George Pitcher: It’s time the sun set on America’s aerial empire

US airlines have been pampered by protectionism, allowing bad management to flourish. But are the jumbos finally coming home to roost? asks George Pitcher

Last week, US Airways filed for Chapter 11 bankruptcy protection and the expectation is that United Airlines might follow. Good. Understand that I bear no ill-will to shareholders of either airline. But there are reasons why we should be glad that the US airline industry is waking up to the harsh realities of the early 21st century.

The most obvious reason is that the Americans have occupied a kind of parallel universe over the past couple of years, distorting the global market for carriers. This is largely down to US federal protectionism – the Americans have clung onto their airspace in the face of international competition in a manner that has suggested that no one else should be allowed to breathe it, let alone fly in it.

What this protectionism has meant is that American carriers have been operating far more capacity than the international market can support. This has made them lazy and careless – US airline managements make British football club managements look positively visionary.

Just one small example: during 2000, when the writing was already on the wall, the airline industries were oversupplied and a market correction was well overdue, United Airlines increased staff wages by 25 per cent and increased capacity. In doing so, it applied a knock-on pressure on other airlines to settle generously with the unions.

In the first half of this year, United lost a staggering $850m (&£567m). You’d have to have a heart of gold to suggest that United – and many US carriers like it – doesn’t deserve all that it’s going to get, now it faces the grim harvest of the seeds that it so carelessly sowed.

But the real story is that we might be about to witness the end of the iniquitous protection of American airspace. This has, in recent years, served the US authorities’ purpose of protecting US airlines from their own folly, while keeping prices artificially high. And that anti-competitiveness has inflated prices, both on internal flights and for those non-American operators – doubtless considered “un-American” in Washington DC – unable to enjoy the economies of scale that access to American domestic routes would have supplied.

I wrote here at the start of the year (MW January 31) that we should not be afraid of condemning American double standards when it comes to what they call anti-trust issues and we call anti-competitiveness. At that time, it was still almost a heresy in some quarters to criticise the US, with the wounds of September 11 still fresh.

I think we can afford to be less ambiguous now. The mess that the US airline industry finds itself in is, at least in (substantial) part, down to the shabby and selfish manner in which it has conducted negotiations with the likes of British Airways (BA).

If the US had allowed foreign access to its domestic market and foreign ownership of its domestic carriers, then of course competition would have been keener and prices would have been driven down, but one can’t help thinking that efficiencies would have been forced on US operators.

As it is, they have been allowed to indulge themselves, to grow bloated and alienated from commercial principles – and they are paying the price.

The US insistence in January that the only way there could be a trading alliance between BA and American Airlines would be for the combined enterprise to surrender 220 landing slots at Heathrow to other American airlines was, frankly, the action of a market bully.

BA described this almost mediaeval piece of empire-building as a “protectionist grab” and, rightly under the circumstances, the deal foundered.

Now the US has its sky to itself, but is stuck with a bunch of airlines that can’t make it pay and which have been so spoilt as to have driven themselves to – and in one case over – the edge of bankruptcy. Sorry if I sound a bit gleeful – but not that sorry.

While the situation will be savoured in Europe, we cannot afford to enjoy the moment for too long. The fear must be of what happens next.

The industry is already being bailed out by the US government. It has received some $5bn (&£3.4bn) in grants from an emergency fund set up in the wake of September 11. I’m not sure anyone could, or should, argue with that. But the airlines that are against the wall are now holding out their begging bowls for a further $10bn (&£6.8bn) in federal loan guarantees.

This holds out the prospect of uncompetitive and inefficient airlines, with incompetent managements, being kept in business by federal authorities which are simply scared of the rest of the world. It will also generate demands for such support from other sectors – the US authorities are making a rod for their own backs.

It also raises the prospect of another run-in with the European Union (EU), already fractious as a result of trade spats in sectors as diverse as steel tariffs and bananas. But this presents an opportunity as well as a threat.

It’s time for the EU to stand up even more firmly to US bullying. It is what the EU should be for. There is probably no better time to kick the US than when its airlines are down.

George Pitcher is a partner at communications management consultancy Luther Pendragon

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