AIRLINE MODELS
Lecture to McGill University School of Management
Pierre J Jeanniot, O.C., C.Q., FRAeS
Montreal, 1 March 2018

 

Commercial aviation started in the Western countries …. in the 1920’s and 1930’s.  … It served some elitist passenger markets … and also some cargo markets and postal services … which enabled goods and information to be transported fairly quickly … compared to the more conventional ground systems that existed at that time.

The volumes were very small … and during World War Two the demand for commercial air transport virtually disappeared … and was dominated completely by the needs of aviation military applications.

At the end of the Second World War …interest in commercial aviation transportation revived fairly quickly … and some of the technical developments which had been made for war purposes were rapidly adapted to civil aviation … mainly passenger travel.

As commercial aviation was likely to grow rapidly … the various governments decided it was necessary to develop rules to regulate … how flights would take place between countries.

This was accomplished by the Chicago Convention in December 1944 … which created ICAO … the International Civil Aviation Organization … an organization of the United Nations … which established a set of rules … or Freedom Rights.

It was followed by the creation of IATA … the International Air Transport Association …  in April 1945 to provide a framework … and rules on how to operate/manage airlines.

From the start …  air transportation was viewed as an exchange of commercial opportunities … and the regulations developed to facilitate travel between countries consisted of a number of rights … such as air rights to fly to a country … rights to pick up passengers from that country … rights to fly over a country … rights to link a country beyond the two countries in question … and so on.

The exchange of commercial operating rights between countries requesting access to markets … required equal opportunities on each side.

The exchange of access to markets … was covered by an international treaty called … an air bilateral agreement. …

This covered an exchange of rights between each country …and regulated how … flights of passengers and cargo … should take place between those countries.

Essentially … this was an international treaty … to permit the exploitation of commercial opportunities in each county.

These agreements originally dealt with a rather elitist market.

The costs of flying were very high … and only the upper class of the population could afford them.

In addition to high quality leisure traffic … there was a need for travel for business … and political reasons.

There was a need to fly between different countries … to ensure that there were adequate … and rapid connections between those countries.

With the exception of two airlines in the U.S. … namely Pan American and TWA … the airlines of every other country were government … owned … and operated according to the rights that had been negotiated by their respective countries.

Most countries wanted an airline for “political reasons” … to establish control over their airspace … and to acquire an international presence.  Hence the term … “National Flag Carrier”.
Two things essentially governed commercial aviation:

• The exchange of commercial rights to exploit the markets between two countries;
• And second … also very important …, was the need for a safe operation to the extent possible … which required increased regulation … and the enforcement of safe practices by each of the operating airlines.

In the years following the Second World War … the number of flights … the size of the airplane … the exchange of rights between countries … were growing fairly rapidly.

Every nation regulated very closely the development of aviation within its respective country and … of course … the development of civil aviation between each country … was regulated by international air bilateral agreements … under the auspices of ICAO.

IATA was to provide rules … and processes … for the actual operation and management … e.g. tariff coordination … standardized procedures for ticketing … cargo … etc.

The concept … or model of national flag carrier … still exists today …   although even those airlines … which are still owned totally … or partially … by a government … have had to become more business-like … and to be guided by commercial considerations.

Any operator within its own country … was under the jurisdiction of its own Air Regulation Bureau … and its international flights would be governed by the Air Bilateral Treaties … its government would have negotiated.

For instance … Air Canada was created to provide fast transportation from one end of the country to the other. This initial role was in many ways … similar to the creation … decades previously … of the trans continental railways.

The original name of “Trans-Canada Airlines” reflected that role … but it was changed to Air Canada when it developed an international network … originally to Britain … then France … Germany and Switzerland.

The mandate was largely to provide fast service at break-even cost.

One Minister of Transport was fond of saying “Stay away from the tax payers purse … and we will stay away from your business.”

But that was not always so!

For instance … when I was head of the company … while it was still a Crown Corporation …  I was prevented from starting a Frequent Flyer program for the best part of a year … by the government … which originally had considered that this was not part of its mandate!

As a crown corporation … Air Canada was required to appear annually …  in front of various committees … where any parliamentary elected individual could appear … and ask questions.

The following anecdote is fairly typical of the kind of cross-examination which could routinely take place.

“The quantity of Canadian wine on board of Air Canada airplanes … being pushed by the Minister representing a southern Ontario riding. – (typical anecdote)

*****

As one can see … sometimes … narrow political motives can become a factor … without any commercial considerations.

A decreasing number of national carriers still largely operate with non-commercial constraints … but generally will still require financial subsidies.

Or … have been allowed to disappear … e.g. Sabena.

*****

Later in the 1960’s … a number of technical developments increased … the productivity of operations.

Most important were the jet engine … and the jet-liner.

It was now possible to transport twice the number of passengers … at twice the speed … on any transatlantic flight.

These new airplanes increased the productivity by 4:1.

Some entrepreneurs understood … that if one could increase the seating density … and achieve a higher degree of seat occupancy … say around 90% … one could operate a flight profitably … while setting a price at less than 50% of what a regular flight was charging.

In some ways … that was the first type of “low cost model”.

They were called … Affinity charters”.

Theoretically … one had to belong to a group … which occupied the entire flight … and required that almost every seat on that flight had been sold.

Affinity charters thus made air transportation available … to less affluent people.

These charters could benefit from the higher level of seating occupation … and therefore this made it possible to operate and sell tickets at lower prices.

The requirement to belong to a group … was subsequently removed.

An airline model that emerged … at that time and featured lower prices … was Laker Airways … called “Sky Train”.

Laker was able to create a new product … which did not require most of the overheads…  of the established airlines.

The airline did not have a reservations system – it was simply walk on … walk off.

Laker Airways operated routinely between major markets … such as London/New York.

The model was dependent on little overhead … and high density seating and occupation.

A rather similar affinity charter format existed in Canada … and met the needs of the low-cost market.

That was the charter airline operated by Wardair.

Wardair operated a series of programme of seasonal frequencies.

It depended on high occupancy … and offered fares which were much cheaper … than those offered by the regular airlines.

Those successful operations encouraged the growth of consumerism …  leading to a demand … for the wide availability of lower cost air transportation.

*****

The Air Regulation Act was passed by the U.S.A. in 1978 to remove Federal control over routes … pricing … frequencies etc. and to allow total “domestic” competition.

All commercial constraints were to be removed … but naturally the U.S.A. maintained all regulations on safety.

Shortly after … the U.S. abolished the CAB (the Civil Authority Board) … which was a rigid …  bureaucratic mechanism … and had become redundant.

This created a climate of total … unrestricted … commercial competition within the U.S. territory.

The U.S.A. domestic air transport deregulation was sudden … and virtually instantaneous.

From that moment on … the U.S. airlines were allowed to fly anywhere they wished within the U.S. … with any flight frequency … any seating arrangements … for any price.

The only remaining regulations concerned safety … and associated air worthiness regulation.

Proving they met the safety requirements … some dozen and a half new airlines emerged fairly quickly.

These were the first U.S. low-cost airlines.

Invariably … these low costs were based on the same model … essentially

• Very low fixed costs/and overheads
• Single airplane type fleet
• Higher density seating configuration
• Single class
• High aircraft daily utilization/fast turnaround
• Focussing their operation on relatively large markets … e.g. Chicago-New York.

Pricing was designed … to significantly undercut existing airlines … on the targeted routes …

And hopefully attract new flyers … In other words … expand the market.

Employees at counters … and flight attendants … would be young … enthusiastic … and relatively low paid.

Typical of those airlines were “Peoples’ Express … the “New York Air” … the “Southwest Airlines”.

A number of traditional U.S. airlines were unable to cope … with the new degree of competition … which was being introduced.

A number of airlines disappeared … or consolidated … such as Eastern and Continental.

Of those new low-cost airlines … some 10 years later … only Southwest Airlines survived. …  The other low-costs were unable to achieve a profitable operation … in a sustainable fashion.

A good question would be …

Why were all the new low-cost airlines unable to survive … short of Southwest?

Apart from managerial know-how … the major difference lay in their choice of markets … and their aircraft scheduling strategies.

The survivor … Southwest … avoided head-on competition … and specialized in smaller markets where there was less competition.

They also decided to serve point-to-point markets … where customers were being inconvenienced … by the hub strategy being followed by the legacy/larger airlines.

Clearly … many passengers may prefer a direct flight … to a connection … if the timing is suitable.

It is also fair to say that Southwest was able to sustain enthusiasm … within its young group of flight attendants and airport employees.

The vast majority of new “low-costs” … chose to go head-to-head with established airlines on major markets.

They were unable to sustain their operation … to gain a sufficient presence … and achieve a minimum profit.

The difficult financial situation … faced by most businesses in the 1980’s … also contributed to their failures.

Given the proximity of the U.S.A. … Canada felt the need …  for progressive deregulation … of the commercial Canadian aviation market.

The Canadian government introduced …  a Domestic Commercial Aviation Deregulation Act … which progressively provided total domestic freedom.

The 1984 “Freedom to Move” Act permitted … progressively …

• Any airline to fly anywhere in Canada
• Total freedom on frequency and pricing

But … of course … the Act maintained all safety-related regulations.

Air Canada … was government-controlled and was faced with the choice of becoming a private enterprise … or eventually disappearing …. since it would not be able to compete on the open market … as a number of important decisions needed government approval.

The new Act forced Air Canada to privatise … encouraged new low costs to emerge … and caused some of the existing airlines to merge … particularly PWA acquiring CPAir … then Wardair.

A new low-cost was successfully launched … “WestJet” … which wisely followed the same successful model … as Southwest Airlines … e.g. one airplane type … high seat density and one class.

WestJet originally …  avoided head to head competition … and also recruited some young and enthusiastic employees.

A number of regional airlines merged … or disappeared … and some of the more traditional charters … survived … generally as a component or holiday/destination package … example Air Transat.

The U.S. Domestic Deregulation Act … had allowed full freedom to the airlines to alter their schedules.

To increase their efficiency in serving the market … the surviving traditional airlines decided to build around a major hub … sometimes called “Fortress Hubs”.

For example … Atlanta became the major hub of Delta …. Dallas for American Airlines … and Chicago for United Airlines.

This enabled each major airline to concentrate traffic … increase the efficiency of airplane utilization … as well as ground services.

The hub strategy provided for more frequent services to the “spoke” cities … but required passengers to transit through the hubs.

This “fortress hub” strategy …  enabled the major airlines to dominate the market of their major hubs.

The passengers had a joke …

“With this system … when I die and I wish to go to heaven … I will have to go through Atlanta … Dallas … or Chicago.”

Hubs were also developed for air freight.

The strategy of the domestic cargo hub in Memphis … enabled FedEx to offer an efficient package delivery service … throughout North America … daily.

On the international side … KLM … was probably the first airline to build an international hub in Schiphol (Amsterdam).

Exploiting its strategic geographic position in Europe … and the proximity of relatively underserved markets … KLM was quite successful at growing its traffic … well beyond its own base.

KLM became a 6^th Freedom specialist … handling traffic flows from other countries … to other countries through Amsterdam.

With a relatively small “home market” … Singapore … an island state … exploited the same strategy … driving traffic flows from Southeast Asia to Europe … through Changi Airport.

*****

During the 1990’s … the European Community decided to deregulate progressively the air travel market.

The creation of a European Common Air Market enabled:

“Any current regular European airline to have unlimited freedom to operate within the Common Market … any location … frequency … price …etc.

The emergence of new carriers … essentially low-costs … with the ability to operate anywhere within the Common Market.”

The model of the new European low-costs … was similar …  to the original group of low-cost airlines in the U.S. … with the following differences:

The new European low-costs:

• Avoided head to head competition
• Operated from secondary/low cost airports
• Attempted to avoid unions
• Emphasises ancillary revenues
• Located their corporate H.Q. … in countries with the lowest corporate tax (e.g. Ireland).

These features enabled a number of new low-costs to grow rapidly … e.g. Ryanair … EasyJet etc.

As expected … the European deregulation forced regular … or legacy … airlines to attempt to adjust … to the increased competition.

Some were allowed to fail … e.g. Sabena … and many consolidated.

Eventually … three major groups emerged … one led by British Airways … the International Airline Group … (IAG) … which included BA … Iberia … and Vueling … a low-cost airline.

The second group was led by Lufthansa … which acquired Swiss … (formerly Swissair) … Austrian Airlines … Brussels Airline … (replaced Sabena) … and low-cost airlines Eurowings … and German Wings.

The third group … of Air France/KLM … operating Transavia … originally created by KLM … Air France is also starting another low-cost … Joon.

The acquisition … or development … of a low-cost airline by the three major European groups … is a recognition of the significant success of the new European low-cost … and an attempt to participate in this expanding market.

The strategy followed by these three major groups … is to concentrate their traditional operations … on the long-haul markets … and to expect their low -cost subsidiaries … to regain a reasonable market presence … on the short to medium routes in Europe.

This assumes … that the long-haul market … will not be seriously threatened … by new low-cost airlines attempting to achieve a profitable operation on the long-haul market.

Long haul/low cost airlines … first began operating in Asia.

“Long-haul” market is defined here … as any operation of more than 4,500 kms.

One of the contenders … in the long-haul low-cost market is Air Asia X … which was originally targeting long-haul markets from Kuala Lumpur in Malaysia … to Sydney Australia … and from Kuala Lumpur … to London England.

The key features of the Air Asia X Business Plan are:

• Single aircraft type operation … (wide-body) A-330 …

B-767-300 etc.

• Daily aircraft hours utilization of 16 hours/day +
• High density seating … and assigned seating

[to help boarding]

• Discretionary income generated by all frills … (food … drinks … entertainment … baggage … certain seats etc.)
• Connections offered … for a fee … but no hub and spoke.
• The L.C.C. terminal at Kuala Lumpur Airport … and Gatwick in London.

Air Asia X has set as an objective … to achieve operating costs of 50% less than the competition … which is a very challenging objective.

The other major low-cost … long-haul contender … is Norwegian International … which is hoping to use more narrow-body aircraft on Atlantic routes … such as Boeing 737 Max … to connect Ireland and Scotland … with secondary airports in the U.S.

But adopting the European model to a long-haul operation has been challenging … and Norwegian’s long-haul operation is running lean. … [difficult to replace aircraft if mechanical] … (poor on-time performance)

While it was able to register its aircraft in Ireland … to benefit from lower corporate tax … Norwegian was not able to circumvent labour law by hiring Thai crew.

Ryanair had been able to sign up its flying personnel … to an individual contract … in Singapore  (now threatened).

In spite of all these efforts … in both Asia and Europe … long-haul low-cost operation has yet to demonstrate clearly … that this model … ensures sustained financial viability.

The growth of low-cost carriers … particularly Ryanair and EasyJet … has been nothing short of spectacular.

Today … Ryanair is the largest European airline … in terms of passengers carried annually.

Perhaps feeling that the low-cost market is becoming saturated … some low-costs have now decided … to attract a portion of the business traveller … by offering a “modest” business product and thus enjoying better yields.

This has given rise to a “hybrid” model for some low-costs.

Their “Business Plus” product includes:

• Travel flexibility (ability to change flights)
• Reserved seat priority
• Booking priority
• Baggage allowance, and
• Dedicated Business check-in at airports

Typical of those are WestJet and Southwest in North America … and EasyJet as well as Ryanair on some European routes.

Some of those low-costs are also offering connection services … which had not been available previously.

*****

In the extreme case of the Ultra-low-costs … every possible feature … such as choice of seats … baggage … any food or entertainment etc. … is the subject of additional price.

A number of ultra low-cost airlines … in the U.S.A. … are leading the way.

Typical of those are “Spirit Airlines” and “Frontier”.

The traditional Ryanair is still the true low-cost … and “no frills” champion … but for these ultra low-cost airlines … ancillary revenues account for an increasing part of their profits.

Internet … and fare search engines … have strongly increased the transparency of pricing … and the face value of tickets … has become the main driver … for customer purchasing behaviour.

Promoting the idea that customers will only be charged … for the services they chose.

For the airlines … ancillary fees represent a high revenue potential … with a large profit margin.

At the centre of the strategy … of those ultra low-cost airlines … lies the need to be a low fare leader in the market.

They aim at operating at fares … at least 25% lower than charged by the competition.

These airlines are planning average daily utilization … of more than 12 hours/day

… and an average load factor of over 85% or more.

New flights to small airports … is also a component of their strategy.

Finally … ancillary revenues have the advantage of being less seasonal … for example … fares move up and down … but baggage fees stay the same.

Three new ultra low-cost airlines are presently being planned in Canada.

“SWOOP” … the new WestJet airline’s … ultra low-cost … will begin domestic flights …. In June … with flights between Abbotsford in B.C. … and Hamilton and Halifax.

While fares will be at rock-bottom levels … SWOOP passengers … will similarly pay for everything beyond the seat itself.

In some cases … ancillary fees may exceed the cost of the fare.

Jetlines … and FlyToo … are still hoping to start operating in the next timeframe … hopefully in 2018.

Required financing is said to be mostly in place … and their plan is said to follow the same successful ultra low-cost model.

We wish them the best.

*****

There are several important topics … which given time constraints … we have not been able to explore … such as:

• The nature and impact of airline alliances
• The “Open Sky” air bilateral … originally promoted by the U.S.A. … to guide aviation rights bilateral negotiations … which increased international competition.
• and the controversy surrounding the definition of “fairness” in the implementation … of Open Sky Air Bilaterals between Gulf Airlines … and the European and U.S. legacy airlines.

Those subjects … and others … have an impact on the evolution of airline markets … and would require further discussion.

 

IATA’S EVENT >> 
30 AUGUST 2016 >> 

Distinguished guests, friends and former colleagues

I am honored – and happy – to be part of this gathering on the occasion of “IATA’s Changing of the Guard”.

I have had the privilege, over the past few years, to get to know Tony Tyler and to witness his important contribution to the international aviation world. Tony’s style of leadership contrasted significantly from that of his immediate predecessor, reminding us that much can be accomplished by a persuasive, quiet and diplomatic style.

Many others have highlighted Tony’s many accomplishments which have been widely acclaimed, and I would not attempt to offend his well-known
modesty by repeating those numerous achievements here.

But I believe that I am expressing the sentiments of the entire Montreal international aviation community when I express our gratitude to Tony for his – and IATA’s – contribution here.

And in saying on their behalf, “au revoir, bon vent” and our best wishes in your future endeavours.

At the same time, I wish to say to Alexandre de Juniac “bien venu et nous espérons vous voir ici souvent – vous êtes chez vous!” as you will remember, of course, that IATA is a Canadian organization, having been created by an Act of the Canadian Parliament.

We all know that Alexandre brings to the Director General’s role – a unique combination of government experience, aerospace hi-tech manufacturing and, of course, airline leadership as CEO of a major international airline. He will require all of that experience and wisdom to steer IATA through the turbulent skies our industry faces all too frequently!

It has often been said that management is much more an “art” than a science.

Some business schools have yet to make that observation!

One of our well-known Canadian authors, “Pierre Burton”, once described a Canadian as “someone who can make love in a canoe”.

Now, I don’t know how many of you have ever tried, but I can assure you that to make love in a canoe takes a lot of determination, a certain acceptance of risk, and a great sense of equilibrium.

Determination, acceptance of risk, and a sense of equilibrium – those skills were very useful to me in my role at IATA, and I would encourage Alexandre to acquire a canoe if he does not own one already.

At times, some IATA meetings would remind me of Kevin Costner in the film “Dancing with Wolves”.

All the wolves need attention, but you must always remember that you could become fair game at any time!

Those meetings would sometimes illustrate that “common sense” is not as common as you may think.

It is useful for any Director General to practice the art of letting a consensus emerge. The D.G. does not really have the authority to impose a view. At best he can use “moral-suasion”. and appeal to the solidarity – and moral responsibility – of the participants, reminding them that an “imperfect agreement” is sometimes better than “no agreement”.

If, at the end of the day, you have not disappointed too many – and pleased quite a few – you must have done it right!

But unlike a science, art can mean different things to different people.

A visitor at a painting exhibition was truly puzzled by a Picasso painting and, since the artist was standing by, the visitor enquired
“Mr. Picasso, can you tell us what this painting means to you?”

Picasso smiled and replied “Oh,

approximately 200,000 US dollars!”

Unlike science, the art of management requires different styles for different circumstances, from Mother Theresa to Niccolo Machiavelli!

At times you need the agility of a politician

One of my favorite politicians would say “If you think it is easy to be a politician, try standing on a fence while keeping your ear to the ground!”

At other times, the role may call for the cold neutrality of an impartial judge.

Sometimes it may call for quick action. Le Prince de Talleyrand would say “the art of statesmanship is to foresee the inevitable, and to expedite its occurrence”.

In adversity, we can get some valuable lessons from Winston Churchill’s determination.

In his darkest hour, Churchill would convincingly declare “Never, never, never give up! And if you are going through hell just keep on going!”.

Ladies and gentlemen, it may be wise for me to stop here.

I do not want to sound like the “mother-in-law” giving advice to the newly weds.

It is easy for some of us who have been there to give good advice, perhaps simply to console ourselves that we are no longer in a position to set a bad example.

Once again, Tony, all the best to you!

And Alexandre, we wish you great success. I know that you can count on everyone here, myself included, to support you to the best of our abilities

Thank you very much.

APG WORLD CONNECT

October 29, 2015 – Marrakech

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THE GREAT DEBATE >

“Open Skies” or “Fair Skies”? That is the question >

Moderator Pierre Jeanniot  >>

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Having completed their respective consolidations, the three major U.S. airlines – namely United, Delta, and American – have been reaching a new height in profitability.

The profit forecast for the current year continues to be excellent, and some concerns are beginning to appear about what is starting to look like a comfortable oligopoly.

An immunized Joint Venture involving the major players of each of the three key alliances was in place and controlling a substantial portion of the trans-Atlantic traffic.

It was now time to renew the fleet – and finally reward the shareholders.

In Europe, the Lufthansa Group and the Air France/KLM Group are hoping to finally reach an agreement with their respective unions to expand low cost subsidiaries, which hopefully will contain the erosion of their domestic/European traffic caused by Ryan Air and Easy Jet , among others.

Lufthansa had an ambitious program in place for German Wings, and the Air France/KLM Group was anxious to obtain the green light to substantially grow TransAvia.

The International Airline Group (IAG), led by British Airways, had been the first to restructure by “right-sizing” Iberia and establishing a strong presence in the low costs game with the acquisition of Vueling.

One would have expected that some new stability would emerge for the airline industry, but this was not to be the case.

 

The Gulf Carriers’ Hub Strategy

Exploiting a strategic geographic position – or some other specific advantages, whether economic, historical or otherwise – is nothing new.

Venice took advantage of its strategic geographic position on the Adriatic sea, and the financial strength of its bankers, to control the trade between Europe and the Middle East during the 13^th to the 15^th centuries.

Genoa became a competing hub, and later on Amsterdam developed a dominant position in Northern Europe.

England, a state island, felt obligated to ensure that London would become a strong naval hub.

In more recent times – and looking at the commercial aviation side – KLM was probably the first airline to build an international aviation hub in Schiphol.

KLM was quite successful at growing its market well beyond its own home base.

KLM became a 6^th freedom specialist, handling traffic flows from other countries to other countries through Amsterdam.

Singapore, an island state, exploited the same strategy, driving traffic from south-east Asia to Europe through Changi Airport.

It is therefore not surprising to see that both Singapore and the Netherlands were the first to welcome with open arms, and to adhere to the U.S.A. “open skies” type of bilateral – essentially because the “open skies” bilateral further facilitated the expansion of the 6^th freedom strategies.

A decade ago, the Gulf Airlines’ 6^th freedom traffic was not yet very significant and did not attract much attention.

However, their growth ambitions should have been fairly obvious, given the very large quantity of aircraft they were ordering.

Last year, the three Gulf airlines – together with Turkish Airlines which is following a similar strategy – carried a combined total of 115 million passengers.

The European legacy airlines began to lose an increasingly significant share of their long-haul market to Asia, which was being diverted through the Gulf airlines’ respective hubs.

Lufthansa believes that its Frankfurt hub has lost nearly a third of its market share on routes between Europe and Asia since 2005.

Emirates and Qatar Airways now serve some 32 destinations in Europe, and Turkish Airlines operates at 84 European airports.

Those carriers are in the process of adding many services to more points in Asia, and are expected to take an increasing share of the Europe to Asia traffic.

They are also increasingly providing good connectivity through their hubs to various points in India, and in the Eastern part of Africa.

The legacy European carriers’ initial attempt to draw attention to their perceived lack of “level playing field” was unsuccessful in bringing the E.U.’s attention to the matter, perhaps because:

• These Gulf carriers were placing on order a huge amount of European-built airplanes, and
• Europe was attempting to negotiate with the U.S.A. an air bilateral agreement which was trying to be even more liberal than “open sky” and would permit expanded foreign ownership.

And thus, on the basis of “if you can’t beat them, join them”, European carriers began to look for accommodations, if only reluctantly.

• Air France/KLM declined to inject more funds into the restructuring of Alitalia, and instead tacitly accepted that, by default, Etihad would acquire a 25% commanding stake in Alitalia.
• Air France/KLM, while maintaining a much reduced position in Alitalia, developed a series of code shares with Etihad – to protect their position.
• The I.A.G. invited Qatar Airways to join “One World Alliance”, and Qatar purchased 9.99% of IAG’s stock.
• More recently, Lufthansa formed a Joint Venture with Turkish Airlines called “Sun Express” for vacation destinations in Turkey and various Mediterranean and Middle East destinations.
• The European Community had tacitly approved an investment of 49% by Etihad in Air Berlin and some 25% investment in Alitalia.

Additionally, the Swiss Civil Aviation Authority gave approval to a 33% stake of Etihad in “Darwin” which was rebranded Etihad Regional.

And then, choosing not to rely on its previous relationship with B.A., Qantas became a major partner of Emirates, choosing their hubs as the most appropriate way to connect with many European destinations.

However, having explored many of the opportunities in Europe, the Gulf carriers now turned their sights on North America.

Now they were ramping up their service to the U.S.A. – to the dismay of the major North American international carriers.

 

Claims of Unfair Competition

The U.S.A. coalition of airlines, a lobby group representing, primarily, the three major North American carriers – Delta, American, United, and their unions – released a document to back a report accusing the Gulf carriers of having received some 42 billion USD in assistance by their respective States over the past decades, and they alleged that this was only the “tip of the iceberg”.

Those benefits would include such things as:

• Zero interest loans – with no arrangements for repayment;
• Grants of land which could be regarded as subsidies;
• Development of massive airports, built and paid by the State, and very cheap rent facilities and landing charges;
• Low labor rates because the home state bans unions;
• Low personal and corporate tax rates to promote the growth of business.

These three carriers were pressing the “White House” and the Department of State Transportation and Commerce, to revise or terminate the “Open Skies” air bilateral agreements with the United Arab Emirates (U.A.E.) and Qatar.

They claim that the extensive government support enjoyed by the Gulf carriers provides them with unfair advantages, and distorts competitiveness.

Not all the U.S. airlines support the attacks. Fedex – a major beneficiary of the U.S. “Open Skies”, and one of the world’s largest airlines – opposes any major change to the current “Open Skies” policy.

Fedex President/CEO, David Bronczek, wrote: “These U.S. passenger carriers do not fly extensively between foreign points like Fedex does. From its Dubai hub, a gateway into Africa, Fedex flights from the U.S. crisscross with our flights from India and Asia, in order to move U.S. products into local markets.”

The U.S. Travelers’ Association and several airlines such as Alaska, Hawaiian, and Jet Blue, have also indicated their opposition to any changes, and have signed a letter defending the Gulf carriers.

The U.S.-U.A.E. Business Council asked that Delta release for public review its study of the subsidies provided by the Gulf States to their airlines, and redirected public attention to its own 2013 “Study of the Impact of Open Skies on the U.S.-U.A.E. relationship”.

This study had identified that the impact of Open Skies on the U.S.-U.A.E. relationship was 16 billion USD and 200,000 manufacturing jobs, plus some 6 billion USD in increased inbound tourism.

 

Who is more subsidized?

Both sides have essentially made claims that their counterpart has benefitted from unfair financial support which has been distorting competition.

The Gulf carriers have responded vigorously to the U.S. major airlines’ allegations. Emirates has published a huge report which indicates that, contrary to these allegations, Emirates received only a total of 218 million US dollars in capital investment and has returned some 3.8 billion US dollars in dividend to the shareholder, while the U.S. carriers have received benefits of some 100 billion US dollars.

Ethiad has estimated that American Airlines, Delta, and United Airlines received 71.48 billion US dollars in government sanctioned “benefits and concessions”, which allowed the U.S. carriers to quickly progress from the “edge of bankruptcy” to being today among “the industry leaders”.

Referring to the current “Open Sky” air bilateral agreement between the U.S.A. and the Gulf States, Emirates points out that under the current agreement:

• A capacity freeze would be a breach of the current bilateral.
• Article 11 of the US/UAE Open Skies agreement – dealing with fair competition – contains no reference to subsidies.
• Article 13, which deals with artificially low prices, does not mention any direct or indirect government subsidies or support.
• Neither party shall take unilateral action.

Emirates currently serves ten U.S. destinations, and still plans to extend its operation to some twenty U.S. destinations in total.

 

European Majors Airlines echo their U.S. Counterparts

The U.S.A. Open Skies discussion had reached a stalemate on the question of foreign ownership some time ago, with the U.S.A. refusing to allow more foreign ownership.

In fact, the U.S. airlines appear quite comfortable with the current status quo, and their unions find themselves on the same page.

Thus no one in Washington wanted a change at this time – but the dramatic rise of the Gulf carriers was having an impact.

Stimulated by the position taken by the three major U.S. carriers with respect to the Gulf airlines, some European carriers decided to go back on the offensive, and asked their governments to intervene.

Both France and Germany’s Ministers of Transport have called for the European Commission to act in order to restore “fair competition with the airlines of the Gulf”, and called on the E.U. to adopt a common strategy to “put an end to those unfair practices”.

Austria, Belgium, the Netherlands, and Sweden supported the initiative.

The European Cockpit Association is calling the rise of the Gulf carriers “an unintended consequence of liberalization”.

The request is now for “fair skies” … not uniquely “open skies”.

The European Union will request a new mandate from Member States to the European Commissioner, Violeta Bulc, to negotiate with the Gulf Cooperation Council on Aviation Competition.

Some European airlines are asking for Europe to withhold traffic rights from Gulf carriers until further negotiations and a new Agreement is achieved between the E.U. and the Gulf States.

They are also requesting that financial support for European “quasi subsidiaries” such as Air Berlin and Alitalia – where Etihad holds a major stake – be subjected to European competition law.

The E.U. and the Gulf States have agreed to hold a round of talks by the end of 2015.

 

Strains on Alliances and Associations

The current situation has introduced some strained relations in both North America and Europe.

Alitalia and Air Berlin have terminated their membership in AEA. Both are affiliates of Etihad.

The International Airline Group (IAG) also withdrew its membership in AEA, citing significant differences in opinion.

Having left AEA, the International Airlines Group has now become a member of ELFAA – the European Low Fare Airlines’ Association.

Encouraged by important membership gains earlier this year, particularly the addition of the International Aviation Group, ELFAA went on a renewed offensive

• Calling for rejection of the air traffic control price hike proposal;
• Requesting improvements in airport charges;
• Condemning the proposed extension of the Intra-EU only scope for E.T.S. (Energy Trading Scheme).

 

 

Initiative by the five largest EU Airline Group

The five largest European Airline Group – Air France/KLM, EasyJet, IAG, the Lufthansa Group, and Ryanair – met last summer and agreed to work together to lobby for the development of a new aviation strategy for Europe in response to the request for input by the new E.U. Transport Commissioner, Violeta Bulc.

 

These five airlines between them carried a total of 420 million passengers in 2014, accounting for half of the passenger journeys in Europe.

 

They also agreed that to have six airline organizations representing the airline industry in Brussels was not the most effective way, and agreed to explore possible forms of future representation, yet their action was ‘de facto’ creating another airline organization lobby group.

 

The five airlines identified a number of measures which would support the Commissioner’s objectives to enhance the competitiveness of the European air transport industry, support the growth of jobs across Europe, and help consumers by providing more flights and lower prices.

 

The group of five proposed the following:

• Develop a simpler, more efficient regulatory structure;
• Look at lowering the costs of the E.U. airports, and at ensuring that monopoly airports are effectively regulated;
• Deliver reliable and efficient airspace by reducing the costs of ATC providers, and ensure that ATC strikes do not cause disruptions;
• Stimulate the economy by removing passenger taxes – and unreasonable environmental taxes.

 

The group confirmed their support for several key principles – the most important, of course, being commitment to safety and safety standards.

They also reaffirmed their opposition to the provision of State aid to airlines and airports, and their support for balanced consumer rights.

 

Airport Council International -Europe

Referring to the ACI Europe 2015 Airport Industry Connectivity Report, ACI Europe at its last annual meeting stressed the need for the E.U. to place connectivity and consumers at the very heart of its new aviation strategy.

Adding its voice to the current debate, the President of ACI Europe stated: “Open Sky and fair competition need to go hand in hand, but airport and tourism organizations do not regard public financing of airport infrastructure, start-up aid for airlines, and more favorable fiscal regimes as necessarily involving unfair competition, but rather as legitimate economic development policy chosen mostly by the Gulf States”.

 

What about consumer interests?

These do not appear to be a central preoccupation in the current airline concerns. The requests for a “level playing field”, and for “fair and equal opportunity” to compete, do not seem to refer to the consumer.

The original force behind aviation deregulation was the need to satisfy consumer pressure. The consumers were clamoring for more choice and better prices, and it could only be satisfied if there was more freedom to participate in the market and allow the offering of different products and prices.

The growing importance of consumer interests replaced the need to protect the interests of national airlines.

But there are no reasons as to why the interest of the consumers and that of each local airline would not coincide!

The Gulf carriers took advantage of their geographic position between Europe and the many emerging economies, primarily in Asia, and the availability of new long-haul and efficient large airplanes.

The Gulf carriers have introduced a level of customer service which corresponds to their expectations – but would that have been commercially possible without financial support from their States?

Open Skies bilaterals were successful in opening up new markets – promoting competition and consumer choice.

Using the particular advantages of strategic geographic position and modern long-haul fleets, the Gulf carriers have provided European consumers with a convenient, one-stop service from Europe to many existing and new destinations primarily in Asia, but not uniquely.

The Gulf carriers are probably taking market share from the European carriers, but they are also most likely stimulating the market, and stimulating overall market growth.

Are the European and North American customers flying on Gulf carriers being subsidized indirectly by the Gulf States – if not by lower prices, by offering higher quality?

And would that be considered predatory?

Have the European carriers, previously owned by their respective States, been also in the past heavily subsidized as well?

IAG and British Airways would appear to have come to a way towards living with the situation.

 

What about Africa?

The question of “Open Skies” is also an important subject for other regions of the world, and specifically for African aviation.

The Yamoussoukro Declaration, signed in 1999, pledged its 44 signatories to establish an “Open Sky” regime across the continent.

But it was really never implemented.

Clearly, not all African governments see aviation as a national asset – nor a strategy of economic development, as is the case for the Gulf States.

Despite this apparent lack of interest by African nations, the latest passenger forecast by IATA for Africa nevertheless predicts that the Continent should enjoy the second highest rate of growth of the various regions, at 4.9% per annum.

But still today, some 80% of the intercontinental traffic between Africa and the rest of the world is controlled by non-African carriers.

The African Union has recently agreed on a Common African Civil Aviation Policy which proposes to adopt a united position in its dealings with the E.U.

However, this proposal is not binding on its members – and has not made much progress.

Meanwhile, there are a few hopeful signs.

Senegal has made a formal offer to South Africa suggesting that South African Airlines and Senegal Airlines take an equity stake in each other, and work towards a common restructuring program.

In December 2006, Morocco decided to join Europe’s Common Aviation Area. This led to a dramatic increase in traffic volume, with the European “low cost” airlines as Ryanair and EasyJet aggressively competing to increase their share of this market.

Morocco had signed an Open Sky with the U.S.A. in 2001, but it did not have a major impact on traffic growth.

Morocco now attracts more than 15 million visitors annually, which is a major success for the tourist industry. However, Royal Air Maroc considers that some of these “Open Skies” agreements are unbalanced and unfair, as they do not feel they have an equal opportunity to compete.

With the population of Africa expected to increase by 50% over the next 20 years, the potential for a large increase in the Middle Class is excellent.

If it finally comes into its own, Africa could follow a similar pattern to that which we have seen in Southeast Asia during the past 20 years.

But today, in most parts of Africa, we may have a case of no “Open Sky” … and no “Fair Skies”!

 

“Open Sky” in Asia

 A 10-member group of ASEAN and developing nations plan to achieve a single aviation market by December 31, 2015.

 

This is part of a broader ambition to create a comprehensive free-trade zone which, however, would not go as far as creating a border control free market such as the Schengen zone in Europe.

 

To become effective, the agreement requires a minimum of three States’ signatures.

 

And given the aviation policies of a few of those nations, this is likely to be achieved fairly quickly.

 

However, the “Open Sky” agreement would, of course, liberalize air transport and services between those signing countries only.

 

Any country having some concerns about the unequal competitiveness of their aviation industry may ask for a moratorium on various aspects of the Agreement.

Looking at the membership of the ASEAN nations` group, there are giants like Singapore Airlines, Thai Airlines, and Malaysian which have bilateral feeder agreements with major airlines all over the globe, and which could readily benefit from such “Open Sky ASEAN Agreement”.

 

On the other hand, many smaller airlines such as Philippines Airlines, Garuda, and Lion Air would likely be more fearful.

 

As such, the implementation of the “Open Sky Agreement” over the 10-member group of the ASEAN nations will be progressive.

 

Intra-ASEAN air travel will increase – but only gradually.

 

What about China?

While attention is being focused on the Gulf carriers, China’s airlines are in the process of overtaking the U.S. airlines on the China-North American market.

In summer 2015, China’s airlines for the first time are expected to carry more passengers than their U.S. counterparts between China and the U.S.A.

Their rapid rate of growth is expected to continue, and the increasingly dominant position of the Chinese airlines is likely to impact on the next round of bilateral air negotiations.

It would not be surprising to see the U.S. position no longer favor a full “Open Skies” Agreement, reflecting on their experience with the Gulf carriers, although the consumers’ associations and tourism bodies would continue to press for more liberalization.

The same situation is occurring on the China-Europe market.

The number of seats – weekly, one-way in August of 2015, according to the OAG – flown by Chinese carriers between China and Europe now exceeds the totality of the capacity offered by the European airlines combined.

And the rate of growth in capacity offered by the Chinese carriers continues to rank in the double and exceed by a factor of three the rate of growth of European airlines in that market.

This summer, 22 airlines connected China and Europe. Some 14 Chinese airports have direct links to Europe, and that number is expected to continue to grow.

In agreeing to more frequencies between China and Europe and the U.S.A. , should the European Community and the U.S.A. be concerned that the Chinese carriers are heavily supported by their governments?

Placing limits on “Open Skies” Agreements on the basis of government support – or `subsidies’ – is a 2-edged sword!

In North America, the cargo airlines – Fedex and UPS – are enjoying the world-wide benefits of Open Skies Agreements, and any retaliation imposed by the Gulf States could be very damaging to their operations.

On the question of fairness, what attitude should be taken with respect to the “fly American” directive which has long been a contentious issue?

This is clearly a policy which gives U.S. carriers a substantial financial advantage.

The question of expanding “open skies” with China was considered very important to the major U.S. carriers.

China’s airlines are hugely subsidized by Beijing, and if subsidies are inconsistent with “open skies”, expanding U.S. flights to China may not be possible – and neither would the lucrative joint venture over the Pacific.

Would limiting competition over the Atlantic trigger a re-opening of the approval of joint ventures?

One thing is clear. Governments, both in Europe and in U.S.A., have been asked to review air bilaterals with the Gulf States.

International travel and tourism is a major engine of economic growth.

The “Open Sky” type of bilateral has greatly facilitated – and accelerated – that growth. But, considering the current questions

• What is fair airline competition?
• What is fair for each country?
• What is fair for the consumers?

the “Debate on Fairness” may prove most interesting.

 

Thank you