With the airline sector set to lose $9bn this year, airline companies have to truly embrace free markets in order to survive.
Opening up air space a question of survival
It is unfortunate that protectionist voices such as Robert Milton of Air Canada stand in the way of Gulf carriers realising their full potential. Mr Milton, the chairman of ACE Aviation Holdings, the parent company of Air Canada, is a key opponent of Emirates Airline's ambitions to fly a daily service into Toronto and other Canadian cities. Rather than giving Canadians the power to choose how they want to get to India or some other far-off locale, which would probably involve a shorter, more direct route via Dubai on Emirates, for example, he wants to force Canadians to fly his airline, taking a northerly route to Europe and then transferring to one of Air Canada's partners in the Star Alliance.
"Let them fly here 100 times a day but only serving traffic between Canada and Dubai, because there is no underlying market of any substance," Mr Milton said at an industry gathering in Kuala Lumpur this week hosted by the International Air Transport Association (IATA). Mr Milton wields an inordinate amount of power over the prospects of Emirates receiving greater access into Canada, due to an archaic system for negotiating air rights.
The 1944 Chicago Convention established that airlines can start services to a new country only through talks between governments. Air Canada, as flag carrier and a large employer in Canada, has been able to protect itself through its lobbying. Mr Milton told the audience that Air Canada was "very much open marketeers" and that the Canadian government "has not fought access". But then he suggested that Emirates and the other long-haul specialists based in the Gulf, Etihad Airways and Qatar Airways, would wreck the Canadian market if they were granted greater access.
This type of thinking is "prehistoric", according to Peter Harbison, the managing director of the Centre for Asia Pacific Aviation, a consultancy based in Sydney. "It's sheer 100 per cent protectionism," Mr Harbison said. "It's the very thing in the industry everyone is talking about being absolutely essential to change." The industry is in dire straits and airlines are set to lose US$9 billion (Dh33.04bn) this year after losing $10.4bn last year because of expensive fuel and the global recession.
Making a clear case that the industry's survival was at risk, Giovanni Bisignani, the director general and chief executive of IATA, said governments must open up to competition and loosen foreign ownership laws. "For our industry with $48bn in losses since 2001, the time for change is now," Mr Bisignani said. "They must deliver normal commercial freedoms urgently and effectively." It is not going to be easy to convince airline executives to change, as they focus more intently on immediate challenges, rather than the long-term benefits for the industry and their carriers.
Mr Milton, for example, seems more concerned about preserving his troubled airline than helping usher in the dramatic changes needed in the sector. He was joined in his Gulf criticism by Rob Fyfe, the chief executive of Air New Zealand, which is also part of the Star Alliance and, like Air Canada, at risk of sharp losses because of a strong decline in global air travel. Mr Fyfe agreed that Gulf carriers had not created any new demand.
Air Canada and Air New Zealand say they are happy to grant competitors access to their home markets if they can bring more travellers. But, they claim, that is not the case. Thus, they argue that they are justified in wanting effective ownership of the existing customer base. But this is a red herring. The issue is that travellers should be given a choice. Emirates and Etihad have new planes, new multibillion-dollar terminals and a superior location for their centres that cuts transit times. That is choice.
Critics of Gulf airlines accuse them of "unfair" advantages and cite these as reasons for constricting their access to the source markets of Australia, Europe and North America. Over the years, carriers such as Qantas, Lufthansa and most recently Air Canada have fought the prospect of losing more market share to the Gulf airlines. It is true that Gulf airlines have lower operating costs and labour unions are banned by law. By contrast, Air New Zealand has 47 different labour union agreements. Gulf airlines are state-owned and, except for Emirates, often keep their finances private, obscuring the level of shareholder support.
But the fact is these airlines have grown immensely in recent years and are competitors not only to individual airlines, but to entire airline alliances. For individual airlines to accomplish this is arguably a measure of efficiency. Back when aircraft flew shorter distances, it made sense for Air Canada to enter into a partnership with Lufthansa, for example, to serve the large trade between Canada and India. It was an efficient way to share resources.
New technology, however, is making these old agreements obsolete as airlines between Asia and the West, such as those in the Gulf, are able to fly the route with fewer stops. Emirates is now the fourth-largest aviation entity measured by capacity, trailing only the Star Alliance (composed of 21 airlines), Sky Team (14 carriers), and One World (10). If the industry truly embraces the free market, it should allow itself to evolve. This would require some bloodletting and result in some airlines shrinking their market share and rationalising their capacity and routes.
With the industry already on the ropes, it may have no other choice. Whether beleaguered airlines such as Air Canada realise it or not, making way for the Gulf carriers ultimately is in their long-term interest. email@example.com