Tuesday, April 26, 2011

Ownership: Finding a New Frontier

David Knibb has an informative piece in the latest issue of Airline Business on the incremental movement toward crossborder investment in the airline industry and the formidable challenges which remain.  See Ownership: Finding a New Frontier, Airline Bus., Apr. 18, 2011 (available here).  As the article discusses, the tolerance for foreign ownership of airlines varies from region to region and, thus far, has often been allowed on an ad hoc basis.  So long as States retain the right under their respective air services agreements (ASA) to limit or revoke the traffic rights of airlines which are not owned and controlled by the citizens of their home countries, international air carries which ingest foreign capital or come under the control of a foreign entity risk losing valuable market access privileges.  For instance, once the merger between Chile's LAN and Brazil's TAM is approved, the United States could, under the terms of its ASA with Brazil, lock-out TAM on the grounds that it is owned and controlled by Chileans.

In an effort to inject a high-level of stability into the international aviation investment regime, the United States has proposed a Multilateral Convention on Foreign Investment in Airlines.  See Facilitating Airline Access to International Capital Markets, ICAO Working Paper No. A37-WP/190 (Sept. 13, 2010) (available here).  Under the agreement, signatories would provide a list of partner States against which they will not enforce the nationality clauses in their ASAs.  This would have the benefit of providing greater legal certainity with respect to which air carriers could freely engaged in crossborder mergers and acquisitions without potentially forfeiting their traffic rights.  While a final draft of the Convention has yet to appear, the International Civil Aviation Organization is currently assessing its terms and whether or not to open the treaty up for formal ratification.

April 26, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, April 25, 2011

Option Contracts

Blog readers may be interested in reading Rolf Hellerman et al.'s new working paper, Option Contracts with Overbooking in the Air Cargo Industry (WHO Mgmt Working Paper No. 2011-PROD-2, Apr. 2011) (available from SSRN here).  From the abstract:

In today’s world economy, which is marked by increasing international trade, air cargo acts as a key facilitator. However, cargo airlines continue to struggle to be profitable because of very high asset costs and substantial demand uncertainty. To improve upon this situation, we propose an options contract. Our model captures the main features of cargo trade between an airline and a freight forwarder and allows to derive an optimal reservation policy. We then go on to analyze the impact of overbooking on the profit of the cargo capacity provider. The model is subsequently applied to real-life booking data provided by a major cargo carrier. This enables us to compare current contractual arrangements with the ones proven optimal in the model. Managerial insights to be drawn conclude this study.

April 25, 2011 | Permalink | Comments (0) | TrackBack (0)