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14 April 2024

There's a whiff of protectionism in the air

By David Robertson

Protectionism is a dirty word in the business world but it is also a subject that generates a great deal of hypocrisy. It seems that everybody likes an open market when they are benefiting from it but as soon as global competitive pressures get too much, you can guarantee that the siren call of protectionism will start up.

Take, for example, the $900 billion (Dh3.3 trillion) stimulus package being put together in the United States. The US Congress, which talks up free markets at every opportunity, inserted a clause into the bill that would require any manufactured goods purchased with stimulus money to be American made. That is a pretty blatant piece of protectionism even for a country as practised at hypocrisy as the US.

Last week, Europe complained about the "Buy American" provisions in the bill and President Obama had to lean on the Senate to water them down or face a trade war, which would hardly have been a sensible way to tackle a recession.

However, the US is by no means the only culprit when it comes to protectionist hypocrisy. There are numerous governments around the world that happily sing the free-markets tune when it suits them and then do the exact opposite when life gets tough.

Last year Russia increased import duties on cars to protect its feeble auto industry, India has increased steel tariffs and with the world economy ailing these examples are expected to become more common. But for truly outrageous protectionism nothing beats the aviation industry.

Aviation is without doubt the most absurdly protectionist sector in the world. For decades, individual governments have negotiated rights with other governments to allow certain airlines to fly certain routes on certain days. Bloated nationalised flag carriers have been given favoured status and a toxic combination of national pride and economic protectionism has kept aviation in the dark ages. It has only been comparatively recently that some of the barriers have come down, but by no means all of them, as a document published by Emirates airline demonstrated last week.

At present, Canada limits Emirates to just three flights a week. That is three flights total – not just to each city. Emirates would like to increase its Toronto to Dubai service from three times a week to daily but is not allowed to do so. And what about services to Montreal or Vancouver? Sorry, that is not allowed either.

This is absurd. The Canadian government does not limit the number of companies allowed to sell computers or cars so why should it restrict consumers' ability to buy plane tickets. I suspect that the answer lies in the Canadian government's desire to protect Air Canada by forcing passengers bound for the Middle East to transfer in Europe so they can fly via the flag carrier's extensive transatlantic network. That might be good for Air Canada and its trade unions but is bad for any business that wants to expand its links with the rapidly growing Gulf.

Emirates has similar difficulties with Germany, despite Lufthansa being more than capable of looking after itself in a fair competitive fight.

However, protectionist tendencies do not stop with obstructive governments. The airline industry is becoming less competitive as carriers coalesce into "alliances". British Airways and American Airlines dominate oneworld while Lufthansa leads the Star Alliance and Air France-KLM runs Skyteam. The various airlines that make up these alliances are able to cross-market and cross-sell tickets, which effectively removes competition as carriers co-operate on the capacity to be allocated to each route.

This gives the alliances huge competitive power. For example, nearly half of the flights from Heathrow, the world's busiest international airport, are with a oneworld affiliated airline. On some routes, such as Frankfurt to Washington DC, there is effectively no competition as one alliance (in this case Star) completely dominates. That cannot be good for passengers.

Despite the dominance of the alliances on many of the world's most important routes they are still paranoid about the rapid growth of Emirates and lobby their governments to keep the Gulf carrier out. A Star Alliance document obtained by Emirates suggests dealing with the threat from the Gulf by sharing intelligence, bringing another Middle East carrier into the alliance, lobbying governments and ceasing co-operation with Emirates on passenger transfers.

If these ideas had been put forward only by Lufthansa, then fine. Pretty much anything goes in the fight for customers but for a competition-limiting alliance of rivals to suggest it… well, it's hypocrisy. There is a good reason why protectionism is a dirty word because it stunts growth. In the airline industry it is us passengers that pay the price for that short sightedness.

- The writer is a business correspondent with The Times of London