Open Skies: Watch Out For Wind Sheer

At the same time that headlines trumpeted a possible "open skies" agreement with the European Union, the U.S. House of Representatives was passing, by a 423 to 0 vote, a bill (H.R. 556) that would give the government broader powers to review foreign investments in the U.S.

Those who follow the protracted trans-Atlantic aviation negotiations will recall that the deal breaker for the E.U. has been U.S. reluctance to allow more than 25% of the voting stock of a U.S. airline to be in foreign ownership. It wasn't clear from the guarded announcements at press time whether the U.S. had given ground on this, but the point could be moot if it has.

Though the House has passed H.R.556, which would subject foreign investment in facilities that could be vulnerable to terror attacks to greater scrutiny, the Senate must still act, and then any resulting legislation would have to be signed by President Bush or overcome his veto. Despite the fact that the law could be a long way from being enacted, foreign investors are gauging the political winds and judging them highly unpredictable.

That's one conclusion of a report issued by the National Foundation for American Policy (NFAP, www.nfap.com). The report says the current situation has created an environment that encourages investors to clog the review process of the U.S. Treasury's Committee on Foreign Investment in the United States (CFIUS) with extraneous transactions, reducing its ability to focus on national security matters. Such filings were up 73% in 2006. Each potential deal is then subject to a 30-day CFIUS review that could trigger a 45-day investigation before going to the President for consideration for 15 days.

Perhaps more important is the fact that second-stage investigations by CFIUS have increased 250% and second-stage withdrawals rose 150%, suggesting that foreign investors are facing a much more difficult time closing transactions in a timely manner, says the NFAP report.

The concerns don't end with a longer approval process. A mitigation or national security agreement negotiated as part of the approval could establish compliance thresholds that can scuttle a deal even after it has been completed. So investors could be wise to be wary of the risks of investing in the United States.

The bill and CFIUS' increased diligence are part of an ongoing chain of reactions to the Dubai-based DP World acquisition of P&O Ports, which included terminal operations in U.S. ports. Though we don't need to dredge up that long history again, the publicly debated issue was concern over national security when a company controlled by a foreign government is allowed to own critical U.S. infrastructure.

Back to the open skies negotiations. Even if the U.S. Department of Transportation should soften it stance on foreign ownership, many foreign airlines are largely or wholly owned by their governments. Given the current wind direction and intensity, that could blow any deals that would bring muchneeded investment in U.S. airlines right off the table.

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