President Trump and US aviation. A likely reversion to protectionism
The 45th President of the USA will be Donald J. Trump.
This CAPA analysis considers the impact of his campaign, and now impending presidency, on the aviation and tourism sector, against the background of the election campaign. It is an upadated version of one produced by CAPA in Jun-2016. There is more to the apparent shift in US international attitudes than just Mr Trump's election, as a sweeping dissatisfaction and distrust of “politicians” pervades that country – and others.
Donald Trump’s presidential campaign was marked by a combination of populism, nationalism, protectionism, racism – notably against Mexicans - and anti-Muslim rhetoric. There were also even less attractive elements of his campaign.
Mr Trump’s positions were matched at the other end of the political spectrum – in a more palatable way – by Bernie Sanders, who also played to the populist disillusionment with Washington. The result has shifted the US' national policy fulcrum. For aviation purposes Mr Trump has said and done things that are relevant in several important areas, as outlined below. Protectionism and an erosion of free trade is a prominent risk.
Impacts could be felt in several areas under a Trump administration
Twelve months ago it was unthinkable that Donald Trump would win the Republican nomination to contest the US Presidency, let alone become President. Today, having brushed aside all hurdles, he will in two months be sworn in as the US’ 45th President, in Jan-2017.
The mere prospect of Trump presidency had caused ructions around the world, as foreign affairs and trade ministries tried to assess the impact that he would have - while never really believing that it could happen.
That he is unpredictable is very much part of his media appeal; his mastery and manipulation of social media is inescapable. Mr Trump must also be considered a pragmatist. Given the extreme nature of many of his off-the-cuff pronouncements, and of the “Positions” on his website www.donaldjtrump.com, pragmatism may prove to be President Trump's most positive attribute – at least as far as touches directly and indirectly on aviation.
Indeed a major difficulty in predicting what a Trump administration will do is understanding which of his internationally outrageous statements (“policies”) he would actually plan to implement once he gained power. Many will presumably be diluted or wholly forgotten once he has a responsible team of advisors and a Congress to introduce reality to the populist bombast.
International trade policy is already different since Mr Trump (and Mr Sanders) arrived
It is significant that Mr Trump’s ascendancy (coupled with the impact of Bernie Sanders at the other end of the spectrum) had already shifted the direction of US policy in trade areas, even before his election. Responding to the current mood even Hillary Clinton had been forced to renounce the trans-Pacific Partnership (TPP), which she had previously strongly espoused. It had been a major goal of the Obama administration – itself sufficient cause to provoke extremist Republican opposition.
Unless the TPP proceeds, a US withdrawal after seven years of negotiation will have a huge impact on expectations among the Pacific Rim parties who signed the agreement on 4-Feb-2016: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam.
Agreement had not been easy to achieve, since Asia Pacific governments had extensive concerns in areas such as services (aviation was not included), and many considered the US to be the main beneficiary, once the agreement entered into effect.
Ironically – given Mr Trump’s hard line against China – failure to proceed would please Beijing, which has reportedly felt threatened by the liberalisation of parallel trade flows that the TPP would produce, largely excluding China.
In itself the TPP has no direct bearing on aviation, but from its relaxation of barriers the trade ties generally could be anticipated to stimulate much higher air traffic flows, perhaps adding another 5-10% to existing services and underpinning new route development. These will be lost to the industry, seemingly regardless of who became President.
Open skies, already clouded, could darken further
Following a lengthy softening-up process by the US over the past year, seemingly against any foreign airline that might threaten the status quo, a Trump administration may well revive that populist course.
The publicity that the Big Three airlines’ 'White Paper' attracted globally has created a belief outside the US that open skies is a thing of the past; that liberal attitudes to air access have passed their zenith. Mr Trump's ascension may be seen by many as a signal to revive that movement and a confirmation that these attitudes are mainstream.
Aviation policy typically does not feature high in the priorities of prospective Presidential candidates. Yet the nationalistic appeal of the airline pilots’ unions struck a chord with both populist candidates – both Ms Clinton's and Mr Sanders’ campaigns expressly attacked Norwegian Airlines International’s moves to operate into the US. The often-misplaced arguments fell squarely into the category of appealing to voters concerned for their jobs, and who see all the perceived negatives of foreign trade - without recognising the positives.
For US airlines and the US industry generally this is dangerous territory as it is the US airlines who have – at least in the medium term – the most to gain from liberal market access. The likely overall outcome: slower growth and less foreign airline competition.
Mr Trump’s aggressive stance against China could undermine the US airlines’ potential future largest growth markets
Mr Trump positions himself as a powerful negotiator, something that implies the ability to compromise, albeit in his case with more than a hint of bullying. In practice he is likely to find that foreign governments do not respond well to excessive pressure, so that short term gains might generate retaliation against US firms, who are often well aware of the advantages they receive from free trade. Such pushback will undoubtedly moderate the international rhetoric, but "making America great again" carries with it a momentum that may well outweigh the need for rationality.
His aim is to play it tough in negotiations and fight back against China’s “blackmail', and "...reject corporate America’s manipulation of our politicians…We need smart negotiators who will serve the interests of American workers – not Wall Street insiders that want to move U.S. manufacturing and investment offshore.” (www.donaldjtrump.com)
The US-China bilateral air services access regime is poised interestingly at present. Under US pressure China had agreed – reluctantly - to move progressively towards an open skies regime. Anticipating the power of the large US airlines and recognising that the Chinese airlines’ reach behind US gateways would be limited, Beijing sought to protect its airlines while they grew and established some brand recognition.
Over the past two years China’s major airlines have expanded rapidly and have substantial widebody orders; in fact, Beijing is bumping up against capacity limits in several markets, including the US.
Delta, for example, would like to establish a joint venture with one of its Chinese SkyTeam partners; the world's largest airline has already invested equity in China Eastern. Although the Chinese majors are heavily and openly subsidised, Delta does not see this as a barrier to cooperation, or to open skies with China.
The US DoT will nevertheless not countenance immunised JVs without a fully liberal agreement in place, so China faces the dilemma of agreeing to open skies – with the potential risks it brings – or having no room for its airlines to expand in the US.
This potentially presents Mr Trump with a paradox. With China seemingly on the brink of agreeing to open skies, he could potentially “bully” China into agreeing, illustrating the effectiveness of his negotiating skills. But that would appear to be at odds with his tightening of trade with China so long as it persists with “illegal export subsidies and lax labor and environmental standards”.
Meanwhile, Delta – and potentially other US airlines – is only reluctantly being obliged to enter the relatively risky China market on direct services, without the security blanket of a JV; nor do Chinese airlines have the room to expand in the US as they would like to. Delta anticipates that "international is key to long term growth" (Delta Investor presentation), but until it has the risk-reduction comfort of a JV, this expansion will be slowed.
And, although air services usually form no part of wider trade deliberations, if the confrontation stakes were to be raised both sides would use all negotiating tools available to them.
The shotgun effect of proposed visa restrictions could not avoid affecting air traffic
In 2015 almost 8.5 million Mexican tourists arrived in the US – nearly a quarter of all foreign arrivals. Many of them came by road but a growing percentage were by air, since the recent liberalisation of the bilateral air services agreement has opened up new opportunities, especially for LCCs and US west coast airports.
Once Mr Trump has forced the Mexicans to pay to build a multi-billion dollar wall between the two countries, some of the less dramatic policies would quickly lead to reduced traffic flows, with significant impacts on tourism and the airline industry. (Although, perhaps like some of the other election rallying cries, this extreme action may be quietly dropped, in favour of more practical and humanitarian solutions.)
Mr Trump’s attitude to the use of visa restrictions to control entry – “our approvals of hundreds of thousands of visas to their nationals every year is one of our greatest leverage points” – has such a shotgun effect that the impact would spread much wider than immigration, substantially reducing Mexican tourism and almost certainly provoking retaliation, with extended implications.
Here again, a considerable momentum had already been established towards greater supervision of visa issues – with the effect of inhibiting air travel growth. Meanwhile, reportedly the Canadian visa website has crashed, seemingly under the weight of Americans seeking to flee.
Withdrawing from the Paris Agreement on the environment has extensive implications
Mr Trump is a long-standing denier of climate change science. According to the New York Times (26-May-2016) he will encourage more US oil and gas drilling, with part of the goal being to allow the US to assert greater power internationally.
More importantly President-elect Trump has said he will “cancel the Paris climate agreement”. He will also reneg. on the previous Secretary of State Hillary Clinton’s commitment: to contribute USD100 billion over the next four years to support the needs of the developing countries that would be economically disadvantaged by complying with the restraints of the Paris agreement.
“We’ve got big problems, folks, and we can’t be sending money all over the world…. We’re going to keep our money here and our jobs here and bring our jobs back”, according to Mr Trump.
Without those payments, and foreseeing the scenario of the US absenting itself from the agreement, it is unlikely that key countries like India would feel any commitment to act. This would dramatically set back any opportunity for world leaders to slow global warming.
One theory is that this would be good for aviation in that it removes costly improvements. But the industry has adopted such a responsible and realistic attitude towards reducing emissions that this is unlikely to derail those measures. Most airlines (the US Big Three are exceptions) are moving quickly to introduce more environmentally friendly equipment, and under the influence of IATA and ICAO the industry will be in good shape in a decade.
As IATA's then-Director General and CEO, Tony Tyler, said on 10-May-2016: "Airlines are determined to do the right thing in mitigating their climate change impact. And we are counting on the 191 member states of ICAO to enable that important result by reaching an agreement later this year on a global market based measure."
Nevertheless, this will not necessarily dictate the direction that national governments take.
The attitude towards Iran is uncertain, but likely to be unsettling; and costly for US aerospace
The Obama administration invested considerable political capital in establishing an agreement with Tehran, driven by a need to curtail a threatening nuclear capability. During his campaign Mr Trump has made a number of statements suggesting that he would renegotiate the deal, adopting a more aggressive stance.
This, and other factors, have already created sufficient doubt that financiers remain reluctant to commit to funding Iran’s aviation expansion. Given the fact that a very large Iranian diaspora lives in the US, any delay in opening up greater connections with the US will dampen traffic growth opportunities.
It will also harm Boeing's and other aerospace industries' export sales; US companies are already well behind the Europeans, Chinese, Japanese and Russians in aerospace sales. And, on a broader scale, disrupting the Iranian equilibrium potentially has much more telling implications.
Mr Trump has direct, yet not very successful, experience in the airline business
If elected Mr Trump would be the first President to have run his own airline, a fact he often brought up in his TV series. It was not one of his successful ventures. He had debt-financed the purchase of Eastern Air Shuttle in 1989 and transformed it into Trump Shuttle – after an extensive rebranding programme and costly interior upgrade.
The airline was remodelled as a high-end full service airline, delivering a hotel style service to passengers. Trump operated regional services to continental destinations with 727s and Sikorsky S-61 aircraft from its Boston hub, losing heavily under a high debt burden. Following a merger with Shuttle Inc it ceased operations in 1992. He also operated a helicopter service in connection with his Atlantic City interests.
Whether or not this experience would colour his attitude to the airline industry, at least Mr Trump has a better idea of the hurdles and risks involved in running airlines than did most of his predecessors.
Regardless of the outcome, and the candidates' views – industry fundamentals had already shifted
Even before the Presidential (and Congressional) election, it was already apparent that the fulcrum of US aviation policy had shifted towards a more protective and less liberal stance. Even if, following a confused bureaucratic process, the DoT has finally approved the NAI application, the reality is that it took two years, with strenuous objections to the delay by the US' sovereign partners.
Any future Administration will need to respond to a clear popular shift that emphasises job protection rather than trade options that increase jobs. Where Ms Clinton was prepared – or obliged – to dissociate herself from the TPP, something she believed to be a valuable trade measure, it is clear that world has changed irreversibly.
A now wholly Republican-dominated Congress suggests that a (nominally) Republican president will have an easy path to securing any restrictive path he wishes. That may be the default position, but there will be many undercurrents and factions, offering some hope that contrary voices will be raised. But in the short term it will be a bold politician who swims against the recent flood tide of populist protectionism.
The final word is with Qatar Airways CEO, Akbar al Baker, someone with a habit of bluntly getting to the heart of the matter, speaking on CNBC on 17-May-2016: "I don't think Trump means what he says (about banning Muslims). He does not realize that he has a lot of investment in Muslim countries and at the same time there is a very huge Muslim population in the United States"..."Like all politicians, he says everything but once he gets elected, he will change his mind."
A lot of people will be hoping he is right. But regardless of what happens next, the earth has already moved, and not in a good direction for aviation.