Assn. of Asia Pacific Airlines DG Andrew Herdman expressed his frustration with the current system during his organizations' Presidents Assembly meeting in Singapore last week: "If Nokia was operating under the same framework as the airline industry, you would have to have a Finish passport to buy one of its phones. [Regarding the automobile industry] you could only buy a Japanese car in the US if you were going to drive it on roads outside the US."
While this may be a bit overstated (after all, consumers can purchase airline tickets across borders and liberal cross-border rules in the automobile industry haven't insulated automakers from fiscal distress), his exasperation is understandable and widely shared throughout the airline industry.
The global structure left in place by the 1944 Chicago Convention has resulted in hundreds of airlines around the world (rather than the relatively small number of major companies in other worldwide industries) competing under rules that limit their international endeavors to what is allowed in the patchwork of bilateral accords negotiated between nations. "We are governed by a system that is completely obsolete," IATA DG and CEO Giovanni Bisignani said on a conference call with reporters last week. "It's a sick industry with too many layers."
Bisignani believes his organization achieved a breakthrough last week when the US, EU, Chile, Malaysia, Panama, Singapore, Switzerland and the UAE signed a multinational agreement to consider a liberalization of the restrictions that govern bilateral air services agreements, including a promise "to consider the possibility of a multilateral agreement to waive ownership restrictions" (ATWOnline, Nov. 17). Though the accord is nonbinding, it represents a significant indication of government intention and can be used as a starting point, he commented, predicting that additional nations likely will sign it in coming months.
Former US Dept. of Transportation Under Secretary for Policy Jeffrey Shane, now a partner in the law firm Hogan and Hartson specializing in international transportation issues and advising IATA on liberalization, said the airline industry is making a "dramatic departure" from its past strategy of asking for government bailouts during periods of economic crisis: "What you see happening now is. . .the global industry seeking greater liberalization, saying to governments, 'We are constrained by the structure of these bilateral agreements. We simply want you. . .through an agreement of reciprocity [to say] you will not enforce some of the rules that are keeping us from being able to make profits'. . .It is a paradox that one of the most international industries is really the least international in terms of its corporate structure." He added that the world's governments "need to get away from this very backward looking, retrograde way of looking at air transport."
Bisignani emphasized that "we want to solve our problems with economic freedom [rather than through government subsidies]. We want to run our business as a normal business." He said a key reason liberalization is needed is so that the industry can reorganize to a more manageable number of carriers. "Consolidation is a must," he stated, pointing out there are more than 1,500 airlines in the world. "How is this possible? Because the rules of the game are not giving us the opportunity to merge and consolidate."
The case against liberalization is mainly rooted in concerns over national security and safety that Bisignani argues are long-outdated. He explained, "In 1944, [Chicago Convention participants] asked, 'What is the difference between the shipping sector [which is largely liberalized] and aviation? [They concluded] if we allow an airline to fly over our country, the plane could carry bombs, and to make sure we are safe, we want to be sure that the plane is owned by a state we respect'. . .Would you imagine this as a problem today? This is history. We need to change."
Shane added that "sovereignty is not an issue at all" because under IATA's vision, "each airline would still be required to have a principal place of business. . .There is no suggestion we will diminish their identity as national carriers." Rather than eliminating an airline's so-called nationality, "we are just talking about where the investment comes from," he said. Under a liberalized structure, the primary change would be that governments no longer would "care about who owns [an airline's] voting shares any more than we care about [ownership makeup in] any other industry."
Of course opposition to changes in ownership and control laws remains intense, particularly from labor. Former US President George W. Bush's administration spent years trying to convince the US Congress to lift the country's ceiling on foreign voting shares in a US airline from 25% to 49%, arguing that carriers would benefit greatly from having access to more sources of capital even as they still would be required to be majority-controlled by US citizens.
However, airline labor unions mounted an intense lobbying campaign against the initiative, with the Air Line Pilots Assn. telling its members they were in a "fight for survival" because their jobs could be outsourced. The 25% limitation remains and the current Congress appears to have little appetite for making a change.
And while last week's agreement encourages governments to ease restrictions on cross-border investment, it was less clear on the always-controversial subject of cabotage. The signatory states "agreed on principles that seek to reduce restrictions on market access and to expedite the further opening of markets in future bilateral negotiations," IATA said. But the specifics of allowing, for example, Lufthansa to operate flights from Boston to Seattle are not likely to be resolved easily anytime soon.