Even the largest of carriers have struggled to survive the current shockwaves hitting the global economy. Regulators must surely now allow airlines to become truly global players, but carriers will need to change their model too.

Rarely, if ever before, have the world's major airlines looked so vulnerable. And never before has the industry argued so hard for the freedom to build truly global businesses, capable of weathering the shocks and storms of the global economy.

Airlines have been tempted to ask whether the entire industry will have to go bust before regulators finally agree to let carriers merge and acquire like any normal business. Of late, that rhetoric has begun to look dangerously close to reality. But if and when the regulators do loosen their grip - and the results from ICAO's recent liberalisation conference were encouraging - it will not simply be enough for traditional carriers to get bigger, they will have to get sharper too.

If the extraordinary events of the past couple of years have exposed a major weakness in the airline sector, then it is surely a basic lack of flexibility over costs, capacity and capital. Admittedly the speed and depth of the crisis that followed 11 September was unprecedented. Admitted also that the airline sector, perhaps more than any other industry, reacted with unprecedented speed in cutting fleets and workforces.

The problem is that in an increasingly interlinked global economy such costly firefighting looks dangerously like becoming a way of life. Looking back over the past decade the industry has had to weather a series of global shocks, starting with the first Gulf War and global recession; moving on to the economic meltdown in Asia; the spectre of the millennium bug; and the bursting of the hi-tech bubble. That is not to mention local upheavals caused by conflict in Kosovo, foot-and-mouth disease in the UK or the financial crises of Latin America. The "war on terror" has since joined that list along now with the outbreak of Severe Acute Respiratory Syndrome (SARS). As Henry Ford once famously said of history, it is "one damn thing after another".

In short, the industry urgently needs tools less blunt than bankruptcy and mass groundings that would allow it to adapt and survive. In the past, a mix of heavy regulation and high growth rates helped soften the shocks. Provided that a carrier could ride out the immediate storm, it could more or less bank on traffic snapping back once trouble had passed. Today, at least in the maturing western markets, there are no such guarantees. The FAA estimates that the US industry will have lost four years of growth by the time that recovery finally arrives in 2006.That looks like a structural shift in demand rather than simply the fall-out after a crisis. Other regions may be less far advanced along the curve, but in a global economy what affects one, eventually affects all.

The major carriers know that they need to achieve global scale if they are to emerge as successful players in the global market. But scale is not everything. Putting together two lumbering dinosaurs may do no more than create an unmanageable giant, as the history of mergers in air transport and beyond has more than adequately demonstrated. What matters more is the ability to make better use of assets, shifting people and planes around the world to the markets where the demand is greatest. It is an enduring irony of air transport, that its principle aircraft assets are so inherently mobile and yet their airline owners are so hamstrung in where they can operate. Just such flexibility, denied to airlines by regulation, has allowed leasing companies to look so much more nimble even during the height of the crisis.

A truly global airline need not find itself tied down to a US market facing years of stagnation and with scores of aircraft parked in the desert and valuable pilots sitting idle at home. The express cargo and holiday charter sectors have already shown that such flexibility is possible and potentially profitable.

The question is whether the traditional flag carrier, if taken to a global scale, would in reality be able to achieve this degree of freedom? On present standings, that is doubtful. In essence the traditional network model looks suspiciously like an old-fashioned piece of vertical integration, owning a vast array of assets and performing everything under one roof from heavy engineering to Internet sales.

Few other industries have stayed with that model. Retail brands have farmed out production to concentrate on design and marketing. Hotel chains often own a minority of their real estate, franchising their brands to local managers. The successful global airline may well find itself in similar territory, owning fewer hard assets, living with much looser relationships, but reaping the rewards of global flexibility.

The first step is to start dismantling rules on ownership and market access. But for those carriers hoping to step up from national champion to global player, the real challenge ahead is a cultural rather than regulatory leap.

Source: Airline Business