Finding A New Regime On The North Atlantic – As Regulatory And Operating Norms Change

Transcript

Brian Havel:Ladies and gentlemen, in CAPA world, a moderator can have an opinion. Have you noticed that?

Tamur Goudarzi:Yes.

Brian Havel:And I have a few opinions to share with you. The plot, as I've been given it, is that I speak for 15 minutes or so, and then ask questions of the panelists. And our panel is to discuss what I'm calling disruption in the North Atlantic market, and we've been assigned the low-cost long-haul model, which Peter mentioned this morning, and the tailwinds from Brexit. We'll speak more about the model than the tailwinds, but let's find out. This is a mature market, the North Atlantic. It's 50% traffic growth in the last 15 years. And Boeing has described the emergence of the low-cost long-haul model as the most striking strategic development out of Europe in the last few years. Suddenly we're getting familiar with names like Norwegian, Level, Eurowings, Joon. Joon was supposed to be called Boost, but apparently Air France decided to reach out to les jeunes gens, the young people who don't fly. So it's now called Joon for that reason, presumably. Also WOW, Air Canada Rouge. There are others. The long-haul, low-cost business model, I must tell you, is not new. It began when consumerization began, after the Second World War, actually, when Caledonian Airways was the first charter carrier to obtain a U.S. foreign air carrier permit. And most recently, of course, in the 1970s, with Lakar Airways, the so-called cartel-smashing independent airline of the 1970s, which broke with the famous tradition of calling airlines after a country— Air France— after a region— Northwest or Southwest— or in the Irish case, stating the obvious, like Aer Lingus, which means air fleet. Although Sir Freddie, of course, disappeared through bankruptcy, he got a lifetime supply of first-class tickets from British Airways, when he sued them for meddling with his business model. Well, right now, Bjorn Schjoes— that's how he pronounces K-J-O-S— Bjorn Schjoes is Sir Freddie's spiritual successor, and he even put a giant picture of Sir Freddie on the tail of one of his aircraft. Now, he's making a margin of about 2 to 3%, compared with the current legacy carrier margins on the North Atlantic of 15 to 20%, so that's not a very exciting frankly, very exciting piece of news for this new business model. But Peter mentioned this morning that Willie Walsh is taking a 4.6% stake and announcing that he'd like to buy Norwegian Air Shuttle. I wonder if this is like Facebook buying Instagram. Is he just keeping shareholders happy? Look, we're in every part of the market. Or is it just another reflexive economic reaction, like McDonald's always opening across the street from Burger King. And you can just as easily wonder, what is the business model of Norwegian? They've entered the Cork to Boston market. That's Cork, Ireland. Now, I know Cork. There are about 15 people in Cork, 20 tops. Is Schuess doing this to justify the fact that he went to all that trouble to persuade Brian Hedberg that he needed an Irish AOC and wanted to get into the States from Ireland? Now, CAPA is always trying to excavate the motives of airline business people, but are they always so well-reasoned and entirely clear, even to the business people themselves? Now, I'll be the first to admit that low-cost long-haul is a potentially amazing proposition, and that's probably continuing the consumerization I referred to, and probably stimulates a little more demand at the margins. And then, of course, you've got these new aircraft. that Peter mentioned, the single-aisle long-range 737 MAX and the A320neo. But I'm a wee bit of a skeptic about this model, not because it won't work at all, but because it has so many shortcomings that make it difficult to sustain. It's true, you see, that not a single low-cost long-haul carrier has ever survived a complete economic cycle. Are you aware of that? In— on the longest flow markets like the North Atlantic or Asia to Europe or the Trans-Pacific. And Peter mentioned, and Airline Leader mentions in its latest issue, that we are not going to see perpetual low interest rates and perpetual low fuel prices. In fact, consider, for example, that in March 2017, Jet A-1 was at $1.44 a gallon on up from 26%— up 26% from a year earlier, and now it's around $2, up 25% from March 2017. Now, the challenges that will inhibit this business model from capturing a substantial market share, in my view, are many. I always begin with the question, if the opportunity is so good, Why isn't Ryanair doing it? Or EasyJet? Why aren't they doing it? The dogs on the street know that Michael O'Leary was in Texas to talk to Herb Kelleher about international service, and nothing came of it. Second point, where is the feed going to come from? Where do you think AirAsia X manages to be successful? Over there in Kuala Lumpur, where it has constant feed from its associated airline AirAsia. That's where— and I noticed that Willie Walsh is pumping feed into— am I pronouncing it correctly— Vueling at Barcelona, for example. As well as setting up these new low-cost carriers, the legacy carriers can also do seat densification and unbundling fares on their mainline services. And they also have yield management. And they also have reach and connectivity. Ladies and gentlemen, 30 U.S. states do not have nonstop, daily, year-round service to Europe. And if you want to get from aviation megacity Hartford to aviation megacity Leipzig in Germany, you won't do it on Norwegian. Compare their $119 fare across the Atlantic one way— that's double for 2 ways— and compare that with the fare for Getting to Hart— getting from Hartford to New York, and from New York to London, and from London to Leipzig. And think of schlepping your luggage through all of those airports, unless you have this new puppy luggage, which follows you around. It's a robot. Have you seen that? That follows you around, and you know somebody's going to steal it as soon as your back is turned. For God's sake, pay the extra $150 and go with the Alliance. That's my non-biased opinion. Short-haul low-cost carriers can sell an aircraft 6 or 7 times a day, an aircraft seat 6 or 7 times a day, but long-haul can only do that twice at most in a day. And if the stage length gets above 10 hours, ladies and gentlemen, you've got one turnaround. How will low-cost long-haul handle Richard Branson's advice to Freddie Laker that you need to cross-subsidize your economy fares with business passengers because 50% of revenue comes from 10% of passengers and allows you to slash a lot of economy fares. What will they do with freight worth about 27%— 25 to 27% of the payload for the legacies? So my skeptical view makes me think that while there is probably significant opportunity for a lower price, lower cost model in long-haul, surely the mainline carriers can and should capture a lot of it. And if they act quickly, there'll be no need or room for new entrants in long-haul. Peter was showing us the slide. All I could see was Norwegian, Norwegian, Norwegian. And now Willy Walsh is going to buy it. With the alliances bedded in at 80% on the transatlantic market, What are they ultimately going to lose to the low-cost long-haul? 1%, 2%. All right, over to Brexit. Are you— are you okay, gentlemen? The moderator is expressing his opinion. Now, there is one government— there is one government in all of this mess called Brexit that has brilliantly analyzed Brexit and sketched a clear path for all parties concerned for the future. The unfortunate thing is that that government is the Japanese government. I urge you to Google Japan Ministry of Foreign Affairs and Brexit. Well, this time the disruptor is a government, British government. The UK Chancellor of the Exchequer, Philip Hammond, has said that Michael O'Leary is right and that Britain theoretically could crash out of the European Union in March 2019 with no deal. I would call that more than a theoretical possibility. In fact, I would call the UK crashing out of the European Union next year as Brexit Max, and I would call some kind of transitional arrangement as Brexit Neo. I wanted to use those words again. You see, at the moment, everything hinges on a transitional— a 2-year transitional arrangement that will stretch the March 2019 date to December 31st, 2020. And to be honest, it isn't even clear that the European Union has the legal authority under the Treaty of Rome to grant that extension to Britain. And you can be sure that some member state, probably the Hungarians, and maybe some member of that cranky parliament over there, will bring an action before the Court of Justice to protest the idea of an extension. And that action will take 5 more years. I teach an EU law course at Oxford, and we just got notice of the annual meeting of the 52 professors— yes, 52 professors— we all voted against Brexit, let me tell you, at Oxford. And we were told by the department chair there's not much point worrying about what we should do in our classes in light of Brexit because we still don't know what Brexit means. And that comes from the heart of the British establishment at Oxford. Now, a no-deal scenario— a no-deal scenario doesn't mean that the telephones will all go dead, or the Channel Tunnel will be bricked up, or that the British will have to become boat people again, which is a satisfying thought for an Irishman. But aviation is not in the World Trade Organization, and we may end up— whether it's United States, United Kingdom, or United Kingdom, European Union— we may end up in that gray area called comedy and reciprocity. And I'm even more worried that the British will crash out of the European Air Safety Agency, despite having contributed with France 2/3 of the expertise. And can you imagine a situation where a Lufthansa plane is stranded in Heathrow, and you have to fly in an EASA mechanic and EASA-certified parts to Heathrow to allow that plane to go back to London? And Brian, you can't comment, I know, But there are rumored to be in the U.S.-EU negotiations problems about the refusal of the U.S. to grant a joint committee on regulatory harmonization, insisting on the ownership and control rule, and not even giving special access to the Fly America program. Well, ladies and gentlemen, why does Willy Walsh keep saying, don't worry, there will be a comprehensive agreement? I don't know how Willy Walsh knows this. Because there are very few political appointees right now who are the ones, after all, who leak. And the reason that there are so few is that the Kremlin has not yet approved President Trump's list. That's a part of the Comey experience. It looks like everyone is just assuming that there will be a transitional agreement. And CAPA calls it blind faith because we are now a year out from the March deadline and airlines are already selling tickets for the period beyond March 2019 without any hard knowledge other than Willy Walsh's Panglossian optimism about what's going to happen next in the U.S., EU, and U.K. markets after Brexit. Well, that's my introduction. I've kept within the 15 minutes. Gentlemen, it's your turn now to answer some questions based on what I've been talking about, and I'll start with you, Tamur, if I may. Are you all right?

Tamur Goudarzi:I'm still okay, yeah.

Brian Hedberg:Be glad you didn't have him in class.

Brian Havel:Can we all hear you? Is that microphone working?

Tamur Goudarzi:Yeah, it is.

Brian Havel:Tamur, we've got to make sure that this market and the trends in the North Atlantic stays competitive. and that it maintains its profitable streak. I'm sure you would agree with that. Now, the low-cost model certainly works in short-haul. It's like a bus service in the sky, somebody has described it. But even in the United States, it hasn't got to the point, for example, where Southwest has 30% of the market. Now, is low-cost long-haul— to move to that model— is that a niche segment? on the North Atlantic market, even though it might at the moment appear dynamic within its segment? Is it a serious competitive threat? It is mostly Norwegian, as far as we can see. And if it's not yet a serious competitive threat, how can it become a serious competitive threat to Lufthansa and the other peer carriers? That's my question. Thank you.

Tamur Goudarzi:Well, well, Brian, I mean, after your unemotional and very balanced speech, I'm—

Brian Havel:It wasn't a speech, it was moderator's remarks.

Tamur Goudarzi:I'm really surprised that Norwegian is not sitting on the 3rd chair here. So they probably would be the ones that felt most challenged. So most of my bullet points I would have brought, you have taken basically away already. So, um, I think from a perspective of an airline group like Lufthansa Group, which encompasses the premium services of Lufthansa, Austrian, Swiss. We have also low-cost service of Eurowings, and we have a kind of hybrid service of Brussels Airlines. We cater for the whole market, and we definitely look at also the market as a whole. We see developments where, of course, most of us are not yet sure how this will all turn out in terms of low-cost. I think we said a year ago on the last CAPA conference for the Americas together and we asked the same question and the question is what has happened in between? And I think some things have happened and no matter what of those models, point-to-point, trans— midpoint transfer, long-haul narrowbody, long-haul widebody, which of those models are currently operated with all these carriers is going to survive and there definitely will be some victims of the competition but— Brian, What's for sure is something, and that has only, I think, become stronger in the last 12 months since we last sat together, is that there's increasingly the narrowbody option. So technology changes some things, and the 737 MAX as well as the A321LR, the long-range one, definitely will be an important factor in shaping the competition I think there will be competition on transatlantic in a certain segment in the future. It depends very much on range, so it depends very much where you're positioned. So I think anything that is too far east on the continent will have trouble with the current technological possibilities of these aircraft types to establish something like a, a stronger position. But some of the players who are more on the western part of Europe are operating from the very east coast. Having here some more options. And I think that's going to be a game changer just by the technology. So for the commercial part, that is definitely something where I think the last 12 months have shown that the aggressive growth of some of those players have led to a doubling of the offer share on the transatlantic. And that's something definitely the traditional airline groupings have reacted to. So it's already happening. The reaction is already happening on multiple fronts. One front definitely is that a certain segment where we're overlapping, we are competing also on price. Unbundling is happening on transatlantic already. Some players have brought it. And there's establishment within these groupings of second-tier carriers in various forms, level— Rouge, Eurowings.

Brian Havel:Yeah.

Tamur Goudarzi:It still is open to suggestion if these models will, you know, become mainstream or not. I think we are, for example, we're starting in 2 weeks in New York-Düsseldorf with Eurowings with even a flat business class. So there's still a lot of, I think, experimentation on, on the side of the carriers to react to these models, and the verdict is still out there. But I don't think that the fact that we have learnings from the narrowbody in Europe will go away. I think it will become a very strong influence also on the transatlantic.

Brian Hedberg:Mm-hmm.

Tamur Goudarzi:So I'm a little bit more hesitant to follow your unemotional statement on, on this is just a bogus thing maybe, or something that's gonna fade away like previous models. I think we will have to, you know, take a close look to that. And I think there will be a niche or there will be a certain segment that is actually going to survive also on the low-cost business model on the transatlantic.

Brian Havel:I'm not suggesting that it's a bogus model, not by any means, but in the past, you have— you and other legacy carriers have set up these low-cost carriers within your group, and according to Björn Schuster, they have all failed. They have all failed, and he's introducing some new method. of competition. What I was trying to suggest is that you have a product called basic economy which you can transfer into the main system. You, you know, British Airways runs 30 flights from London every day, not one flight as the low costs will do, and you have a blanket network coverage. You have a price point that's a notch above the low-cost carriers. You should be able to construct a viable competitive response even without building all this new infrastructure of low-cost carriers within the group. I'm worried that that's not the ideal approach to compete with Norwegian.

Tamur Goudarzi:Yeah, I fully agree with you, but we already do it. I mean, we have 10,000 flights and 10,000 flights a day in our current joint venture. 10,000 flights a day to 570 destinations. The time that this will be matched on more point-to-point destinations or even connecting, let's say, by chance, certain points, midpoint, is a long way off. In case the model would be successful, it will take years and years until you reach a similar competitive status. And by having erected on a certain segment that is overlapping, it's not just that you compete on every segment, but a certain overlapping segment clearly is the answer that we're doing right now. So I fully agree with you that there are enough answers by the current system. Nevertheless, you should not just close your eyes and see what could come, and therefore I think we have to, you know, do it both ways. We are reacting in the existing system, but we're also creating— and that's every alliance is doing that— creating some opportunities to see if there are alternatives to that.

Brian Havel:All right, thank you very much. And I just want to turn to Brian. Brian, You're the regulator, and you've had some experience already with Norwegian, as we know, and with other low-cost carriers. Let me ask you first to reflect on, if you would, the current status of the appeal which the unions have taken against the Department of Transportation's finding that Article 17bis of the U.S.-EU agreement, which relates to the the social protection clause, as you might say, is not something that you as a regulator need to take into account with respect to decisions on granting foreign air carrier permits. Would you want to suggest where that current court case lies, and what are the consequences either way of what the court might decide?

Brian Hedberg:Well, as a recovering lawyer, I'm gonna hedge with every answer there, but, um, I'd actually I'd like to try to get to that question and tie that a little bit back into your premise about competition in the low-cost, in the long-haul low-cost market. One of the wonderfully interesting things about being an economic regulator in the United States is that we like to see competition. You know, we are supposed to be serving the public interest, and part of that public interest is the consumers, and part of it is creating an opportunity where different business models get to enter the market. Now, whether they will be competitive in the long term, that's part of what we're, you know, here to see. We'll see how that evolves. And you asked the question about whether it's a niche that's being filled. You know, I would argue that the low-cost long-haul isn't so much a niche as it is serving a particular market segment. There are a number of people who travel in the markets that may not need those 20 BA flights And so creating a space in which a carrier like an NAI or a French Bee or Joon or one of the others that we were talking about earlier, creating an opportunity for them to provide a service to all segments of the market and seeing if they can make a go of it is very, very important to making sure that we're carrying out our mandate to do things in the public interest.

Brian Havel:Thank you.

Brian Hedberg:On the point of 17bis, disclaimer, it's an ongoing legal case. I can't actually comment on it. What I can tell you is that the Court of Appeals in D.C. heard the case— gosh, I should have looked this up— but about 6 weeks ago. And I had the pleasure of sitting in the gallery just with folks on both sides of that. And the Court of Appeals asked a number of very, very good questions with very eloquent representation on both sides from the United States Department of Justice and from ALPA. And in fact, some folks from ALPA are here in the audience. So maybe pick up— pick on them a little bit after the panel. But, you know, the issue here is, for us, the Department of Transportation, had 3 legal opinions by 3 different agencies, the Department of Transportation's lawyers, the Office of Legal Counsel, and the State Department lawyers, and moved forward on that basis to act in accordance with their view of 17 deaths.

Brian Havel:Well, Brian, from a legal perspective, if the court were to find that the The department should have taken Article 17bis into consideration in determining the award of a foreign air carrier permit. What would be the consequence of that? Would Norwegian's permit be somehow suspended while the department goes back and revisits the proceeding? Do you have any idea what could happen?

Brian Hedberg:Yeah, well, we'd have to see what the court said, because it could be remanded or they could overturn it. I mean, the issue is we did take it into account. It's reflected in the record. that this was one of the elements under consideration, because the licenses, the licensing procedure was challenged. And we obviously issued the license, and if the Court of Appeals makes a decision that is adverse to the department's decision, they'll determine what happens.

Tamur Goudarzi:Yeah.

Brian Hedberg:You know, and it could be remanded to the department, or they could choose to take other actions, and I just, I don't know what, The realm of possibilities is very wide there.

Brian Havel:Well, one thing that will happen is that academics will be fascinated to see how the court rules on a treaty interpretation issue, and whether Article 17bis is hortatory, to use the term of art, or whether, in fact, it is a binding provision. And that is something we would be delighted to see in a written opinion. Brian, if I could extend out the regulatory question a little bit, going beyond Article 17bis and the Norwegian situation, which is very specific. What is your expectation with regard to some of these low-cost carriers that are being set up by the legacies in terms of their participation in the transatlantic alliances, whether they might in fact seek to join the immunity that those alliances have, or even the metal-neutral joint venture? And what is the process if, for example, Lufthansa— and we have Tumar sitting here— if Lufthansa wanted to get Germanwings, or Eurowings as it's now called, into its immunized alliance Star, would it be able to do that by dint of just being Lufthansa, or would it have to engage in a process before you?

Brian Hedberg:So if you want to add a carrier to an existing joint venture, an application has to be made, and again, we have to find that there are public benefits and the decision would be in the public interest. Now, the bigger The question there is, to my mind, is given that every one of these joint ventures and these, the low-cost hybrids that you're mentioning, they're all business decisions being taken by multiple companies.

Tamur Goudarzi:Mm-hmm.

Brian Hedberg:So the real question, the threshold question anyway, in my mind is, you know, would bringing that kind of a joint venture into a broader joint venture actually bring benefits to the carriers? I mean, that's a business decision. that I try not to judge, but if they were to come to us, we would obviously give everything a fair hearing.

Brian Havel:Can you understand why that would be a business decision? Why would they bring something like Level, Level, which is such a strange name for an airline, isn't it? I just wonder if the confusion that could be caused by the name Level in air traffic control, when you hear the words Level 300, Level at 350 feet, You know, level is a word that's used a lot by air traffic controllers. I would not have called it— it's a palindromic name, of course, as it goes the same way backwards. Anyway, I'm distracting you from your answer, but what do you think would be, in fact, in this situation, a reason, a business reason, why immunization would be sought for one of these low costs? I don't see it myself, but maybe you do.

Brian Hedberg:Off the top of my head, I don't. But it doesn't mean that they don't, because, you know, as I was saying, they— part of the experimentation here is serving different market segments.

Brian Havel:Mm-hmm.

Brian Hedberg:And I don't know if they're going to look at it through a point of competition. I don't know if they're going to look at it to a point of expanding their reach. And they have to weigh the benefits to the joint venture from that accretion. And I try not to— I mean, we don't want to be in a position where we're making choices. Well, I wonder what— So we'll see where that goes.

Brian Havel:I wonder what Tamur thinks about that.

Tamur Goudarzi:I think it depends what you talk about. If you have a low-cost carrier that is within an existing alliance system like Level or Eurowings, I think you want those low-costers to benefit from the benefits that this joint venture is offering. That's why you would probably try to bring it in and also have immunization. If you are low cost outside of that system, a startup, um, it depends on your business model. Are you managing enough volumes with secondary points that you can fly year round? And we've seen recently some of those carriers have seen that it's not so easy to fill even a smaller aircraft in the winter. So they even closed some of the routes for the next winter. So if you don't have that, you might want to add some feed, natural feed. You don't build it as a hub, but you want to have natural feed. And then you would, you might cooperate with another player, probably another low-cost carrier, and you would like to see some transfer passengers coming. For that, you don't need immunization in the first place. You just need an existing interline agreement and possibly a code.

Brian Havel:Mm-hmm.

Tamur Goudarzi:And that's something you can do in the existing framework. So that probably is the initial impetus for any low-costers outside of the alliance system go for connectivity which is more natural than organized.

Brian Havel:So you'd be getting the advantage of network breadth, is what you're saying, in that context, without necessarily seeing the necessity for a legal patina over the whole thing. You don't have to have that.

Brian Hedberg:Right.

Brian Havel:Now, Brian and Tamur, what about the idea that the Asian market, which has had more success, I think, with the long— the low-cost long-haul model, is now starting to see alliances between low-cost carriers. And I'm wondering if that is a process that could migrate to the North Atlantic in some way. There's even talk of alliances between the low-cost alliances and the big alliances, Star and so forth. Is there room in the North Atlantic for that kind of operation? Of course, we could always ask, as we talked about before we came on here, what is an alliance? What does it offer? What does a joint venture offer? And you talked, Tamur, about connectivity as being something significant, but could you speak to the idea of low-cost alliances and the effect on the North Atlantic market? And maybe, Brian, you could add something to that.

Brian Hedberg:Sure.

Tamur Goudarzi:Yeah, that's basically what I said before. I don't think in the first step you need to have a joint venture. if that's what you meant by an alliance. So a pure cooperation case could work for you as a low-coster, probably. Why would you go further? I mean, we'll see now how the whole thing with Norwegian and IAG is turning out, if it's just taking out a competitor, or is it something that, you know, leads to a new business model in— within the existing joint venture or the existing alliance that there is. But I do not— I do not see that this is something per se logic or per se needed, as I mentioned before, not within the alliances existing and neither with the cooperation that's possible probably between the low-costers anyway. So, is there urgent business need? I don't see it.

Brian Havel:You don't see it. I just— I find the whole idea of the low-cost long-haul puzzling because I'm not sure as when you add up all the pieces, as I said earlier, with regard to Hartford getting to Leipzig, whether it makes absolute sense as a value proposition for the customer. And I just happened to check Lufthansa's website this afternoon, and I see that if I want to go from London to Frankfurt in 4 days' time and back— I also checked Ryanair's website— Ryanair is charging £226, which is the basic nothing-included fare. You get nothing. You show up. And if everybody's flown Ryanair, you know exactly what I'm talking about. Lufthansa is charging about £80 more, I think. Yeah, about £80 more, offering a very similar schedule but more flights with a carry-on bag included. You can select your seat the day before. You have the protection of multiple flights in the event of a cancellation or delay. You, of course, can connect to other carriers. If I were a late-booking calf, traveler, I would never fly Ryanair. Does that give you a competitive advantage?

Tamur Goudarzi:Brian, I'd like to hire you. So basically, um, you give all the arguments for us why, why we would— where we would not necessarily, um, you know, be in a bad position, because we have, I think, more and more passengers who actually, who actually understood that the total cost of their travel or the whole value tower not just actually the full ticket price, but— and you mentioned before what's coming before and after— if you're tired and you need another hotel night, etc., etc., that this is something that's becoming more and more transparent. And so I think—

Brian Havel:More what? I didn't hear you.

Tamur Goudarzi:Say again?

Brian Havel:What did you just say?

Tamur Goudarzi:I just said that it's become more and more transparent for the customer that actually the total value to our accounts and not just the net price of a bare seat where you might even have to buy the water on board. So I think with that, you know, if you have a compelling premium product and you really make sure the passenger— or you hit the passenger expectation or even exceed it, I think you're in a very good position even to charge a little bit more on top of the price because the passengers really value that.

Brian Havel:Yeah, it's sort of— these are fascinating comparisons. Well, I just wonder if anybody in the audience wants to pitch in on this rather significant topic. Does anybody agree that We're making a lot of fuss about a model that's never going to be more than 1% or 2% of the trans-Atlantic market. If you don't, I'm going to have to pitch a question on Brexit to the panel. And I must say, I can't see out there, but is there anybody who's got a question on any aspect of the discussion? I know you've just had lunch and you're relaxing. Anybody? All right, let's pitch a last question on Brexit. And Brian—

Brian Hedberg:Actually, do you mind if I just—

Brian Havel:You were making notes. Maybe you want to—

Brian Hedberg:I'm a good student. Somebody taught me well. No, just on the point about the low-cost long-haul and connectivity, you know, comparing what's happening in Asia with what's happening in the North Atlantic, it's not an apples-to-apples comparison. It's not even an oranges-to-tangerines comparison, because, you know, we have over 380 daily passenger flights connecting United— the United States—

Brian Havel:Yeah.

Brian Hedberg:to Europe. And that kind of connectivity is something that has been severely lacking in Asia for a very long time. Historically, it's something that's been lacking in the Americas. I was talking to somebody last night, you know, at one point when I lived in Mexico, it was easier to fly from— if you wanted to get from Mexico City to Merida, you actually flew through Houston or Miami, you know. And so we've seen— Shifts and growth in both places, and maybe really what we're talking about is a normalization or an increase in connectivity kind of across the board. So you're talking about an introduction of a new and different, you know, in the long view of things, a new and different business model being introduced into a place that lacked connectivity.

Brian Havel:Well, that's true, but at the granular level, that's true. At the granular level, that's true, but the model is there. The model is there. It's been transplanted to the North Atlantic, and if you see something like an alliance happening in the low-cost world, it might happen across the Atlantic. I'm just trying to suggest that there are precedents here that we should at least pay attention to. Well, with that discussion closed, I have time before we finish for one question to pitch on— Havel.

Brian Hedberg:How many subparts to the question?

Brian Havel:This is— I shortened it following our discussion, so it's a short question. It relates really to the fact, you know, Britain is going to be no better off if this crash-out occurs with respect to Brexit next year. Britain will be no better off vis-à-vis the European Union than Venezuela or Yemen, for that matter. It will have no more rights than any of those countries, and it's really somewhat unsettling. Proposition. And the 2 years that are being asked for to extend the negotiation will not be enough in the view of the Commons Treasury Committee. They need at least 5 years to try to work all of this out. The Secretary of State for Exiting the European Union, David Davis, has said that he expects the worst effects of a no-deal scenario to be mitigated in aviation by a big deal based on sheer mutual self-interest. Brian, what do you think about that? Are you going to get a bare-bones deal based on sheer mutual self-interest, remembering, of course— and I'll pitch you a subpart to this— what did the Americans want with the US-EU agreement? Everybody knows the answer. You wanted Heathrow.

Tamur Goudarzi:That's right.

Brian Havel:And you can still have Heathrow. Why don't you just junk the U.S.-EU agreement and take on the Brits to keep Heathrow open? Don't let Bermuda II put its bony hand out of the grave.

Brian Hedberg:Well, you know, we have this unfortunate situation where Bermuda II still exists.

Brian Havel:Yes.

Brian Hedberg:For all of those islands that the Queen is hiding behind her back, we still have an issue of resolving those. Bermuda II, and I assume most people in the industry know what that is, but it's a— the agreement is so antiquated, it has no hope of serving the United States in the current market. And in our discussions with the UK, we're talking about what will happen after they exit the EU. And certainly, we are looking at an open-skies agreement. You know, we're talking to a new bilateral partner, or if you want to call them a returning bilateral partner, however you want to look at it.

Brian Havel:Yeah.

Brian Hedberg:There's no need to scrap the EU deal.

Brian Havel:Why are you so sure you're looking at a U.S.-U.K. bilateral agreement when it isn't even clear that the U.K. might not join the U.S.-E.U. agreement as a plurilateral member like Norway did? Why is it so clear to you what's going to happen?

Brian Hedberg:Because I work for a safety agency and we belt and suspenders everything.

Brian Havel:So it's safety?

Brian Hedberg:No, no, no, no. But what I'm saying is I work for an agency that has a culture of you make sure that you have belt and suspenders. And you know what? Maybe that's what happens with the UK-EU-US relationship, maybe it isn't. But certainly, we've been asked by our partners to make sure that we're in a place where we know how our relationship is going to exist after they leave the European Union. And there is— you talk about, you know, rational self-interest.

Tamur Goudarzi:Yes.

Brian Hedberg:In every negotiation I've done in the last 15 years, I have 20 to 30 industry partners sitting behind me, goading me and listening on every single word and making sure that I'm doing what is in their best interest. And sometimes not everybody wins. But again, my underlying mandate is making sure that we're doing what is best for the traveling and shipping public and all stakeholders, which includes the airlines and the labor groups and the airports. And you know what? Being prepared for whatever might come in March, is very important to everyone, and you're absolutely right, the carriers are selling tickets. And, you know, one of the beauties of being an economic regulator is I can help keep the market open. I, you know, I don't need that agreement. You mentioned CNR. Well, it's important for everybody, and I want to be prepared when this happens, whatever it may be.

Brian Havel:And I certainly respect the fact that American negotiators in particular have a history and a reputation of being quite pragmatic. And we'll speak in terms of de facto accommodations, not necessarily the notion of a signed treaty. It could be a memorandum of understanding. So yes, there is reason for optimism that the bridge can be, can be crossed, but the Commons Committee pointed out that you can never underestimate the possibility in this very fraught situation of a bad-tempered breakdown in negotiations in which people are not necessarily acting in their best economic self-interest. So I suggest you read the Japanese government approach and see if we can persuade the British and the Americans and the Europeans to adopt that. Thank you very much, Tamur. Thank you, Brian, for a very interesting discussion. And thank you, audience. We look forward to the next opportunity to discuss these subjects later in the afternoon. Thank you.

Brian Hedberg:Thanks.

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