Former Virgin Atlantic director Barry Humphreys discusses his new book "The Regulation of Air Transport From Protection to Liberalisation, and Back Again" and where he sees the industry going.
Don't miss a single episode. Subscribe to Aviation Week's Window Seat Podcast in Apple Podcasts and Spotify.
Rush Transcript
Karen Walker:
Hello everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm ATW and Aviation Week Network Air Transport editor-in-chief, Karen Walker. Welcome on board. It is an absolute real pleasure to be joined this week by my guest Barry Humphreys, an aviation consultant specializing in strategy and regulation. Barry, welcome and thank you so much for joining me for your home in the England. Barry continues a long and very distinguished career in the air transport industry. He's a former senior regulator at the UK Civil Aviation Authority and a former director at Virgin Atlantic Airways. Among his many current commitments, he's on the board of Airlink, which connects vital first response air transport capacity to emergency responders in humanitarian disasters. You're involved in so many things, Barry, I know, across the industry, and now you've just published a book entitled The Regulation of Air Transport from Protectionism to Liberalization and Back Again.
It's a fascinating insight into the history of how the modern global air transport industry developed with all its idiosyncrasies and unique government rules and interventions. It's really a book that connects the dots from how the industry has evolved and opened up allowing for things like low cost carriers and other consumer friendly innovations. But of course, it still remains uniquely challenged, especially when it comes to covering its own costs. Barry, I've really enjoyed reading this book. It's very informative. It's an easy read, and like I said, I love the way it does connect those dots from that history to what's happening today and where you see things going. Can I just start off by asking you what motivated you to produce the book now?
Barry Humphreys:
Well, the origins who are actually with my friend John King in Australia who's editing a series of books that intended for practitioners, but with sort of an academic tinge to them, and he asked me to write a book on regulation, a small book. And I started to write and I just kept writing and as you probably see it turned into 250 pages, so it wasn't really suitable for that series. I've also think that if we really want to understand the problems that we face today, we need to understand how we got here in the first place. And that's why the history is so important. People don't... Well, don't always appreciate that so many of the problems in the industry today can be traced way back to 1944, the infamous Chicago Conference. And unless you understand how we got here, as I say, it's very difficult to address the problems that we have.
Karen Walker:
I agree with you. I think it's that historical reference at the beginning of the book that is really powerful. Because I think a lot of people today, particularly on the passenger side, but I would argue a lot of younger people in the industry this today just don't any longer really understand what was going on in those early days of what I would call extreme regulation. Governments were dictating everything from where airlines could fly, how often, even the type of meals that they could have. And of course they regulated fares essentially making it a cartel industry. Now over the years, the industry has become more liberalized or deregulated in US terminology, but it's still mostly a money losing business. And even those few airlines that make a profit have razor-thin margins. Other industries just wouldn't entertain this as a going concern. And you talk about this a lot in the book, the money challenge. So why do airlines actually stay in business even when they lose money?
Barry Humphreys:
Basically, it's a failed industry. The airline industry has lost money year after year after year. Just before COVID at a really good time for airlines when superficially airlines were prospering, IATA produced a study that showed that just 30 airlines in the world were truly profitable. They were covering their cost of capital, and unless you cover your cost of capital, you're not sustainable. So the industry has survived because of government bailouts and chapter 11 type bankruptcies, and that's not a prescription for a long term success. And I'm afraid that has been the key characteristic of the industry. Why is that? Well, some economists have argued that the very structure of the industry means that it's impossible to make money. I don't subscribe to that. I don't think that's the case. And I think if you want to see why that's not the case, you need to look at the example of the United States.
If you cast your mind back not many years, US airlines were a basket cases of international aviation. They were losing massive amounts of money. They were frequently in bankruptcy. They were the most unprofitable airlines in the world, go but forward a relatively short time and they suddenly become the most profitable airlines in the world. The success stories. Why? What happened? What changed? Well, there's only one significant thing that changed and that was they consolidated. There they were takeovers, mergers, and you now have 80% of the domestic market covered by four airlines, and that made a massive difference and is an indicator of the solution to the global industry in my view. The problem is the US airlines could consolidate because they were all US airlines and they were operating within a single jurisdiction. International airlines can't do that because if they merge or take each other over, it involves cross border transactions.
And then we run into to archaic ownership and control rules that do indeed date all the way back to the mid-forties and still dictate the very structure of the industry today. We have an industry that is still national based. There is not a single truly global airline, unlike other industries, cars, chemicals, where you have global companies, airlines aren't like that. They tried to bypass the rules in various ways, but fundamentally they're still national based. And then we have things like the big airline alliances. Now, these didn't emerge out of the blue. They are a direct result of those decisions taken in the forties because they are a substitute for true mergers. Yes, that's a long-winded way of saying we're a failed industry, I'm afraid. I think it was Warren Buffet or you just said that we destroyed more capital since the Wright brothers than we created. That's not a good record at all.
Karen Walker:
You're absolutely right. As you say, there's been all these workarounds that this is irony here, isn't there? This is a global transport business. It literally connects people and trade around the world, but it can't operate as a global organization the way other industries do. Now you devote a whole chapter to the industry's Draconian ownership and control regulations. Unions, especially pilot unions, have been very powerful in maintaining a lot of those rules. They cite safety as their concern, but it's really protectionism, isn't it? It's about protecting their jobs and their pay. What would be the effect do you think if like other industries, airline mergers could freely occur across boundaries across national boundaries? And do you think it'll ever happen?
Barry Humphreys:
Well, it would transform the industry. I have no doubt about that. I mean, how it would transform it, I wouldn't care to be precise, but we've seen what's happened in the United States in terms of profitability. As I mentioned, when you remove the government factors, you release entrepreneurial spirit. So I call in my book, I call it the normalization of the industry, in of words in the airlines would be just like any other business and which are certainly not at the moment. And to just go back to your point about the pilots, you're quite right. The pilots did oppose during the EU-US negotiations, if you recall, the US pilots fought very strongly. I always struggled to understand where they were coming from because in Europe, the pilots were also fighting and the American pilots were saying, we're going to lose jobs to the Europeans.
And the Europeans were saying, we're going to lose jobs to the Americans, but they can't both be right. But they could both be wrong. And I think history suggests they were wrong. But that's part of why. The problem is, how do you solve this? Now you can't do it bilaterally, that's the fundamental problem. Two countries cannot get together and say we're going to do a waive of the ownership rules because that's fine for services between those two countries. But of course their airlines fly all around the world. So you need a multilateral approach. Getting a multilateral agreement on something like this is near impossible. The great hope, certainly my great hope, was the EU-US negotiations. When there was the opportunity to create an enormous free trade area for aviation, I think at the time it would've counted for something like 60% of all scheduled air services between the two.
And if the EU and US had done something in this area, you could see other liberal-minded countries joining Canada, Australia, Singapore, and so forth. And you have a momentum that would've been unstoppable, that didn't work for reasons we know. And to be honest with you, I can't see a way out now because there's so much opposition, so much inertia in the system that it's very difficult to see. Who knows, maybe one day the EU and US will get together again and we see... Maybe the pilots will have a change of mind. But at the moment it doesn't look very hopeful at all.
Karen Walker:
Sadly, I agree with you. I'd like to just pick up another point from what you just said also about the US example, about what changed, what made them, as you say, basket cases for so long there was always another airline in chapter 11 to becoming right now almost the only profitable airlines in the world. And that was the consolidation. The interesting thing there is that is a success point for the airlines. My personal feeling is that that's the way it should... A good airline, just like any good company, is one that is also soundly profitable, but it's hated by the lawmakers here in the US and by the consumer. They're constantly going on about this is the bad thing that's happened to the industry. And there's some of the talk that you hear now in the US about being proposed rules is essentially re-regulation, they're starting to want to actually dictate not the safety side.
I have no problem with that, but with the interfering with how airlines do business and dictating that. So even when the airlines are operating, as you say, in a more normal way, it tends to not go down well with the politicians. Another big part of your book, another chapter here is Open Skies, which really gets into that whole liberalization aspect of the industry. Open Skies, of course, it started with the US-Netherlands agreement. It's been hailed as a huge success story for airlines and the traveling public in terms of opening up roots that will want completely hamstrung by what government said an airline could or couldn't do. So do you agree that the Open Skies model is a universal success template?
Barry Humphreys:
Yes, absolutely. I mean, Open Skies of course followed domestic deregulation in the US and then liberalization in Europe. Actually, and both of those followed freight liberalization. Freight always seems to come first 'cause nobody seems to bother too much about that, but it leads the way ironically. It's all part of a process of this gradual liberalization and Open Skies was the international version of that. And it's great. It's done wonders. It's brought consumer benefits. I think everyone has benefited, but we go back to the point that it's not true deregulation because we still got the ownership and rock control rules still [inaudible 00:13:45] restrictions and so forth.
So it's definitely an enormous step in the right direction and the very fact that so many countries around the world followed that pattern shows its value, but we shouldn't kid ourselves that it's the final step by any means. There's still so many restrictions left there that are affecting the industry. Deregulation itself is a word, a bit of a misnomer because what we actually have seen is not the removal of regulation, but a change of regulation. We've lost the old ways where some civil servant in an ivory tower dictated who could fly where and at what prices. But now of course we have masses of legislation designed to protect the consumer, maintain competition and so forth, as it did in most industries. But we're still highly regulated.
Karen Walker:
No question on that. You talk about low cost carriers in terms of liberalization, I mean, first of all, would it be fair to say that without what's happened with things like Open Skies and a change in regulation, shall we say, low cost carriers really couldn't have happened?
Barry Humphreys:
Absolutely. Young people today in the industry probably don't realize just the extent to which the restrictions restrained airlines in the past and especially in the area of what fares they could charge and how quickly they could amend it. I mean, I can remember, I've been in this industry a long time, as you kindly pointed out, but in the eighties, I can remember attending government meetings at the European Civil Aviation Conference in Paris. Numerous countries represented there and their airline minders as well. And the issue was, should airlines be allowed to file their own fares? Just file their own fares. Because the process at the time was that if you say, take London, Paris, BEA, British Air always was then would file with the UK authorities for itself and Air France and Air France would file in Paris for itself and BEA.
But the question was, and there were several meetings for this, should they just be allowed to file their own fares? And the result was no, that was far too radical a solution couldn't be done. So I mean that sort of mindset, a low cost carrier could not operate under those circumstances because they are totally reliant on dynamic pricing, changing things, going in and out of markets quickly. It's just a totally different world. So liberalization was an absolute requirement for the type of LCC that we see today. But having said that, we do forget there was a type of LCC in the early years. I mean the inclusive tour charter, it was very much a European phenomenon, but you have to remember something like 50% of all traffic in Europe at one stage were charters.
They weren't the schedule carriers and they were offering very low fares and inclusive tours and so forth. And the reason for that was charters a bit like freight, they'd sort of crept under the radar when it came to originally designing the regulatory structure. So while there were all sorts of restrictions on what they could do, there were ways that they could sneak around them and exploit gaps in the rules. And they were very, very successful and they were the original low cost carriers. But it just shows you there is enormous entrepreneurialism in this industry.
Karen Walker:
Does somebody's worked both on at the government authority side and at a very entrepreneurial airline Virgin, what's your take, Barry? Do you see more inventiveness among people or more stay in the box thinking?
Barry Humphreys:
Well, as we just discussed, there is enormous inventiveness and it has exhibited itself in many ways over the years. And entrepreneurs are attracted to the industry. It's a sexy industry. They come in. So yes, there's a lot of flexibility and so forth, but I've also been struck over the years by how conservative the industry is. I mean, it is remarkable, really for an industry at the forefront of technology it can also be very, very conservative. To give you an example, I remember when I was at Virgin, Virgin had problems getting slots at Heathrow like everybody else does. But there's a particular problem because we were up against British Airways, quite a lot of slots. And so we campaigned for a reform of the slot allocation rules and we came up with radical proposals and we tried to persuade everybody else, the other airlines. And we failed to persuade one single airline, even airlines who would blatantly benefit from what we were proposing. They just didn't want to upset the apple cart.
Karen Walker:
Interesting. Now you talk about concerns that the industry is headed back towards protectionism. What are you seeing and what are the drivers for that, Barry?
Barry Humphreys:
Yeah, I think there are three points there. One is there's a global move against globalization, if you see what I mean. More protectionism widely and aviation can't be immune to that. We see that in all sorts of areas. Second factor, there was a big kickback as you know against the success of the Gulf carriers. And although that's gone a bit quiet now, and it still had a big impact, I think, and I think people are quite nervous about the emergence of these super hub carriers who perhaps don't or are alleged not to follow normal commercial principles. And so that has made people nervous and has had a detrimental effect.
And the final factor is COVID. Because what happened in COVID of course, was there was widespread bailouts of the airlines, not all airlines. So the market got distorted in many ways, but in many instances, airlines received large government handouts or loans or government backed loans. And that's greatly increased the indebtedness of airlines. And it's greatly increased the involvement of governments in airlines. And if you are invested in a company, the last thing you want to do is, I would suggest is go out and encourage more competition.
Karen Walker:
It's interesting you mentioned the COVID effect there. Now, of course, what everybody said the worst part of the COVID, of the pandemic was there was extreme pessimism being expressed about the future of air travel. The old thing of travel will never come back like it was before. People now know how to use Zoom, et cetera, et cetera. Ironically now if you look at the numbers, there are now more airlines operating this year than there were in 2019. Personally, I think that shows, again, something wrong with the industry, but there you are, aircraft and airports are absolutely packed. I've just been through several of the major hubs and they're all completely packed every time. You've talked here about what I think is an interesting aspect of how the pandemic has perhaps created more protectionism and less willingness to allow free competition because of the indebtedness of the airlines. Do you think there are other changes for the industry that are long-term from the pandemic, or is there travel in itself just going to come back as ever?
Barry Humphreys:
Well, I never bought into the fact that the pandemic in itself would destroy demand for travel. I always thought that was rubbish. There was a debate as to whether the increased use of Zoom and so forth would affect business travel and you can see the argument for that. But then again, that argument has been going for decades. It existed long before COVID and it never proved to be the case. I remember sitting at a conference in Washington and listening to some of them, this is a long time ago, we're talking decades rather than years. And somebody I think from the FAA was just saying how he thought increased telecommunications would destroyed the need for business travel. And I was sitting next to somebody who lent over to me and whispered. He said, "I've just come back from Saudi Arabia. If these bobos think that they can sell airplanes to the Saudis by telephone, they need their head looking at."
That's struck me as absolutely right. The demand is there. The reasons for travel are still there. We're experiencing a slightly artificial environment at the moment because there's a bounce back and people have hadn't been able to travel and they now want to, in the longer term, I think will resume what was there before. The same overall trends and influences will apply. And from that point of view, the industry has a great future. There are other elements that perhaps pointing into a different direction, but I don't think COVID is one of them. It'll just be seen as a blip, a big blip. We've had blips before. This is just a bigger blip than before, in my opinion.
Karen Walker:
And then the other big change, if you like, that's going on in the industry regardless of COVID, is the big focus on sustainability and reducing carbon emissions. That's become huge. I've just been at the IATA AGM, it was a huge talking point and I got a feeling of a distinct shade of concern and pessimism as well about the goals that the industry has set and whether it can meet them. What are your thoughts on how that aspect is changing the industry?
Barry Humphreys:
Well, I think their history teaches us two lessons on this. The first is the industry is very slow to react to the problem. Just supposing Willie Walsh's predecessor, one of them had stood up a decade two decades ago and said, at the IATA AGM, "I want each of you airlines to give me half a million dollars and I'm going to out there launch a campaign to tell everybody in the world how useful and wonderful aviation is." That would've been the best investment those airlines had ever made in their life. But didn't, of course, I mean, it wasn't likely to happen at that time. And we let the story be taken up by others who had other games to play. And now we are the [inaudible 00:25:14] completely unfairly in my opinion. But at the same time we've also... And the second lesson is we've engaged in greenwash.
I mean, an awful lot of rubbish has been spoken over recent years about how wonderful things are going to be in the future. And we're on the verge of major transformation. I don't think that's true at all. The technology is coming, but it's going to be slow and very slow. The battery aircraft are not going to be able to fly very far and carry many people for a long time. Hydrogen well has massive challenges of hydrogen. So who knows, we're dealing with technology. There will be advances, but I'm not particularly optimistic that by 2050 we'll be able to say we have a zero carbon industry, therefore we should be more honest. I think people will understand it's actually going to prove extremely difficult to completely remove the use of carbon. And then society has to make a decision whether the benefits are worth the cost. There's too, as I say, too much greenwash.
Karen Walker:
Yeah, I've long been saying that the industry spent a lot of time congratulating itself and telling itself the good things it was doing, but it forgot to tell the people it really needed to tell. And as you say, paying dearly for that. Now in the final analysis, Barry, you do express concern in the book for the future of the industry. And of course as we have talked about here, mostly because of its inability to be reasonably sustainably profitable. What's the biggest thing that could change that and what do you feel when you look to the future of this industry?
Barry Humphreys:
As I already said, I think the underlying trend will be maintained, but there are some very negative impacts coming along. Two of them we've already discussed. One is protectionism. The second, the environment and the environment is not only a challenge technically, but also it comes with much higher costs and technology. Technology has been the savior of aviation over the decade. When aviation was a really inefficient, badly run industry, it was technology that reduced costs to such an extent that fares came down and then demand blossomed. Going forward, we still got technology coming along, but not the type of technology, it seems to me that's going to reduce costs not to anything like the extent that that has happened in the past with the development of the jet engine and then wide bodies and then twin engines and so forth.
So those three together all point into the direction of significantly higher costs to the industry and if you have higher costs, higher fares, you have lower demand. Now, how that will impact in practice given the underlying trends of people wanting to travel, I don't know, but certainly I think the probability is that the growth will be less than it would've been of otherwise. Sorry to end on a negative point, but I'm not particularly optimistic about the future in that respect.
Karen Walker:
I think it's realistic, is the truth. But Barry, it's been absolutely fascinating talking with you. Again, congratulations on the book. I've really enjoyed it. I think there's a lot of great insights there, regardless of people's experience and understanding of the industry, there's a lot to be gleaned from this. So for our listeners, the title again is The Regulation of Air Transport. You can get a copy via routeledge.com, which is part of the Taylor and Francis Group. So thank you again for joining me. Thank you also to our producer Cory Hid, and thank you to our listeners of course, make sure you don't misses each week by subscribing to the Window Seat podcast on Apple Podcast or wherever you listen. Now we'll be skipping next week's broadcast because of the July 4th Independence Day holidays. So wishing all Americans everywhere, good celebrations and I'll be with you again the week of July 10th. This is Karen Walker disembarking from Window Seat.
Related Content
