Will the new aviation landscape see a move to protectionism rather than liberalism? The aviation industry is in ‘survival mode’ right now and in the ‘fog of war it is risky to take any decisions for the long-term,’ experts warn

24 April, 2020

It is a widely held belief that the global aviation industry that emerges from the Covid-19 crisis will be vastly different and require global leadership on the core regulatory structure that governs the way the industry works. The big question is: is the 75-year old regulatory structure that has governed aviation and travel up to now, no longer relevant, in fact even obsolete?

The subject of the future regulation of the aviation industry was the topic of CAPA – Centre for Aviation’s second CAPA Masterclass this week where CAPA’s chairman emeritus, Peter Harbison; consultant and former US Government lawyer, foreign policy adviser, and negotiator, John Byerly; and European Commission director for aviation, Filip Cornelis shared their views on the theme.

The consensus was that retaining an open, liberal framework would be the right thing to do, but the concern is that might not necessarily be the path that some of the world’s aviation economies follow. The fear is that the new aviation landscape could ultimately see “a move to protectionism rather than liberalism,” warned Mr Harbison, but with the sector in “survival mode,” according to Mr Byerly, right now is not the time to make those decision. As Mr Cornelis acknowledged, “in the fog of war so risky to take any decisions for the long-term”.

Mr Byerly, who as the US deputy assistant secretary of state has been recognised as being instrumental in securing market-opening air transport agreements with over 70 countries, including leading the US delegations in talks that secured Open Skies with Germany, France, Japan, and the European Union, obviously understands the value of a liberal approach.

He said that “lessons can be learnt” from the response to the 911 attacks in the US, although acknowledged that “digging out will be much more difficult” as this is a war on the world and not just the US. “After 911 the first step was to reinforce the value of an open vibrant aviation sector and I hope that is what we can do as we work through the current crisis,” he said, but noted: “It wont be easy!”

Mr Byerly called for a landscape of “open trading with rules” and warned it would be “wrong and detrimental” for countries to take a strategy of “crawling into their shells” and “protecting their own” operators. “The loser would be everyone,” he added.

Mr Cornelis highlighted that a big worry from the European Commission perspective is the “risk we could lose some of the advances we have made in developing competitive vibrant markets if airlines and states have the feeling that they need to retrench and go to a more managed phase of aviation”.

The latter scenario would have a significant impact on the North Atlantic metal neutral joint ventures and Mr Byerly acknowledged they could be at “serious risk if the wrong decisions are taken”. He explained that countries need airline connectivity, and that cannot always be sustained by local operators.

“My concern is that as each [country] follows its own programme [to support its airlines], it will be a varied framework,” Mr Byerly explained. This would not deliver a level playing field and could ultimately lead to disagreements that could quickly move from a liberal to restrictive outlook. “Grants of antirust are based on an open market. If that’s taken away by government regulation, I cant see how you can justify antitrust approvals,” he added.

Mr Cornelis noted that is why the European Commission is being very careful with its guidance of support from governments for airlines across the Continent. He said that loan guarantees and salary compensation agreements are less distortive to individual cash injections. “We can’t force states to provide certain aid to airlines and airports, but we could end up in an unequal situation,” he warned.

States taking equity into troubled airlines carries the “risk of being more distortive in the long run,” according to Mr Cornelis. That, as Mr Harbison commented would mean governments would “naturally be more protective, especially when it comes to opens skies,” and that could cause significant imbalances in the market.

Right now there are more questions than answers on the rebirth of the air transport sector. Mr Cornelis said the European Commission is “working hard on protocols and measures to be put in place” but it is difficult to make decisions when it remains unclear who will be allowed to enter into foreign territories and with what health screening. That is all before you have even considered how to organise travel in a safe way. He acknowledged it is “early days” and will be “a gradual process”, but that European protocols will likely come first.

Mr Byerly reinforced that it will obviously be easier to build domestically. “It takes two to tango when you fly internationally, so you need a joint agreement,” he noted. His experience is that it will be “hit and miss” with measures, but “building traveller confidence will be critical to measures and how effective they are at getting the industry up again”.

What is clear is that China will play a key role in the revitalisation of the industry. It is already growing its domestic offering at a pace and has now overtaken the US as the world’s largest aviation economy, four years earlier than predicted by IATA. OK, these are unprecedented times, but it does highlight a shift of power. “Its probably going to be China’s decade,” said Mr Harbison.

But there remains geopolitical issues with China. “Many may see China more of a threat. Their air service agreement compliance has been anything but perfect from a US perspective,” noted Mr Byerly. Regardless, he believes that the nation’s travellers will be an essential ingredient within the future air transport industry.

“We need those Chinese tourists to reinvigorate tourist industries and hospitality industries. Airbus and Boeing need people to buy their planes – China could be a critical player in reinvigorating the aviation sector,” he explained, but added: “China needs to play by the rules.”

The regulatory regime that China takes will ultimately influence the industry’s long-term development, according to Mr Cornelis. “Is it managed growth like we have seen with government intervention pushing airlines into markets or an outward looking self confident open system in a rules-based scheme like we are advocating - with open and equal competition?” he questioned.

We are in an unprecedented environment. Aviation has always responded favourably after previous hurdles, but Covid-19 has taken things to a new level. There is no manual to guide us out of the crisis and lots of different parameters.

As My Byerly noted, with fuel being negatively priced and a producer having to pay to offload stocks “that is bad news to modernising fleets” which many predicted would be one outcome of the current crisis. Then, there is the threat that after Covid-19 “there will be brothers, sisters and daughters to follow that could impact aviation operations and the regulatory structure,” according to Mr Harbison. As the he noted, after this “we could back to the 1970s – let’s hope we don’t”.