Foreign Ownership Restrictions & Cabotage Rules in U.S. Aviation

The Two Core Restrictions

Two longstanding provisions of federal law shape which carriers can operate domestic air service in the United States: (1) foreign ownership and control limits on U.S. air carriers, and (2) the cabotage prohibition on foreign civil aircraft. Both originate in the era of the 1944 Convention on International Civil Aviation (the Chicago Convention) and the Air Commerce Act of 1926, and both remain encoded in Title 49 of the U.S. Code. These restrictions define the competitive universe of airlines eligible to serve U.S. airports and, by extension, the tenant pool available to airport operators.

Foreign Ownership: The Statutory Framework

Under 49 USC § 40102(a)(15), a "citizen of the United States"—the prerequisite to holding an air carrier certificate under 49 USC § 41102—is defined as a corporation or association that meets three cumulative requirements:

• Incorporation: organized under the laws of the United States or a state, territory, or possession thereof.
• Management: the president and at least two-thirds of the board of directors and other managing officers are U.S. citizens.
• Ownership and control: at least 75% of the voting interest is owned or controlled by U.S. citizens, and the airline is under the "actual control" of U.S. citizens.

The 75% voting interest requirement has been in federal law since 1938 (originally in the Civil Aeronautics Act). In 1991, the Department of Transportation (DOT) administratively permitted foreign entities to hold up to 49% of a U.S. carrier's total equity, provided the foreign entity holds no more than 25% of voting shares, following the KLM-Northwest Airlines transaction. Transportation Secretary Samuel Skinner announced the relaxed interpretation to facilitate expanded foreign participation in U.S. airline ownership.

The result is a two-tier structure: foreign interests may own up to 49% of total equity and up to 25% of voting equity, but U.S. citizens must retain at least 75% of voting control, two-thirds of management, and "actual control" of the airline.

The "Actual Control" Test

The statutory ownership thresholds alone do not determine citizenship. The DOT applies a separate, qualitative "actual control" analysis—a facts-and-circumstances test examining whether U.S. citizens genuinely direct the airline's affairs. The DOT evaluates equity ownership, business and personal relationships, control over voting rights, veto power, equity/debt agreements, competitive status, and other features of corporate governance.

The Virgin America Precedent

The most instructive modern application of the actual control test is the DOT's review of Virgin America, Inc. (VAI). In December 2006, the DOT tentatively concluded that Virgin America was not a U.S. citizen, principally because the airline's affairs were "structured so as to give their actual control to a foreign citizen"—Sir Richard Branson's Virgin Group, which had conceived the airline, developed its business plan, ordered aircraft, and assembled its management team.

Virgin America submitted a substantially revised application proposing changes in financial arrangements, management, and corporate governance. After a second review, the DOT issued a final order on May 18, 2007, tentatively finding that Virgin America could qualify as a U.S. citizen subject to conditions including: (a) amending aircraft leases and commercial agreements to restrict the Virgin Group's power over business decisions; (b) replacing the CEO; (c) restructuring the board of directors; and (d) establishing a voting trust to administer the Virgin Group's 25% voting interest. The DOT granted Virgin America its certificate effective August 8, 2007. The case established that the DOT will examine the full history of airline formation—including who conceived the business, ordered aircraft, and assembled management—when evaluating actual control, even where the formal ownership structure satisfies the 75% voting threshold.

The 2005 NPRM and Its Withdrawal

On November 7, 2005, the DOT issued a Notice of Proposed Rulemaking (NPRM) on actual control of U.S. air carriers, proposing to liberalize the interpretation of "actual control," allowing foreign citizens to manage certain day-to-day operations of U.S. airlines provided that delegations of authority to foreign interests were revocable by the board of directors or voting shareholders. The proposal was part of the U.S.-EU Open Skies negotiation strategy.

Congress objected. At a 2006 Senate hearing, legislators argued the NPRM would "trade away the crown jewel of American transportation—our Nation's airlines." The DOT ultimately did not finalize the rulemaking, and the interpretation of "actual control" continues to be applied on a case-by-case basis using the pre-2005 precedent.

Cabotage: The Domestic Market Reservation

49 USC § 41703(c) prohibits a foreign civil aircraft from transporting "persons, property, or mail for compensation or hire" between two points in the United States, except when (1) specifically authorized under the emergency exemption provision of 49 USC § 40109(g), or (2) when a U.S. air carrier operates a foreign-registered aircraft under lease without crew, pursuant to DOT authorization.

The emergency exemption is narrow. Under 49 USC § 40109(g), the DOT may authorize a foreign carrier to perform cabotage only when: (a) unusual circumstances not arising in the normal course of business prevent U.S. carriers from accommodating the traffic; (b) all possible efforts have been made to place the traffic on U.S. carriers; and (c) the transportation is necessary to avoid undue hardship.

International Context: The Nine Freedoms of the Air

Cabotage restrictions are the norm globally, not a U.S. anomaly. The Chicago Convention, Article 7, gives each contracting state the right to refuse cabotage to carriers of other states. ICAO classifies air traffic rights as the "Nine Freedoms of the Air." Cabotage corresponds to the Eighth Freedom (consecutive cabotage—domestic carriage as part of an international itinerary) and the Ninth Freedom (standalone cabotage—domestic carriage by a foreign carrier entirely within the granting state, with no connection to the airline's home country).

Cabotage rights (Eighth and Ninth Freedoms) are granted in very few bilateral air transport agreements. The European Union is the primary global example: since 1997, EU member state airlines have held full cabotage rights within the single aviation market, meaning an airline certificated in Ireland can carry passengers between Paris and Berlin. The United Kingdom and New Zealand exchanged Eighth Freedom rights in 2005, though the agreement is functionally symbolic given the geographic distance between the two countries. No U.S. Open Skies agreement, among the 140 listed bilateral and MALIAT partner jurisdictions (as of March 2026), includes cabotage rights for foreign carriers.

Open Skies Agreements: What They Do and Do Not Allow

The United States maintains Open Skies agreements with over 130 partner countries and territories, as listed by the Department of State. The DOT's current list of Open Skies agreements being applied includes 140 bilateral or MALIAT partner jurisdictions, plus Vietnam under cargo-only authority (as of March 3, 2026).

Open Skies agreements provide for unrestricted route rights, capacity, frequency, and pricing on international services between the signatory countries. They do not grant cabotage rights. The EU-US Air Transport Agreement of 2007—the single most commercially impactful Open Skies agreement—allows any EU carrier to serve any U.S. gateway and vice versa, and grants U.S. carriers the right to fly between two EU points as a continuation of a U.S.-originating flight (a form of Fifth Freedom). However, EU carriers cannot operate flights solely between two U.S. points.

The Phase 2 Protocol, signed in June 2010, attempted to link progress on U.S. foreign ownership liberalization to EU concessions on environmental noise restrictions. The EU delegation sought U.S. Congressional action to permit majority foreign ownership and effective control of U.S. airlines. The U.S. delegation acknowledged that "changes in ownership and control of US airlines remain a sensitive topic and would require Congress to revise US law" and that "there currently appears to be no political support to change US laws regarding ownership and control of airlines" as of 2015.

The Norwegian Air International Case

The Norwegian Air International (NAI) application tested the boundary between the foreign ownership restriction and Open Skies obligations. NAI, a UK-registered subsidiary of Norwegian Air Shuttle ASA (Norway), applied for a U.S. foreign air carrier permit in December 2013. The application was opposed by Delta Air Lines, United Airlines, American Airlines, Lufthansa, SAS, Air France/KLM, and multiple labor organizations, which argued that NAI was using UK registration as a "flag of convenience" to circumvent Norwegian labor laws.

The DOT spent over two years reviewing the application. In April 2016, the DOT issued a show-cause order tentatively granting NAI's permit, concluding that under 49 USC § 41302, it was required to grant a foreign air carrier permit if the applicant was "fit, willing, and able" to provide the proposed transportation and if the applicant's home country had a bilateral agreement with the U.S. covering the proposed services. The DOT issued the final permit in December 2016.

The NAI case is distinct from the foreign ownership restriction because NAI was applying as a foreign air carrier, not a U.S. air carrier. The question was not whether NAI met the 75% U.S. ownership threshold—it did not, nor did it need to. The question was whether the DOT could deny a permit to a carrier properly certificated under an EU member state's authority and covered by the EU-US Open Skies Agreement. The DOT determined it could not.

DOT Enforcement of Cabotage

DOT enforces the cabotage prohibition through civil penalties. In a 2011 consent order, the DOT imposed a $20,000 compromise civil penalty on Cameron Air Service, Inc., a Canadian charter air taxi operator, for carrying two passengers between Teterboro, NJ (TEB) and Boston, MA (BOS)—two U.S. points—aboard a foreign civil aircraft for compensation. The DOT found that this constituted cabotage in violation of 49 USC § 41703 and also an unfair and deceptive practice under 49 USC § 41712.

The case illustrates the strict application: even a single segment between two U.S. points by a foreign-registered aircraft for hire triggers the prohibition, regardless of whether the overall trip originated or terminates outside the United States.

International Comparison: Canada's 2025 Reform Proposals

The Canadian Competition Bureau published its market study report, "Cleared for Take-off: Elevating Airline Competition," on June 19, 2025. Among its seven recommendations, three relate directly to foreign ownership and cabotage:

• Recommendation 5: Increase the single-investor foreign ownership limit for Canadian airlines from the current 25% to 49%.
• Recommendation 6: Allow up to 100% foreign ownership for a new class of domestic-only Canadian airlines.
• Recommendation 7: Work with partner countries to remove cabotage restrictions, allowing airlines from approved countries to fly domestic routes within Canada.

The Bureau found that Air Canada held 48% of domestic passenger share in 2024 and that "foreign ownership restrictions limit competition" by making it harder for new and smaller airlines to access capital from international investors.

Canada's existing foreign ownership limit of 25% for a single investor mirrors the U.S. voting interest threshold. The Bureau's proposals represent the most detailed government-commissioned case for foreign ownership liberalization and cabotage relaxation in a North American context to date. No comparable U.S. government agency has published similar recommendations. The International Association of Machinists and Aerospace Workers (IAM) opposes the proposals, arguing they "threaten to unravel the very infrastructure that sustains Canada's aviation sector."

Implications for Airport Operators

Foreign ownership and cabotage rules define the pool of carriers eligible to serve U.S. airports. Several specific intersections with airport finance and operations merit attention:

Tenant Pool Constraints

Under the current framework, only airlines meeting the 49 USC § 40102(a)(15) citizenship test may hold a U.S. air carrier certificate and operate domestic service. This limits the domestic tenant pool to carriers capitalized primarily with U.S. equity. The 49% total equity cap restricts (though does not eliminate) foreign capital available to U.S. airlines. The ICLG's 2026 Aviation Laws and Regulations report notes that several structural limitations differentiate foreign from domestic operators, including "restrictions on revenue traffic solely between two US points" and "limitations on foreign control of US airlines and preservation of US citizen ownership and actual control of US certificate holders."

International Gateway Traffic

Open Skies agreements directly affect international enplanements. The DOT's list of 140 Open Skies partner jurisdictions represents the market-access framework that determines which foreign carriers can serve U.S. gateways without bilateral capacity restrictions. The Open Skies Coalition estimates that Open Skies agreements save passengers $4 billion annually on U.S.-international routes and support over 15 million U.S. tourism and hospitality jobs.

Carrier Certification and Fitness Monitoring

Airport operators with airline use agreements tied to carrier certification status may wish to monitor DOT fitness determinations. The DOT Air Carrier Fitness Division evaluates applicants for U.S. citizenship, managerial competence, financial fitness, and legal compliance. Under 49 USC § 41110(e), a carrier must remain "fit" to retain its authority. The Virgin America proceeding demonstrated that the DOT may impose conditions on a carrier's certificate that affect governance, management, and commercial arrangements.

The Legislative Status Quo

Changing the foreign ownership thresholds in 49 USC § 40102(a)(15) requires an act of Congress. The FAA Reauthorization Act of 2024 (Public Law 118-63), signed May 16, 2024, did not amend the foreign ownership provisions. The EU-US Open Skies Phase 2 discussions acknowledged that "there currently appears to be no political support to change US laws regarding ownership and control of airlines" as of 2015, and no subsequent Congressional action has altered this assessment. The cabotage prohibition in 49 USC § 41703 has not been amended since its recodification.

Restriction	Statute	Threshold	Last Amended
Voting interest	49 USC § 40102(a)(15)(C)	≥75% U.S. citizen	1938 (original); recodified 1994
Total equity (administrative)	DOT interpretation	≤49% foreign	1991
Management	49 USC § 40102(a)(15)(C)	President + ≥2/3 board U.S. citizen	1938; recodified 1994
Actual control	49 USC § 40102(a)(15)(C)	Case-by-case DOT test	Ongoing DOT precedent
Cabotage	49 USC § 41703(c)	Foreign civil aircraft prohibited	1958 (Federal Aviation Act); recodified 1994