Martin Broughton: Speech at the Wings Club in New York, 18 January 2006

Martin Broughton – chairman of British Airways – speaking at the Wings Club in New York, 18 January 2006
Those of you who have heard my recent criticism of the US Open Skies proposals or heard BA’s recently retired CEO, Rod Eddington’s valedictory speech at the Aviation Club in London where he accused the US of turning from being ‘The Land of the Free’ into ‘The Land of the Free Ride’ may anticipate that I have come here to whinge.
Well I haven’t.
Of course there’s lots I could whinge about but it’s New Year and it’s always good to enter a New Year in a positive frame of mind.
So, today, I want to paint a positive picture. Call it a vision of what I would like to see the global aviation industry look like and how this Aviation Utopia is actually much more achievable than you might at first think.
Before we get to the future can we agree that the present isn’t working?
For an industry that has only recently celebrated it’s centenary; which has demonstrated truly incredible technological progress; and has opened up the world both to personal travel on a basis inconceivable to our forefathers and to business travel in a way that has facilitated the globalisation process for the rest of industry, we have to ask ourselves “how come we’re in such a mess?”
“How come we can’t be globalised like those industries we facilitate?”
“How come, globally, we have lost more money in the few years that have passed in this 21st Century than we made in the entire 20th Century?”
“How come about half of all US passengers are today travelling on bankrupt airlines?”
So, I repeat, before we get to the future can we agree that the present isn’t working?
Especially here in America.
The status quo is not sustainable.
The aviation model desperately needs to change. But what to?
Well, it doesn’t take an Einstein to see that the model that has worked for so many other consumer products and services may be worth considering. Let’s call it the ‘Open Market’ model.
The model that has thrown up corporate giants like Pfizer & Glaxo Smithkline in the pharmaceutical industry; Procters & Unilever in consumer products; Anheuser Busch & Heineken in brewing; Citigroup and HSBC in banking, for example.
It’s a model that allows companies to operate on a global scale, in competitive markets, offering consumers a consistent product.
It’s a world where the consumer buys the product or service knowing what to expect of a particular brand, where the consumer has alternatives to choose from and where the consumer doesn’t care who owns the corporation because it’s the product or service he cares about not the ownership.
And incidentally, those other industries are profitable.
And in case you hadn’t noticed, the world leaders in those industries feature a disproportionate number of American success stories.
What would the Aviation industry – and here I’m really focussing on passenger aviation rather than cargo – what would the industry look like if the ‘open market’ model were applied?
Well, American Airlines for example, could fly from Sydney to Singapore or Lagos to Cape Town or whatever routes it chose to fly – and become as ubiquitous as Coca-cola or MacDonalds – available anywhere in the world.
It could choose to compete on new routes or it could acquire existing airlines that already operate those routes.
It could choose to rebrand its acquisitions, like Citigroup does, or it could retain the existing local brand name just as Procter or Unilever do.
It would be a world where the strong get stronger and the weak go out of business either through acquisitions or bankruptcy, but they wouldn’t get subsidies to enable them to continue operating unprofitably thus destroying the industry economics.
It’s a model that has already been adopted on an Intra-EU basis and is working as well as it can, given the geographic constraint of the EU market.
In fact, it’s a world that looks remarkably like old-fashioned capitalism – the model that made America the world leader it is today.
It would be a world where alliances and codeshares, which at best confuse the consumer and at worst deceive the consumer, would be unnecessary. They have only sprung up as ‘second-best’ alternatives in the absence of the acquisition option used in the open market model.
Before summarising the winners and losers under such a new aviation model, let’s just consider whether this Utopia is within reach or is just a dream.
The structural impediment to progress is the bilateral system. Devised, ironically, to prevent the US dominating the fledging post-war aviation industry the Chicago Convention, now over 60 years old, came up with the bilateral system.
It means new routes have to be negotiated government to government and require the other party to be ‘nationally’ owned i.e. majority owned by nationals of the country negotiating the route.
As a poison pill it works better than anything ever dreamt up on Wall Street.
And what is the secret code that can unlock this straightjacket?
It’s called the EU/US Open Aviation Area proposals.
Yes, you heard correctly. The EU/US Open Aviation Area.
It’s not the same as the EU/US Open Skies agreement. I know they sound like they are two ways of expressing the same thing. But they are not.
It’s much more than the old reference to two nations divided by a common language.
Let me explain.
The U.S. has pursued the “Open Skies” policy vigorously under successive administrations.
But time has overtaken the Open Skies model. It perpetuates the bilateral world with its restrictive ownership provisions and it generally benefits the U.S. industry relative to its foreign counterparts.
The sheer size of the U.S. market means that there are usually more U.S. airlines to take advantage of an Open Skies deal than from the other country.
And the unlimited 5th Freedom Rights which the U.S. insist should be in any Open Skies arrangement usually, due to simple geography, offer U.S. carriers more opportunities than their foreign counterparts.
And, of course, America rejects cabotage, which is the parallel internal right that offers more opportunities to their foreign counterparts.
It is therefore not surprising that those countries who have declined to sign up to the Open Skies model are those with the largest home markets and the greatest 5th Freedom opportunities for U.S. carriers.
But there is now a new international model on offer which is much better suited to the modern needs of the aviation industry, its customers and its employees.
It’s the ‘Open Market’ model I have referred to.
The model saw its genesis in the creation of a single aviation market within the EU – a single market based on individual sovereign states, each with their own seat at ICAO.
These states voluntarily pooled some of their sovereignty over air travel between and within their respective countries.
They removed restrictions on traffic rights, on pricing, and most crucially on ownership.
At the same time they built a common regulatory framework which levelled the playing field for all carriers operating within the EU.
The results in terms of traffic growth, new entrants, more jobs and lower fares are undisputed.
The fact is that the Open Skies model has run its course. The U.S. Administration has manfully negotiated it with every country that it can – however the countries with the biggest markets remain unconvinced, and will continue to be so.
As recently as June 04, the EU Council rejected a deal with the U.S. that was as close as makes no difference to the Open Skies template – the Council quite rightly ruled it out on the basis of it not being ambitious enough, and being unbalanced in favour of the U.S.
The EU has a much more far-reaching and ambitious mandate. The Commission’s negotiators are charged not just with replicating another Open Skies deal, albeit at an EU level, but with building a single aviation market between and within the U.S. and EU – a so-called Open Aviation Area, or OAA for short.
It’s a genuinely ‘Barrier Free Transatlantic Market’ – remember that expression.
It’s on the table right now.
All it needs is a little courage.
If the opposite of pro is con, what’s the opposite of progress?
Yes, you guessed it.
Congress can break the code. Congress can free the aviation industry from its straightjacket.
All it needs to do is to agree to eliminate the foreign ownership rules restricting foreign ownership of US airlines.
One thing is certain if the EU/US truly become a single transatlantic aviation market, where any airline based in either continent could freely operate without restrictions anywhere in either continent it would set the new template.
The rest of the world would come following along.
But will Congress have the courage to act?
Well, obviously, the Administration doesn’t think so – or at least doesn’t want to risk it. To be fair to the Administration, the Transport Secretary, Norman Mineta’s current proposals for Open Skies have gone as far as possible, short of seeking Congressional approval.
Let’s just spend a moment looking at these proposals. They are in the infamous NPRM – Notice of Proposed Rule-Making – except it’s not making a rule, only an interpretation of policy.
The NPRM seems to be all things to all people – depending on who you talk to, or perhaps when, it will either definitely keep control of U.S. airlines in the hands of U.S. citizens, or, then again, it won’t.
We have, of course, studied the NPRM at length, as have our lawyers.
We have also listened carefully to every pronouncement by DOT since it was issued, and analysed all the comments made by the most respected observers.
And I have to say that at this stage it is not clear to me that the NPRM, if unchanged in its final form, will have any value to EU airlines.
The first question of course is – will the NPRM deliver what it purports to offer? We have grave doubts that it will.
It all seems designed to give the appearance of change without really changing anything. It’s a recipe for confusion.
It is very imprecise in its wording, for example what exactly do the 4 areas reserved for U.S. citizens alone to control actually encompass?
Safety and security alone can cover a multitude of airline activities depending on the definitions used.
And what does control of organisational documents mean precisely? Even DOT seems hard pressed to offer a clear explanation.
The claim that minority foreign investors will be able to “collaborate in the management” of a U.S. airline doesn’t inspire much hope that effective control will be able to be exercised.
And the example given in the NPRM of how the new policy can be used by a foreign investor does not give any encouragement either.
It foresees minority owners being able to participate with the US majority owners in a committee that could agree on certain commercial strategies.
This very limited degree of influence is not going to reassure a minority shareholder that he will be able to protect what could be a substantial investment.
The bigger question though is why do we have to go through the ordeal of such a tortuous process for such little, if any, benefit?
In the 1970s, Congress played a major role in helping to shape the US’ international aviation policy.
It seems to me that Congress is crying out to play a similar role today.
Rather than trying to stretch out the ordeal by fudging the issue through the NPRM, I wonder why the U.S. Administration isn’t prepared to have an open debate with Capitol Hill about a proper legislative solution?
By all accounts the NPRM has certainly grabbed the Hill’s attention. Many are concerned that Congress is being bypassed on a matter of strategic importance.
Why try to bypass Congress?
Why wouldn’t Congress act to facilitate the introduction of the Capitalist, open-market model?
Let’s just look at who stands to gain and who stands to lose with a change – America certainly stands to gain.
I’ve recently taken on the Co-chairmanship of the TABD – the Transatlantic Business Dialogue. Over here it’s sometimes called TAB-D which makes it sound like an appendix but in fact it’s the most important EU/US corporate lobby group who’s objective is a Barrier Free Transatlantic Market.
Remember that expression? I used it earlier - it’s what an Open Aviation Area would deliver for aviation.
The reason we’ve set a Barrier Free Transatlantic Market as our objective is both obvious and compelling. Our two economies are the largest trading partners in the world and are to a significant degree interdependent. Trade between us amounts to one billion dollars a day, and the total volume of two-way investment adds up to $1.5 trillion. This activity results in an additional 6 million jobs for people on each side of the Atlantic.
And, despite the strains on the political relationship between the U.S. and
the EU over recent years, at an economic level, I know from discussion with the Secretary of Commerce, Carlos Gutierrez, that America is keen to pursue this agenda, just as his EU counterpart, Gunter Verheugen, is keen on Europe’s behalf.
President Bush endorsed the goal of a Barrier Free Transatlantic Market in October last year when he said “The United States is ready to eliminate all tariffs, subsidies and other barriers to free flow of goods and services as other nations do the same.”
It’s also clear that in relation to aviation the Department of Transport is sympathetic to the underlying principles involved.
Jeff Shane, the U.S. Under-Secretary for Policy at DOT, gave an interesting and typically erudite historical perspective to this when he spoke to the Royal Aeronautical Society in Montreal last month.
Jeff quoted President Carter as writing the following in 1977…….”We should be bold in granting liberal and expanded access to foreign carriers in the United States in exchange for equally valuable benefits we receive from those countries. Our policy should be to trade opportunities rather than restrictions.”
“Trade opportunities rather than restrictions”……this is an admirable policy which we at British Airways can willingly sign up to – unfortunately it is a policy that is still waiting to be executed after almost 30 years.
So, clearly, America stands to gain as its free market philosophy would get extended to a new sector of global activity.
The consumer stands to gain.
Without being cynical, in Congressional terms this means the voter stands to gain.
Today, it’s fair to ask whether the US fare-paying passenger has real quality options.
If price is the sole criterion, then yes, the consumer does have some cheap options. But in truth, the choice the US passenger has today – all too often – is between cheap price with cheap service or more expensive price with cheap service.
It’s summed up in the apocryphal story of the young man who approached the check-in desk of a well- known American carrier just before Christmas. He saw above the counter a sprig of mistletoe.
Seeing that the check-in attendant was an attractive young lady he leans forward, points to the mistletoe and says “Does this mean it’s my lucky day – am I allowed a kiss?”
“No” comes the reply. “It means you can kiss your baggage goodbye”.
Can the US aviation industry truly put its hand on its heart and say it’s proud of the service it offers the domestic consumer?
And once we look outside the US, the American citizen can either stick with the devil they know, who incidentally offers a bewildering range of codeshares on foreign airlines or they can have direct access to foreign airlines that they don’t know much about because they are barred from operating within the US domestic market.
The Taxpayer stands to gain.
Yes – there’s that voter again in a different guise. But a true open market system wouldn’t find the taxpayer funding huge pension liabilities of airlines in Chapter 11. Since the current system has loaded these liabilities onto the taxpayer at least make it worthwhile.
Are these subsidies to be used simply to prop up ‘the walking dead’ until the next crisis?
Or are they to be used to create some global winners in the aviation industry?
Which do you think that the voting taxpayer is going to prefer?
The Investor stands to gain.
As any investor will tell you, the U.S. aviation industry has not represented a great opportunity for shareholders.
The European aviation market currently has more attractive investment opportunities – it’s growing and most of its airlines are financially sound without resort to State Aid or Chapter 11.
And truly global airlines in an open market model could prove to be even better investment.
Well, 100% ownership and control of EU airlines is on offer. Now – no catches, no fudges, no caveats. It’s part of the EU Open Aviation Area offer.
Why is no-one on this side of the Atlantic talking about this?
Why aren’t U.S. entrepreneurs and private equity houses champing at the bit and knocking on DOT’s door to get a slice of the action in Europe? They do in other sectors.
Perhaps they don’t know what’s on offer?
And the employees stand to benefit.
At least those who work for the winners – both domestic winners or global winners, who will now have secure positions in growing businesses.
Of course not all employees will be winners, as the weak operators get taken out.
But then, is the current protectionist system helping the employees?
Is it securing their jobs? Since the year 2000, over 100,000 U.S. airline employees have lost their jobs.
Is it securing the pensions they thought they were entitled to?
Let’s face it – the current protectionist system is broken and offers nothing but empty promises for employees.
So if America gains, and American consumers, taxpayers, voters, investors and employees all gain, who loses?
Well, national pride takes a bit of a jolt if one of the big players is acquired by a foreign enterprise, but surely that’s not really significant in today’s world where the same has happened in many industries without damage.
The Unions stand to lose.
At least the unions will see themselves as potential losers.
They see their role as to protect the jobs of those members currently employed in the industry and indeed to protect their earnings too.
As we’ve seen, the current system is not achieving either of those aims.
I recognise that whilst it is easy to make the case for why a successful, thriving airline industry should be better for employment than what exists today that may be a hard sell to a Union Leader who may see things from a more parochial perspective.
In truth, Unions needn’t be losers in this and indeed acquisition of an existing airline by a foreign owner is more likely to save jobs than mergers between US domestic airlines.
Of course, the trump card that is played by protectionists is the National Security card. Sometimes known as CRAF – Civil Reserve Airfleet Programme.
They claim National Security could be at risk if foreigners got control of national airlines, because in emergency the US Government would lose the right to commandeer civilian planes for national defence purposes.
But would it really?
This trump card turns out to be only the deuce of trumps – easily overcome.
The same conditions could be placed on any airline operating within the US domestic market as an operating licence condition not an ownership condition.
So I ask again, why shouldn’t Congress vote in favour of change?
Is Congress truly so irrational as to pursue a status quo that is so plainly broken in preference to a model that has worked in other industries to make America the great country it is?
Well, obviously, I don’t know your Congress as well as you do – but shouldn’t we at least be asking them to make a choice? Shouldn’t we at least give Congress a chance to show some leadership?
So where does British Airways fit into this scenario?
We’ll take our chances.
We believe we offer a superior service – service that matters for people who value how they fly.
For example, we believe we have led the industry in flatbed business class travel and, even as world leaders, plan to unveil an upgraded Club World product in the Summer.
Some people prefer the cheapest route and nothing else matters.
That’s fine. It’s available from someone else.
We offer competitive pricing that we believe passengers, on completion of their journey, should be able to say – I’m glad I paid that little bit extra, it was worth it.
So we think we should be one of the long term winners in the open market model. We think a lot of people around the world would be pleased to pay a little bit extra – because it’s worth it.
But we understand the capitalist system just as well as you do here in America. If we get acquired by someone else as part of the consolidation process then at least our shareholders will be happy.
But not just them.
If we were acquired because of our success then presumably the acquirer would want to build on that success – so offering opportunities for employees to progress as well.
Like I say, we’ll take our chances. But this isn’t about British Airways, or any other airline. This is about the model.
And I suggest to you that the biggest long term winners would be America and the fare-paying consumer – our passengers.
And shouldn’t we be putting them first?

Source: Airline Business