Wide open skies

Last week, the Financial Times carried an editorial on expanding “open skies” between the U.S. and Europe. After heralding the decline of flag carriers (even more marked with the proposed merger of BA and Iberia), the editors write: “Governments . . . must deal with the remaining obstacles to effective global airline consolidation.”

The US once led the way in deregulating air travel. However, the first European Union-US “open skies” agreement, which came into force in March, showed the Europeans are now keener to open up air traffic. The deal gave US carriers the right to operate flights between EU member states — but the US denied European operators access to its domestic market. After a slow start, Europe can reasonably claim it is now the leading advocate for a freer air-travel industry.

The current open skies negotiations’ top issue is whether the U.S. will allow foreigners to own more than 25 percent of voting stock in U.S. airlines, the quota that nearly scuttled Virgin America. According to the FT,

These absurd anachronisms must be abolished as soon as possible. Removing restrictions on cross-border ownership would pave the way for mergers between US and European carriers. Since the US and the EU dominate the airline industry, it would encourage other countries and regions to abolish their restrictions. Consolidating large airlines adds to their networks and allows significant economies of scale. Confining international operators to operating largely from one continent is ridiculous.

Americans discovered in the 1970s that confining airlines to certain regions or routes was also ridiculous. But what are the obstacles today to opening our airlines to foreign investment and our domestic routes to cabotage (i.e., allowing foreign carriers to operate domestically)? First, U.S. airlines fear competition from rivals that may still enjoy state subsidies or are simply better airlines. There’s no reason to shield them from competition; protectionism is both economically and politically retrograde. Second, small communities fear losing service. What incentive, they say, would Lufthansa have to maintain service to Hibbing, Minn.? Well, Northwest doesn’t have much of an incentive either, apart from a subsidy, so that’s a non-issue. Third, some fear that the U.S. will not be able to exercise sufficient safety oversight over foreign airlines. The solution here is to ensure that the parallel safety institutions in open skies partner countries are equal in quality to the FAA and that all parties are subject to ICAO standards. Furthermore, if we already trust an airline to operate at U.S. airports and over U.S. airspace, there is no reason to block it from a domestic flight. The fourth concern is labor. China is preparing to ramp up its pilot training program to meet domestic needs, but what if a U.S. airline could pump in cheap laborers domiciled in, say, China, who commute to the U.S. to work? At the moment, however, that’s not the situation we’re in. China is instead hiring hundreds of pilots from overseas, as are Middle Eastern, African, and other airlines. The U.S. has become a talent pool for airline pilots. In fact, allowing European cabotage might actually increase the U.S. pilot base, should European airlines wish to take advantage of lower relative labor costs.

Should we expect any tectonic shifts at the open skies negotations?

However, despite acute domestic problems, it is the US government that is standing in the way of a new deal on foreign ownership. Banning foreign takeovers may win populist acclaim, but American consumers should not thank their politicians for shielding their airlines from help from abroad.

Borders in the sky [FT]