Opening the Fifth Freedom

On airlines, Covid-19, and public funds

When Pfizer and BioNTech announced their Covid-19 vaccine's promising results this week, airline shares around the world soared. But that may have been premature; it will take more than a vaccine to rescue the industry. The pandemic laid bare the structural problems of airlines, and it’s apparent the crisis is deeper than the collapse in passenger numbers. 

Energy-efficient airplanes and cuts to inflight service aren’t going to be enough. The industry needs a deep rethink and radical pivot. It’s often noted (albeit not entirely correctly) that the Chinese character for “crisis” is an amalgam of “danger” and “opportunity.” To be sure, there’s danger all around this crisis, but airlines may not like the opportunity. If they survive, most will no longer look like the carriers of even a decade ago.

The notion of a national flag carrier is an outdated leftover from a different era. It’s time to bury it. Look at the ongoing battle to save South African Airways as a cautionary tale of how inefficient flag carriers waste public resources. Flag carriers are prestige projects. Few of them have consistently earned enough money to make persistent business sense but they have wasted untold sums of public funds.

Covid-19 could mean an end to this. If national carriers are killed off, what happens to air travel? Firstly, it means that instead of nearly 200 national airlines and dozens of more private-sector ones, there will be a few large global carriers, like Emirates, Qatar Airways, Turkish Airlines, Singapore Airlines, KLM, etc. These airlines have no, or few, domestic routes (with the exception of Turkish).

They mostly carry passengers from point A to point C. Point B is the home airport of these airlines, where passengers transit. This is the hub-and-spoke model in international air travel. So if you want to fly on Emirates from London to Perth, you must transit in Dubai, the carrier’s hub. But as it stands, you can’t fly on a Turkish or Emirates flight directly between Cape Town and London because the industry’s business structure prevents it. 

This system enables flag carriers to maintain a lucrative monopoly over heavily trafficked routes and ensure that competition is left to a minimum. Now, after the economic hit and government treasuries’ fiscal crisis, it’s finally time to move beyond this protectionist model and open up more routes under the “fifth freedom” – one of the rights of airlines under the Chicago Convention of 1944.

Under its fifth freedom, an airline can fly to a second country, pick up more passengers there, and then fly on to a third country. It can also disembark passengers ending their journey in the second country. A passenger’s journey doesn’t need to begin or end in the airline’s home country.

There are already a handful of popular fifth freedom routes, but they’ve been highly contentious. American aviation officials have been particularly hesitant to allow more fifth freedom routes because they can significantly cut into the revenue of national carriers flying direct routes. So forget about the US and focus on emerging markets. 

If fifth freedom routes were normalized, it would allow for a concentration of global carriers to connect disparate cities worldwide through their hubs. Doing so would make the surviving airlines more commercially viable while many legacy airlines die out. But who would serve short and unprofitable – but necessary – routes, either domestically or regionally? These might be left to the remnants of national carriers, operated as a public service, and which might be subsidized through a tax on the global hub-and-spoke carriers serving the respective country. Or the national carriers can subsidize their withered down operations by leasing out or selling their landing rights in choice international airports like London’s Heathrow. 

Beyond this, airlines have to think beyond merely putting asses on seats as a way of making money. Incredibly, although plane seats are commodities, they are treated as a luxury. It’s time to treat them more like soybeans. One way might be to monetize routes as tradable futures contracts. Let syndicates buy up blocks of seats on routes on specific dates or a range of dates and then sell tradable contracts on the expectations that these seats will be filled, canceled, or left unsold. Radical ideas are needed. 

The aviation industry must focus on connecting new destinations by removing outdated barriers to global carriers and wasting public money. Without this, the Covid-19 crisis will end up with just danger and missed opportunities. 

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A final thought

“Disappointment is the inevitable consequence of endless ambition, and bitterness a common refrain when things do not work out.” -Mark Epstein, Advice Not Given