Airline Industry Turning Point: Driving Force in Globalization, or Laggard On Global Deregulation, Restructuring & Efficiency.

Business Editors/Aviation Writers

WASHINGTON--(BUSINESS WIRE)--Nov. 1, 2000

Globalization Bringing Hard Decisions

& Dramatic Change: CERA Report

The powerful forces of globalization, which have created new rules and new winners in scores of industries worldwide, will inevitably bring hard decisions and dramatic change to the worldwide airline industry, according to "Fettered Flight: Globalization and the Airline Industry," a new report by Pulitzer Prize winning author Daniel Yergin, Professor Richard H.K. Vietor of the Harvard Business School and Peter C. Evans of Massachusetts Institute of Technology (MIT).

The international airline industry faces a crucial dichotomy as both a leading driver of globalization - helping enable worldwide commerce and interchange - and a laggard, trailing other industries in adopting such globalization-driven strategies as consolidation, expanded scale, deregulation and network structure, according to Yergin, chairman of Cambridge Energy Research Associates (CERA).

Regulatory constraints among countries are preventing the worldwide airline industry from achieving the efficiency and performance levels being reached in other global industries, the authors said in a briefing here today on the study's findings.

Global Marketplace Access

In order to fully participate in and benefit from the new international economy, cities and communities around the world will need speedy and efficient access to the global marketplace, Yergin said, and "delivering access" will be the responsibility of airlines in the 21st century. But this poses a key question: Will aviation play a leading and facilitating role in globalization or will it lag and constrain globalization because it has reached its regulatory-imposed limits?

Throughout the global airline industry, as in other industries, according to Yergin, pressure to consolidate will continue to mount, driving toward economies of scope and scale, increased efficiency and meeting customer needs. Airlines that can build the most effective networks are most likely to be successful in both lowering costs and delivering the type of service that the broader process of trade and economic integration will require.

"The airline industry is behind many other industries in adjusting to the growing global flows," said Yergin, co-author of the international bestseller The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World, the recent winner of the Special Award for the European Economics Book Prize.

"U.S. airlines may be further along in that they have gone through a longer process of deregulation and have been exposed to competitive pressures for a longer period of time," said Professor Vietor, Senior Associate Dean at the Harvard Business School and author of Contrived Competition: Regulation and Deregulation in America. . "But the entire industry confronts a common agenda of issues driven by globalization, including regulatory adjustment and risk, scale and ownership, role of national identity and investment policy, competitive pressures, consolidation, service, national security and network economies."

Key Observations

The study makes several observations about the marketplace:

- In the era of globalization, consolidation is a common method across
industries to achieve economics of scope and scale, increase efficiency, and
meet customer demands. The airlines that can build global networks are likely
to be the most successful in both lowering costs and achieving the type of
service that the broader process of trade and economic integration is
demanding.

- International regulatory reform is "at the top of the agenda." Deregulation
in the United States followed a domestic regulatory system overwhelmed by the
tremendous growth in demand, high-cost structure, and regulatory overload - the
same pressures in the context of globalization, that are putting the reform of
the international regulatory regime front and center.

- The Open Skies initiative launched by the United States has marked an
important turning point in the tightly constrained bilateral aviation system -
even though it is still only a beginning.

- A central question is how alliances will evolve, to what degree they will
remain rooted in national companies and to what degree will there be
cross-equity ownership and cross-border consolidation. "Looking at other
industries, one must question whether alliances represent the ultimate
evolution of the industry - or only a layover en route to someplace else,"
Yergin said.

- The next major trigger of change for global aviation will likely be the
evolution of the industry structure and the level of regulation in the European
Union. If Europe's national airlines begin to consolidate into true European
airlines, the competitive dynamics of the entire industry will be altered.

- "Opportunities for other industries to find efficient solutions are not
currently available to the international airline industry, which is unique
among industries in the level of regulatory rules, owing to history, security
considerations, and national development," said Evans, a specialist in
international political economy at MIT

- Governments will continue to be concerned about the key role of aviation in
linking communities to each other, both domestically and internationally, to
ensure that all have equal access to the benefits from globalization. Countries
are likely to continue to guard their right to review various mergers and
acquisitions to ensure they benefit consumers, but will need to do so on a
coordinated basis.

Difficult Decisions

Globalization is making it abundantly clear that the airline industry will increasingly be viewed from a broad international perspective, according to Yergin. Decision-makers will face trade-offs between national sovereignty and security on the one hand and integration and economic efficiency on the other, and between reliance on regulation and confidence in competition. They will also face challenges in determining the degree to which antitrust policy should be seen in the context of the global marketplace and how it should be coordinated among countries.

"Regulators, the airline industry, and the publics they serve will increasingly be required to think about competition, scale and scope, quality of service, and industry consolidation, not only from the perspective of their national markets, but from a global standpoint and in the context of network competition," says the study. "This will be a considerable challenge in a world in which barriers and borders of all kinds are coming down - a world that is at one and the same time composed of nation states and a global marketplace.

Nevertheless, Yergin predicted it is a challenge that must be met to ensure that the airline industry does not lag further or constrain globalization, but continues to play its key role in providing communities around the world with access to the global marketplace. A competitive airline industry, with sufficient scale and scope, will be vital to achieving the many benefits that can be gained from increased trade and economic integration throughout the world, he concluded.

Cambridge Energy Research Associates (CERA) is a leading international research and consulting firm providing independent analysis and insight. CERA's focus is on energy and on economics and politics. CERA's headquarters is in Cambridge, Mass., with offices in Bangkok, Beijing, Buenos Aires, Calgary, Houston, Mexico City, Moscow, Oakland, Oslo, Paris, Seoul and Washington, D.C.