-- Lisa Caruso, NationalJournal.com

Just pretend that the proposed innovation had been our policy from the get-go, and that we’re debating whether to change it to the policy we have.   This simple reverse flip usually makes it a lot easier to decide whether a proposed change makes sense, especially if the old policy has been around forever. 

Let me illustrate with an example. Think about the decision to ban smoking on airplanes. All we needed to do was pretend that we had never allowed smoking on airplanes. It’s now the early 1990’s. Most air travelers are flying in pressurized cabins equipped with drop-down oxygen masks. A cigarette company files a petition with the FAA asking that passengers now be allowed to strike matches in mid-flight and light up little burning sticks of tobacco whenever they feel  the urge. Because it was simply impossible to imagine the FAA ever allowing smoking for the first time in that imaginary scenario, it was pretty difficult to argue that we should continue to allow it in the real world. 

We need to put the reverse flip to work in today’s debate about what’s best for the airline industry. Let’s start by pretending that from the dawn of commercial aviation our laws allowed any airline with its principal place of business in the United States to be licensed as a U.S. air carrier, provided it satisfied sensible tests regarding financial and managerial integrity, safety oversight, capitalization, etc. These imaginary laws include conditions regarding cooperation with the military and a national security filter comparable to the CFIUS process. There is no flat rule, however, restricting investment or control by the nationals of friendly countries. Other governments around the world have adopted a similar approach, following the U.S. lead just the way they did in the real world.  Most bilateral air services agreements confer rights based on the same principal-place-of-business test rather than the nationality of owners. 

The result is that U.S. airlines today look like any other major industry – a random mixture of U.S.-owned and foreign-owned companies, some successful, some less so. There's lots of competition.  Some U.S.-owned airlines have by now become truly global – not just by flying to destinations around the world, but by investing in and operating airlines in a variety of overseas markets. By integrating the operations of these corporate affiliates, by forming multinational companies where it made sense to do so, and by exploiting economies of scope and scale in ways that would be possible in this more conventional regime, they have become global powerhouses. 

Now imagine that somebody proposes an amendment to this old law that for the first time would limit investment in and control of U.S. airlines to U.S. citizens. What rationale would be offered in support of such a change? What harm would have befallen America that needed to be remedied in this way? What would economists tell us about the wisdom of the proposal? To make it a tad more interesting, imagine what the reaction might be if the proposal to prohibit inward investment for the first time were made during a worldwide economic meltdown. How would proponents of the change explain why they had chosen this particular moment to terminate our airlines’ access to the global capital marketplace?

The utterly wrong-headed, non-starter of a proposal in that little reverse-flip fantasy, of course, is precisely the policy we have today. The simple fact is that if we had allowed our airlines to prosper in a more normal legal environment from the beginning, it would be impossible to make the case that the citizenship of airline owners and managers has anything whatsoever to do with achieving the important public policy objectives that Congress has established for our air transportation system. My guess is that even labor – which would be doing a lot better under that scenario than the one we have – would oppose those newly proposed citizenship restrictions vehemently in the interest of maintaining healthy employers. So would Bob Crandall, one of the greatest and most innovative leaders in the history of commercial aviation. Imagine what a global behemoth American Airlines would be today if he had been permitted to exploit the opportunities for expansion and ubiquity available under a more accommodating regulatory framework.  

Our airlines are struggling today to survive their most serious financial crisis ever. Their market capitalization is a small fraction of what it would be in a more prosperous time, and thus the specter of a potential fire sale is likely to complicate further the process of developing a more relevant and contemporary policy for aviation. The instinct, already apparent, will be to protect our airlines the way Zanzibar protects its cloves. 

Conditions might not be conducive to achieving the rationalization of U.S. aviation policy that’s so long overdue. But it should be abundantly clear that this is the wrong time to risk exacerbating past mistakes.  Our airlines need more freedom, not more regulation. If legislators aren’t persuaded that it’s time to embrace a new paradigm in the interest of a more successful and sustainable air transportation system, let’s at least agree that this isn’t the time to make the old paradigm even worse.

The airline industry can definitely "be profitable and serve the interests of the traveling public without greater government intervention", but this requires a new and different perspective of the problem facing the airlines, and, therefore, the solution.

As I have read and listened to the discussion of airline profitability and Air Traffic Control (ATC) problems, punctuated by bankruptcies, delays, congestion, meltdowns, etc., I have concluded that the problem, and therefore the solution, lies outside the current industry focus. Please allow me to explain.

 The Federal Aviation Act as amended required the Secretary of Transportation to ensure that “efficient and well-managed air carriers to earn adequate profits and attract capital,” that “consumers in all regions of the United States, including those in small communities and rural and remote areas have access to affordable, regularly scheduled air service,” and that U.S. airlines have a competitive position of least “equality” with foreign air carriers.  Title 49, United States Code, Section 40101.    Yes, in case you are wondering, this law is still on the books. But we’d have to give ourselves failing grades on each of these measures, and if three decades of deregulation has taught us anything, it is that we cannot fulfill all of these goals when the only thing we really care about is keeping airfares at 1978 levels.

To have a profitable industry that serves the interests of the public, as this week’s question explores, we don’t need greater government intervention, as much as policies that intelligently pursue Congress’ original objectives. This  means moving away from a singular focus on lowering prices to consumers, the guiding principle of virtually all federal aviation policy to date.    

This fundamental misunderstanding of our objectives is not a mere academic problem.    Over the years it has produced a visceral and foolish opposition to almost any form of consolidation by network airlines, harebrained attempts to legislate customer service (such as current bills that would micromanage air carriers in their handling of ground delays), assaults on the networks themselves (read: “fortress hubs”), and most bizarre of all, proposed rules to prohibit large airlines from matching prices set by smaller airlines in the name of ensuring competition!  Now we have “actual control” legislation that, according to Mr. Wytkind, will protect us from the danger of non-Americans making decisions about airline “schedules” and “pricing.”     

It is often said that the law most frequently enacted in Congress is the “law of unintended consequences,” and nowhere is this truer than in the airline industry.   By pursuing policies that were designed to ensure major U.S. airlines had no pricing power, and that fares would always be low, we engineered a perverse outcome that has harmed consumers in a more lasting way:   As the legacy carriers were forced to slash domestic capacity last year (due to sky high fuel costs that they could not pass on to their passengers), prices began to go up, not down.   And even with fewer flights, we saw abysmal customer service, increasing delays, and a frightening reduction in service to rural communities.   (In a hub and spoke system, airlines pull out of their thinnest markets when times get tough.)   Labor hasn’t fared any better either.   Airline payrolls have dropped, with lower wages and fewer employees, than we had eight years ago.   Meanwhile, the much touted 2007-2008 “recovery” of the industry quickly fizzled out once the country became mired in recession.       

Washington myopia about airlines is not only bad for industry; it hurts American consumers in the long run as well. The rules of capitalism were never suspended for the passenger airline business.    Like other companies, airlines that perennially lose money cannot afford to reinvest in their core businesses, much less innovate or improve them.    Instead, they focus on cutting costs and just staying afloat.    Even when they make profits, if the long term prospects for their shareholders remain bleak, they are wise not to reinvest the money in new capital assets. Sadly, almost eight years after the shocks of the World Trade Center attacks, none of our largest network carriers has replenished its fleet.  

This situation is disastrous for U.S. airlines competing in an increasingly global marketplace against the likes of Emirates, Singapore Airlines and Lufthansa. So while Washington insiders agonize over whether a domestic merger will result in fares from Tuscaloosa to Tulsa going up by a few bucks – and thus “harm consumer welfare” – foreign competitors with protected domestic markets go on reinvesting and buying new aircraft.    In fact, our legacy carriers have fallen far behind their foreign rivals on every measure of success:   profitability, average fleet age, market value, and customer service.  (Not a single U.S. legacy carrier was even listed in the top 40 carriers in customer service and product quality by the highly respected World Airline Survey in 2008.)   Instead, we are forced to excel in the creative use of the bankruptcy laws.   All of this is a recipe for extinction of the U.S. airline industry in the name of keeping competition alive. Strange public policy, indeed. 

I don’t believe that the federal government should promote higher prices as such.   But at the same time, as a matter of national priority, we should not cherish persistent below-cost pricing either -- especially in an industry that is so critical to our nation’s economy and transportation infrastructure.  Let’s be honest: Why should it cost less to fly from New York to Los Angeles than to take a taxi and buy a meal out when you get there?  This absurd situation can’t go on indefinitely; airlines really cannot be expected to remain viable forever while failing to earn any return on capital. The capacity cuts we have seen since the price of oil spiked last year are only the beginning, in my opinion.    

In response, some have proposed re-regulation of fares and markets as a solution, but not too many observers believe this step is desirable (consumers would clearly be worse off) or practicable (who stops flying where?) in a world where most other countries are rapidly removing the last vestiges of regulation.    The real solution is apparent to every investor I have talked to on Wall Street: Permit the airlines to consolidate – through mergers, asset sales, or exit by failed firms -- just as other deregulated industries have done.  The airline industry today is still as highly fragmented  as it was after being deregulated three decades ago. The fact is, to have sufficient competition over prices, we don’t need five network air carriers flying largely duplicative route structures today any more than we would need five wireless phone companies, five Internet search engines, or five express package carriers.   (Speaking of which, FedEx and UPS are an example of two companies that some would say “dominate” their businesses while consistently producing highly innovative and profitable services for their customers.)    

So, rather than enact new laws, with unanticipated effects, Congress should remind the Department of Transportation of the objectives set when deregulation occurred, and then give the new Secretary the tools (and discretion) needed to achieve those goals.   

A public/private partnership approach, taken now, can stabilize the airline industry and improve customer utility and outcomes.

Scheduled airlines and private aviation have for decades been major contributors to American business productivity, promoting efficiency, faster communication and improved readiness in times of peace and conflict.  The business productivity that aviation throws off creates further consumer demand and skilled jobs through a strong multiplier effect. 

Over the past two business cycles however, and ironically, partly a result of the 2001 Air Transport Stabilization Act, network airlines have fallen into slow liquidation and risk failing American business and consumers.  Airlines once manufactured and sold productivity; with few exceptions, that is no longer the case. Year after year, network airlines underperform ever more modest customer expectations.  These failures relate in part to complexities associated with regional and global alliance developments.  These alliances are frauds on the public, but unless banned outright -- here and abroad -- all should be allowed to play the game, and live with the outcome.  

Essentially by design, the network airline business model has failed all but hub city-based businesses and low time value individuals:  undesirable connections and trip circuity including those alliance itineraries, pervasive delays on top of creeping scheduled elapsed times, intrusive processes requiring excessive airport dwell time, evolution toward 'self-service’ and unbundling of basic services driving a panoply of fees.  Which explains why private aviation experienced such dramatic growth.

Despite diversification efforts, aviation has never been immune to business cycle phenomena.  We now see a highly exaggerated cyclical and global downturn.  By the same token, as is always the case at the trough, we see a parallel trend evident in continuing investment in performance and productivity, communications and mobility.  As the economy recovers and as media focus changes from outrage to optimism, pent-up demand will surprise on the upside.

While the market settles and in advance of the recovery we must address the nation's pressing aviation infrastructure needs.  This is where a government involvement and public/private partnership make sense.  Both airline "self-help" and accelerated overhaul of the nation's air traffic management system must be part of those plans. 

First, airlines must take available, off-the-shelf "NowGen" steps to manage their aircraft assets and their footprint on the national airspace and airport systems, in the decade before FAA "NextGen" is funded and arrives.  This is a problem of their making, and is theirs to solve, not FAA's.  Delta Air Lines has done so at Atlanta since 2006 and has produced a track record of improved on-time performance, fuel savings, reduced CO2 emissions and  better airport capacity utilization.  Other carriers and airport operators should follow, not simply complain and point fingers.

Second, the administration must simultaneously address and coordinate key policy issues on transportation (air and surface modes), energy, environmental and economic policy.  Without well coordinated policy in ALL those areas, we risk further compromising the effectiveness of our scheduled and private air travel networks and further risk industries that have been vital to prior rounds of American business expansion and will be so critical to their incipient recovery.

If the US airline industry is to have a future, we need prompt intervention by airlines and government.  We can ill afford more of the same finger-pointing by managers or a laissez faire approach by policy-makers.

 

Chairman Oberstar is working to strengthen what has been U.S. policy for decades, while globalization is  posing new challenges in aviation.  We applaud his actions, because longstanding U.S. ownership and control rules are under siege from European interests.

The European Union is aggressively encouraging the U.S. to change its ownership and control rules as part of the second stage talks of our Open Skies agreement.  In fact, the EU has even threatened to withdraw from the existing “First Stage Agreement” if it is not satisfied with U.S. actions.  U.S. negotiators should reject these tactics.

Decisions about fleet acquisition, jobs, route planning, schedules and pricing should  be made by Americans.  A foreign air carrier is likely to direct American operations in a way to maximize its own economic objectives.  For example, a European airline could well transform its U.S. partners into “feeders” that supply traffic to its own international flights.  This would hardly be robust global competition – and could lead to the surrender of another key American industry.  And if a foreign airline has control over maintenance decisions, even more repair work could be shipped overseas to facilities that may not meet the highest safety and security standards.  Purchasing decisions could bypass key domestic producers like Boeing.  U.S. aviation employees already face the uncertainty of not knowing the fate of their collective bargaining agreement rights when flying overseas; introducing a “controlling” foreign owner would add even more uncertainty for these workers.

To see the ill effects of bad trade agreements, look no further than auto, steel, aerospace and other industries where flawed trade agreements literally killed off companies, sent workers packing and ruined entire communities.

In 2006, Congress rejected a Bush Administration proposal to change U.S. control rules as part of an Open Skies agreement with the EU. Despite that reprimand, the 2007 stage one talks produced an agreement that infringes on our ownership and control rules and today, the EU has its sights on completely eliminating them.

Expanding aviation trade with the EU is an important goal but it must be done without harming the U.S. aviation industry and threatening good jobs.

Aviation is a Global Industry

 Despite deregulation of domestic airline activity more than 30 years ago, the U.S. government still practices a “father knows best” approach to airlines where “foreigners” are concerned. Among the most egregious protectionist practice is the severe limit imposed on non-U.S. ownership of U.S.-incorporated airlines. At a time when U.S. airlines are struggling and might benefit from new infusions of capital, these archaic rules prevent what is increasingly a global industry from taking advantage of global capital.

 While Rep. Oberstar proposes to reinforce those regulations, other countries are moving in the opposite direction. Both Australia and Canada are moving to increase their limits on foreign ownership from 25% to 49%. Compared with the United States, those two countries have far fewer airlines than we do, yet their policymakers appreciate the global nature of both aviation and capital markets. Even India, where a form of airline deregulation is under way, is discussing liberalization of what is now a complete ban on foreign investment in airlines.

 Code-share and alliance deals are attempts to gain some of the advantages of airline globalization despite the government’s restrictions on ownership. If those restrictions were repealed (as opposed to being strengthened), we’d likely see cross-border mergers that would lead to better-capitalized airlines, something this industry sorely needs.

 As for the potential of diminished competition, the ultimate taboo in aviation has always been “cabotage”—the ability of foreign carriers to provide domestic service (i.e., between two U.S. cities). Removing the cabotage restriction would be a welcome complement to repeal of the ownership restrictions. That would lead to a whole new level of competition for domestic air service, in addition to international service.

Based on airline member data, ATA estimates that this legislation could cost as many as 15,000 airline jobs. In the absence of antitrust immunity, numerous routes and frequencies would be instantly rendered nonviable. For an industry that already shed 28,000 jobs in 2008 with thousands more expected this year, this bill could not come at a worse time.

We are pleased that the Obama administration recognizes the importance of antitrust immunity for U.S. airline participation in international airline alliances. In a recent order, DOT wrote, “[Granting antitrust approval]... would be in the public interest because it would support increased levels of service in international markets served by the carriers, give consumers more travel options and shorter travel times, and reduce fares.”

Not only does antitrust immunity help the United States in meeting its economic stimulus objectives, it also ensures that U.S. airlines can compete globally, strengthens open skies relationships with other countries, improves the customer experience and increases the stability of the workforce.

No, I do not think Chairman Oberstar is going the wrong way on either Alliances or Foreign Ownership, although many in the industry will doubtless disagree.

In my view, an objective observer would have to look very hard to find a way in which alliances have benefited consumers. In the major markets now dominated by alliances -- U. S. / Paris and U. S. Frankfurt for example -- there is far less competition now than there was in pre-alliance days. And that is exactly as one would expect, since any non-alliance carrier serving those markets can offer far fewer origin-destination markets than the alliance carriers with which they compete.

Additionally, the alliance approval process has become extraordinarily political -- as if anything isn’t, of course. Still, since the alliances serving both Paris and Frankfurt already control a higher percentage of slots at those airports than American and British Airways would control at Heathrow if their proposed alliance were approved, it’s very hard to believe that the approval criteria being used are objective.

In addition, I think airline Alliances have been far more beneficial for international airlines than for U. S. carriers, and for that reason alone, I think they should be disallowed.

As to Foreign Ownership, I’d ask “Why”. Do offshore airlines or entrepreneurs really want to compete in an industry which has never been able to earn its cost of capital? Does the U. S. have a capital shortage relative to the rest of the world? Or could it be that international airlines might have some motive other than serving the U. S. market for seeking ownership?

I think the answer is that international carriers -- most of whom are run by smart folks -- have little interest in serving U. S. domestic markets in which U. S. airlines have been unable to earn satisfactory profits. But they would very much like to gain control of the facilities, routes, aircraft and personnel needed to funnel long haul international passengers more effectively to their own operations. So, to my mind, the likely by product of changing the foreign ownership rules would be even less domestic service -- hardly an attractive prospect.

As to the prosperity of the industry, I have long thought -- and still believe -- that the airline industry cannot prosper without a higher level of oversight than is presently in place. I think the airline industry, like our utilities, provides an essential service, and needs the kind of oversight we have traditionally provided for companies which do so.

Should we go back to the way we regulated in 1978? No, I don’t think that’s either practical or desirable. But I think government needs to do more, and make different choices, than it has in the past.

Some examples:

• It makes no sense to allow our Air Traffic Control System to fall behind world standards. Providing the needed capital, and political resolve, is a governmental responsibility which has been shirked for too long. We need to get the next generation system built now!

• It makes no sense to allow airlines to schedule more flights into a given airport than its facilities can accommodate. Doing so creates delay which consumes unnecessary fuel, raises airline costs, and irritates customers.

• It makes no sense to let airlines send planes offshore for heavy maintenance. Doing so may save money, but has cost the country a very substantial number of high skilled blue collar jobs. In my view, that’s a bad trade.

• It makes no sense to sustain labor and bankruptcy laws which are clearly ill suited to the industry’s needs.

• And, to return to question 1, it makes no sense to foster alliances which reduce competition and disadvantage U. S. carriers.

I think we have been off track for many years, and I welcome Chairman Oberstar’s initiative. A fresh look may provide some fresh answers.