If the world's 10 best airline executives agreed to manage airlines from 10 small to mid-size countries, 10 years later those 10 carriers would still have roughly the same rank as they do today.
One day liberalisation may sweep away the limits on ownership, control, and airlines' permitted destinations. Carriers may then prosper more on merit than market size. But for now, Singapore Airlines and Cathay Pacific are the exceptions that prove the rule: no matter how well an airline is run, its size and strength depend on the size and strength of its domestic market. There is no way an airline in Croatia can match one in China.
Up to a point, a carrier from a small country can bootstrap itself into the big leagues by joining a global alliance. But as David Bentley, joint managing director In Manchester, UK for transatlantic consultancy Big Pond Aviation, points out: "I am one of several people in this industry who believe that alliances don't suit all airlines. Star Alliance membership hasn't exactly been a godsend for SAS and British Midland International, nor did being in oneworld help Mexicana in its hour of need."
This practice began in Latin America and has spread around the globe. For some airlines, it is an alternative to an alliance, but others use this strategy to supplement alliance membership. Practices vary, but in most tie-ups, affiliate airlines based in separate countries share common livery and branding, and appear to operate as a single or at least closely related entities. All comply, at least nominally, with requirements for "substantial ownership and effective control" by nationals of the country where they are based.
LAN pioneered this practice. As Enrique Cueto, LAN's chief executive, recalls: "Our market was so small that it was impossible to compete with the world if we didn't increase the size of our airline." LAN needed "a more powerful network". Whether it merged with other airlines or formed separate companies, Cueto saw the need for affiliates throughout Latin America.
It created the first in Peru, then Ecuador and Argentina. Aires, recently bought by LAN, will re-emerge as LAN Colombia. As one observer quips: "Had it not been for the unpredictable Hugo Chavez I think there might have been a LAN Venezuela by now as well."
For years the biggest blank on LAN's map was Brazil, and filling that gap topped LAN's wishlist. Its proposed merger with TAM now appears to colour in that space, subject only to approval from several anti-trust agencies.
Some analysts claim that LAN's complex deal with TAM is a takeover disguised as a merger. Whatever the label, however, it is consistent with LAN's practice of buying into a local airline and using its licence to launch a new affiliate. This varies in other parts of the world, where carriers such as Jetstar have also bought into existing airlines to ease their entry into new countries, while others, such as AirAsia, prefer to start from scratch.
TACA was the next Latin airline group to follow LAN's example, but for slightly different reasons. Central America's small nations were already accustomed to regional co-operation at a number of levels, so it was natural for TACA to evolve into a cross-border airline. Only after it added a start-up in Peru was Grupo TACA recognised as a truly multinational airline group.
Avianca followed suit after Brazilian entrepreneur German Efromovich bought it. He first combined his Ocean Air in Brazil with several other small airlines to form Grupo Synergy, then he renamed the group after Avianca. Colombia's lack of foreign caps simplified merging the Avianca group, which has since bought Ecuador's AeroGal. Now Avianca and Grupo TACA have themselves merged to form the only Latin airline big enough to pose serious competition to the LAN/TAM grouping.
The pieces that came together to build both Latin groups - LAN/TAM and Avianca/TACA - are all the result of cross-border initiatives taken to improve scale economies and avoid restrictive local laws and bilaterals.
Cueto at LAN is not thrilled about relying on this sort of growth. "Why should we need to look for a partner and create a separate company in each country?" he asks rhetorically. "You don't get the best synergies this way. But we have to grow this way until we have an open market."
The lack of progress towards real liberalisation has prompted this self-help solution, resulting in a form of liberalisation through the back door.
Europe best illustrates how aviation might work in a world without borders. All European Union member nations have accepted a common set of aviation laws. In return their airlines may fly to and from anywhere within the EU. Some, such as Ryanair and easyJet, have a pan-European presence with bases throughout the EU. Others, like Lufthansa, form separate units such as Lufthansa Italia to serve different bases. Labour law differences still spark airline disputes within the EU, but rights of establishment and seventh freedoms are not among them.
Europe's common aviation area is spreading east. Wizz Air, Eastern Europe's first low-cost carrier, has been quick to exploit it. From its Hungarian roots, it has become the Ryanair of Eastern Europe. Its strategy has been to stay one jump ahead of liberalisation, so that it can exploit the fruits of it as the common aviation area spreads. When a number of Eastern European nations joined the EU in 2007, for example, Wizz Air was already in place to take full advantage. It now operates to secondary airports throughout Europe from bases in Bulgaria, the Czech Republic, Hungary, Poland, Romania and the Ukraine.
The Ukraine is not an EU member, but is in advanced negotiations with Europe on a common aviation pact. Later this year, Wizz Air hopes to repeat this pattern with a new base in Serbia. The latter is one of several Balkan nations working on forming a common aviation area with the EU.
If Europe represents the future, policies across the Mediterranean represent the same old past that persists in so much of the world. IATA describes Middle East-North African aviation as "fairly restrictive". UAE, Kuwait, and Lebanon offer open skies, but "the rest of the region is entrenched in the bilateral system." Cabotage by foreign carriers is banned, fifth freedoms are restricted, seventh freedoms do not exist. IATA sees "no signs that governments in the region are changing their attitude towards ownership and control". Given the region's current unrest, it is hard to imagine the subject even coming up.
It is remarkable in this climate that Air Arabia, the Middle East's first low-cost carrier, could succeed in forming two cross-border units. It launched Air Arabia Maroc in 2009 with a 29% equity stake and Air Arabia Egypt last year with 50%. It hopes to set up a unit in Jordan, but plans have been delayed. Yet there is no doubt that chief executive Adel Ali envisages more cross-border growth for Air Arabia. Codeshares, he told Airline Business last year, are "things of the past".
Liberalisation in sub-Sahara Africa is on a par with the Middle East. Because of the number of African countries with small but growing markets, the region is ripe for someone to copy Air Arabia's example. Fly540, a low-cost but still small turboprop and regional jet operator headquartered in Kenya, appears to be the only carrier so far to venture across any African borders.
In liberalisation terms, South-East Asia is somewhere between the common aviation market of Europe and the restrictive markets in much of the rest of the world. The Association of Southeast Asian Nations has lifted all third and fourth freedom limits between its 10 capital cities and is working toward the goal of a single aviation market by 2015.
Does this explain why South-East Asia is also the world's hotbed for cross-border expansion?
Malaysia's AirAsia has units in Indonesia and Thailand, and plans to launch new ones in the Philippines and Vietnam; Singapore's Tiger Airways has close ties to a Philippine carrier, while Australia's Jetstar has units in Singapore and Vietnam, and hints of an imminent venture in Japan.
Alan Khee-Jin Tan, National University of Singapore law professor and a close observer of the Asian aviation sector, thinks these ventures are not a product of ASEAN's progressive policies, but cause and effect are really the other way around.
"If anything", he says, "it is the cross-border arrangements that are providing impetus for the SAM [single aviation market], together with the vision for an ASEAN Economic Community by 2015." As ironic as it may sound, it is this back-door liberalisation through cross-border moves that is giving front-door liberalisation a boost.
So long as the players respect foreign ownership caps, Tan says, "governments are willing to tolerate and even welcome" cross-border operators.
Ownership caps are fairly easy to monitor, he notes, while the issue of who controls these cross-border units is more amorphous. The local owners of AirAsia's Indonesian and Thai units, for instance, are not airline interests. "So there is a suspicion", Tan says, "that management/operational instructions come from the minority shareholders, who are the real airline experts, and they call the shots.
"If you speak to the CEOs [of these local units] and the different governments, they will maintain that there is effective local control due, for instance, to the CEOs being local and the separate units having different airline codes," he says.
"As far as the governments are concerned, the question of effective control seems less critical as long as foreign investors own no more than 49%."
The result, Tan says, is that these cross-border units "conveniently get around the restrictive bilateral system that prohibits carriers from setting up multi-hub operations overseas. The fact that the model is tolerated (and even implicitly encouraged) attests to its utility." The result, he says is "a de facto relaxation of ownership and control, even within the framework of a restrictive regime".
Tan's big concern is that this de facto approach "is not reflected in specific policy and remains arbitrary and subject to ad hoc conditions".
Tiger Airways can attest to this. Efforts by the low-cost subsidiary of Singapore Airlines to set up a cross-border unit in Korea failed. It still faces resistance to its Seair venture in the Philippines, and its plan to form Thai Tiger later this year still awaits approval. The specifics in each case differ, but Tan sees a common cause. As he explains, the entry of AirAsia and Jetstar into other countries "may not be viewed as threatening as, say, a Tiger Airways with its links to Singapore Airlines and Singapore Inc".
A final group of cross-border airlines are the three Virgin carriers. Their differences from the more conventional approach underscore how much the rest have in common. The Virgin carriers were not formed to expand beyond small markets. They are not limited to one region, indeed, their end-to-end networks span the globe. They do not have a common business plan, and are united by a shared stakeholder with its own prominent brand.
Virgin exercises little control other than through stock ownership, which varies from 25% in Virgin America and 26% in Virgin Blue, to 51% in Virgin Atlantic. The Virgin group most resembles, if anything, a small global alliance of its own.
So long as liberalisation creeps along at its current glacial pace, more cross-border moves by the likes of LAN and AirAsia are part of a trend that seems certain to grow.
Read about the struggles to liberalise the bilaterals covering the airline sector at flightglobal.com/BilateralWeb
Source: Airline Business