Airlines are saddled with an outmoded international regulatory system. ICAO is giving them the opportunity to throw it off, but will they dare?
Flags of convenience have not, so far, been a choice for airlines. The idea, however, has struck sufficient fear into enough hearts to enable regulators and established airlines to use it as an excuse for not reviewing the conventions that have controlled international aviation for nearly 60 years. This has been merely the most emotive of a range of reasons for not examining better alternatives. Others include the wishes of governments that own flag carriers to control the competition they face and the fares they charge.
In calling its just-finished seminar "The challenges and opportunities of liberalisation", the International Civil Aviation Organisation is showing its impatience with the industry for failing to innovate and is trying to persuade them to confront the possibilities for change.
The USA began its domestic deregulation process in 1978 and completed the dismantling of the old Civil Aeronautics Board in 1983. It seems unbelievable now, but the old rules virtually confined Southwest Airlines to its home state of Texas. Deregulation allowed it to bust out of Texan state boundaries and prosper.
The European Union took 15 years to deregulate "domestically", but by the new millennium it had done so. If international airlines, or those that serve both international and domestic markets, need an example of how deregulation's simplicity can help airlines, look at the carriers that are making profits - the low-cost, no-frills airlines - while others face bankruptcy. One reason for their success is that they only operate in deregulated marketplaces. The regulatory simplicity and lack of restriction on management decisions about where and when they fly or what they may charge is one of the factors that enables them to offer low fares and still make a profit during a downturn. Encouraging examples of airlines operating in a quasi-deregulated international market are Singapore Airlines and Emirates. They operate from states that have more or less dumped the bilateral system, inviting all-comers from overseas to serve their hubs. They, in return, can go everywhere, and all they have to worry about is competition. It has certainly not damaged their financial health.
Meanwhile, carriers such as United Airlines and the other US majors are in trouble. Their roots were in a regulated domestic marketplace, and they inherited the management and workforce attitudes and the company and route structure that went with it. After deregulation they entered the international marketplace, and when they did so they acquired all the restrictions bequeathed them by the world's system of bilateral treaties and ownership restrictions.
Although ICAO in 1994 first broached the subject of reform that would enable a wider liberalisation for states that wanted it, nothing happened. Meanwhile, starting in the 1980s, some countries, pair by pair under the bilateral aviation treaty system, created open skies agreements. These benefited only the two states involved, and skies were "open" only by comparison with how restrictive they had been.
It seems to have taken the latest crisis in air transport business to force the airlines, in desperation, to look for another way. After 11 September 2001 several of the US majors' senior executives voiced in public their concern that foreign investment in US carriers was not even an option because it was against the rule book. While governments in the 1980s, and 1990s were gradually relaxing the conditions and restrictions in their bilateral treaties and calling this liberalisation, the treaties themselves still exist.
But the most pernicious of the rules is the ownership restriction. In order for an airline to be able to operate under a bilateral agreement it must have a definable nationality. This means majority ownership must be with citizens of its base country, which makes it easy to define which state oversees and enforces crucial standards such as safety for any given airline, and makes it easy for the senior executives to be called to account.
The fear has been that, if an airline can choose the state with which it registers, it will copy the marine industry and register with nations whose standards are the least demanding. Of course, airlines must have defined national registration so operators' certificates can be issued or withdrawn, but the 60-year assumption that ownership is the only way to define the state of registration shows a lack of imagination that was excusable only when the industry was in its infancy. Now ICAO has laid before the world air transport industry the opportunity to change this archaic system, the world's airlines must throw their hats into the ring and get down to making it happen.
Source: Flight International
