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Protectionist Policies Threaten Newfound Stability of Global Airline Industry

Protectionist Policies Threaten Newfound Stability of Global Airline Industry

The international airline business has always been known by economists and business experts to be an unpredictable and volatile industry. Its success depends on accurately forecasting major world events, bracing for changes in consumer preferences, and careful management of capital stock during extreme weather and natural disasters. Governments in the 1980s would routinely fund airline companies at a loss in order to ensure the availability of transportation, due to the airlines’ razor-thin profit margins. As a result, profit margins have historically been razor-thin, so much that until the 1980s, governments would routinely fund airlines companies so that air travel could endure. In recent years, however, airlines have found stability. Profit margins have bounced back from the recession and have exceeded pre-recession levels. Any yet, despite this, the airline industry is far from being safe from calamity in the near future. The recent shift of countries favoring nationalistic and protectionist policies, most notably Great Britain and the United States, threaten the newfound stability of the airline industry. Policymakers must actively work to sustain this stability, to encourage free market competition, and to refute the recent compulsion to uptake protectionist trade policies.

Starting an airline requires enormous sums of up-front investment. Moreover, the financial components of this process entails building capital stock, which can vary from the facilities where airplanes are held to the airplanes themselves. To put that in perspective, the cheapest passenger airplane that Boeing makes in the 737 model, at an estimated cost of $51 million. These purchases occur in tandem with hiring an army of employees ranging from pilots, flight attendants, and gate workers, to facilities maintenance and management. The airline, moreover, must lease gates at airports, which are enormously costly; control over airport gates is typically determined through a bidding process. The cost is much higher for a newly-formed airline to buy a gate at an airport and fly planes out of it. Should that route be unprofitable, it can mean the failure of the airline. However, bigger airlines can afford to take losses at times for they can afford to fly half-full airplanes, repair their jets with considerable profit loss, and most of the time, remain functioning even after a severe supply shock. After the 9/11 attacks on the World Trade Center in 2001, the U.S. Federal Government closed airports for over 2 full days, and global demand for airline travel shot down. As a result, Swissair, Sabena, and Ansett airlines shut down, while others like United, US Airways, and Delta all filed for bankruptcy shortly thereafter, despite still being in operation today.  In addition to a drastic change in the industry as airlines faltered, airport security in the United States was revamped, with the creation of the Transportation Security Administration (TSA), or the scapegoat many travellers blame for delaying travel. Less noticeably but perhaps just as importantly, the U.S. Congress created the Air Transportation Stabilization Board, which allocated $10 Billion to help failing airlines in the aftermath of 9/11. From the industry breakdown and structure to the aftermath of 9/11, it is clear that airline companies face considerable risk, and as a result, operate under an economy of scale, meaning that they become more efficient as they acquire more resources and market power. It is therefore up to our policy makers and global decision makers to work diligently to ensure the stability of the airline industry so that it can remain competitive and profitable.

Recently, however, airlines have been more stable than any other time in their history. One possible reason for this overall strengthening of the airline industry in the global economy post Great-Recession. During the recession, airlines around the world felt the burden of a decline in consumer spending. Global giants like KLM and Lufthansa put a hold on ordering new planes – leading to a serious shock for Airbus and Boeing. Between 2008 and 2009, United and American airlines cut over 10,000 jobs. More recently, however, economic conditions have been better for airlines. According to the International Air Transportation Association (IATA), in each year since 2009, when the recession began its downswing, annual profit margins have exceeded 3%.

Another explanation is the increase in mergers that allow airlines to experience economies of scale and increase their profits. The increase in airline company mergers is another contributing factor to airline industry stabilization. Prior to 2005, there were nine major airline companies that dominated the United States domestic airline market. However, since 2005, the number of ‘major’ US airlines has shrunk to four, the most recent being Alaska Airlines’ purchase of Virgin America. These 4 major companies now currently represent over 70% of the total airline industry marketplace. When the Alaska Airlines/Virgin America merger was announced, it worried legislators that a small concentration of airlines with considerable market power had the potential to stifle free market competition with low-fare airlines and other companies. This scenario had the potential to lead to an increase in fares and a lower quality of airline travel overall. As a result, the U.S. Department of Justice blocked the merger but eventually agreed to concessions, which included divesting from gate slots, or take-off and landing authorizations, at major airports. The results have thus far been satisfying of all parties involved, as the increased profits of airlines have coincided with decrease in cost of flying.

The stabilization of airlines has lead to new sources of investment in the industry.  In February, 2017, famed billionaire investor Warren Buffett made headlines by taking a $10 billion stake in American, Southwest, United, and Continental Airlines. Just a few years earlier he had vocally warned of the risk associated with investing with investing in airlines. Yet, despite great progress towards a stronger and more stable global market for airlines, various parties who have benefited from this change must worry about political factors that could upend this recent phenomenon. In particular, the policies of the United Kingdom and the United States have worried airline executives.  According to The Guardian, the trade organization Trade for America has been actively lobbying members of British Parliament to carefully consider Brexit negotiations impact on airline travel – specifically between Heathrow Airport in London and carriers from the United States. The organization argues that even a day’s delay in implementing a policy change could deeply impact carriers. It is estimatedthat 140 passenger flights and just under 50 cargo flights travel between the United States and London each day. Grounding these planes for 24 hours or more could have a monumental impact on global trade. Even with recent improvements in profitability, not all airlines could successfully absorb the shock of losing business within a full 24-hour cycle, which would imply for many millions in losses, and other residual effects on commerce.

It should be noted that airlines flourish under current rules that allow for the free-flow of people and goods between the United States and Europe, otherwise known as the “Open Skies” agreement. Since the likelihood of Brexit talks would place the United Kingdom outside of the European Union, which is under the jurisdiction of the agreement, this privilege would no longer be offered to carriers travelling between the UK and the US. Losing this privilege, or even adjusting to some slightly different system, would take a heavy toll on a handful of international airlines.

Many feel that President Trump’s ban on electronic usage on flights from certain airports threaten the stability of global air travel as well. This March, both the United States and the United Kingdom banned electronic usage on flights, which precludes the use of laptops and tablets, from specific airports that pose as likely targets for terrorists.  However, the US conspicuously included more airports on this list than the UK. Political scientists Abraham Newman and Henry Farrell, accredited experts on global and international affairs, suggest that this could be retaliation against specific Middle East-based airlines. Etihad and Emirates, whose hubs are included on this list of US airports, receive more government funding from their home countries to operate. In the past, many US companies have complained that this creates an unfair advantage, as they can operate at a loss but receive government subsidies that allow them to remain operating and competitive. Regardless, retaliatory actions from governments in the name of security threaten the overall freedom and stability of the global marketplace and airlines specifically.

Airline travel will continue to be a crucial part of the global marketplace. Its efficiency and stability will determine the success of transporting information and knowledge across borders for the foreseeable future. Actions that attempt to draw arbitrary boundaries around trade, for protectionist sake or otherwise, only threaten the stability of an industry with an already tumultuous history. In the future, policy leaders must be steadfast in addressing these issues, for the progress of global markets depend on it.

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