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Moves to restrict Gulf airlines a backward step for aviation liberalisation

13-Apr-2011

While open skies regulations continue to break down barriers, airlines must work to overcome other barriers such as slot constraints and other issues that distort competition in order to forge a competitive position, according to panelists speaking at two sessions of the Phoenix Aviation Symposium last week.

Alliances, too, are breaking down barriers and helping airlines compete but moves to restrict competition from the Gulf states is setting back worldwide liberalisation.

Conference attendees completely rejected calls by the Association of European Airlines to create a capacity cop at the International Civil Aviation Organisation, saying that an economic role does not fit with its regulatory mandate.

The latest round in the West/Middle East spat occurred a few months ago when Secretary General Ulrich Schulte-Strathaus excoriated the Gulf carriers for unfair competition in a speech that made the decades-old Airbus/Boeing trade war look like a kindergarten tiff. He objected to governments from the Persian Gulf using their aviation industry as an instrument of international commercial policy, as if US and Europe have never done that. Indeed that is the entire purpose of open skies.

Emirates' Senior Vice President Public, International and Industry Affairs, Andrew Parker, described Emirates open skies progress as one step forward and two steps back and then two steps forward and five steps back.

The UAE has signed 65 open skies agreements to date with another 20 expected this year. He cited the government’s recognition that aviation is a huge part of the economy, 25% is aviation related. However, attendees did not expect the EU to be given a mandate to negotiate open skies with a Gulf state such as the UAE or Qatar before “the Chicago Cubs won the World Series and the lottery in the same day”.

He expressed some optimism, even so, citing the fact the UAE often expects more resistance than they actually encounter when it works to forge new agreements. Progress is being made in the former Soviet sphere, Asia and Africa, he said.

“However, I have some larger concerns,” he said. “My job is to wake up and see what Lufthansa is accusing us of today. Our concern is that many world leaders will resort to protectionism that will push back progress for open skies further. Unfortunately, we saw that happen when Lufthansa pressured the Austrian government to restrict us in Vienna where Lufthansa is now the owner of Austrian. We wanted a second daily service. Lufthansa wanted to block Gulf carriers, saying it has serious doubts about the future of Austrian if the government didn’t block us. There is evidence that competitors want to stop competition and want to build walls of protectionism.”

Mr Parker noted that while Lufthansa may complain that Emirates receives export financing to acquire Airbus aircraft, Lufthansa received EUR500 million in state aid to buy Austrian. “There are many cases of subsidy,” he said.

US State Department Deputy Assistant Secretary for Transportation Affairs Kris Urs said several major markets remain in US sights in addition to China, including Russia and South Africa. Having inked its 101st agreement last year – 18 years after its deal with its first partner, the Netherlands – he noted the broad coverage in Europe, Asia and Africa with 70% of passengers flying to open skies partner countries.

Mr Urs also cited the recent success in a formerly intractable market of Latin America. In addition to the recent addition of Colombia and Brazil to long time open skies partners Peru and Chile, the US would like to add the Dominican Republic and Argentina in the region. While it has a trade agreement with Mexico, it remains one of the countries high on the US wish list, along with China where it will have discussions in August. South Africa is also high on that list along with Russia. In the meantime, it is talking with several Balkan states and is awaiting more stabilisation in Egypt before proceeding there.

The US is also is seeking an increase in liberalisation beyond the cargo agreement it did with Vietnam and has talks scheduled for this year. It is also seeking a deal with the Saudis, he said, adding that the Philippines recently reversed its opposition to open skies with the US.

For its part, Europe has three conditions for open skies including real liberalisation with air transport having proved to be a success, according to French Embassy Sustainable Development and Transportation Counselor Thierry Buttin. However, other economic sectors have not been as successful as aviation. There also has to be a balance between markets with good opportunities for each partner. Finally, he pointed to regulatory harmonisation. First priority is doing agreements with those in the immediate European neighbourhood and then extending agreements around the Mediterranean.

“The other mandate is big markets,” he said, adding he contemplates discussions with Japan now that ANA and Lufthansa have applied for a joint business. “We have strong debates on China and would also like to have relationships with some countries in Africa, including South Africa.”

The EU-Japan regime remains very restrictive, according to ANA Vice President International and Regulatory Affairs Hitoshi Kawahara.

“Our joint venture with Lufthansa will be a challenge but we have copied the procedures of our US partners did with their European partners,” he said. “If you look at the EU-Japan market, only ANA and Lufthansa have very limited shares. We can start with that.”

Mr Buttin cited Europe’s experience with the US-EU ATI but, given its power as a competitive tool, the Lufthansa/ANA deal may have problems depending on whether competitors have the same opportunities to establish similar agreements. Europe worries that would distort the market.

“I find it difficult to see that Europe would allow that imbalance,” he said. “Maybe we’ll take a two-step approach first dealing with the Lufthansa and ANA and then take a step with open skies. The key issue will be ensuring everyone has a fair and equal opportunity.”

Panelists extol alliances

Alliances are the best thing next to a merger, according to a panel at the Phoenix Symposium. However, if a miracle happens and foreign ownership laws change in the US, alliances will change dramatically to continue the consolidation of the global airline industry. However, it will likely take a massive crisis to overcome the labour and other objections that now constitute the barriers to change, at least in the US.

A poll of the symposium audience indicated 76% thought alliances were better than interlining but was a significant step down from travelling worldwide on a single carrier. A slight majority also said that alliances do not hurt consumers and, in fact, are a must for frequent flyers whose mileage collection constitutes the most important benefit for consumers.

The audience also indicated while the alliances will probably grow there will always be room for non-aligned carriers which will be a necessity in order to keep alliance power in check. Interestingly, the audience indicated that the power amongst the three alliances will likely tilt toward Star in the future, largely on the theory that the biggest get bigger.

Virgin Atlantic Director Commercial and Revenue Planning Edmund Rose suggested alliances were here to stay as a proxy for cross-border mergers, despite the fact his airline opposes them. The current, big-three alliances -- Star, SkyTeam and oneworld will maintain their current shape for the foreseeable future. The question, he said, is whether they will grow and that remains to be seen.

He also questioned whether there were alternatives to alliances noting that interlining is far from dead as illustrated by Virgin’s many such relationships, including with those airlines that are members of alliances. It also has nine codeshare partners.

American Airlines Senior Vice President Government Affairs Will Ris did his usual riff on the irrationality of governments that would prevent cross-border mergers. “Imagine,” he said, “you had a country in which there were two towns that prohibited marriage outside of each town but all the pretty girls were in the other town. That’s what we have here in which the only fulsome mergers can occur within a single country. We have created something unique among global industries.”

Air China Vice President and General Manager North America Zhihang Chi,, agreed. “Alliances are the weirdest creature in the industry,” he said, noting Air China was part of the Star Alliance. “We can look and touch and probably go much further but we can’t talk. So in the end the two most important things we can’t talk about – price and schedules – are off limits. For that you have to have ATI. Even so, you can pick and mix by working with others outside the alliance such as JetBlue because there is no one in Star that is strong at JFK. Alliances, for me, are a means and I think it is good for consumers who want the through checking and the frequent flyer programmes. Alliances are here to stay. We have to have some way for airlines to work together and provide benefits for consumers.”

It was clear from Mr Chi that Air China would not be part of an antitrust immunised joint venture because they are predicated on open skies which China not only does not want but has no need for.

“We don’t need it today,” he said citing the US visa rules as a major factor. “We have so many unused frequencies. We can’t get visas for Chinese passengers so they can’t travel to the US even though it is the number one most desired destination. Without visa liberalisation, we don’t have enough passengers to fill the airplanes so we just don’t need open skies.”

Despite his rejection of open skies, the panel suggested that it is still probably only a matter of time. “This is a marathon,” said Mike Korens, who moderated the open skies panel. "The more important the market the longer it takes.”

The panel suggested that opens skies acts as a catalyst for liberalisation not only throughout the two economies but also in beyond markets. Mr Korens noted that is what happened when the US and Japan finally cut their deal not too long ago.

Mr Kawahara said that open skies included a visa waiver program for Japanese visitors to the US.

Mr Chi also pointed out the significant cost of joining an alliance noting the dozens of requirements to join Star. “It means a heavy up-front investment; an entrance fee in the millions if not bigger. Also running an alliance is a huge undertaking in which the systems have to be able to talk to one another.” He pointed to JetBlue as being in the sweet spot at JFK and Air China definitely wants to work with the JFK-based airline. “But even then you have a lot of issues on the IT side which requires an investment of money and manpower to accomplish.”

Members of the audience said the best outcome for consumers would be to stabilise on the three alliances complemented by the independent carriers to keep alliances in check.

Interestingly, while alliances were seen as a way to create synergies, lower costs and develop purchasing power to counter the duopolies that make up the airframe and engine industries as well as in dealing with airports, they will never achieve total cost reduction. Panelists pointed out that flight assignments may be metal neutral, they do not go to the most efficient operator because of the necessity for compromise to accommodate labour concerns.

“The reality is that another element that is important for success is the need for employees to buy into the proposition,” said Mr Ris. “In most alliances, the flying is done on the basis of historical flying which does not result in the lowest cost producer doing the flying. Employees need to have assurances that at least their portion of the business will not chance and they will have a job. That’s a reasonable compromise that brought all the parties together. From a pure economic point of view it may not be the smartest way to do it but we had to make that compromise.”


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