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Thursday, 1st October 2020
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Intervention in the air Back  
Tony Ryan was one of the founders of a global industry - aviation finance - which, as other articles in this issue indicate, is now a jewel in the crown of the Irish financial services industry and indeed the economy. By 1987, his aircraft leasing venture had taken flight and his entrepreneurial thoughts were turning to aviation itself. In August of that year he contributed the below article to Finance, then in its third month. Twenty years later his thoughts remain remarkably topical, as well, of course, as prophetic regarding the potential of deregulated commercial aviation in Europe.
For an industry driven by the unremitting pursuit of technological efficiency, civil aviation ‑ in the flag-bearing form in which it has matured in Europe - has been slow to adapt to irresistible forces of change emerging from quarters outside its own borders.

Such a dynamic activity can no longer afford to sustain the precepts of outdated nationalism; continued economic advance and social development in Europe are dependent upon the progress of a free and responsible civil aviation industry.

Despite the lofty aspirations embodied in the Single European Act and the specific, if limited, air transport initiatives introduced by the EC, there is abundant evidence that individual national governments are defeating the popular wish for more open air legislation by adhering to its letter while avoiding its spirit.

But surrounding so called ‘new freedoms’ with a multitude of arbitrary restrictions governments are effectively depriving their citizens of attractive travel possibilities.

The air-seat mile should be regarded as a necessary commodity, and, subject only to the operational standards of the Community, airlines should be free to supply it at a profit in line with market demand. To act contrarily by cosseting expensive monopolies with continued protectionism, makes about as much sense as the ultimate silliness ‑ the sale of seat-miles into intervention!

Unlike road and rail transportation, there is no ‘social service’ element to be argued in aviation. No existing carrier would say that any of its present services are deliberately operated at loss to meet a social need.

It is instructive, to look at Europe from an American perspective. Washington sees Europe as a collection of individual states purporting to trade as a single entity.

The analogy with the Federal/State system of government is obvious. In an air transport context, all intra-European air services are seen as the equivalent of US domestic air services with the only truly international services being those to points outside Europe.

The logical corollary of each European government seeking independent traffic rights to and from every gateway in the US is that each American state should independently negotiate traffic rights to and from every point in Europe. Thus, American negotiating power may in itself contribute to a less heavily regulated system within Europe.

The arguments against deregulation run generally along these lines:

• while initially increasing competition, deregulation will lead to the emergence of a small group of mega-carriers who will act as an oligopoly and force prices back up;
• it produces an excessive concentration of ‘hub and spoke’ systems to the point where, in the words of a colleague, ‘people are treated like Fedex packages, who have to sort themselves out at the hub!’;
• it results in fewer and less well paid jobs.

The American experience supports the mega-carrier anxiety, but are they likely to be different from the ‘national flag carriers’ who have got there simply because they represent countries with large populations, rather than because of any innate commercial ability? At worst that scenario could scarcely be less desirable than the present situation where, in effect, half a dozen big flag carriers make the decisions behind closed doors.

Equally, the hub-and-spoke argument is unpersuasive. The present European situation has led to an over-development of the concept as national carriers, deprived of any fifth freedom route opportunities, are forced to develop almost exclusively on a hub-and-spoke basis with the result that almost every capital city is a hub. Under deregulation, some hubs would undoubtedly get bigger but others would get smaller and I believe, the final, stable, free-market system would have more direct (through plane) services than at present, not less.

The trend towards partial or complete privatisation of ‘national’ carriers should ease the path towards deregulation. Once, the name of a flag carrier and its interests were thought to be synonymous with those of its host nation. This can scarcely prevail in the future. A privatised British Airways with a substantial proportion of foreign shareholders (including many non-Europeans) cannot and will not expect the same deference as was accorded to its illustrious predecessor, Imperial airways.

Led by the British, the Dutch - and more recently the Irish - Governments have given European travellers a taste of the fruits of deregulation by opening up two of Europe’s busiest air routes (London-Amsterdam and London-Dublin) to real ‘gloves off’ competition from the private sector.

The public’s response in terms of traffic growth has been nothing short of startling. In the long run it will be the obvious success and high visibility of examples such as these that will bring about a change on the wider front.

Operating leasing of aircraft - the technology which permits airlines to have the use of the aircraft that they need for as long as suits without having to own them ‑ is transforming the structure of civil aviation worldwide and has important relevance for the advance of deregulation in Europe. An operating lease provides the flexibility in terms of financial structure, technological choice and competitive market response so critical in start-up or route development situations.

Six years ago there were approximately 6,000 jets in service with Western airlines of which about 360 or 6 per cent were on operating lease. Today there are some 7,000 aircraft of which 800 or more are on operating lease ‑ a growth of 100 per cent. I estimate the operating lease industry should have a 20 per cent share of a world fleet of approximately 8,000 aircraft in 1991. Thirty months ago, in a comment on the prospects of European deregulation I said: ‘Europe is still very much a Communité des Patries (De Gaulle’s phrase) than it is prepared to admit even to itself’. I expressed doubt about the political will in Europe to give up national property in airline rights.

There has been little political or legislative initiative in the meantime to wrench me away from that view. But there is a clear message coming through from the public that has to be heard.

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