Cont’d… Part 2 of 4: Aviation: Climbing through the clouds, from The Economist paints an excellent current state of the airline and aviation industry. All systems go for continued growth in the Asia Pacific Region, home to China and India and a host of other economies that are expanding faster than anywhere in the world.
Consolidation—of a kind
… For years airlines in America staggered in and out of Chapter 11 bankruptcy, which was supposed to give them protection from creditors until they became fit to fly profitably again. Their reliance on this device was criticised by foreign carriers as a disguised subsidy that maintained excess capacity and postponed overdue consolidation. Yet it did eventually lead to reductions in cost, for example by allowing airlines to renegotiate labour agreements with unions.
The industry’s plight also led to an easing of the antitrust scrutiny that had attended airline mergers. Delta was cleared to take over Northwest Airlines in October 2008. Struggling United Airlines and Continental were allowed to merge in September 2010, after several spells in Chapter 11. The mergers helped airlines trim their capacity and restore profits (although rising oil prices pushed them back into loss this year). The only network carrier in America not to go through Chapter 11, American Airlines, has fallen on hard times, slipping from the number-one slot to number three. Its share price has fallen by about 80% in the past five years as it has slid into loss. Without the pain of bankruptcy to force change, it is left with the highest labour costs and pension obligations.
European airlines have been consolidating too. Air France and KLM led the way, merging in 2004. They created a holding company so that each airline could keep nation-specific traffic rights under bilateral deals with countries outside Europe and America. The liberalising “open skies” deal between these two blocks, signed in 2007, made European mergers much easier by allowing European and American airlines to fly from anywhere on one side of the Atlantic to anywhere on the other.
After much dithering British Airways and Iberia got together in 2010. BA plans to use Madrid as a second base to get around capacity limits at Heathrow, where plans for a third runway have been blocked. Paris-Charles de Gaulle and Frankfurt now serve more destinations directly than London’s main airport does.
Lufthansa has swallowed Swissair and Sabena, and has taken full control of bmi British Midland. However, the European Commission has blocked purely national mergers between Ryanair and Aer Lingus, in Ireland, and Olympic Airways and Aegean Airlines, in Greece.
The big limitation of the open-skies arrangement was that it left in place the 25% limit on foreigners’ stakes in American carriers. In the European Union non-EU investors are restricted to 49%. Limits on foreign ownership have spurred international airline alliances, which for years have pooled marketing and sold seats on each other’s flights, to press for the antitrust immunity needed for deeper integration, or “virtual” merger. The pursuit of this is justified by a (contested) theory that virtually merged airlines offer lower fares on flights through their hubs. Separate carriers, seeking to maximise profit on each leg of a journey, would charge more.
As a result of all this consolidation on both sides of the Atlantic, Aviation Economics, a consultancy, says that this summer three virtually merged groupings will carry 73% of traffic across the ocean. These are: International Airlines Group (BA and Iberia) plus American Airlines; United, including Continental, and Lufthansa and Air Canada; and Air France–KLM with Delta, incorporating Northwest. Some routes from continental airports, such as Frankfurt or Amsterdam, are monopolised.
The failure to scrap barriers to foreign ownership has meant there are no intercontinental mergers. Aviation has thus missed out on the sort of global rationalisation that occurs in most other industries. Apart from the transatlantic joint ventures, attempts at linking up between continents have tended to be disappointing. Singapore Airlines makes no secret of its desire to ditch its 49% stake in Virgin Atlantic, which is in turn up for sale by Virgin Group because it can no longer compete across the Atlantic with merged and virtually merged rivals.