Willie Walsh: Chocks away

Governments should lift outdated rules on who can own airlines and where they should fly, says Willie Walsh

The airline industry is at the heart of globalization. Without commercial jet travel, companies and countries could not do business with each other, economic growth would fade away and the people of the world would be poorer.

Airlines understand their importance. Today, however, they are also beset by problems of history, economic structure and environmental impact, and face a future more uncertain than it has ever been.

Air travel has been a global industry since flying boats started to link continents on opposite sides of the world three-quarters of a century ago. Yet despite these traditions, aviation still has remarkably few of the characteristics of a true global industry.

Home ownership

There is no free movement of capital. Most airlines must be majority-owned in their home country. In many countries, the routes that carriers fly and the frequency they fly them are determined not by airlines or their customers but by government regulators and international treaties.

Many of these regulations can be traced back to the 1940s, when they reflected the need to establish basic international safety standards in a fledgling industry that catered for a tiny handful of passengers.

Now aviation is a mature and technologically-sophisticated industry with an outstanding safety record, carrying 2 billion passengers a year. Yet the old rulebook remains, preventing the kind of sensible economic rationalization and market dynamics that we have seen in virtually every other global industry.

It is not as if overregulation works. According to Airline Business magazine, world civil aviation has not achieved a profit on turnover of more than 3% in any of the past 20 years. The usual place you find this industry is in the red. In 2004, airlines lost $5 billion worldwide. In 2005, the figure will have exceeded $7 billion.

Regulation means government involvement. In safety and security matters, this is often entirely legitimate. However, in many economic and financial areas, it is unnecessary, damaging and often works against the interests of the consumer.
Nearly half of the world’s top 50 airlines remain government-owned, and the past five years have seen overt and covert state aid for airlines rising all round the world.

States aid

The US, traditionally viewed as the home of free enterprise, has been one of the worst offenders. In the past four years, American carriers have soaked up $15 billion to $20 billion of public subsidies and loan guarantees. That excludes the latest ploy of the major American airlines, which is to use Chapter 11 bankruptcy protection to dump pension liabilities onto a federal government agency. For the four biggest airlines in Chapter 11, this ruse is worth an estimated $25 billion.

The European Union has a better but far from unblemished record. A bale-out loan of j400 million ($480 million) has been approved for Alitalia, while j500 million of apparently unlawful support has been provided to the Greek national carrier, Olympic Airlines.

State aid tends to support the unprofitable and inefficient, while undermining the more successful. For failing businesses, it encourages inertia and rewards bad behaviour. Market forces ensure adaptation – or oblivion.

As things are, we have more than 300 airlines in the world. Most of them lose money and are unwanted by consumers. The industry is crying out for sensible consolidation.

A process of mergers and takeovers would generate a virtuous cycle of cost efficiencies, sustainable low fares, passenger growth and levels of profitability that would allow increases in economically and environmentally-beneficial investment. Why isn’t this happening? Because the intergovernmental restrictions on foreign ownership do not allow it.

Aviation must be released from this regulatory straitjacket. Opponents of liberalization should consider what has happened within the European short-haul market since restrictions on routes, fares and capacity were removed in the 1990s.

Dozens of new operators have come into the market. Fares have tumbled, passenger numbers have soared and Europe’s point-to-point route network has expanded enormously, bringing unprecedented booms for regional airports and prosperity to less-developed parts of the continent.
The competitive pace has proved too hot for some. Two big national carriers, Swissair and Belgium’s Sabena, have fallen by the wayside; at least one other – which shall remain nameless – looks mortally wounded; and several start-ups soon faded away. In other words, normal market forces have held sway.

That is the model we need across the globe. We need it particularly between Europe and America. It remains unclear how close we are to an “open skies” agreement between the world’s two largest air markets. Genuine liberalization is what I want. I am also convinced, however, that a hasty agreement, which entrenches obstacles to consolidation and denies equal access to markets, would be bad for airlines and consumers.

Cutting carbon

The next 30 years will demand not only a more rational economic structure for aviation but also a more determined drive towards limiting airlines’ impact on the environment.

At British Airways, we have taken the lead in pressing for a system of emissions trading for carbon dioxide (CO2), so that operators have a financial incentive to invest in cleaner technologies within the framework of a steadily-reducing emissions limit.

Aircraft produce about 3% of global emissions and will continue to generate carbon (or carbon dioxide) for the foreseeable future, until technology develops a new type of fuel or power source that can be safely applied to air transport.

The best way forward is a trading scheme to allow airlines to buy some of the emissions reductions achieved by companies in industries with a greater practical potential to cut their CO2 output.
The need for airlines – and companies in other sectors – to purchase emissions allocations will drive up their price and give everyone an incentive to be as fuel-efficient and as carbon-conscious as possible. In the battle against global warming, it is the world’s total output of CO2, rather than one industry’s, that is important.

Imposing a special tax on aviation fuel might make some people feel better, but it would bring no environmental benefit. As the recent explosion of oil prices has shown, higher fuel charges have a negligible effect on the demand for air travel. Airlines could simply pass the new tax on to passengers, and feel no obligation to invest in less-polluting aircraft.

Climate change is an urgent challenge for all airlines. So is providing the world’s economy with effective and efficient transport links. With policymakers’ help, airlines can rise to these challenges for the good of all.

CV Willie Walsh

Willie Walsh became chief executive of British Airways in October 2005. A pilot, he was previously CEO of Aer Lingus, which he radically restructured into the most profitable state-owned airline in the western world.