Nationalism in the Skies and the bête noire of the 21st century

Emirates CEO Tim Clark says the airline industry considers the Gulf giant its “bête noire” –the “monster of the Middle East.” With two-thirds of the world living within eight hours […]
Published on March 18, 2014

Emirates CEO Tim Clark says the airline industry considers the Gulf giant its “bête noire” –the “monster of the Middle East.” With two-thirds of the world living within eight hours of its Dubai hub, it seems the whole world is now changing planes in the Middle East. But in siphoning off passengers from Europe’s traditional hubs in London, Frankfurt and Schipol, Emirates’—now, twice more profitable than most network carriers—aggressive expansion plans are provoking strong reactions from legacy carriers, like British Airways and Air France. Those airlines, Clark says, refuse to accept that “the business we are carrying wasn’t theirs anyway. The 21st century is very different from the 20th century.”

20th century thinking—that a country’s passengers effectively ‘belong’ to its flag carrier—traces its roots to the 1944 Chicago International Civil Aviation Conference. The Chicago Conference was convened by U.S. president Franklin D. Roosevelt to establish the rules for post-war international aviation. The U.S. was pushing for a free market in air commerce to allow airlines unfettered access to international routes. But the free market for airlines failed to pass. Protectionism, with its nationalist underpinnings, emerged the winner. Ever since, aviation, the most global of businesses, after all, has remained strictly nation-bound, with arcane air commerce agreements dictating everything from the number of seats, number of flights to airport destinations and pricing. 

This operational minefield of more than 4000 tit-for-tat air service agreements allowing airlines into countries on an individual basis has made it impossible for airlines to merge beyond their borders. Nor can they tap into international equity markets as other industries do, leaving them weakened and exposed after being battered by the global downturn. For the air industry, one that has struggled to earn a real rate of return on capital, freezing access to markets remains a dangerous course.  If airlines were able to merge, they could streamline operations, with more practical routing and flights and fares more responsive to changing markets.
Despite the regulatory straight-jacket, airlines have, over the years, developed methods of working around the constraints through open skies agreements and quasi mergers. The first was 1992’s Open Skies agreement between the U.S. and the Netherlands followed three months later with anti-trust immunity exempting its airlines KLM and Northwest from laws preventing co-operation. This pioneering two-stage work-around was the equivalent of a modern joint venture and provided sizeable benefits to both airlines.

In 1996, U.S. president Clinton and German chancellor Helmut Kohl signed an Open Skies agreement between the two countries. Along with anti-trust immunity between Lufthansa and United, this deal, according to air negotiator kingpin, John Byerley, was “the baby that became the Star Alliance”—the world’s largest airline partnership—which formed a year later. It was followed in 1998 by Oneworld Alliance with its brand as “leaders in the world’s most desired destinations” and led by British Airways. In 1999, SkyTeam, focussed on network integration, entered the alliance strategy. 

Although some airlines remain staunchly committed to the alliance, others had less allegiance and were just in it for the marketing potential or lounge access. Without commitment, movement of airlines to other alliances became common. “It’s like dating”, says Paul Stephen Dempsey, head of McGill University’s Institute of Air and Space Law.

Two events could be said to have changed the shape of the airline industry.  The single European community set off major consolidations amongst the E.U. carriers. With government policy acknowledging that an E.U. and U.S. Agreement would have collapsed the Chicago regime, negotiations were closely watched by the industry. The 2010 agreement, although a failure of full liberalization, resulted in major U.S. domestic airline mergers.

As E.U. liberalization was unfolding, the Gulf carriers, Emirates, Etihad and Qatar were emerging as a major force. At an eight hour flight from four billion people, the new crossroad of global travel shifted to Dubai, Doha and Abu Dhabi.

Dubai International Airport, home to Emirates, has witnessed a jump in passengers of 77 per cent in the past five years. Although Canada fought the bête noire tooth and nail three short years ago, in April, 2013, Air Canada set on a realpolitik course of action, announcing a code share agreement with Etihad Airways.

The 21st century differs from the 1944 Chicago regime. In the 21st century, claims Byerly, all passengers want is “a low fare, their bags not lost and a good price and whether its Air France, Singapore or United, they don’t really care. They don’t care about the flag on the tail.”

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