Several vital policies in aviation can trace their roots back to the Chicago convention of 1944. The convention saw participation by fifty-four countries and led to the establishment of the International Civil Aviation Organization (ICAO) which continues to act as the global multi-lateral policy body for aviation. A key foundational principle that emerged was that of substantial ownership and effective control (SOEC).
The substantial ownership and effective control provision stipulate that a country’s airlines must be owned and controlled by local interest. This can be traced back to US domestic law that required US airlines to maintain 51 percent of their voting shares under US ownership and to ensure that 66 percent of the members on the board of directors were US citizens.
The important reasons for this law were to protect the airline industry – a jobs multiplier; to alleviate safety concerns about access to US airspace, and also because during war-time the US military can call upon civilian airlines for airlift capacity.
In both, the US law and the Chicago Convention, state sovereignty is an overarching theme. As such, SOEC became and continues to be an expression of state sovereignty. It is also a key regulatory barrier that serves as a source of significant competitive advantage by limiting market access.
Developed countries continue to abide by stringent SOEC norms while pushing for “dilution” of this clause elsewhere. The US continues to have some of the most stringent norms with foreign ownership limited to 25 percent the European Union in spite of the common aviation market did not dilute SOEC or supersede SOEC rights of member states and has ownership limited to 49.9 percent; Japan limits ownership to 33 percent; Canada limits ownership to 49 percent and Israel limits ownership to 34 percent.
China too has a restriction of 35 percent ownership that is further aided by other access barriers including language and policies.