Happy inauguration day, everyone. Even though this year’s was clearly upstaged by… the existence of indoguration day, it remains one of the most important indicators of the continuance of the American democracy. So today I’m bringing you a special Wednesday guest post from Howard Kass with a message for the new president, Joe Biden, on how he can help bring the airline industry back to health through changing foreign ownership rules.
Howard has been involved in airline and travel industry issues for over 25 years. Currently, he is General Counsel at Pangiam, as well as an advisor to start-up travel companies Landline and SkySquad. Prior to joining Pangiam, Howard was an executive vice president at CLEAR where he opened the company’s Washington DC office and further built out the company’s airport and airline partnerships. Before that Howard spent ~15 years in executive roles at American and US Airways where he led teams solving regulatory and government affairs challenges around the world. After 9/11, Howard helped stand-up the Transportation Security Administration and he practiced aviation law and consulting prior to joining TSA.
Congress has done a good job of supporting the airline industry through the darkest days of the COVID-19 pandemic with cash and loans to protect jobs and help preserve the status quo so it can rebound quickly when the pandemic is under control.
Despite the government’s help, an airline industry return to normal is projected to be 2-4 years off, because while a lot of traffic may come back, airline balances sheets are in disarray, e.g., assets are leveraged and borrowing capacity is at or near maximums. It will take years of profits and growth for airlines to get their financial houses in order.
What if things don’t go well — travel is slow to return, the vaccine is not as effective as thought, or video-conferencing really does become a replacement for business trips? Can the airlines continue to rely on Congressional largess for survival? Probably not. And, as airline employees well know, a trip through bankruptcy court is never a good outcome.
One way to break this lose-lose cycle is for airlines and labor unions to work toward changing the foreign ownership laws to permit true cross border capital flows and/or integration of airlines. Yes, the current immunized alliance model helps airlines act as one company on certain routes. They are not, however, a replacement for large-scale cross border investment and integration, as each alliance member is a separate legal entity with its own shareholders and Boards of Directors who have fiduciary obligations to many stakeholders long before they worry about their alliance partners. Thus, alliances do not unlock all of the cost savings and revenue synergies that full cross border ownership allows.
If foreign investment rules were relaxed so trans-national airline mergers and acquisitions could occur, more synergies unlock as centralization of many functions drives cost savings on everything from office supplies to aircraft purchases. Customers also win as airlines deleverage faster and resume innovating and investing in the flight experience.
The post-pandemic recovery period represents a unique opportunity for airlines to lose the regulatory shackles that prevent a truly global industry. If airline partners were globally integrated in all aspects of their operations, no matter the region, they could achieve efficiencies and synergies that are out of reach today, as well as recapitalize faster at no cost to taxpayers. After the last wave of domestic consolidation, spurred in part by the financial crisis, airlines deployed their new financial resources to reinvest in fleets, customer service, and innovation that led to a rapid improvement in air service and customer satisfaction. Post-pandemic, that same opportunity exists to help a devastated airline industry restart by creating global efficiencies, investment, and innovation through more access to foreign capital.
The time is right for the Biden Administration to lead here. Historic opposition by labor to changes in foreign ownership laws are solvable. Labor unions have the new Administration’s ear and can work with the Biden team to address their legitimate concerns about protecting jobs and growth opportunities. Regulators can require that labor concerns and U.S. jobs are protected, as part of any investment review.
The other historic concern is national security. The Pentagon also has legitimate worries here, as a robust industry is critical to the Pentagon in times of national crisis. The Pentagon can insist on reasonable conditions on foreign ownership, e.g., increased foreign investment is limited to certain countries to ensure that in times of crisis, aircraft that are needed are available. Intellectual honesty demands that we stop worrying about whether a Canadian pension fund or European airline owns a large portion of a U.S. carrier, while there are seemingly no restrictions on U.S. carriers leasing aircraft from Chinese banks. Successive Administrations have learned to manage foreign investment in other critical industries and those lessons can be applied. Ironically, the pandemic likely has reduced the ability of airlines to provide lift to the Pentagon because of the mass retirements of entire fleets of aircraft, including widebodies.
The industry may just weather COVID-19. The best way to ensure it survives the next crisis is to stop worrying about where the owner of the airline is located and let capital flow to the industry, with guardrails, from around the world.