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Obama and aviation policy: next moves for airlines, airports, airways – and Boeing

14-Nov-2008
US President-Elect, Barack Obama
US President-Elect, Barack Obama
  • A failed system in need of surgery – not more bandaids;
  • Working from a clean sheet – protectionism leads to failure;
  • Airlines: The first priorities;
  • Playing hardball: President Obama’s great opportunity;
  • But it will require courage – and reliance on the special circumstances;
  • Sorting out the mess at home;
  • Airport Privatisation;
  • Airways, the Federal Aviation Administration and security;
  • The Outlook: President Obama has a once in a generation opportunity.

When President Obama first places his feet on the table in the Oval Office on a cold January day next year, he will have two great advantages in his policy portfolio.

First of all he is new and, until a mere few months ago, largely unknown; with that comes a certain freedom and an ability to apply a new style to whatever he does. He will be forgiven a few foibles in his early days.

Secondly and more importantly, he will already be in the midst of the biggest economic crisis ever to face the US and the world. That delivers him an unparalleled opportunity for policy pragmatism. If the Republican administration can foreshadow the death of capitalism, then a Democrat can surely also act in ways that are freed of the normal constraints of party dogma.

Deliverance from the current trauma will not be achieved by blindly applying old idioms. And an anxious populace will already be inured to innovative policy initiatives, which may or may not be successful. The boundaries for action - and for error - are greater in these conditions.

One concern often raised by his opponents during the seemingly endless election process was that Senator Obama lacked experience. He now has two years of election experience under his belt as well. To survive that and win - even with the help of a failing economy and a dubiously qualified opposition team - adds a dimension that wasn't there before.

Also, against that supposed inexperience, he is extremely bright, politically attractive in almost a Kennedy way and, critically, is apparently willing to listen to his advisers, of which he has gathered a highly qualified team.

If they too are liberated by the new condition and President Obama is prepared to listen, the outcome could be surprising on many fronts. One or two of those advisors know something about aviation too.

In the maelstrom that is government at present, aviation will unlikely rank top of his priorities. That said, it should be remembered that 30 years ago it was a newly-elected Democratic President, Jimmy Carter, who, in search of a "quick fix" to anchor his presidency, rushed through as his first priority: nothing less than airline deregulation, domestically and internationally.

All that to suggest that reviewing the incoming President's track record on key issues, or at the classic Democratic knee-jerk policies for an indication of where he will head in 2009 may be of little more than historical interest.

There may be surprises. In fact if there are not, it will be surprising.

A failed system in need of surgery - not more bandaids

When the new President does turn his attention to the aviation industry, he will find a system which would scarcely do justice to an emerging third world country. It is riddled with failed airlines, many of which offer service levels that would be wholly unacceptable in a developed country and few of whom justify their existence by generating financial returns.

The country's airports number among the worst in the world, in terms of quality of infrastructure and of passenger friendliness. And its airways system stumbles along, bereft of investment, looking for patch-up solutions where revolution is needed.

Yet, out of this morass have come some of the most innovative and creative industry initiatives, since adopted across the world, mostly for the better.

Were it not for the US' insistence that liberalisation of air transport was critical to economic and social development, the still-ugly level of government intervention in the industry would be manifoldly uglier.

A small handful of visionaries in the US government have continued to battle over the past decade for what is valuable, rather than what is politically comfortable. Many millions of air travellers would not have got off the ground; the world would be a very different place, mostly for the worse, had it not been for the US leadership in this area.

But domestically, deregulation seems to have gone off the rails. Good old fashioned protectionism and union rear-view-mirrorism generally prevail. Foreign ownership of airlines is strangled, even though it could breathe life into the industry, Chapter 11 bankruptcy laws create, and later regurgitate, walking-dead airlines; airport security and infrastructure make air travel a hassle to be avoided if possible. Hardly where an industry with such a great tradition in the US should be positioned.

Working from a clean sheet - protectionism leads to failure

So, President Obama, when you come to looking at the air transport industry, you will have a clean sheet to work from. And a patient that is drastically in need of surgery. If the next four years consists of more bandaid "solutions", the US' global superiority in this field will be gone for ever.

Agreeably too, if you choose to do so, you will have the opportunity instead to provide leadership to the world, by freeing the international airline network from the shackles that condemn it to penury and under-investment.

You have only to listen to one of your more prominent advisers, who both knows a bit about aviation and has some strong views on its current framework. Warren Buffett is on call. He has been there and seen it. He doesn't want to go back, at least not until something is done about to revitalise the industry. As he observed in one of his more generous moments in 2002, "You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success."

The Sage of Omaha might have added another reason for the intrinsic failure of the airline model as an investment: the fatal attraction of governments to intervene whenever possible. The fluttering "flag" on the airline's tail stimulates all sorts of anti-commercial economics. Just like steel production and the car industry, "social" and political overtones drench the prospects of sound investment opportunities. And generally provoke excessive - or, at least, inappropriate - supply.

The driver? Protectionism, of one kind or another.

That is the area where a new President will need to look hard if the US system is to prosper in the future. And take bold, prompt action.

I. Airlines: The first priorities

(1) North Atlantic Open Skies

From a global perspective, nothing can be more important than completing the exceptional work done so far on removing regulatory restrictions on the North Atlantic.

This is urgent, as the next phase is due to be signed off in a matter of months. But it is also dramatically symbolic.

By providing for the world a clear statement that the two most powerful aviation forces, the US and the European Union, are jointly prepared to overthrow six decades of regressive protectionism, they can create a new operating environment which promises to be sustainable and very much in the public interest.

Yet the tough bit is still to come for the US. As the emphasis swings towards the Americans to drive the agreement forward, by offering (reciprocal) concessions on foreign ownership of US airlines and the right to fly domestic routes within the US as part of international service, some sacred cows loom into the headlights.

So far the only step towards relaxation of the US' protective rules has been the "concession" granted to Virgin America on ownership. That costly and protracted process could hardly be considered liberalising and, unfortunately, may well have helped reactive forces to align more solidly. Certainly, together with the debacle of the rejection of the Dubai Ports World investment in the British company P&O's US ports, the US emerged with its reputation for liberalism and free enterprise seriously challenged.

Such proposals will now come up against the ingrained opposition of the all-powerful Democrats who, apart from comfortably winning the Presidential election, also increased their majority in the Senate and the House of Representatives. In fact, it is not only the Democrats who are reluctant to permit foreign ownership of essential infrastructure like airlines.

Typically, Senators and Congressmen of both parties have opposed change - on the often spurious and murky grounds of national security. It was Congress, rather than President Bush himself, that successfully drove opposition to the Dubai Ports World takeover, supposedly on the basis of security issues.

If Stage Two of the Open Skies Agreement fails, the whole package may at risk. There are also questioning voices in Europe - historically a bastion of aviation protectionism. If the US now seeks to play hardball, voices would be raised in Europe in support of winding back the entire process.

That would be disastrous as a global example. It would also seriously undermine the interests of several major US airlines which have for example profited from the opening up of London's Heathrow Airport to more services (not to mention the interests of travellers and the respective economies).

Playing hardball: President Obama's great opportunity

The typical approach in these circumstances is for each side to play hardball. The Europeans, trading on the hope that carriers like Delta and Continental will support Phase 2, as their establishment at Heathrow will otherwise be challenged, will hope to use this edge to make the foreign ownership inroads. The US, meanwhile, will be pushed by the reactionary forces at home, both in principle and in Congress, to resist change.

President Obama here has the unique power, almost with a single (brave) stroke, to sweep away the trappings of an archaic system and, most probably, to revive a floundering US airline industry. The example to the rest of the world would be deafening.

By contrast, submitting to the entrenched forces of inertia will set the world's aviation development back by at least five years.

More importantly for the US, that would spell doom for the long term interests of its home grown airlines. They would miss out on the positive moves being taken in Europe, as Air France-KLM, Lufthansa and its various "partners", British Airways and Iberia combine, surely to be followed by others. US airlines would become more isolated as international forces and, as the US domestic system implodes, set themselves up for even more drastic solutions in the future.

But it will require courage - and reliance on the special circumstances

Inevitably, protectionist sentiment will be fed by spiralling US unemployment figures and the impact of foreign ownership on job prospects. The country has recently been rocked by the machinists strike at Boeing (supported by Senator Obama during his election campaign), focusing attention on what it might mean for terms and conditions of employment under foreign ownership.

Large labour groups like the machinists, who have raised alarms about losing jobs to offshore construction and maintenance facilities that promise to do the job more cheaply, have immense power if they are given a mere hint of encouragement - even if their demands are impractical and unrealistic, as Boeing seeks to defend its market share in a global marketplace.

There will be many voices raised against any creative initiative by the new President. That is precisely why prompt action, in the heat of an economic meltdown, is the solution.

(2) Sorting out the mess at home

Many of the same prejudices and inertial forces guide policymaking at home too - garnished with the difficulties of persuading a reluctant Justice Department that new competitive principles may be necessary to permit consolidation of the industry. Or, at least, a legislative recognition that Chapter 11 is not the source of solutions for long term sustainability.

Perhaps the greatest danger, where there is serious talk today of a bailout for the car industry, is that such thoughts would overflow into the airline industry. Propping up ailing dinosaurs is not conducive to health, at least not for the potentially healthy survivors.

But something significant is necessary here too. Much of the US airline fleet is geriatric and, relative to foreign competitors, US airline orders for new aircraft point to a substantial decline in global influence. Moreover, most of the current orders are for short haul, twin aisle aircraft, and therefore unsuitable for transcontinental operation.

If US airlines are not able to fund the purchase of new aircraft (and in current circumstances they are not), they will neither be able to fulfill competitive aspirations, nor will they be able to meet environmental requirements which will soon apply, even, surely, in the US.

President Obama, we would not presume to advise what you should - or can do - in your own backyard, other than to note that this is not a time for soft solutions, which only pass the problem forward, increasing its scale with every day that passes.

II. Airport Privatisation

There has been little speculation about the incoming Administration's likely attitude towards airport financing, which is yet to register on the radar. US airports, like the airways system, are drastically underfunded and have become even more inadequate as draconian security measures were overlaid on them since September 11.

The result has been an air travel experience which has persuaded many travellers to resort to surface transport alternatives. US airports, run typically by local councils, with private investment by airlines, have become generally unattractive and uneconomic pieces of infrastructure.

Airport privatisation outside the US has not been universally praised as a concept in action. But certain features have tended to emerge. Where adequate regulation (of charging, master planning and associated aspects) is in place, the quality of infrastructure delivered has generally exceeded the government-delivered standards - especially when the level of government is local.

So the Pilot Programme Privatisation of Chicago's Midway Airport has become a focus for attention.

Despite the fact that Chicago is the President-elect's home city, he is not known to have made any statement about the privatisation of the city's second airport. This trial case is already virtually delivered - save for a potential Congressional investigation.

But the new President is unlikely to do anything to hamper a measure that is Mayor Daley's top priority at the moment. In fact, on the scale of current dramas, airport privatisation is unlikely to receive detailed attention at all. As a result, any future airport transactions and foreign ownership concerns are more likely to be driven at the Congresssional, rather than Administration level.

One possibility is that a protectionist-leaning Congress will ask more questions about Midway than they might have during the Bush regime, meaning that any future privatisations will be subject to even greater scrutiny.

This is only a limited threat, as the next airports potentially in line each appear to be keen to embrace the process. But, in any event, these are still part of a "pilot" programme. A wholesale privatisation move will take time to get underway, especially in a difficult economic climate.

Alternatively, local council owners, increasingly challenged by economic conditions, may actually be more likely to actively seek privatisation for themselves, if the capital return outweighs the benefits of the existing federal support programme.

If, over the next couple of years, this form of real estate proves more attractive than investment in the share market and debt becomes both cheap and available the pressures for more widespread adoption of private ownership could actually intensify.

So, Mr President, you should not be under pressure in this area, provided the Chicago Midway pilot does not fall on its face.

III. Airways, the Federal Aviation Administration and security

Unfortunately the same cannot be said of the US' sadly decrepit airways system. Almost everyone agrees that drastic action is necessary.

When it comes to airways infrastructure and air traffic controllers, more intractable problems present. They are relatively simple problems. They can mostly be fixed with money. In the case of the airways system a true fix means a generation change - and the dollars to match, but Congress has so far been unwilling to take the deep breath necessary for that.

More air traffic controllers are needed, with a large bulge of retirements imminent as the controllers appointed in a surge when President Reagan took on the union 20 years ago move on. Meanwhile, controllers are retiring at a higher rate than previously projected.

Under the current administration the Democrats have criticised the underfunding of basic needs, such as the hiring of new control tower operators and inspectors. On his election roll, Senator Obama made it clear that a key plank of his aviation policy will be addressing this problem.

Not only has he promised more air traffic controllers, he has sponsored legislation to force the FAA to return to the bargaining table with the National Air Traffic Controllers Association, NATACA. Controllers have been without a contract for nearly two years, even as many older colleagues retire.

In a statement outlining his transportation policies, the candidate stated he would direct the FAA to "restore morale and improve working conditions and operations at the agency." The new President will have to foot the bill for that. NATACA has thrown its weight behind the incoming President, so he must deliver, or face real turbulence in the airways.

More fundamentally - and much more problematically - a large piece of legislation to fund the FAA's USD20 billion "NextGen" ATC system has been stalled in Congress for more than a year while the FAA operates under temporary budget extensions. If federal government funding is not available there may be other options.

But Senator Obama strongly opposes putting ATC in private hands and this is anyway hardly an ideal time to contemplate such a massive undertaking coinciding with a difficult privatisation process. Corporatisation, by contrast, has many good examples of successful operation elsewhere in the world. But that still means that the sole shareholder - the government - must provide the capital for development.

More positively, the President-elect has supported increased numbers of federal airport screeners and improved funding for aviation security. He also supports preserving the Essential Air Service programme, a subsidy that has continued well beyond its original expiration date because of support from members of Congress whose districts might be left without any scheduled flights without it. Again, these activities all cost money. The competition for funds will make this task more complex, once the candidate is in office.

The Outlook: President Obama has a once in a generation opportunity

The incoming President Obama has a once in a generation opportunity to take some major initiatives in the aviation sector.

Internationally, that includes most importantly completing the Open Skies process initiated by his predecessor. Dropping that ball would be near-unforgivable.

With courage and a willingness to pursue what every objective observer knows to be necessary, the new President can achieve, almost at one blow, the resurrection of the US airline industry (but yes, that does imply some element of prior death).

Action however must be prompt, as long as his key advantages - of novelty and freedom from dogma presented by economic crisis - remain.

There will be many other major demands on his time, as there will be on the taxpayer's wallets.

This time though, the price of a backward step will almost certainly ensure the irreversible terminal decline of the US air transport industry. To avoid politically difficult decisions such as foreign investment rules and the delivery of massive levels of funding would achieve just that.

We welcome your thoughts on this report and on President Obama's options and likely actions. Please advise us if you would prefer your opinions to remain private. Contact us: publications@centreforaviation.com


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