Transport Airlines

How History May Be Hampering the Airline Industry

Jun 02, 2014 10:00 am

Skift Take

Old regulation do have a way of hampering moves forward, but they can also contain speed bumps that can keep things from changing so fast that we’re not really aware of the cost.

— Jason Clampet

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On New Year’s Day, 1914, Abe Pheil squeezed into the open cockpit of a Benoist Type XIV boatplane in St. Petersburg, Florida, and became the world’s first airline passenger, flying 20 miles in 23 minutes for a specially auctioned fare of $400.

Last year three billion people followed in his footsteps.

But while the first century of paid flight has transformed the passenger experience from a bone-shaking wooden biplane to frills such as flat beds, for many investors it provides the same risk of getting wet as the original hop across Tampa Bay.

Global airlines are set to make $13 billion this year, but a centennial gathering in Doha this week will hear that margins remain thin and the industry has rarely if ever covered its cost of capital since the original St. Petersburg-Tampa Airboat Line.

At the heart of the problem is a debate about whether a unique system of ownership controls and bilateral agreements, which make it hard for airlines to combine, should be relaxed.

“We as an industry wish that we were treated like any other industry and were able to buy and sell across borders, and merge and do business like any other business,” said Tony Tyler, director general of the International Air Transport Association, whose more than 200 members are meeting in Doha until June 3. [See more from Tyler at IATA here: "The State of the Airline Industry, 100 Years In"]

“After 100 years, we haven’t found a way of doing that and governments haven’t found a way of letting us do it – not yet,” he told Reuters ahead of IATA’s annual meeting, where a replica of the first boatplane has been given pride of place.

About 3,000 people gathered to watch the original plane make the first scheduled flight, which took place a long way from the storm clouds of conflict gathering in Europe.

But experts say the background to today’s ownership debate lies in decisions taken after the last century’s wars, when airspace was deemed sovereign partly due to fears of militarization. The alternative, treating the sky like the high seas, was rejected.

Those fears have retreated but the bureaucratic landscape remains, with the industry ruled by bilateral traffic rights limiting market access, and backed up by ownership restrictions that help to preserve more than 1,000 airlines.

Despite extensive deregulation and consolidation in the United States and Europe, airline leaders say ownership barriers are hampering efforts to cope with high fixed costs.

“It is a very fragmented industry because you can’t consolidate across political borders,” Tyler said.

“If you take the rules that run airlines and translate them into another industry, you do get some pretty funny ideas. The consequences seem bizarre, yet those are the ones we work in.”

The sheer scale of the IATA event staged each year is proof of the industry’s dispersal. Without foreign ownership controls, such a summit of industry leaders might look rather different.

“You could have five, 10 or 20 big global brands competing with each other wherever they go, possibly with differing regional strengths in different parts of the world,” Tyler said, asked what the industry would look like with free ownership.

“I am sure you would still find regional airlines would make a tidy living as specialists in particular regions.”

Privately, some airline chiefs put it more bluntly.

“There are quite a few airlines here that just shouldn’t be around,” one delegate said, asking not to be named.

‘I Just See Airlines’

Some IATA members are fighting to repel incursions by foreign airlines into their markets through subsidiaries.

Still, airlines have been creative about getting around the foreign ownership curbs that exist in most of the world’s markets, forging global alliances and setting up powerful revenue-sharing ventures on key markets such as the Atlantic.

Abu Dhabi’s Etihad took a step towards expanding an alternative model based on building minority equity stakes and sharing procurement decisions when it offered a long-awaited tie-up on Sunday with Italian carrier Alitalia.

Others such as Asia’s largest low-cost airline AirAsia, which is not a member of IATA, opt to franchise a single brand through numerous loosely controlled affiliates.

Tyler said the cost structures of low-cost airlines and the traditional network carriers would converge, especially when the time comes to share the cost of new airport infrastructure, and that more non-traditional airlines would be welcome in IATA.

“I see the world differently: I just see airlines,” he said.

ICAO, the United Nations aviation agency, which oversees rules dating back to the 1944 Chicago Convention, last year called for looser control of ownership and more liberalization.

But analysts say that could take decades to achieve.

“Until the laws are changed, which is very unlikely, the industry is not going to change in the way it operates,” said UK-based aviation consultant James Halstead.

(Additional reporting by Victoria Bryan, Siva Govindasamy; Editing by Robin Pomeroy)

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