The Role of Boards in State Aviation Enterprises
Keynote Address to the APG World Connect Conference
Montréal, October 15, 2012 >>
The socio-economic contribution of the aviation industry is very important to all countries.
For aviation to be truly successful, the government needs to be a strong partner, and each aviation related organization – whether an airline, an airport, an air navigation services provider, or a regulatory agency – must share in this quest for success.
There is, at this time, a particular need for every aviation-related organization to understand the forces reshaping the aviation world in order to decide how best to reposition itself in this changing environment.
This has increased the responsibility – and the urgency – for those involved in the governance process to carry out a strategic direction review of their respective organizations.
We will recall that in December 1944, at the Chicago Convention, the International Civil Aviation Organization – ICAO – was created as an agency of the United Nations to oversee the orderly evolution of international aviation.
A few months later, in April 1945, the same participants at the Chicago Convention created IATA – the International Air Transport Association – to provide standards and guidance for the development of operational and commercial activities of the airlines.
With very few exceptions – essentially in the United States, where TWA (Trans World Airlines) and Pan American were privately owned – everywhere else in the world, every company and organization involved in aviation was controlled and operated by a State.
Governments controlled, owned, operated and regulated every facet of the commercial aviation activity including flight frequencies, capacity and the price of the product being offered by the airlines.
The paralyzing weight of bureaucratic aviation regulations – and increasing consumer pressure – led in the late 1970’s to a major change in the attitude of the United States vis-à-vis its commercial aviation.
In a bold move, the Carter Administration decided to disband most – if not all – of its commercial aviation regulatory oversight, thus opening its air transport industry to unrestricted market forces.
As one would expect, this caused a major upheaval, and the change was, of course, most disruptive to the established carriers.
Some airlines disappeared, unable to adapt; others restructured extensively, adapted, and became stronger.
With many of the regulatory entry barriers eliminated, numerous new airlines were able to emerge.
Most were based on a new “low cost” business model.
Unfortunately, many of those new carriers expanded too quickly, and were unable to survive when the next downturn of the economy occurred at the end of the ‘80s.
But as we know, the “low cost” concept survived, was re-launched a few years later, and now flourishes in every region of the globe.
Stimulated by the new opportunities, the market reacted with vigor and expanded rapidly.
With greater choice – and extensive price competition – the consumers were the clear winners!
The U.S. experiment was closely watched by other countries and regions.
And based on the conclusion that there was much more to gain than to lose, many States have followed the same path – but admittedly in a more gradual way.
Canada, for instance, deregulated its domestic market during the second half of the 1980s.
Previously considered as a highly regulated and quasi essential service, aviation is now – in most parts of the globe – regarded as a consumer product, largely driven by market forces.
Beyond the domestic air markets, liberalization has also progressed steadily on the international scene with the emergence of a number of common air markets such as within the European Community, as well as some regions in Asia, Africa and Latin America.
“Open Skies” style air bilateral agreements – launched originally at the initiative of the U.S.A. – have greatly increased opportunities to expand the market internationally.
Canada and the U.S.A., for example, reached an Open Skies Agreement some fifteen years ago – and air traffic between the two countries increased by some 27 percent in the following two years.
Exposing airlines to full and unrestricted market forces has resulted in a highly significant re-shaping of the airline industry.
Many “national” airlines have disappeared.
A number of previously “national” airlines have merged and restructured to create a more viable regional entity.
Typical of those in Europe are the Air France/KLM Group, the Lufthansa Group, and the International Airline Group – I.A.G. – of British Airways and Iberia.
A new breed of “national” airlines has emerged, typically from the Gulf States which have identified aviation as a strategic industry.
The new airlines, based on the so-called “low-cost business model “, have now firmly established a significant market presence in every region of the world.
Although prevented from merging across borders by foreign ownership restrictions, many “traditional carriers” have regrouped in alliances, and have also been permitted to operate joint ventures in specific markets.
Unaccustomed, and uncomfortable, in dealing with such fiercely competitive situations, States have found it very difficult – if not totally uneconomic – to continue to own and operate airlines.
Yet abandoning its own flag carrier has been a decision extremely difficult for many States to accept.
It can be an emotional subject – and a matter of “national pride”.
To postpone what is all too often unavoidable, a government may choose to continue to pour money into an airline to compensate for its mounting operating losses, hoping that somehow it may eventually turn around.
But without massive restructuring – read massive layoffs – and numerous other painful retrenchments equally politically unacceptable, continuing to support financially an inefficient and uncompetitive national airline at huge cost to the taxpayer may simply prolong the agony.
The demise of SABENA and ALITALIA are prime examples, and unfortunately the current situation of Air India appears to be following the same path.
Privatizing a national airline requires not only a management group willing to take – and live with – tough decisions. It also needs the support of a fully committed government.
The labor unions are usually strongly opposed – for obvious reasons – and the public in general is concerned about the loss of services.
For Air Canada, the decision by the Canadian government to deregulate air transport in Canada -and allow unrestricted competition – made it essential for the corporation to become privatized to be able to react quickly to rapidly changing market conditions, and to access much needed private capital.
More specifically, and as an example of the many aspects to consider in the case of the privatization of Air Canada – which I piloted –
• All labor contracts were re-negotiated to remove inefficiencies and improve productivity;
• There was a need to achieve a significant reduction in headcount and identify a number of services and functions which would be more economical to outsource;
• A number of uneconomic international and domestic services needed to be terminated, and we needed to find a way to deal with rather strong objections from the communities affected;
• In the case of the domestic services discontinued, we created a number of regional airlines which could provide adequate service at much lower cost;
• To reassure the smaller communities affected, a program of subsidies was put in place to ensure continuity of service;
• All the obligations of the corporation which had benefited from government guarantees had to be re-negotiated;
• An extensive employee and public communications program was carried out to explain – and reassure.
The successful privatization of Air Canada served as an example, and paved the way for other State corporations to become privatized.
Despite the obvious socio-political and economic difficulties which need to be overcome, the privatization of State-owned airlines has continued to progress – and in some cases accelerated.
During my term as Director General of IATA, we set up a few seminars to assist airlines in this difficult process.
The pressure to have the State “step back” from the ownership and operation in air transport activities is not limited to airlines.
The presence of private investment in other major elements of the air transport industry – such as airports and air navigation services – has also been growing.
Private capital seeks new investments in what had previously been regarded the restricted domain of States.
Additionally, a number of governments are anxious to reduce their deficits and have welcomed private investment, which would enable them to shift spending to other needs – for instance social.
This does not mean at all the end of the State presence in the field of air transportation.
While the State may reduce its intervention in the ownership and operational aspects of aviation, it should refocus its efforts in other areas.
Governments should shift towards becoming “referees”, setting the rules of the game to promote competitiveness and ensure, among other things, safety and security as well as public trust.
In any enterprise, regardless of the type or its nature, the role of a Board member is to represent the shareholders, and to ensure that the business is managed in the best interests of those shareholders.
In private enterprise, a very key role of the Board is to select and appoint the CEO – and, of course, to periodically evaluate the performance of the CEO.
In State-controlled companies, the choice of the CEO may – or may not – uniquely involve the Board.
In any event, the governance process needs to provide general oversight to ensure that the business is managed efficiently and in line with the mandate given to the CEO.
In aviation-related enterprises, one would have to add that the concerns for safety and security, as well as the issue of environmental impact, should also be subjects for Board discussion and oversight.
For any State-owned and operated enterprise, the Board probably has an even greater responsibility to minimize “reputational risk”.
It must ensure that the entity is well regarded by the public and avoids any controversial situation – particularly any which could cause embarrassment to the shareholders.
State-controlled entities are, by their very nature, rather risk adverse. The decision making process is very slow and requires many checks and balances.
Following established procedures is often more important than the results.
And yet, facing up to commercial challenges requires taking a certain amount of risk to manage the necessary change, as well as react quickly to a changing market and competitive environment.
Together with management, the governance process must come to grips with the transformations required to best position the enterprise in its need to respond to the challenges – and opportunities.
This may call for:
• Reviewing and redefining the mission/mandate;
• Setting some new objectives;
• Re-assessing the re-affirming the values;
all of which would be necessary to provide appropriate guidance to the development of a new strategic plan.
But, of course, this new mission, new objectives and new strategic plan cannot be developed without the participation – and agreement – of the shareholders.
And here, in my view, lies an important role for the governance process.
There is a need to encourage the government to develop or adapt its aviation policies in response to the changing economic and competitive environment – a role of liaison between the management and the State to ensure mutual understanding of the challenges being faced, and the socio-political-economic implications of the changes being contemplated.
The socio-economic impact of air transport is simply huge on any country, region, and indeed the world.
A recent study carried out by Oxford Economics clearly demonstrated the economic and social benefits of aviation at the national level.
This study involved over 50 countries, and concluded that when the air transport industry was encouraged to grow efficiently – in response to the demands of the expanding market – the economic impact was very substantial.
But achieving those substantial benefits could only be obtained if:
• The proper investments are made to support efficient growth – either by the State making the investment, or by encouraging private interests to meet the requirements;
• Taxes and levies of all kinds are kept at a just minimum ;
• Monopoly suppliers are efficiently regulated, with proper incentives to strive for better productivity.
This, incidentally, is one of the major areas of IATA activity on behalf of the airlines of course, but equally of interest to the air traveler who ultimately will bear the brunt of the additional costs.
• The demand for air transport – under market forces – has been expanding and will continue to expand;
• The demand for investment in air transport – required to meet adequately that demand – has been growing and needs to be met if the benefits are to be realized.
• The State is likely to depend increasingly on private investment to fund the growth in aviation and its required infrastructure.
• The various actors of the aviation industry increasingly need to respond to commercial/business criteria, and in that context the role of the State in the air transport industry is being challenged and needs to be redefined.
• Given the huge socio-economic benefits generated by air transport, the State must act to encourage this growth, and develop an appropriate and comprehensive aviation policy – balancing, as the need may be, the various socio, political economic considerations.
At the end of the day, one must deal with the realities of each case.
Government is also about the “art of compromise”.
In this period of transition, what role should be played by the governance process assisting States in developing a new vision – and a new government policy? More specifically
• What part of air transport should be largely, if not totally driven by the market?
• What safeguards, if any, are required?
• What should remain state-owned, and why?
• Under what conditions would a public-private partnership be desirable?
Can appropriate conditions be developed to satisfy both the public requirements – and the private expectations?
These are a few of the decisions being faced by those involved in the governance process.
But in closing, the fundamental question really is:
• In this period of transition, where should the frontier lie between the State – and the market?