air transportation[1] service must receive and maintain economic authority from the US Department of Transportation (DOT).  For economic authority, a US air carrier must be “fit, willing, and able” for commercial operations and meet US citizen ownership and control requirements.[2]  All US air carrier owners and prospective owners should pay attention to these requirements; there need not even be a change in ownership to fall out of compliance (e.g., through contractual provisions allowing for a substantial foreign influence over the carrier).

The DOT often addresses citizen ownership and control issues through informal procedures.  In part, informal procedures are used to encourage the sharing of confidential information with the DOT, to allow for investment and air carrier ownership changes, and to avoid unnecessary and burdensome proceedings.[3]  Such informal procedures, however, mean less guidance, especially for new entrants in the industry, on how to navigate US citizen ownership and control requirements. 

The following is an introduction to the US citizen ownership and control requirements and to issues that commonly arise for air carriers and their owners.[4]

     I.         US Citizen Definition

A statute, 49 U.S.C. 40102(a)(15), defines “US citizen” for purposes of the air carrier citizenship requirement as either:

(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.

The US citizen ownership and control requirements are more difficult to navigate than they appear on the surface.  Most challenges arise from (1) determining the percentage of equity interest owned and controlled by US citizens and non-US citizens in air carriers with multiple layers of ownership by different entities and (2) the requirement that air carriers remain under the “actual control” of US citizens.

   II.         DOT Percentage Equity Ownership/Control Determinations

Per statute, non-US citizens cannot own or control more than 25 percent of voting equity in a US carrier.[5] 

The DOT must determine whether non-US citizens’ percentage ownership and control of a US air carrier voting equity complies with statutory requirements.  The DOT’s assessment does not end at the air carrier’s direct equity holders.  Instead, the DOT has used two approaches to calculate percentages of equity ownership and control: the “traditional” and “multiplying out” approaches.

Traditional Approach. In most cases, the DOT uses the “traditional” approach.  Under this approach, the DOT applies the US citizen definition in 49 U.S.C. 40102(a)(15) to “each layer of an air carrier’s ownership so that each successive ‘parent’ entity must be found to be either a US citizen or not.”[6]  Therefore, where there are “several layers of ownership by different entities,” the DOT examines the citizenship of the entities in each layer “until the ultimate individual owners are reached.”[7] 

The DOT’s use of the traditional approach raises issues for some US private equity investors in air carriers utilizing certain investment vehicles considered non-US citizens under 49 U.S.C. 40102(a)(15).  In certain cases, the restructuring of investment vehicles, such as the “walling off” of individual non-US citizen investors, has led to finding of US citizenship.[8]

Multiplying-Out Approach.  In rare cases, the DOT applies the “multiplying-out” approach as approved by the DOT in its 2005 finding of Hawaiian Airlines’ US citizenship post-bankruptcy and reorganization.[9]  In the Hawaiian Airlines matter, air carrier equity was held by a “diffuse array of passive offshore investment vehicles in which foreign citizens are investors.”[10]  Instead of examining each layer of Hawaiian Airlines’ ownership (which could have led to a non-US citizenship determination), the DOT determined the percentage of foreign-owned equity by calculating the total beneficial interest held by foreign citizens.  The DOT applied the “multiplying-out” approach because (1) “the foreign interests [were] genuinely passive (that is, none of the new investors demonstrate[d] any incentive, or indicum of ability, to exercise actual control of the airline) and (2) the interests [were] highly diffuse, with no single foreign investor holding more than a very small interest.”[11]

There is a dearth of guidance as to when the DOT will consider foreign interests sufficiently “passive and diffuse” to trigger the application of the multiplying-out approach.  The DOT uses this approach “in very limited circumstances  – where foreign interests are genuinely and obviously passive (that is, none of the new investors demonstrates any incentive, or indicum of ability, to exercise actual control of the airline), foreign interests are highly diffuse with no single foreign investor holding more than a very small interest, and the interposed limited liability companies, interposed between the corporation and the existing offshore investment entities, are structured like corporations with independent US managers holding all the voting stock.”[12]

Ownership of Convertible Instruments.  Ownership of instruments that can convert into equity may not factor into the DOT’s determination.  In the past, the DOT did not equity-conversion features of a subordinated note and warrants held by foreign entities to constitute a voting interest in the carrier “unless and until the notes are converted into equity or the warrants are exercised.”[13]

 III.         DOT Actual Control Determinations

Separate from meeting the numerical statutory criteria, US citizens must have “actual control” over the US air carriers.

To determine actual control, the DOT looks to whether a foreign interest may “have a substantial ability to influence the carrier’s activities.”[14]  There is not a bright-line test for “actual control” – DOT considers the totality of circumstances.[15]  To ensure compliance with the “actual control” requirement, the DOT’s review may include the air carrier’s “capital structure, management, and contractual relationships.”[16]   

The DOT considers the following factors, among others, when assessing whether a US air carrier is a US citizen.

Non-Voting Equity Ownership.  The statutory definition of “US citizen” is silent as to foreign ownership and control of non-voting equity in a US air carrier.  However, the DOT limits foreign ownership and control of non-voting finding that foreign ownership of a large share of equity, even non-voting equity, raises potential citizenship issues.[17]  For foreign investors that are nationals of countries in open skies bilateral agreements with the US, the DOT has allowed up to 49 percent total equity ownership (voting and non-voting equity).  For others, the DOT has capped equity ownership at 25 percent. 

Foreign-Selected US Citizen Board Members.  The DOT regards an individual US citizen selected by a foreign interest as a non-US citizen for purposes of the statutory requirement that at least two-thirds of the board be US citizens.[18] 

Debt and Debt Agreement Provisions.  Generally, the DOT does not consider foreign ownership of US air carrier debt an indicium of actual control unless the provisions in the debt agreement “operate to turn the [foreign interest’s] loans into something more than a passive instrument.”[19]  In the Virgin America matter, the carrier agreed to remove provisions in a debt agreement that raised actual control issues, including those requiring a foreign lender’s consent regarding the payment of dividends, the incurrence of senior indebtedness, and the making of fundamental changes to the carrier’s business.[20]

Agreements Allowing Exercise of Substantial Foreign Influence.  The DOT considers whether agreements, such as shareholder and debt agreements, allow for a foreign interest to exercise substantial control over a US air carrier.  Among other things, the DOT may assess whether the foreign interest can veto or control the management structure, trigger the reorganization of the carrier, restrict sales of the carrier, or allow for the foreign interest to buy out the US interest.

The fact that a US air carrier obtains a substantial amount of its revenue and/or has a cooperative arrangement with a foreign entity is not enough to find that the foreign entity controls the carrier.[21]  For instance, in DHL Airways, Inc., the carrier’s dependence on its relationship with a foreign entity to remain in business was insufficient to show the foreign entity controlled the carrier where the foreign entity was not in “a position to control the air carrier by [credibly] threatening the removal of certain benefits.”[22]  In Virgin America, the DOT allowed a licensing agreement between UK citizen Virgin and Virgin America so long as it did not impose unreasonable restrictions on the carrier and permitted any operations without the use of the “Virgin” name.[23]

Other Arrangements Suggesting Substantial Foreign Influence. The DOT will consider whether an individual’s relationship with a foreign entity makes that person beholden to that entity.  In Discovery, a Japanese entity’s affiliation with an individual who was the carrier’s majority stockholder and board member raised questions as to the foreign entity’s ability to influence the carrier.[24]  In the Virgin America matter, the DOT found Virgin America’s CEO potentially beholden to foreign ownership, because he was appointed chief executive by foreign ownership (Sir Richard Branson) before the involvement of US investors even though the CEO was subsequently vetted and approved by the US investors.[25]

 IV.         Conclusion

Stakeholders in air carriers must pay close attention to US citizen ownership and control requirements.  Compliance with these requirements is not as simple as ensuring direct equity holders are US citizens.  Even if meeting the requirement of 75 percent US citizen ownership, careful attention must be paid to contractual provisions and relationships which may lead to a determination of non-US citizen actual control.

[1]           “Air Transportation” is the interstate or foreign “transportation of passengers or property by aircraft as a common carrier for compensation, or the transportation of mail by aircraft.” 49 U.S.C. 40102(a)(5).

[2]           US DOT, Information Packet on How to Become a Certificated Air Carrier 12 (Sept. 2012), https://www.transportation.gov/sites/dot.gov/files/docs/Certificated_Packet_2012_final.pdf.

[3]           Actual Control of U.S. Air Carriers, 70 Fed. Reg. 67392 (Nov. 7, 2005)(Notice of Proposed Rulemaking).

[4]           This article is not intended to be relied upon as legal advice. 

[5]           49 U.S.C. 40102(a)(15).

[6]           Virgin America, Inc., DOT Order 2006-12-23, issued Dec. 27, 2006, at 14.

[7]            Id.

[8]                Virgin America, Inc., DOT Order 2007-3-16, issued March 20, 2007, at 49 (finding that the proposal to exclude participation by foreign citizens would allow for a conclusion that US citizens owned and controlled a 75 percent voting interest in the air carrier).

[9]           Letter from Karan K. Bhatia, Asst. Sec. for Aviation and Int’l Affairs, DOT, to Jonathan B. Hill, Esq., Dow, Lohnes & Albertson, PLLC (March 7, 2005)

[10]         Id.

[11]         Id.

[12]         Virgin America, Inc., DOT Order 2006-12-23, issued Dec. 27, 2006, at 14.

[13]         Virgin America, Inc., DOT Order 2007-3-16, issued March 20, 2007, at 50.

[14]         DHL Airways, Inc. n/k/a ASTAR Air Cargo, Inc., DOT Order 2004-5-10, issued May 13, 2004, at 8; Northwest Airlines, DOT Order 89-9-51, issued Sept. 29, 1989, at 5;

[15]         DHL Airways, Inc. n/k/a ASTAR Air Cargo, Inc., DOT Order 2004-5-10, issued May 13, 2004, at 8;

[16]         Actual Control of U.S. Air Carriers, 70 Fed. Reg. 67390 (Nov. 7, 2005)(Notice of Proposed Rulemaking).

[17]         Northwest Airlines, DOT Order 89-9-51, issued Sept. 29, 1989, at 6.

[18]         Virgin America, Inc., DOT Order 2007-3-16, issued March 20, 2007, at 53.

[19]         Id. at 54.

[20]         Id.

[21]         DHL Airways, Inc. n/k/a ASTAR Air Cargo, Inc., DOT Order 2004-5-10, issued May 13, 2004, at 8.

[22]         Id. at 20.

[23]         Virgin America, Inc., DOT Order 2007-3-16, issued March 20, 2007, at 57.

[24]         Discovery Airways, Inc., DOT Order 89-12-41, issued Dec. 21, 1989, at 13-14.

[25]         Virgin America, Inc., DOT Order 2006-12-23, issued Dec. 27, 2006, at 16.