There needs to be consumer and shareholder benefits of transatlantic Open Skies, says Chris Tarry of CTAIRA, with analyses from Fabrice Tacoun
Last month this magazine reviewed the background to and prospects for transatlantic Open Skies as a curtain raiser to the next round of meetings. Although nothing in life is certain, and even progress towards an agreement may be a significant step, it is worthwhile trying to review some of the issues relating to actual rather than the theoretical benefits under the key headings; ownership and control and access.
There is little doubt that the mood music has improved, although we would caution that no deal will still be better than a bad deal – to use one of the best instructions given to budding pilots: “If in doubt – don’t.” It will be important not to get carried away on a wave of “deal momentum”. In order to gauge the scope for meaningful engagement it is necessary to consider the needs and wants of the respective parties.
For many years now the US airline industry has had both a want and a need to expand into other markets. In the past an Open Skies agreement with the USA generally appeared to be the quid pro quo for the grant of anti-trust immunity between a US carrier and generally the flag carrier of the non-US country – other than in the case of the UK, where the price of granting British Airways and American Airlines anti-trust immunity was considered unacceptable. Clearly, increased market access generally, and to and from London Heathrow in particular, would appear a fundamental requirement.
However, the more powerful catalyst for any deal on the US side now appears to be a hope that an agreement would open the way for new capital for the US industry, other than from manufacturers or leasing companies. However, there are two basic issues that have to be overcome.
The most difficult is that of majority ownership – probably of more significance to US carriers than those in Europe. But a minority stake is just that, it does not give any control rights over the business. So even if the USA were able to accept that one or more of their major airlines might be owned and controlled outside the USA, does it necessarily follow that it is likely to happen in the near or medium term?
This identifies a second issue; the extent and timing of benefits that need to be achieved relatively quickly. There is nothing wrong with having a vision, but the tangible benefits need to be captured early. Will a change in ownership result in a change in the financial performance of the business? This is by no means certain given the cost of, and likely resistance to, the range of actions that will be need to be taken.
There will be those who argue that from the point of view of a strategic investor, those carriers in Chapter 11 may well emerge stronger – the cynic may be tempted to ask “for how long?” Indeed, there should be real concerns about whether non-US managements would be able to act for the benefit of the combined entity, given prevailing labour legislation in the USA. It is possible US airlines might seek to take majority control of a European airline, but for the time being this is a less likely outcome.
In the past, and generally for the benefit of the competition authorities, great store has been placed on the potential consumer benefits that are likely to emerge from consolidation; more connections, more destinations and lower fares; clearly as passengers we stand to benefit.
However, as the North Atlantic shows signs of maturity, is the more realistic outcome one where existing traffic will be redistributed among the existing operators, or will Open Skies really bring an opportunity to grow the market profitably? Recently there have been several withdrawals from routes between secondary US cities and European destinations. It is the reality of the marketplace rather than the theoretical outcomes of traffic forecasting that is relevant.
Furthermore, consumer benefit is not necessarily shareholder benefit. A few years ago, when BA initially sought to get closer to American, we estimated the negative impact from what amounted to slot confiscation and a reallocation of the market would have been £400 million ($700 million) in revenue, most of which would be profit – and this was just from a deepening of the alliance relationship.
The rationale behind a move towards Open Skies may be sound. However, it is important to make sure that it is genuinely a two-way street and that the benefit flow does not end in a cul de sac, resulting in a downward shift in shareholder benefit and an even less attractive industry to invest in.
Source: Airline Business
