There’s a fun-filled cycle of hate in the US airline industry that works in a specific way. First, something bad happens (legroom gets cut, traveler gets dragged off an airplane bleeding, person forced to pee in a cup, you name it). Then there are cries for airlines to stop being so mean. Finally, inevitably, people started putting out their own solutions; one of which is always that foreign airlines should be allowed to fly within the US. After a fair bit of negative news over the last month, we’ve reached the end of this cycle again. I’ve heard this a few times lately, most recently from Gary Leff at View from the Wing, and I agree that foreign airlines should be allowed to compete domestically… but not because it’s going to somehow improve customer service. It won’t.
For those who aren’t familiar with the government regulations determining what airlines can and can’t do, it’s probably important to explain that it’s exceedingly rare for foreign airlines to be able to fly within any one country. This is called “cabotage” and in the US, it is not allowed. In fact, US-based airlines may have no more than 25 percent of shares owned by a foreign entity before they’re considered to be foreign-owned and not permitted to fly domestically. Why? Oh, there are a host of weak reasons batted around, but it’s really just inertia with a healthy dose of protectionism added in.
What would happen if we opened the floodgates and allowed any foreign airline to come into the US? Would Etihad and Qatar bring their high levels of service along with low fares as is the case internationally? Only if they wanted to lose money doing it, and you know they wouldn’t be allowed to get subsidies from their home governments to support a domestic US operation like they can internationally.
One of the big advantages that these airlines have is their ability to deliver a better product at a lower cost, but many of those low costs would evaporate in a domestic operation. First, lower labor costs from a foreign workforce won’t be allowed within the US. Any airline that operates in the US would have to fly under US labor laws and obey minimum wage rules. I’d also imagine they wouldn’t be able to export labor from their home (or other) countries even if they were hired under US labor law. There’s been a tremendous uproar about airlines like Norwegian doing that for international flights today, and I don’t believe that’s something that would ever be allowed for domestic flying. The companies would also be unable to ban unions, as some can do in their home countries.
That eliminates a lot of the cost advantages these airlines enjoy, but it also kills some customer service “advantages.” There are a lot of reasons people can be fired in other countries that won’t fly in the US. Even if a foreign airline does try to legitimately fire people for providing poor service, it can’t get too aggressive or unionization will be right around the corner in a domestic operation. It’s a much more even playing field within one country.
But that’s ok, right? After all, Emirates could come in and provide generous legroom, great inflight entertainment, and people would flock to them. But wait, no they wouldn’t. That’s because for the vast majority of travelers, price and schedule rule. Travelers don’t want to admit this. They get angry at airlines for squeezing legroom but balk every time a fare goes up. So if you think Emirates could waltz into the US market and charge more on the vast majority of routes, then you’re nuts. Sure, it could work on a few routes here or there; big routes with a fair bit of premium demand might support it. But those routes are few and far between.
The best case scenario for a foreign airline coming into the US is to turn into something like JetBlue. But we already have JetBlue. We don’t need a foreign airline to come in to provide that level of service. If you live in Springfield or Dubuque or any of the smaller cities around the US, you’ll never have a chance in hell of seeing a foreign carrier come in.
Instead, you know what would happen? Mergers. If the US government allowed foreign airlines to fly domestically within the US without getting the same thing in return, then Lufthansa would buy United, IAG would buy American, etc. There would be a tremendous benefit to having a true merger instead of the joint ventures they have today, and these companies would likely jump on that option quickly. If the US government only allowed cabotage in exchange for the same in other markets, then you could see the reverse: United buying Lufthansa. This may actually end up being good for consumers, but it’s not going to deliver better service or more legroom. It will just mean a more seamless experience for travel around the world.
The simple reality is that most people in the US want a cheap fare, and the airlines are responding by cutting the base product in order to deliver. If foreign airlines came to the US, the high expectations for opulence would instantly result in disappointment. Or a whole lot of red ink. Or both. But go ahead and let them try… I’ll be happy to take advantage of the fare wars while they last.