Consolidation will be crucial for airlines to survive

Have you ever thought about why the aviation industry always seems to be in a permanent state of crisis? Why in 2008 as many as 30 airlines went out of business and why many experts are predicting that others will follow in 2009?

I will give you a clue – it's not just the current global economic slowdown.

The truth is the traditional economic structures of the aviation industry have failed for far longer than the current downturn. The subject of one of these failings is airline consolidation.

The problem being that airlines cannot achieve the kind of sensible consolidation across national boundaries that is taken for granted in banking, telecoms, pharmaceuticals, electronics and so many other industries in the modern world economy. Most customers do not care who owns an airline. They are not interested in governmental imposition of route rights. What they want are safe, secure airlines flying where they want to go at a price they want to pay.

At British Airways we are keeping our eye on the bigger industrial picture – and looking out for opportunities to strengthen our business, and thus the customer's benefit – through consolidation.

That is why we are pursuing merger talks with Iberia, and why we have applied – with Iberia – to establish a joint business with American Airlines on flights across the Atlantic. The talks with Iberia have taken longer than we originally anticipated. Just after we started talking, the world was plunged into the biggest financial crisis for 80 years – which inevitably put the brakes on our progress.

Now, a few months on, we are making good headway again, and I am hopeful our discussions will reach a successful conclusion.

Our application for US anti-trust immunity with American Airlines and Iberia would allow us to operate transatlantic services jointly on the same basis as Lufthansa and Air France/KLM do already with their respective US airline partners. In other words, we are asking the competition authorities simply to give our oneworld alliance parity of treatment with Star and Skyteam.

Our application, if approved, would bring real customer benefits through greater access to discounted fares, more convenient schedules, smoother connections and improved frequent flier rewards. Which, evidently, is what it is all about, the best for the customer.

Of all air passenger traffic between the EU and US, the Star alliance has 35 per cent and Skyteam 28 per cent. Oneworld's share stands at just 21 per cent.

Star and Skyteam were granted anti-trust immunity (ATI) some time ago. This allows them to co-ordinate schedules so that connections for transfer passengers are smooth and convenient. Without ATI, we and American Airlines are at a disadvantage. We have filed our application to the US Department of Transportation, and we expect a positive outcome later this year.

British Airways is not alone in pursuing major consolidation objectives. In the US last year we saw Delta merge with Northwest, and Continental moved closer to United – announcing its intention to switch from the Skyteam alliance to Star.

In Europe, Lufthansa had already taken over Swiss – and in recent months announced plans to take a majority stake in Austrian Airlines and BMI in the UK as well as a 45 per cent holding (and option for 100 per cent) in Brussels Airlines. Lufthansa is also pursuing serious talks with Scandinavian Airlines, SAS.

Meanwhile, Air France/KLM are continuing to reap the benefits of their groundbreaking merger five years ago – and have just acquired a 25 per cent stake in the new Alitalia.

Consolidation will not stop there – nor should it. We need a new world order in aviation. A commanding re-evaluation in which the structure of the industry is determined not by government hand-outs or directives, but by the needs of the travelling public.

Now is the time for boldness from the regulators. Now is the time to advance toward the goal of deregulation in markets that remain restricted, and to ensure that deregulation applies not just to routes but to airline ownership too.

I hope that in the current economic climate, the negotiators come to recognise that foreign investment is better than no investment and that liberalisation is better than extinction. British Airways will continue to fight for the same rights enjoyed by the other major alliances. It's only then that the playing field will be even and customers will see the benefits.

- The author is British Airways' Commercial Manager for the Middle East