Thursday, December 11, 2008

The Outlook for 2009

The International Air Transport Association reported on Tuesday that U.S. air carriers could post a very modest $300 million profit while the world's other regions will likely endure $2.5 billion in losses.  The losses will be nowhere near as severe as $5 billion IATA expects the global industry to lose this year.  A substantial drop in fuel prices and a 10% domestic capacity reduction accounts for the comparatively sunnier outlook for U.S. carriers next year.  More gloomy was the outlook for air cargo, which already experienced a 7.9% decline in October. 

In a speech delivered at IATA's 2008 Global Media Day, IATA Director General and CEO Giovanni Bisignani once again decried the slow pace of liberalization for the global air transport industry.  The longstanding system of bilateral agreements which have ordered international aviation for six decades "denies airlines the basic freedoms to access markets and global capital or to merge or consolidate," said Bisignani. He continued: "Industry losses clearly show that airlines feel the recession like any other business.  But we don’t have the commercial tools that other industries take for granted to manage through it."

To anyone who has followed the strange tale of modern aviation, this is old news.  But "old" is hardly synonymous with "unimportant."  The problem is that Bisignani's cries aren't being heard or, rather, heeded by the right ears.  It goes without saying that the European Commission is looking for robust liberalization in its various aviation agreements with partners such as the U.S. and Canada, along with Australia and New Zealand.  But are those partners on board with the idea?  As mentioned on this blog earlier in the week, the U.S. appears as recalcitrant as ever when it comes to foreign ownership of its carriers and cabotage rights.  The Canadian Government, despite the encomia heaped by the European Commission on its newly-inked Canada/EC Air Transport Agreement, has made no clear-cut statement that it intends to move foreward anytime soon on raising its foreign investment cap for airlines, to say nothing about allowing European nationals to own and control them.  Even Australia, which has shown far more liberality with its air transport sector than most, has indicated reserve over the possibility of allowing British Airways to merge with Qantas.  Doing so would mean a potential forefeiture of Qantas's right to conduct international services to Japan since the two countries' bilateral arrangement contains a so-called "nationality rule," namely that at least a 51% stake in Qantas must remain in Australian hands. 

Given the financial turmoil in which global aviation finds itself, what are the alternatives?  Nobody knows for certain how long the current recession will abide and once it clears, where will fuel prices be again?  U.S. carriers, which took the brunt of the 2008 downturn, cannot endure these conditions indefinitely.  How long before they join the automakers and get in line for a bailout?  And what will be the ramifications of that?  We could see a rapid dismantling of the business freedoms and consumer benefits which came out of the 1978 Airline Deregulation Act.  We could also very well see the EU, provoked by a U.S. retreat in market medievalism, prove chief U.S. negotiator John Byerly wrong by indeed doing the "nutty" thing and "tak[ing] down the whole transatlantic [aviation] structure."

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