Trans-continental Airlines: Do we want them?

With the latest mergers acquisitions of the past few years such as Delta/Northwest, Lufthansa and its European purchases, Continental/United and now TAM/LAN, a new discussion on multi-national airlines has emerged.  Many are predicting that airline mergers that cross borders such as a US airline merging with a European airline is the next wave.  Airlines see more synergies and more savings available to them and, more importantly, an even bigger network to take advantage of.

A number of countries as well as the IATA are advocating that countries such as the US (but certainly not limited to it) drop their laws permitting, at best, only 49% ownership by a foreign carrier.  I’m not so sure that is a good idea. 

Advocating that bigger is always better has a flaw in it.  It might only be better for airlines.  It might not be better for consumers or their respective governments.  With the current alliances we have, we’re already seeing strong dominance by airlines on many routes.  Yes, competition still exists on most routes but that isn’t true on every route.  With the new anti-trust agreement between American Airlines, British Airways and Iberia (as well as smaller Oneworld partners), one alliance now completely dominates the DFW-London route.  They have pricing power over that route at a level that is rarely seen.  And there are others that are trending towards that development.  Take a look at who dominates Atlanta-Paris, for instance.

I don’t think we’re ready for that yet.  I think we need 10 to 15 years before we can see how this latest round of growth affects consumers.  If these new SuperLegacy airlines start competing with each other at hubs that were previously dominated by one airline, perhaps more mergers would work.  If, however, airlines continue to treat each others hubs as “home turf” not to be invaded, I would be skeptical of the benefits to the consumes from multi-national mergers. 

In fact, I think our current state is probably just about right for the world markets at present.  Consumers are being served pretty well in areas such as price and service.  At the end of the day, it’s important to remember that airlines are publicly traded businesses that do have a duty to serve the public as well as earn profits for their shareholders.  We offer the ability to organize that way in return for obtaining benefits to the consumers. 

In addition, I think foreign ownership of airlines still has national security questions that need to be answered.  In times of conflict, airlines are often involved as both cargo and transport service providers to a nation’s military.  Having the interests of the airline aligned with national interests a la corporate ownership still seems like an important strategic objective. 

What happens if Air France buys Delta and then a US conflict arises where we need transport capability but France decides that it is against their interests to serve that role and forbids Air France from providing that capability?  That potential question is a troublesome one for any nation with a national airline system today.  Preserving our national interests when it comes to these mergers is, I think, a very important objective. 

We need to time to let things settle into a new market pattern and we need time to answer these strategic questions as well.  Until we can see things more clearly, I think it would be best for countries to limit their foreign ownership to less than complete control of one of their airlines.

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