Thursday, August 14, 2014

Recent Investments in Malaysia, Alitalia Hardly Constitute a Trend

A column in the forthcoming print issue of the Economist uses last week's announcement that Malaysia Airlines may return to full state control as an excuse to criticize governments' unwillingness to allow airlines to fail.  Given the unique trials Malaysia Airlines has faced this year, it is an unfair example. While it is true that Malaysia Airlines was losing money before either of this year's tragedies hit, we have no way of knowing whether the state's sovereign wealth fund would have offered to buy out the approximately 30 percent of Malaysia Airlines shares that are privately owned had 2014 been merely business as usual for the airline. What we do know is that the carrier's near-term forecast is entirely different because of the two high profile disasters that have befallen its aircraft. In that way, Malaysia's circumstances arguably resemble that of the U.S. airline industry immediately following the 9/11 attacks when it received considerable financial support from the U.S. government. Obviously, the actions of the U.S. government then and Malaysia today can both be criticized, but neither can accurately be characterized as indicative of the normal relationship between States and their airlines.

Perhaps in recognition of this weakness, the piece includes a brief reference to Etihad's recently announced agreement to purchase a 49 percent stake in Alitalia to broaden its case that governments continue to throw good money after bad in the air transport sector. Unfortunately, this example is no better chosen. Etihad's investment is not an example of political pressures and national pride motivating a domestic government to futilely prop up a failing flag carrier, but the most recent iteration of an ambitious and controversial expansion strategy by a rival with no concern for protecting Italian jobs.

This isn't to say that privatization and liberalization continue unchallenged in the international air transport sector. In fact, the Etihad-Alitalia partnership is likely to raise concerns about the European Union's commitment to both objectives, though it may also provide some needed clarification regarding the  EU's restrictions on foreign ownership and control. But any argument that these two carriers should have been allowed to fail needs to first accurately explain why they were rescued.

http://lawprofessors.typepad.com/aviation/2014/08/recent-investments-in-malaysia-alitalia-hardly-constitute-a-trend.html

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