Geopolitics, the Main Uncertainty for Air Transport

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The powerful and constant offensive of the promoters of ecology has acted as a scarecrow on air transport, which, very unjustly attacked, has sought solutions, even if it means profoundly modifying certain aspects of this activity, such as, for example, stopping the reduction in fares. All the measures taken are not without interest because the more this sector of activity meets the criteria of good ecological conduct, the more profitable it will be. However, this requires colossal investments that will only have their full effect in the very long term, while being financed in the short term. We will not be spared from price increases to finance such complex research. But the constraints suffered by operators are only very gradually noticeable. Another factor is much more penalizing: geopolitics.

It has just been remembered since the extension of the conflict to the Middle East. Suddenly, air traffic in the region was brought to an almost complete standstill. It must be said that civilian aircraft can be prime targets when they are unable to defend themselves, and airports are important infrastructures, perfectly located, and that it only takes a single impact, even in a car park, to bring them to a standstill.

This is what happened with strikes, admittedly limited, but which hit the airports of Dubai, Doha, or Oman, to mention only the main ones. Dubai and Doha are huge hubs. They are home to the two main “hubs” in the region and among the most important in the world. So the shutdown of their exploitation has not only local and regional consequences, but also global ones. And they are difficult to replace because their efficiency is created by a conjunction between fixed equipment on the ground and two very large operators, Qatar Airways and Emirates. And these two companies operate on the entire planet.

But the consequences don’t stop there. The closure of the Strait of Hormuz immediately led to an increase in the price of oil, which has risen by 59% since December 16, when it was quoted at $58.64 per barrel, while on March 6 it rose to $93.04. This is not going to do business for air transport anywhere in the world, even if many companies have already secured their supplies, at least for the year.

And then there are the insurances. Air transport is largely covered by a battery of insurance contracts that range from the manufacture of planes to the loss of luggage. However, some events are not covered, in particular the case of weather hazards, but also armed conflicts. So customers who thought they were protected by their travel insurance are discovering that they have to fend for themselves.

And it’s not over. The rights to fly over territories depend on the will of each state, which can prohibit access at will. This is the decision of Russia, in particular, which, in response to the embargo imposed on it by the so-called Western countries, has banned all airlines from these countries from flying over it. However, Russia has the largest airspace in the world, and all flights between Europe and East Asia must fly over Siberia, and if the overflight is impossible, then it is necessary to pass through the south of the Asian continent, which extends the flight time by more than 2 hours in each direction, and each hour of flight of a long-haul aircraft such as the Boeing 777 or the Airbus A350 costs around 30,000 dollars. For a round trip, the additional cost is therefore $120,000 for Western carriers, while Chinese operators can fly freely over Russia. However, since the conflagration in the Middle East, the entire area has been declared a war zone, and it can no longer be used by carriers. You then have to go around the Arabian Peninsula to get to Asia.

It is easy to see how a conflict, even a very localized one, can have harmful consequences on the entire air transport activity. I also do not forget that the supply of spare parts and the entire widely dispersed aircraft manufacturing complex may also be affected by increases in customs duties.

Basically, we can only admire the resilience of air transport, which, even in the face of all these difficulties, nevertheless continues to grow steadily. Must the inhabitants of our planet have a furious need to travel? And that’s good.

When Regulators Do Too Much

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Surprisingly, last week, the Court of Justice of the European Union, in a final ruling after 16 years of proceedings, condemned a (so-called) cartel of airlines for collusion on service prices in the air cargo sector. This concerns Air France, KLM and their subsidiary Martinair, but also British Airways and Singapore Airlines, among others. The amount of the fines is not insignificant: 183 million euros for Air France and 127 million euros for KLM, for example.

One can legitimately question the validity of these sentences. How could an agreement between airlines, sometimes competitors, affect the smooth running of this sector of activity? As far as I know, Air France, KLM, and Martinair are part of the same capital group, and it is reasonable to try to improve the profitability of the whole. Instead, they will have to pay 340 million euros. For whose benefit?

Of course, I understand that the European Commission, as well as the U.S. federal government, seek to fight against dominant positions in order to avoid monopolies that would be built to the detriment of consumers. But then why authorize the acquisition of capital shareholdings? And, speaking only of Europe, has this in any way hindered the fierce competition between the major operators on this continent?

Let’s go a little further. Air transport has been built for more than 80 years on agreements, or even collaboration, between carriers. This is evident both in the technical field, with the safety rules imposed by the ICAO (International Civil Aviation Organization), and in commercial cooperation carried out within IATA (International Air Transport Association) which, in particular, manages the BSP (Billing and Settlement Plan), the global tool for the distribution and repatriation of passenger sales. Why accept joint ventures between competing carriers, such as Delta Air Lines and Air France/KLM or American Airlines and British Airways, on the major international route, the Transatlantic?

Moreover, the practice of codesharing, which consists of selling flights operated by another carrier under the brand name of a different airline, is commonly used without regulatory authorities seeing any disadvantage, while there could be much to complain about from the consumers’ point of view.

I also note that the decision of the European Court of Justice may have new consequences, particularly with regard to the latent conflict between Lufthansa and Deutsche Bank over the fuel surcharge cartel. The bank’s claims on behalf of some of its large clients amount to several billion euros.

I do not see how agreements between carriers would be reprehensible, provided that they do not aim to create a monopolistic situation, which is difficult to imagine on a continent where the freedom to operate is granted to any company approved by civil aviation authorities. Freedom of trade is a major factor in economic expansion, and the relentless struggle between competitors whose aim is only to lower selling prices—or at least display them—can only weaken a sector where margins are, on average, less than 7% of turnover, while capital requirements are considerable.

It is conceivable that the courts, and particularly the supreme authorities, have other concerns than controlling the way operators conduct their commercial strategies. The best protection for consumers remains free competition. All that remains is the allocation of operating capacity at the major airports. These are subject to ecological constraints, many of which are nevertheless highly demagogic.

The accounts of the major companies affected by the Court of Justice’s decision will not be impacted because the fines in question had been provisioned for a long time. Even if this does not change anything in the current economic situation, it is a bad sign for air transport—in freight for the moment, but perhaps for passengers in the future as well.