US and UK negotiators sit down this month to thrash out a new open skies bilateral. They will face a barrage of pressure from anxious onlookers keen to see their interests included in any final deal. But amid the clamour there is at least one issue that virtually no-one is prepared to champion. That is an end to the foreign ownership laws that still prevent any real move towards global industry consolidation.
Admittedly it is not a comfortable political point to raise. Governments worldwide still jealously guard their limits on foreign airline ownership. That includes self-professed US and UK free-marketers along with the rest. Where equity tie-ups have occurred (usually based on indecisive minority stakes), they have made a less than compelling argument for the virtues of merger and acquisition activity.
Instead the airline industry has turned to the strategic alliance. Such partnerships clearly have their advantages. At best they promise the operational benefits without the pain and politics of takeovers. But alliances are also inherently fragile affairs, without the glue that ownership provides. Nor do they offer the same scope for rationalisation as an outright merger or acquisition. The whole point is that the alliance leaves national carriers still intact with their own branding and management. Comforting perhaps for the airlines involved, but hardly ambitious.
Few of the principle arguments on which the ownership limits have been based stand up to too much scrutiny.
Perhaps least cogent are claims of national security. It was nominally this argument that was dredged up in the USA at the end of the 1980s when it seemed that network majors might fall prey to European bidders. Congressmen duly dusted down an ageing federal law limiting foreign holdings to 25%. That itself was an offshoot of even older legislation designed to shelter US steamship companies from foreign control, on grounds that they might be needed in times of crisis.
Such arguments hardly bear on modern reality. While airlines may remain steadfastly in national hands, there is no such guarantee about their aircraft or personnel. It is quite possible for a US airliner to be owned by a Japanese bank or a European aerospace lessor and be flown offshore by a foreign crew.Nevertheless the US law still stands.
Perhaps the real objection still centres on that deep-seated sense of national pride. This too is a part of a fading legacy from the days when national carriers still flew the flag for their state owners. Alliances may help postpone the evil day when carriers no longer carry the flag (BA has notably already dropped the Union Jack), but it does so against the stark realities of commerce and a tide of globalisation.
A more practical barrier is that of regulation. In short, that an airline stands to lose its rights under bilateral air treaties if it can no longer call itself national. But bilaterals are not cast in stone, as their wholesale rewriting into open skies agreements amply demonstrates. Exceptions have already been made where practical politics dictates. Britannia Airways, for example, is among the UK's top international passenger carriers despite years under Canadian ownership.
Neither have national politics been enough to stand in the way of other strategic industries. Europe's telecommunications companies, which were largely state owned and hide-bound by regulation, are now in a frenzy of transatlantic deal-making. Even in the defence sector, most strategic of all nationally strategic industries, there is a steady flow of international takeovers and mergers.
Those US and European regulators fretting about the lack of airline competition may find that they have less to fear here than they do from a cosy alliance of national players. All the evidence suggests that the presence of big global corporations unleashes more ruthless competition than a series of smaller players with an eye to protect their home turf.
Breaking down of ownership barriers will not come overnight. But the real risk for the industry is that it might not come at all unless the carriers themselves start to push a little harder. It is, after all, the industry itself which stands most to gain from a more rational world market. Mergers and acquisitions may not be a universal solution. Indeed, they could themselves serve as a core around which to build broader alliances, but without them it is difficult to see how the industry will achieve its twin long-term goals of building sustainable profits for itself and a more seamless international network for its customers.
Source: Airline Business
