CAPA offers a top 10 of key areas – some wholly external and, in other cases largely controllable – where airlines and the associated industry will need heightened awareness in this critical year, 2009. If they don’t, they have a good prospect of not having to worry about 2010.
01. The aviation industry at present falls between two existences: (i) the hangover from the historical heavy handed regulatory regime remains pervasive – in foreign ownership restrictions and, to various extents, constraints on market entry, as well as…
CAPA offers a top 10 of key areas – some wholly external and, in other cases largely controllable – where airlines and the associated industry will need heightened awareness in this critical year, 2009. If they don’t, they have a good prospect of not having to worry about 2010.
01. The aviation industry at present falls between two existences: (i) the hangover from the historical heavy handed regulatory regime remains pervasive – in foreign ownership restrictions and, to various extents, constraints on market entry, as well as a host of unwritten prejudices and support that distort fair competition; and (ii) a liberalisation movement where for example new entry is encouraged, where cross-border ownership devices are permitted, with real practical inroads into foreign ownership restrictions;
02. Unfortunately, in a global industry, the coexistence of conflicting regulatory regimes sits uneasily. Taking advantage of one country’s liberalism can raise extensive issues when operating internationally in other markets. Other governments will still object and react to prevent operation. Also, where some competitors are still protected, but others not, there is an obvious potential for disruptive competition;
03. Then, as participants in this uneven system, some older airlines, often government-owned are gradually being left to find their way, despite carrying all the overweight baggage that results from years of intervention and protectionism. They cannot become efficient and will require constant subsidy. These, in reality, need to disappear. They have no commercial future, yet the political pain of letting them fail is still too great to accept;
04. Introducing a consolidation movement – however valuable and necessary that change is – into this environment is clearly fraught with risks. Cross-border consolidation is complex. The global model, Air France-KLM, involves a complicated legal structure that complies with the letter – but not the strict principle – of the law, thus making even it fragile in some of its external dealings. And it is difficult to believe that Lufthansa‘s flurry of new airline investments will be free from extensive political and commercial problems, once the dust settles – yet the carrier is doing what many companies in other industries would do, given a normalised regulatory environment. Meanwhile, as illustrated in the recent failed Qantas-British Airways merger, government insistence on retaining local control of the overall entity, political intervention will continue as a backdrop to all moves;
05. Then there is an array of other complexities that need to be dealt with when airlines want to cooperate. Competition laws for example.
06. Despite the fact that the industry has proven conclusively over many decades that it cannot support financial returns that serious investors need (presumably implying that the competitive framework is too destructive), competition bodies continuously reject or impose unacceptable conditions on cooperative ventures between airlines. British Airways faces protracted competition law issues in several jurisdictions in its proposed transactions with American Airlines and Iberia – and not for the first time;
07. Maintenance of the competitive status quo – by not permitting agreements that cause a reduction in competition – seems perfectly reasonable. Other competing airlines should not be unfairly disadvantaged. But where that status quo does not permit efficient airlines to make profits in the first place, something must be wrong somewhere. And if the result of disapproval is to cause one carrier to go out of business, with attendant pain for many, there is often a case to be argued that cooperation would have been in everyone’s interests – especially at this early stage in the transition from the old system to a new one;
08. Nonetheless, despite all of these hurdles to true consolidation, many airlines will this year attempt some form of cooperation. It is a logical and genuinely necessary adaptation that the industry must make if it is to be truly viable.
Many network airlines – and some LCCs – will try to forge new relationships this year, from operational “mergers”, to full equity transactions. Most will fail.
1. It has often been said that the worst time to try to merge is when there is no other option – because the wolves are closing in. Quite simply, two dogs don’t make a cat;
2. If airlines are indeed forced to cut back on their own capacity and route networks to be profitable, they will need partners to expand their marketing presence. Consolidation offers a logical (but in practice, often unworkable) way of achieving a bigger presence;
3. This, and the current rush to find partners, will stimulate many airlines to look for opportunities, before the options become too limited;
4. Outside Europe, the probability of successful international consolidation in the current receding economic conditions is limited at best. And, even within Europe, it is clear that real complexities remain;
5. At this stage of its evolution, the realistic prospects for consolidation, however necessary, are not good. Airlines will enter them at their peril.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
