By Frank Kane www.thenational.ae
I’ve met Willie Walsh, the chief executive of British Airways, a few times and always found him a serious, straight talker, ready to tell the story as he sees it without embellishment or hyperbole.
He was in action last week at the European Aviation Club in Brussels, delivering a speech to his fellow leaders of the continent’s airline industry and shooting from the hip: the industry faces major challenges; BA has suffered two years of record losses; cost-cutting and consolidation are the order of the day. And that was before he moved on to the contentious issue of the volcanic ash crisis of last April and its disastrous effects on European airline finances.
He also touched on another financial aspect of the industry that is obviously looming large in his mind: the so-called “home country rule”, which he feels puts European airlines at a disadvantage to their global competitors in the crucial area of fleet expansion.
The home country rule is one of those obscure bits of the regulatory apparatus originally intended to do good but which now appears to act against the interests of the European aviation industry.
Carriers from countries that help manufacture aircraft, such as France, Germany, Spain and the UK in the case of Airbus, are not allowed to use their governments’ export credit guarantees to finance the purchase of new planes. To do so would be an example of state subsidy, which the EU is against in principle, although lots of exceptions slip through.
(The USA has the same kind of arrangement in place, preventing US airlines from purchasing Boeings with cheap finance through the Export-Import Bank.)
However, it was when Mr Walsh strayed from his scripted speech that the real target of his complaint was revealed. In impromptu comments, he identified the fast-growing airlines of the Middle East, especially Emirates Airline of Dubai, as the main beneficiaries of the home country rule.
Europe was “funding the expansion of Emirates,” he said. Along with Etihad Airways of Abu Dhabi and Qatar Airways, there was a “significant threat” to the European industry. “These are our competitors. We’re financing our competitors by providing them with cheap access to capital. There’s something not quite right here. I do not take this threat lightly.”
He went further. If the growth of the Middle East airlines continues, he said, it could change the shape of the long-haul aviation business in the same way that airlines such as Ireland’s Ryanair and the UK’s EasyJet have transformed the economics of short-haul air travel.
Those are strong words. Mr Walsh is not just identifying a technical anomaly in European and US aircraft leasing policy – and calling for it to be tweaked – he is zeroing in on a whole region, the Middle East, as a major threat to the established global airline industry.
He is right to do so. The growth of the Middle East airlines is the latest example of economic power slipping inexorably eastwards, away from Europe and North America, and towards China and India.
The old “colonial” model of the global aviation industry was based on the need to get businessmen and tourists flying between the USA and Europe and to the outposts of commerce in Asia, when they had to go there.
Now, air-travellers are just as likely to originate in the east, on business and leisure travel between Asian centres and on business trips to the west. Sitting in the perfect geographical position is the Middle East.
A businessman heading from Shanghai to New York will want to break his journey, or change planes, somewhere in the middle of his trip and this is likely to be in one of the Gulf states, such as the UAE and Qatar, that have spawned the new, fast-growing airlines Mr Walsh so fears.
Emirates, Etihad and Qatar Airways have been called “super-connectors” and are set to dominate the global industry in the next few decades. Already Dubai International Airport (DXB) is the third busiest in the world after London and Hong Kong, with 42 million passengers moving through its three terminals.
DXB is set to overtake Heathrow as the busiest aviation hub in the world in the near future. And this is before the gigantic new Al Maktoum International Airport in Jebel Ali comes online, with capacity for 160 million passengers per year in the early 2020s. By then, industry analysts reckon more than 200 million passengers will use Dubai, Abu Dhabi and Doha each year.
It is true also that new aircraft orders are dominated by Middle East airlines. Their fleets have more than doubled in the past 10 years and will account for 1,000 new aircraft by 2020, around 14 per cent of the entire aero industry.
Tim Clark, the president of Emirates, responded to Mr Walsh’s claim that Europe was subsidising Emirates’s expansion by pointing out that very few aircraft were bought with export credit assistance from Europe.
Mr Walsh should forget the minor technicality of the “home country rule” and focus instead on the fundamental change that is taking place in the global aviation industry. The old colonial model is gone forever.