The International Air Transport Association (IATA) has released another revised forecast for the airline industry. If you are easily scared, you might wish to turn away now.

Growth rates and load factors have declined, with the honourable exception of those in the Middle East, and the fall in the oil price, as welcome as it may be, is only because the world economy is falling too.

In any other industry the solution to this would come out of the standard textbooks. One of the standard tools is consolidation. The strong would take over the weak. That would reduce the amount of capacity in the market and create stronger players, more able to survive and thrive once the market turns again.

But this is air transport, so you can start by throwing away that standard textbook. Air transport is governed by a 1944 international treaty, the Chicago Convention. It is one of the most widely acceded to treaties in the history of the UN.

The Chicago Convention does a number of things, most of them good. It codifies who is responsible for things like pilot licence issuance and air worthiness inspections. It also addresses such things as who has sovereignty over the airspace above each country.

But, the convention was written in 1944, which was not a normal time for the world, as you will realise. The driver for the convention was the USA, which had an aeronautical industry that had had a good war. Boeing, Douglas, Hughes and Lockheed were all manufacturing big aircraft that could easily be reconfigured to passenger requirements once the war was over. Europe, on the other hand, had little or no aviation industry left to speak of.

The Americans proposed a system whereby airlines could fly anywhere around the world. The Europeans, led by the British, could see that this was not going to help their airlines recover once the war was over. So Britain organised all parts of the Empire to fight a rear-guard action. Ultimately, it was successful.

Pressure

The system that we now have, and which is under so much pressure, has two lasting features of particular importance to Gulf aviation. First, it requires that states, not airlines, agree how much capacity should be allowed to fly between them. Secondly, it requires that the states that have agreed that capacity should only designate airlines ‘substantially owned and effectively controlled’ by its own nationals to use their share of the capacity.

The argument between the UAE and Canada arises because of the first restriction. Canada is not prepared to allow more capacity into the Canada-UAE market because it fears that Emirates and Etihad will dominate that market.

Some markets, such as between the USA and the EU have what is called ‘open skies’ agreements. These markets have no capacity restrictions on the designated carriers, or indeed restrictions on the number of carriers that can be designated. The benefit to the passengers of such arrangements is generally accepted to include more services and lower prices.

To the extent that these agreements allow airlines to behave in a more competitive and commercial way they are for the good. However, the ownership and control restriction means that even in open sky areas, there is not full competition in aviation.

Poorly kept secret

It is a very poorly kept secret that India’s airlines are not in good shape. Therefore, they are looking to find investors to help bring capital, expertise and market access. In other words, the smart play for the airlines is to find other airlines that might be interested in investing. Emirates, Etihad and Qatar have all recently been reported to be discussing with various Indian airlines what sort of cooperation might be possible.

Overhanging these discussions is the ownership and control restriction. There is no hard and fast rule about what constitutes ownership, or control. In the USA, which is very conservative, there is a hard and fast restriction on foreigners owning more than 25 per cent of an airline. In Australia it is 49 per cent. There is no number in the UK. Rather it is left to the directors of an airline to assess if its market access is jeopardised.

India’s ownership restrictions are even more complex. Overseas investors can hold up to 49 per cent of an airline, but off-shore airlines are excluded from any ownership. It is hard to see how India’s airlines can benefit from the expertise and market access without other airlines being involved.

The bigger point is that airlines around the world are chaffing under this restriction. We have seen some, limited, consolidation: Air France and KLM, BA and Iberia in Europe, and now LAN Chile and TAM of Brazil have merged. Each required complex structures to be able to satisfy a regulatory restriction from the past.

For India, it seems even more complexity is called for.

Andrew Charlton is Managing Director of the Europe-based strategic advisory, government and public affairs firm, Aviation Advocacy)