Administration About Face on Aviation, Industry Concerned about Alliances

The industry apparently gave the White House an earful about how it has not only been ignored but is continuously being hurt by being criticized at every turn. That is the message delivered by Air Transportation Assoocation President James May, who, accompanied by airline officials, met yesterday with economic advisor Larry Sumner. Related Story

Apparently Vice President Joe Biden wasn’t in on that meeting given his statement on The Today Show that he would avoid flying because of the flu epidemic, something the rest of the administration and health officials have been carefully trying to avoid. I now know why his nickname is “open mouth, insert foot.”

It is an understatement to say the industry went ballistic. The White House spent the day in damage control saying it was safe to fly on airplanes and ride on subways as did health officials testifying before Congress yesterday. Biden, himself, issued a message clarifying his statement saying he was talking about Mexico or referring to preventive measures. But he told The Today Show specifically that “it was not just going to Mexico but being in confined spaces. If someone sneezes, it goes through the whole airplane,” he said.

The Sumner meeting resulted, it seems, in new marching orders for Department of Transportation Secretary Ray LaHood, who a day earlier had seemed to be oblivious to aviation issues. In addressing an Aero Club audience, yesterday, he did an about face to the message he gave the industry at Wednesday’s U.S. Chamber of Commerce’s aviation summit.

“I could tell from just talking to Larry today that those of you who met with Larry Summers really made an impact on him,” he said. “I believe you are going to see some movement here on the part of the administration, on the part of Larry Summers and certainly from our point of view, to see if we can really rally some dollars and get some of these dollars that are necessary to get us to NextGen.”

The industry tried unsuccessfully to get $4 billion in equipage funding in the stimulus package and since then has watched one surface transportation initiative after another including high-speed rail. Related Story

The industry spent Wednesday sending the message that not only could the FAA field NextGen, but, according to May, there are four or five technologies that, in the short term, could yield big benefits for both the industry and the economy if only funding were made available. Related Story

LaHood also announced the appointment of Jane Garvey to oversee the intractable labor dispute between the Federal Aviation Administration and the National Air Traffic Controllers Association underway since the agency imposed new work rules when the two parties failed to reach agreement during former administration Marion Blakey’s term. The move comes after the General Accountability Office’s report saying that retirements are sapping the strength of the controller workforce and putting too many trainees in critical facilities. Related Story

"With this bold step, President Obama is fulfilling his commitment to the safety and modernization of the air traffic control system and to the dedicated men and women safety professionals who run the system each day," said NATCA President Patrick Forrey. "President Obama is showing the leadership that will guide a positive way forward in which aviation safety professionals will be included as valued stakeholders. As the president made clear, a resolution to the dispute is critical to stabilizing the controller workforce, restoring a collaborative working relationship between controllers and the FAA and successfully installing the Next Generation Air Transportation System needed to spur economic development and increase the safety, efficiency and effectiveness of air travel.

FAA/NATCA labor problems are high on the Congressional agenda and mentioned by members at every aviation hearing as hampering efforts to field NextGen. Members have also inserted language in reauthorization legislation to get the dispute settled through the National Mediation Board. The move will likely clear the way for controllers to take a role in the development of NextGen, something they have been seeking for years saying that no modernization will be successful without it being designed from the start to fit the controller’s needs in the tower, judging on other programs that have encountered numerous teething problems once they were installed.

So, we now have the Administration’s attention on NextGen. Now all we have to do get the funding. But we also have to ensure it is aware of the other critical issues facing the industry, specifically open skies and airline alliances, the latter of which is under attack by House Transportation and Infrastructure Chair James Oberstar who says they are not good for the consumer. While DOT recently approved Continental’s entrance into the Star Alliance, the practice is coming under increased scrutiny on both sides of the Atlantic and speakers at the summit Wednesday went out of their way to speak to the dangers of restricting them.

Fed Ex Chair Fred Smith and Lufthansa Chair Wolfgang Mayrhuber attacked the labor issues behind moves to study the issue on both sides of the Atlantic. They both said that the expansion opportunities provided by open skies provide greater opportunities for labor by increasing employment and that, far from exporting jobs, more are created throughout the world, including the United States.

“The record is pretty clear,” said Smith, pointing to his own experience. “Tens of thousands of jobs have been created directly at Fed Ex and indirectly at Boeing, Pratt & Whitney, GE and Airbus, not to mention vehicle manufactures.  They would not exist without, first aviation being deregulated and open skies. There is always the temptation when markets are shrinking to beggar your neighbor with protectionism. That is not the way the market operates. We understand the concerns of labor and we support the right of establishment where an entity in Europe or the U.S. may own a carrier but it is certified in a particular country. Commerce is like water in a stream. If it hits a rock it will find a way around it. The absence of open skies led to alliances so airline management could meet what customers want through routing all over these networks.”

Smith also said efforts to stem maintenance outsourcing, saying the repercussions would mean the loss of millions of dollars and jobs in the U.S. since more work is done in the U.S. on foreign aircraft than is done outside the United States on U.S. aircraft. That tallies with Mays testimony to Congress.

“Today there are 1,200 repair stations in the U.S. which work on both U.S. and international aircraft,” he told Congress in Feburary. “There are 425 in Europe. By that ratio, if action precipitates trade barriers, we stand to lose a far greater volume of business than we might gain if we end up doing the work the Europeans do now.”

Smith and Mayrhuber also discussed going further and allowing ownership control of U.S. airlines.

“This is a global industry,” said Smith, pointing to other industries such as banking. “Most global industries have cross border ownership and there is no reason the airline industry should be precluded from that. Congress is proposing to roll back liberalization which is full of risk. If we do it, EU will pull back the rights we have and said as much if they are not satisfied with the progress of open skies. That would result in an all out trade war. Open skies can’t be put back into the bottle without significant costs. All such barriers should be torn down once and for all, for the benefit of all.”

Yesterday, many in the industry noted that no one was batting an eye over Fiat taking over bankrupt Chrysler, yet those who would turn back the clock on alliances looked with horror on foreign ownership of airlines, despite the fact that even the Department of Defense has no objections on national security grounds.

Mayrhuber noted that Lufthansa has 10,000 U.S. employees serving its 18 destinations here, adding that it purchases billions of dollars in goods and services including catering, cargo services, and aircraft purchases. It also owns numerous companies here, all providing U.S. jobs. Worldwide, he said, only 30% of employees were German because of all the employees in its destination countries.

He acknowledged labor concerns in Lufthansa’s acquisition of Swiss and Austrian airlines but said it was impossible to export those jobs to Germany. “They thought we could transfer jobs but you can’t transfer all that traffic so we have to stay there,” he said. “Globalization is what made this world so successful, not just in aviation but in communications and the internet and the elimination of technological barriers. We need the same thing to happen to regulatory barriers for airlines. There is a risk in protectionist moves. We need a framework that allows globalization and for the U.S. to provide the leadership. The airline industry is the prime mover in globalization and it is ironic that it is subject to more artificial barriers than any other industry. It is important to apply logic and allow airlines to have the success shown in other industries when barriers have come down. The rules are counterproductive.”

Noting the rules were crafted in the 1940s, he said they were impossible to work with now. “We can’t function with rules that are not global,” he said. “This is an important issue and must be taken seriously especially as officials in various governments are trying take regulation in the wrong direction. We need an open aviation market between the U.S. and EU. They are the most mobile markets and we need to harmonize the rules especially as we see how global demographics and wealth is shifting around the world. We must maintain our leading position in this area.”

He also called for the flexibility to consolidate. “It may not be the answer for everything but is is helpful to our customers and for those who consolidate,” he told the aviation summit. “We all know how small the margins are. That is why we look at every part of the value chain. The word partnership helps us understand how important we are to each other. We work much better together than if we keep to our own silos. We have to make sure we eliminate redundant and burdensome regulations. Foreign ownership should not be perceived as a negative but as an opportunity. We own 51 operations in the U.S. and there is no way we would do that if we were not able to control them.

"I believe from California to the Eastern bank of Europe this is one market and we should treat it as such,” he continued. “If we do, we will create a lot of value for American operators. The passenger is not worried about who owns the airline. I think we have proven that the consolidation process has helped us identify opportunities and give us responsibility and has proved that working together is something that creates value for employees, for our shareholders and for the customer. Obviously, this industry has created huge value for society.”

Despite that fact that aviation is central to the globalization occurring in other industries, air travel remains a very restricted industry, according to a report issued yesterday by Frost & Sullivan.

Business travel has grown over the last decade as companies become increasingly international in their investments, supply and production chains, and customers, said the company. “The rapid growth in international direct investment has also contributed to a rise in business travel,” said Frost & Sullivan Industry Analyst Nathan K. Smith. “The airline industry is the most global business, while being the most restricted industry. Some [change in] the industry essential if governments continue restricting the global airline industry from the freedom allowed to other industries."

The report, Merging Air Transport Market Dynamics, finds that airlines earn revenue by transporting cargo, selling frequent flyer miles to other companies, fuel surcharges, baggage fees, and up-selling in-flight services. The largest proportion of the industries generated revenue derives from regular and business passengers. This research covers market segments by the geographic regions of Europe, Latin America, Russia, North America, Africa, Middle East and the Asia Pacific.

"Customers have fewer issues about their flag carrier. Instead, they are more concerned about the service quality and value provided,” said Smith echoing Mayrhuber.

The report also cited other problems including labor and the failure to modernize the air traffic control system as well as security. "Airport security is a major concern for airlines, airports and governments," concludes Smith. "Innovative technologies and solutions are creating effective options for increased security and cost efficiency, thereby driving the market."