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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Global | Publication | January 2021
Chris Randall is a corporate partner in our London team and is a member of the Norton Rose Fulbright global aviation group where he has advised extensively on joint ventures and alliances in the airline sector. Chris is a senior corporate partner, qualified as a solicitor both in London and Hong Kong. Chris has broad ranging experience of international equity offerings, public and private company mergers and acquisitions, joint ventures and general public company advice. Advice in the airline sector includes:
Find out more about Norton Rose Fulbright’s global aviation practice.
Although the aviation sector tends to be fiercely competitive, there are numerous ways in which airlines cooperate with one another. Many airlines are members of an alliance such as SkyTeam (whose members include Delta Air Lines, Air France and KLM), Star Alliance (whose members include Lufthansa, United and Air Canada) or One World (whose members include British Airways, American Airways and Qantas). Alliances tend to involve limited cooperation in relation to areas such as:
As well as airline alliances, there are a number of so called airline joint ventures. These tend to involve a higher degree of cooperation between a smaller number of airlines on specific sets of routes or between specific markets. For example, there are three major transatlantic joint ventures (between: (i) Delta, Virgin Atlantic and Air France-KLM; (ii) British Airways, Iberia, American Airlines and Finnair; and (iii) Lufthansa, United and Air Canada). Other joint ventures serve different markets between, e.g., Europe/Asia, US/Latam, and Europe/Middle East, with the geographic scope and degree of cooperation varying widely between particular joint ventures.
At a basic level, the degree of cooperation in a joint venture tends to be much higher than in the case of an alliance. Usually the airlines involved seek to operate a single business in relation to the relevant markets by coordinating their schedules and sales activities so as to maximise revenue and profit for the overall business. The parties then share the revenues generated by the business in a way which is designed to ensure that it makes no financial difference to airline a joint venture partner whether a customer flies on its aircraft or that of the joint venture partner. This is sometimes referred to as the airlines being “metal neutral”.
Of course, airlines also might cooperate with other airlines or third parties in relation to specialist areas of mutual interest. For example, a number of airlines are party to a joint venture, which in turn holds a controlling stake in the UK National Air Traffic Service (NATS). In this context, all the airlines have an interest in ensuring that air traffic services (which are a natural monopoly service) are operated in a safe and efficient manner. These kinds of joint ventures tend to be more similar to traditional joint ventures in other industries and are not considered in any detail in this interview.
Unlike many joint ventures, airline joint ventures tend to be contractual arrangements rather than being established through a corporate vehicle. This is because most jurisdictions have historically required airlines to satisfy nationality-based ownership and control (O&C) requirements in order for them to be granted operating rights. These typically limit ownership of an airline by non-nationals to a minority stake. These rules, which were adopted when most airlines were national “flag carriers,” may seem somewhat anachronistic in the current global economy although initiatives to remove such restrictions have been largely unsuccessful. One recent exception to this however is in the UK, where the requirements adopted following the end of the Brexit transition period now reflect a “principal place of business test” rather than any nationality O&C requirement.
As a result of this, airline joint ventures tend to be highly complex bespoke arrangements which deal with matters such as governance and revenue sharing on a contractual basis outside of the framework of company law. In relation to governance, commercial decisions tend to be taken by designated committees on which each partner has representation with decisions being taken unanimously and providing for escalation in the event of disagreement. Revenue sharing provisions can be very complex but work on the principle that all partners benefit if the overall business which is the subject of the joint venture does well. The idea being that the parties are economically agnostic as to whether any particular passenger flies on their aircraft or that of their partner.
The joint venture agreement itself tends to be supported by many technical agreements dealing with matters such as code-sharing, the sharing of take-off and landing slots at capacity constrained airports and the ability for passengers to benefit from all parties’ frequent fly programs.
As well as the contractual joint venture arrangements, it is not uncommon for one or more of the partners to the joint venture to take an equity stake in the others.
Airline alliances and joint ventures obviously affect the degree of competition between airlines and therefore give rise to issues under competition laws. In broad terms, competition authorities both in the US and Europe have historically been prepared to sanction such joint ventures on the basis that they enhance the service that customers receive and facilitate global competition, but numerous other global competition authorities have also reviewed (and imposed remedies upon) airline joint ventures. In the US, an approval of this kind is referred to as anti-trust immunity or ATI. Under EU rules, decisions have been taken in respect of the main transatlantic joint ventures under Article 101 (the rule prohibiting anticompetitive agreements).
The focus of authorities in competition reviews of joint ventures is primarily on the “trunk route” overlaps between the hubs of cooperating parties where the reduction in competition tends to be greatest. Such concerns have generally been addressed by remedies offered by the parties to make available take-off and landing slots at relevant airports to support new entry. The approach of competition authorities in this respect varies, and involves detailed analysis and advocacy before those authorities. Airlines will seek to demonstrate the customer benefits arising from the joint ventures, by reference for example to extended network connections, improved itineraries, and elimination of double-marginalisation. Such efficiencies may offset reductions in competition in certain contexts in the analysis of the competition authorities.
Where the partners to a joint venture also take an equity stake in one another, that together with any shareholder agreements between the parties, is likely to need to be approved by the relevant aviation regulatory authorities to ensure they do not offend the O&C requirements which may prohibit foreign ownership above certain levels. In addition, equity stakes can trigger additional competition reviews under merger control rules (distinct from the reviews of the joint venture agreements themselves).
The aviation sector is a challenging environment in normal times and it has obviously been very hard hit by travel restrictions necessitated by the pandemic. This is likely to increase the need for cooperation and consolidation within the sector. Unless nationality O&C requirements are further relaxed, which would seem to run counter to current trends in other areas, it is likely that contractual joint ventures will remain one of the best ways for airlines to achieve the benefits of consolidations which cannot be achieved in other ways.
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