Foreign Carriers in the US Market - Example

Name: Student ID: Title: Date: “Foreign Carriers in the US market” Global airline industry provides services in every corner of the world, and has played it part in the creation of world’s economy. “The airline industry itself is a major economic force, in term of its own operations and its impacts on related industries such as tourism, horticultural and aircraft manufacturing industry, two name but three” (Chang, and Hsu 34). Few other industries in the world the intensity and amount of attention given to the airline industry, not only among its participants but from governments rules and regulations, the media and almost individuals who have experience air travel. Open Skies agreements gives airlines the operating flexibility to expand and improve services efficiently. These policies have gone hand-in-hand with the carrier’s globalization. By allowing registered airplanes from other countries unlimited access to points in the U.S. and unlimited access to intermediate and beyond points, they will provide airline companies with maximum operational flexibility for alliance partners. Another advantage that airlines in U.S. will enjoy is that open skies agreement will allow for code sharing and other cooperative relationships between airlines companies. For example, the bilateral Open Skies agreement between U.S. airlines and Thai carriers, code sharing alliance has been established between these two countries. Thereby market service to any point in Thailand or U.S. by flying to Thailand or U. S. gateway and using the infrastructure of their Thai/U.S partner airplane to reach the final U.S/Thai destination (O’Reilly and Stone 448). Open Sky agreement in United States will allow for more airline flexibility and productivity of airlines. Ultimately, the competition that is created by opening up U.S. skies to foreign carriers will force carriers to lower their prices thus benefiting air travelers. In addition, the new liberalized air space will encourage low-cost and lesser known airlines to prosper in U.S. By allowing foreign airlines to provide air services between U.S and other countries, the lowest cost airlines in U.S. will gain market access and cost will fall. The primary benefits, the ease and access of travel, and low cost, will go directly to the travelers or consumers. Additional benefits will go to the nation, by allowing better services and raising capacity, lower carrier rates will increase employment in aviation sectors, government revenue and foreign exchange that would eventually occur as a result of competition in other sectors that will be positively affected by Open Skies agreement. Furthermore, if United States opened its skies to foreign carriers the overall free flow of goods and services would benefit the country economically. A good example can be seen in Singapore which supported “open skies agreement”, which has become a major aviation hub in Asia due to its key location in Asia (Levy 23). Strict rules and regulation on “open skies agreement” is inefficient and hurts not only U.S tourism industry but also the development of U.S. as a continental hub for international business. Recently published reports have showed how liberalization of U.S. skies would increase business and tourist in general. These reports have showed how development of regional hubs in Singapore, London and Dubai, just to mention a few, has allowed these cities to grow not only their aviation industry ( air traffic) but also it has impacted positively on the wider air traffic infrastructure- trade, cargo and export-import services (Mayor and Tol 25). Many “open sky” reports point out the important of being first. Many of cites around the world which have open their skies were able to do the right things at the right time to make their aviation industry attractive (Robyn, Reitzes and Moselle 51). The aviation business is all about volume and if a country makes its airports attractive enough to foreign carriers you get benefits. The gains to be had for United Sates opening up its skies are immense. Tourism is U.S. is among the biggest sector and has shown rapid growth in the past, which has been in line with global markets. The Obama’s administration should do more in opening it skies if it wants to create good jobs. In 2007, tourism industry in the world generated 500 billion dollars and is growing immensely as people get wealthier (Robyn, Reitzes and Moselle 52). United States gets the lion’s share of the world’s tourists. In 2007, U.S. received 56 million visitors. U.S has the capacity to attract more than 60 million tourists per year; certainly the country have to work to do in developing the support services tourists need. But pathetically low number of tourists which is experienced in U. S. is mostly explained by a reluctance to open up its skies. For example, in 2000 and 2003, South Africa and Kenya entered into a bilateral agreement to open up their skies between Nairobi and Johannesburg. Monthly visitor volumes in those two countries ended up 69 per cent higher than the previously year. Studies show when the U.S. opened up its skies could increase traffic volumes by up to 30 per cent annually. Domestic restrictions in the country also hindered U.S. travelers. The country used to have a tight aviation Industry. When the domestic market was partially liberalized, low cost carriers like MetroJet, Midway Airlines and National Airlines emerged. Travelers using these low cost airlines have never had it so good. With SkyValue and Southeast Airlines joining the fray, travelers using these low cost airlines are now offered more destinations at prices that are pocket friendly. Other than the impacts on airlines and passengers, the next largest impact will be on U.S. tourism. If there is a high proportion of travelers to U.S, the fare reduction to the country will make the country as a whole to be more competitive as a tourist destination. As a result more tourists will come to the U.S. and tourism expenditure in the country will increase. Therefore, when the U.S. becomes more competitive as a destination, better services and lower fares within the U.S. will only mean that some tourists who would have gone out of U.s. for a trip will switch to a trip to U.S. In 2003, some amendments were proposed by Bush Administration on Laws that restrict foreign ownership of United States airlines, thus raising the allowable percentage of foreign ownership in U.S. airlines from 25 per cent to 49 per cent. According to DOT (Department of Transportation) suggested that amending this restrictive laws will provide benefits to U.S. airlines and consumers, particularly by providing the much needed capital, which would help the financial health of the aviation industry in the U.S. Department of State and DOT also believe these amendments would make the U.S. aviation industry to be in line with current foreign ownership laws of the EU (European Union) (Hill 40). In 1992, GAO (Accountability. Integrity. Reliability) reported on the potential impact of changing U.S. airline foreign control and investment laws. There are five key issues that were identified in that report and currently are still relevant. DOT’s 1991 proposal came in response to the heavy losses U.S. airlines suffered in 1990 and early 1991. According to that report, it noted that three large U.S’s airline had ceased operations and six of them had declared bankruptcy. That report concluded that few airlines operating in the U.S. could mean higher fares and less competition. Issues which were identified in 1992 GAO report are still relevant in the current U.S. aviation industry; which is similar to 1992. In 2003, the U.S. aviation industry faced issues which were similar to those in 1990 such as high fuel prices, weak economy, and military action in the Middle East (war in Afghanistan and Iraq). These conditions, as in the past, have contributed to decreased airline revenues, weak passenger demand, and some airline bankruptcies. In 2003, almost all U.S. airlines used same basic strategies to control operating costs. For example, major airlines responded to the 1992 economic downturn by implementing cost- cutting measures, delaying or canceling aircraft deliveries, laying off employees and refocusing services. These same strategies were employed in 2003 in the U.S. aviation industry. For example, American and United airline retrenched some of its workers, and Continental Airlines defer prior orders for additional airplanes until the U.S. domestic economy recovers. Some U.S. carriers have expressed interest in acquiring capital through foreign investment. Therefore, issues which were identified in GAO report (1992) are still relevant to U.S aviation industry interests. For example, the U.S. carriers have reduced in their services, but continue to have more capacity than travelers demand (Hill 45). Many airline companies are seeking foreign capital to provide funds to survive the shrinking revenue and passenger traffic and avoid bankruptcy. According to DOT, most U.S. airlines have weak balance sheets, and they believe access to foreign capital is most important in the current economic environment. In addition, due to non- U.S. alternatives, Northwest Airlines and Delta Airlines has announced plans to merge and streamline their operations or businesses, share their enough financial resource and link each other’s strong coastal routes so that they can be able to withstand the current economic slowdown experienced in the U.S. “More resilient European Union (EU) carriers like Lufthansa and British Airways might welcome mergers with their alliance partners in the United States, but in the U.S. there is no political will that can allow this due to restrictive natures of aviation laws that currently exists (Booz 19). Open skies in U.S. will bring substantial economic benefits particularly direct air connections. Open skies agreements liberalize charter regulations, expands cooperative marketing arrangements, improve flexibility for carriers operations, and include provisions for the government to observe high standards of security and safety (Lawton 65). Open skies also will produce countless cultural links globally. In the U.S. before open skies was liberalized, cities like Detroit, Dallas-Fort Worth, Las Vegas Minneapolis, Memphis, Salt Lake City and so on, had few or no direct global air connections. Now these cities have direct connections to cities found in other parts of the world, and bring with them some economic benefits. For example, In 2005, The Memphis-Shelby County Airport Authority concluded that direct flight between Memphis airport and Amsterdam has a 120 million dollar yearly impact in Tennessee and support nearly 2200 local jobs. Similarly, in Portland Oregon, it has been estimated that direct flight to Amsterdam, Tokyo and Frankfurt generate the State over 240 million dollars in visitor and airport revenue. A private study conducted in the U.S. found that new route between a U.S. city or state and a point in the EU has the capacity to generate up to 720 million dollars annually in new economic activity for the U.S. state or city and its local region, which will depend on the size of the markets in the city or state. Connection to the massive economies of Asia-Pacific can mean an increase in trade of 230 billion dollars for U.S. by 2020 and creation of new jobs. The government should therefore concentrate on building the infrastructure that will be able to support this growth. In addition, open skies agreement with the country’s key trading partners will facilitate the investors, tourists, movement of business people and enhancing opportunities throughout the U.S (Lawton 65). In conclusion, “open skies” agreement in the U.S. is the right thing to do in today’s open trade based economy and interconnected world. There are many benefits to the U.S. businesses and consumers which have been brought by open skies agreements, but there are still some restrictions enshrined in the open skies agreements which deprived foreign carriers of the option to build strong businesses, “and this has reduced the investments coming into the U.S. There is also the danger of the U.S. government depending on few major carriers to provide international links” (Richards 994); some of these carriers have had to withdraw from some routes, leaving a gap in direct flights. Therefore, the government should try and correct these problems by allowing more access to foreign carriers coming into the country. Works Cited Booz, Hamilton, “The Economic Impacts of an Open Aviation Area between the EU and the US”, Report prepared for the European Commission (DG TREN), January 2007 Chang, Yu-Chun and Hsu, Chia-Jui, “Open Skies or Open Aviation Area? Prospects for the Aviation Relations Between the European Union and the United States”, Aerlines Magazine (e-zine edition), issue 34, January 2007 Hill, Christopher, “The Capability - Expectations Gap, or Conceptualizing Europe’s International Role”, Journal of Common Market Studies, vol. 31, no. 3, 1993. pp. 305-328 Lawton, Thomas C., “Governing the Skies: Conditions for the ‘Europeanisation’ of Airline Policy”, Journal of Public Policy, vol.19, no. 1, 1999. pp. 91-112 Levy, Jack S., “Learning and foreign policy: sweeping a conceptual minefield”, International Organization, vol. 48, no.2, 1994. pp. 279-312 Mayor, Karen and Tol, Richard S.J., “The impact of the EU-US Open Skies Agreement on International travel and carbon dioxide emissions”, Working Paper FNU-134, April 2007 O’Reilly, Dolores and Stone, Sweet Alec, “The liberalization and reregulation of air transport”, Journal of European Public Policy, vol. 5, no 3, 1998. pp. 447-465 Richards, John E., “Institutions for Flying: How States Built a Market in International Aviation Services”, International Organization, vol. 55, no. 4, 2001. pp. 993-1017 Robyn Dorothy, Reitzes James and Moselle Boaz, “Beyond Open Skies: The Economic Impact of a US-EU Open Aviation Area”, in Daniel S. Hamilton and Joseph P. Quinlan (eds), Deep Integration: How Transatlantic Markets are Leading Globalization, Centre for European Political Studies, 2005. pp. 50-73 Read More