Debate is heating up over whether it is time to loosen today's restrictive airline foreign ownership rules. Harsh reality if forcing some airlines and governments to question why this industry remains almost uniquely immune to the global trend of mergers and buy-outs.
Perhaps only the airline industry could offer up such a paradox. While the rest of the corporate world is caught up in mergers and acquisitions brought about by globalisation, this most international of all businesses remains tightly bound by its decades-old and protectionist ownership laws. It is an irony not lost on Qantas chief executive, James Strong. "We are one of the most global of industries and yet also one of the most parochial," he remarked earlier this year at the annual general meeting of the International Air transport Association (IATA).
Casting his eye over the room full of fellow airline chief executives, gathered for the meeting in Rio de Janeiro, Strong also noted: "Let's face it, the only reason that 250 airlines and not 25 attend the IATA AGM today is the Chicago Convention, which makes the airline industry different from any other. I think there is a certain inevitability about change, however."
Strong is not alone in his thinking. Although the subject of ownership remains an emotional one, it is being debated at high levels this year. A three-day conference devoted solely to this subject, held in Phoenix, Arizona, back in May, and organised by GKMG Consulting of Washington DC, posed the question: Are airline citizenship laws passé? It revealed some surprises. Most attendees were not aware, for instance, that one of the fiercest supporters for keeping the ownership rules in place is the US Department of Defense (DoD). Woe betide the entrepreneur who thinks he can open up the US market without first running the idea by the Pentagon.
Ownership and privatisation received another high-level airing at the IATA AGM a month later, when it was the subject of a panel discussion. And in December, US Department of Transportation (DoT) Secretary Rodney Slater plans to host an international conference in Chicago on the same topic. If, as some argue, discussing changes in airline ownership rules remains a largely academic exercise, then there seems to be no shortage of eager scholars. Perhaps, as some industry observers are beginning to note, this is an idea whose time has come. Australia has been mulling changes to its foreign ownership rules which would relax limits on outside holdings. In August, Canada brought the issue to the forefront when it was revealed that Transport Minister David Collenette is seriously considering a change to foreign ownership restrictions. The Canadian Government is believed to regard this as the most promising way to find a rescuer for financially-troubled Canadian Airlines.
There may be nothing like a crisis to open doors that not so long ago seemed firmly closed, but general resistance to change remains strong. Apart from the US military, which believes foreign-owned commercial carriers would not be as willing to take part in its voluntary programme to provide aircraft and crew during a national emergency, there is also suspicion among labour chiefs, who point to the flags of convenience and horror stories of the maritime industry. At the IATA annual meeting, it was clear that many of the world's smaller flag carriers, especially in Africa, would fight changes in foreign ownership rules, fearing they would have no future in such an unprotected environment. Then there is the emotional issue of public acceptance. Some argue that passengers do not care who owns an airline so long as they are getting good service and decent fares. But British Airways' attempt to drop the Union Flag from its livery has not been popular with the public and illustrates the great national pride that people and governments attach to their flag carriers. As Dr Rene Fennes, principal administrator, GVII (transport policy), at the European Commission put it: "Aviation is a sexy thing and ownership control has been a Viagra ".
Even when a potential change in ownership of an airline does not involve a foreigner, government overseers can get twitchy. Witness the US Department of Justice's (DoJ) keen interest in the deal in which Northwest Airlines took a 49% stake in Continental Airlines. While the transaction has been permitted, a DoJ lawsuit has been filed and the government seems particularly concerned that management voting control remains independent at each airline.
For all of the barriers, however, there seems to be a recognition that the airline industry cannot forever remain immune to the economic forces that are affecting almost every other industry. Only in the airline industry has the word 'alliance' become a buzzword ð elsewhere the trend is for mergers and acquisitions. As Tony Baker, director of international aviation negotiations at the UK Department of Transport, commented at the GKMG conference: "This is all part of globalisation. It's here and it's going to happen and it cannot be fought."
More cement
But what is prompting a change in thinking now? Some point to the mature state of the airline industry, with rising load factors, internationally established safety standards and shifting views about what makes up an airline's most valued assets. The new emphasis is on branding and routes rather than aircraft and hardware. Some alliances might benefit from the stability that equity investment would offer. "Some airline partners are in need more of cement than glue," says Ulrich Schulte-Strathaus, vice president of international relations at Lufthansa. "Those airlines might merge certain parts of their operations and the consumer would not care."
The EC's Dr Fennes does not believe that safety issues should block foreign ownership law changes. He told the GKMG conference: "We do not need government ownership to that ensure safety and environment rules are met. It is really an issue about how to find a way beyond open skies. The answer is to go beyond the current bilateral framework and look at things from a broader perspective. We need to find a real framework solution for the USA and Europe ð that's something I could strongly recommend." But he adds an important caveat: "First we must create a strong multilateral framework across the Atlantic. Until then, let's face it, you will have to walk over our limp bodies before you take government ownership and control away from us."
Warnings aside, the US DoT seems equally keen to explore all possibilities and to get industry and other governments on its side. Bradley Mims, acting assistant secretary for aviation and international affairs at US DoT, says: "It is the duty and the responsibility of countries to examine this subject thoroughly and very carefully. We want the ability to move forward and to change our laws, but to do so we must present uniformity to Congress. We seek an approach that would best serve both the public and national interests." At the forthcoming Chicago conference, Mims says, "we will address the issue of citizenship substantially. It is a very controversial issue facing the industry today."
Mims is less clear over whether the DoT is prepared to take the lead in addressing the highly-vocal concerns of the DoD. Mary Lou McHugh, DoD assistant deputy under-secretary, fears an erosion in the US military's civil reserve air fleet (CRAF) programme if foreigners were allowed to buy controlling stakes in US airlines. In a national emergency, the DoD relies on being able to use commercial airliners and their crews to provide up to 93% of its troop movements and 41% of cargo transportation. McHugh says it would cost $50 billion to replace CRAF and, because it is a voluntary programme to which airlines subscribe on a year-to-year basis, the DoD says it would be less certain about the level of commitment it would receive from a foreign-owned airline. "We feel very comfortable with the current situation," says McHugh. "US carriers give us strong support in this area. It is less certain to us where a foreign-owned airline would stand. That country might not agree with the policies the USA is pursuing, so what then would be the commitment?"
The USA is not alone in relying on the commercial sector for additional resources in a crisis - the UK Ministry of Defence, for example, has sweeping powers over civilian ships and aircraft and activated those rights during the Gulf War - but the DoD's stance seems particularly firm and would not be waived lightly.
White knights
Another major hurdle is unionised labour. Duane Woerth, president of the Air Line Pilots Association, the world's largest pilots' union, says it would take "a great leap of faith" to support a relaxation in ownership rules. In the USA, he points out, airlines are "flush with cash" so capitalisation is not an issue. "New entrants are popping up all over and I don't see any need for white knights to come and rescue American carriers," says Woerth.
Of chief concern to pilots are the issues of job security and seniority levels, but they also point to the shipping industry and the flags of convenience that have emerged under a relaxed ownership regime. Stuart Howard of the International Transport Workers Federation says his organisation daily comes across instances of seaworkers operating in "appalling work conditions". He cites examples of malnutrition among crew, poor safety standards that lead to a cargo ship sinking almost every week, and court battles to try and reclaim unpaid wages. "People say it will never happen in the civil aviation industry, but they are the same governments that have lived for 50 years with flags of convenience in the maritime industry," says Howard.
It is unlikely, however, that any serious attempt to loosen foreign ownership rules in the airline industry would be motivated by a desire either to dismantle a country's national security programme or to wreak havoc with labour. And any underhand deals that resulted in a lowering of safety standards would rapidly turn away the passenger. So it must be assumed that the pro-ownership-change camp has higher economic motivations and would be prepared to make the concessions necessary to government, labour groups and other interested parties that would make such changes palatable.
One of the most prominent calls for ownership changes over the past year has come from Virgin Atlantic Airways' Richard Branson, who says he would set up a low cost airline in the USA provided he was allowed to maintain control of that enterprise. Virgin Atlantic's director of external affairs and route development, Barry Humphreys, says he is confident the company could find ways to resolve the concerns of labour and the military.
The real issue, he says, is offering new competition and better service to the consumer. "We would have our hand bitten off in gratitude if Virgin offered service in the USA," says Humphreys. "At one hub that I can think of, we would lose a whole arm." Humphreys adds that it is not ownership that worries the passenger; it's service. "We are a service industry and we ignore the views of the public at our peril," he says.
No Asian bargains
Still, there has not been a rush of potential new owners lining up to grab Asian carriers during the region's economic crisis. While the time may have been ripe for bargain hunters, and airlines such as Thai Airways say they are seeking capital investment from outside, action on this front has been virtually non-existent. Which does not surprise Richard Stirland, director general of the Association of Asia Pacific Airlines. "It is almost unthinkable that any [Asian] carrier would be taken over by a foreign carrier," he says.
"It is an unacceptable concept to a lot of people and governments because in developing nations, the flag carrier is a huge source of pride." Cathay Pacific Airways' director of corporate development, Tony Tyler, concurs. "In Asia, de-nationalisation is not the issue ð most of the airlines are privatised. Nor is the economic crisis the issue. There has not been a mass takeover spree in Asia from outside and that's partly because there are no willing sellers. Any change of ownership requires a willing buyer and a willing seller. Airlines in Asia are very much seen as vital to national interests and the engines of economic development. Only in a very few cases would foreign management be even accepted."
But elsewhere in the world, momentum is building to push the boundaries so that the airline industry can progress beyond alliances and into an aviation equivalent of a 'brave new world'. Jan toe Laer, director of foreign relations at KLM Royal Dutch Airlines, says that ownership rules are the only impediment left in the airline industry. He believes that the next step into that brave new world might be via an international treaty signed by those countries that have open skies agreements and which would grant their airlines unrestricted ownership. Laer says KLM would support such a treaty and is discussing the idea with the Dutch Government. Other industry observers agree that some sort of treaty, perhaps under the auspices of the World Trade Organisation or the General Agreement on Tariffs and Trade, would be necessary to progress the lifting of ownership rules on a global scale and address complex issues such as taxation.
Such momentous change may still be several years away, but foreign ownership has become a hot issue in 1999. Frederick Reid, executive vice president and chief operating officer at Delta Air Lines, believes this is the result of a number of converging issues. "No major carrier has so far felt this issue to be vital to its strategic and economic interests. But alliances have raised the temperature. The European Union has raised the temperature. And deregulation has raised the temperature. It's all converging and it's gathering momentum at a pace," says Reid. "For this to happen, the US industry would have to secure a fair deal and also be fair. But personally, I believe that globalisation of citizenship in the airline business is nothing but inevitable."
Source: Airline Business