Closing Skies? Airlines in an Age of Protectionism
APEX Insight: Britain’s vote to leave the European Union and policies set by the Trump administration are putting globalization at risk. With protectionism on the rise, what does the future bode for the aviation industry, which both enables and depends on globalization?
Britain’s vote to leave the European Union and Donald Trump’s US election victory mean 2016 was the year of political upset. But historians may also see it as the time when the old ideological divisions between left and right were replaced by those of open and closed. A briefing last summer by The Economist summarized the issues defining the new fault lines as, “Welcome immigrants or keep them out? Open up to foreign trade or protect domestic industries? Embrace cultural change, or resist it?” With protectionism on the rise, what does the future bode for the aviation industry, which both enables and depends on globalization?
Aviation: The Business of Freedom
Some early signs are ominous. Following the US President’s executive order barring entry to America for citizens from seven predominately Muslim countries, there’s evidence that the country’s tourism industry is experiencing a “Trump slump.” Data released last month by travel search engine Hopper reported a 17 percent decline in flight search demand from international origins to the US. The overwhelming majority of countries showed a dip in interest, with Russia as the exception.
In an address at last week’s US Chamber of Commerce Aviation Summit in Washington DC, IATA’s recently appointed CEO Alexandre de Juniac echoed the industry’s concern. “I believe that aviation is the business of freedom. Air travel liberates people to live better lives and makes our world a better place,” said de Juniac. “So we are deeply concerned with recent developments that point to a future of restricted borders and protectionism. These deny the benefits of globalization – a product made possible by our industry.”
Worries of this sort were compounded when the European parliament voted last week to temporarily suspend visa-free travel for Americans visiting the EU. The dispute predates the Trump era and has been simmering since 2014. While most EU citizens can travel to America without a visa, those from Bulgaria, Croatia, Cyprus, Poland and Romania cannot. Although the vote is nonbinding and will be up to the European Commission to decide upon, it points to a growing chasm between allies on either side of the Atlantic. Barbara Bodine, director of the Institute for the Study of Diplomacy at Georgetown University told the Washington Post that such threats had been issued before, “But this time, it has more salience.”
Warren Buffett, however, appears unfazed by the current pessimism. The man who just four years ago described the airline industry a “death trap for investors” has now made sizeable investments in the four largest US carriers over the past few months. Cheaper jet fuel and record profits over the past two years may have persuaded his change of heart. The so-called “Oracle of Omaha” gave little away when explaining the rationale behind his big bets on the country’s aviation sector. “It’s true that the airlines had a bad 20th century. They’re like the Chicago Cubs. And they got that bad century out of the way, I hope,” he said when speaking to CNBC last week. “The hope is they will keep orders in reasonable relationship to potential demand.”
Where Will We Land?
But Buffet’s optimism hasn’t caught on among those on the other side of the Atlantic. Britain’s vote for Brexit could cause serious problems for the country’s aviation sector. The UK has the largest aviation network in Europe and the third largest in the world, contributing $74.5 billion each year to its economy. This is largely thanks to the EU’s single aviation market, which is often described as the world’s most liberal skies agreement. It allows unfettered access for EU-based airlines to fly from any one point to another within the 28-member bloc and has resulted in air fares that are 40 percent lower than they were before it came into force. It has made possible the success of low-cost carriers such as easyJet, which itself admits it is a “product of the EU’s deregulation.”
Describing the worst case scenario for Britain, Paul McClean and Alex Barker wrote in the Financial Times that “without that web of international deals to replace what the UK stands to lose after Brexit, Britain’s planes may literally be left with nowhere to land.” Retaining membership of the European Common Aviation Area would be a way around this, but that would mean accepting all EU aviation laws and European courts, something Prime Minister Theresa May pledged would have no influence on the UK after it leaves the union.
“2017 is off to a very strong start, with demand at levels not seen since 2011.” €” Alexandre de Juniac, IATA
What does the immediate future hold? The big three US airlines initially saw a silver lining in Trump’s protectionist economic agenda, with opportunities to present cases against Gulf carriers and Norwegian Air International’s foreign air permit. However, comments by White House press secretary Sean Spicer hint at disappointment for US airlines regarding the latter issue, after he described the “huge economic benefit that lies in that deal right now.”
After the chaos, condemnation and judicial backlash that followed the Trump administration’s initial travel ban, a revised order was issued on March 6. The new version keeps the long-term goal of restricting visas and refugee admissions in place, but the temporary measures are far more limited. While Airlines for America and IATA both issued statements welcoming the advanced notice and coordination with the industry, shares in Delta Air Lines, American Airlines and United Airlines fell the most in five weeks. Analysts appear to share Buffett’s prognosis, seeing this as a short-term blip rather than a long-term worry.
Despite concerns outlined by Alexandre de Juniac last week, IATA’s January global passenger traffic figures released today were the strongest in five years. The numbers show demand rose by 9.6 percent compared to the same month a year earlier. “2017 is off to a very strong start, with demand at levels not seen since 2011,” acknowledged IATA’s CEO. “This is supported by the upturn in the global economic cycle and a return to a more normal environment after the terrorism and political ‘shock’ events seen in early 2016.”