Is the USA relegating itself to a secondary role in tomorrow's global aviation market? asks William Swelbar, research engineer with the International Center for Air Transportation at the Massachusetts Institute of Technology
After five years the "restructuring" of the US airline industry is far from complete. It is naïve to think US carriers are ready for new international competition on top of the formidable opposition they already face. Any US airline's unit cost advantage is far outweighed by its capital structure disadvantage.
The first test of "new" US global competitiveness begins when Phase I of the new US-European Union Open Skies agreement is implemented. This will provide some new flying, but the biggest impact is only the change of three letters from London Gatwick's LGW to Heathrow's LHR.
The second test also begins early in 2008 as many airlines begin a new cycle of labour contract negotiations. The process is still young, but labour's chant of "concession recovery" is getting louder. After a relatively good 2007, labour has prematurely declared the recovery sustainable.
The third test will be Phase II of the US-EU negotiations, which will test the resolve of US policy makers, airline management and labour. The pending question: Will it be the protectionists that negotiate on behalf of the USA or will true agents of change emerge?
Despite claims to the contrary, nothing is new in the USA. Business is conducted in the same old way, which begs the question, has the fabled restructuring made any meaningful changes in the competitive profile of US airlines? Despite deep cuts, many outmoded and troubling practices remain. Following an industry life cycle of value destruction, US legacy carriers now face a dilemma: should they invest in their core businesses?
The tendency toward legislative and regulatory gridlock did not get restructured. An inflexible labour construct did not get restructured. The fragmentation of the US domestic market did not get restructured. The infrastructure, whether it be ATC or the airport system, was not restructured. And the historic mindset that capital will be forever recycled among manufacturers, vendors, labour and government imposed actions, was not restructured. Little has changed when it comes to labour and regulator views on consolidation. The mindset among the 535 decision makers on Capitol Hill is that any congressional district with a runway, a terminal and security is entitled to service. Compounding this sense of entitlement is labour's sense that the industry will return to "pattern bargaining" - a supposition that fails to recognise structural changes.
The US market should not fear individual carrier failures or consolidation. This market has demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency.
The virtuous circle of US airline industry prosperity has developed a disconnect. The mantra is that liberalisation leads to new and better service which leads to traffic growth which leads to economic growth which leads to job growth. And so it goes.
But most critical markets are already liberalised. International growth helps cross-subsidise a fragmented and ailing domestic industry. We have modest traffic growth and are finally seeing employment growth. But we do not have reinvestment or value creation.
It seems that the regulators and policy makers somehow think the US low-cost sector is the answer. But even these carriers, the darlings of policy makers, are struggling to find opportunities in a fragmented home market. Further compounding the conundrum, low-cost players have not invested in the tools to serve all markets - particularly those that involve crossing an ocean rather than one of the Great Lakes.
So, in this global environment, it is airlines like Air France-KLM, British Airways, Singapore Airlines or Qantas that smell prey. These airlines have invested in their core businesses and already offer a product that will ensure their place among the world's elite providers. That their own domestic aviation markets are healthy only adds to the competitive threat for US carriers.
In the USA we have a convergence of costs, revenues and service between legacy and low-cost carriers. Product differentiation exists only in theory. The domestic market fails to offer any meaningful attributes of sound investment. And just as low-cost carriers have found an opportunity to exploit the weaknesses of the US legacies, there is sufficient opportunity for the global leaders today to drive US carriers to a secondary role tomorrow.
The sad truth is, until the home market is fixed, for US carriers liberalisation means only the marginalisation of a former world industry leader.
William Swelbar also manages MIT's Airline Data Project airlinedataproject.mit.edu and writes swelblog.com