Airlines argue for the same commercial freedoms as other industries
Wednesday 26, January 2011
Airlines have never returned the cost of capital. Many cite consolidation as part of the solution. But this has never been viable internationally in a hyper-fragmented market governed by antiquated regulations. A global industry needs global rules.
Pre-World War II, aviation was completely liberalized. When the bilateral system evolved in 1945, state security was paramount and air transport carried only nine million passengers a year. Governments owned airlines, and national rights over routes had at least some logical consistency. Today, well more than two billion passengers fly annually. Globalization has diminished nationalistic concerns, and over-regulation has become synonymous with the industry.
Many countries still limit foreign ownership of airlines. In the United States, even with a market deregulated since 1978, US airlines must be at least 75% owned and controlled by US nationals. The ownership issue has become a big problem, and is the crucial ingredient in liberalization. Relaxing ownership would mean there is little point in protecting domestic or seventh freedom rights, which allow airlines to operate between two foreign countries without any continuing service to the airline’s home country.
By comparison with aviation, in most countries, other industries that could be construed as equally vital to national sovereignty, such as telecommunications, have been freed to merge or seek investment across borders.
Airlines don’t have to be big to survive, of course. Smaller carriers will continue to play a vital role. In his Vision 2050 speech, IATA Director General and CEO Giovanni Bisignani says aviation “will be a consolidated industry of a dozen global brands supported by regional and niche players”.
Airlines argue only for normal commercial freedoms. But it is worth noting that consolidation in other industries was a response to conditions clearly identifiable in aviation; margins were thin, revenues precarious, and investment hard to find.
Aviation Consultant Hubert Horan explains: “Material cross-border efficiency gains occur in two cases. One is short-haul (non-intercontinental) airlines whose home markets are too small to support efficiently scaled operations. The other is intercontinental links where connecting traffic beyond the gateway hubs is much larger than gateway O&D traffic on both ends of the intercontinental flights.
“There would be huge efficiency gains if the short ‑haul model could be fully applied to Southeast Asia, the Middle East, Africa, and other regions with many small home markets,” he adds.
Although Horan questions the rationale and success of many airline consolidations to date, most commentators believe that consolidation is integral to the future sustainability of the industry.
“Consolidation is good for this industry,” says Doug Parker, US Airways CEO. “It’s something that needs to happen, will happen, and will result in a much stronger industry.” Parker says a fragmented industry means higher costs, making profits hard to come by and putting jobs at risk.
While regulatory restraints remain, for airlines intent on merging, integrated alliances and joint ventures—especially those with antitrust immunity—could provide a way forward. There seems to be a relaxation in government attitude, which would allow airlines to better manage capacity and price optimization. Ironically, while alliances help to move consolidation forward, they may suffer if mergers become more likely.
“The lines are being drawn,” suggests David Savy, Air Seychelles CEO. “There will be some mega-carriers in Europe such as British Airways-Iberia, Air France-KLM, and Lufthansa. Partnerships will be formed in the Gulf and Asia will follow. The United States is already in this process. Other carriers will disappear or become smaller niche players.”
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