Special report:  Airlines await green light for consolidation

Special report:  Airlines await green light for consolidation

Aviation leaders appear divided on the outlook for a relaxation of ownership and control restrictions. Ian Taylor reports

Alitalia’s decent into bankruptcy protection following the failure of stakeholder Etihad to oversee a successful turnaround raised once more the issue of restrictions on foreign ownership and control of airlines.

Etihad held a 49% stake in Alitalia, the maximum non-EU ownership allowed under EU rules. The US retains a 25% restriction. The rules in most of Asia remain more restrictive still so that Air Asia, for example, has had to establish multiple joint ventures around the region in order to grow.

The Capa Airline Leaders’ Summit in Dublin earlier this month tackled the question head on with an opening debate on whether existing ownership and control rules would be discarded.

The motion for debate proposed these could be gone by 2025, which seems fanciful. But aviation consultant Professor Rigas Doganis, a former Olympic Airways chief and non-executive director of EasyJet, presented a compelling argument.

Doganis noted: “The rules are becoming increasingly irrelevant. Governments around the world are keen to change them and the speed of change is accelerating.

“Some countries now accept 100% foreign ownership – India changed its rules last year.

“Joint ventures with anti-trust immunity make a mockery of the rules. On transatlantic routes, 80% of capacity is controlled by three businesses.”

He suggested: “Nobody really believes Virgin Atlantic has any effective control [of its business]. Control rests with Delta Air Lines [which owns a 49% stake]. KLM is owned by Air France.

“Governments want to relax the rules because they want more investment to come into their airlines. They believe foreign management will benefit them. They believe it will bring in more foreign tourists.”

Doganis’ argument was comprehensively trashed by Ulrich Schulte-Strathaus, managing director of consultancy firm Aviation Strategy and Concepts and a former secretary general of the Association of European Airlines.

He insisted: “Ownership and control rules will remain. Governments don’t want to get rid of them. They need ownership and control provisions in order to negotiate with other governments.

Schulte-Strathaus pointed out: “When the EU created a single aviation market it did not abolish ownership and control rules, it created a new condition. “

He argued: “We still have state sovereignty and the last bastion states will give up is control of transport policy, to have some control over investment policy.

“This is still a pillar under which states negotiate access to their air space. Do we want the most subsidised airlines to have open access?”

Former Virgin Atlantic executive and chairman of consultancy BKH Aviation Barry Humphries begged to differ.

He argued: “The rules are archaic and out of synch with other industries. We repeatedly see governments whose airlines are in trouble accept foreign ownership.”

But the rejection of this argument by investment analyst Albert Muntane Casanova, senior vice-president of aviation research at Frankfurt-based DVB Bank, was hard to refute.

Casanova insisted: “There is no pressure from the investment community to abolish ownership and control rules.

“Only 11 airlines in the world are investment grade,” he said. “Their yields are not significant. From an investment perspective airlines are not appealing.

“If you moved away from government support [for airlines] the financial sector would have to support more risk. Is there pressure for that? No. I don’t see ownership and control rules moving away.”

Speaking at the summit later, Willie Walsh – chief executive of the IAG group which owns British Airways, Iberia, Aer Lingus and Vueling – noted: “Alliances and joint ventures exist because the ownership and control rules prevent airlines from consolidating across borders.

“These arrangements are the best we can do in the current circumstances. I’ve no doubt there are airlines that would want to pursue cross-border consolidation.”

Undoubtedly, IAG would be one of them.

Consolidation benefited passengers, Walsh said, even in the US where “if the US regulator could go back in time, I’m not sure they would allow the level of consolidation there is”.

However, Walsh dismissed the Etihad model of minority investments in multiple carriers, saying: “I’m not a fan of strategic equity investments. You see a lot of airlines taking stakes in other airlines and not really achieving anything.

“Qatar’s investment in IAG is a financial investment. Qatar is very clear. It has been very successful. They are very pleased with the development of the share price and the dividend.

“Airlines pursuing equity investments like Etihad – I didn’t think it would achieve anything. There was no real strategic alignment.”

Walsh agreed with Doganis on Delta Air Lines’ control of Virgin Atlantic, saying: “Delta came up with a smart way of working around the restrictions. The truth is Virgin Atlantic is controlled by Delta.

“We know Delta has a 49% stake, but the way it is structured it is clear Delta controls Virgin Atlantic and is leading the JV [joint venture]. There is clarity there. That is the reality.”

The IAG boss has previously dismissed the idea that a liberalisation of ownership and control restrictions is on the cards. This time he said merely: “If there were no ownership and control rules, I don’t think we would see JVs. The landscape would look very different.”

It was left to the European Commission’s director general for mobility and transport Henrik Hololei to spell out what is most likely to happen – which may not be much.

“What is the healthy level of consolidation?” Hololei asked.  “In the US, the pendulum has potentially moved too far. You hear every day of the quality issues of US airlines.”

Noting Norwegian Air’s long wait for permission to enter the US market, he said: “There is a desire to push away all potential new entrants.

“Europe is far more open and liberal than the US. But we have a 49% limit [on non-EU ownership] and it’s debatable whether that is fit for purpose.”

He said: “I’m pessimistic whether anything will change with the US. It is very unlikely China will open up. So it very much depends whether Europe is ready to challenge its own framework.

“We have the market asking for that [a relaxation of the rules]. What allowed us [in the EU] to move ahead is that we shifted the question. We don’t ask to prove you have effective control, but to prove you don’t have effective control.”

In other words, the EC has fudged the issue to allow foreign takeovers in all but name, while foreseeing no change in prospect globally.

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