Jeffrey N. Shane, IATA’s former General Counsel, put international aviation on the road to open skies. As he retires, he hopes governments won’t stray from this path.

Jeff Shane’s career spanned six separate stints in the US government, years of practicing law, several countries, and notable industry firsts.

His retirement on 30 June 2020 sounds well-deserved. But Shane admits that, with hindsight, he wouldn’t have chosen this moment to step down from his role as IATA’s General Counsel. “My heart is still in the industry and I would have liked to see it back on a more solid footing,” he says. “But my retirement date was set almost a year in advance.”

Shane is under no illusions about the enormous challenges ahead for air transport. He points to the decimation of the capital base and the slow return of demand as just two of the more obvious issues.

“But for creative people, it is an opportunity to implement innovative and game-changing solutions,” he notes.

And that is something Shane knows a thing or two about.

 

More competition

IATA’s former General Counsel didn’t start out with the intention to change the industry. He was working in Thailand when the Carter Administration deregulated the domestic US market in 1978 and the news largely passed him by.  As a specialist in environmental law at the time, he had other things on his mind.

Even when he returned to the US Department of Transportation (DOT) in 1979 as Assistant General Counsel for International Law and getting involved in aviation bilateral negotiations for the first time, it wasn’t a passion.  He had developed a healthy scepticism about the downsides of excessive regulation but liberalizing international air transport wasn’t yet an aspiration.

The US government was trying to introduce more competition into aviation markets at the time, however, and Shane was happy to take that line.

Gradually, air transport began to take center stage in his career and in 1985 Shane was put in charge of bilateral aviation negotiations at the US Department of State. “It is always a special privilege to represent your country across the negotiating table,” he says.  “Whether the subject is nuclear disarmament or a new route to Pittsburgh,” he says, “the dynamics are about the same.”

At that stage, US airlines were expressing unhappiness with the US government’s efforts to open the market to more foreign competition.  Heavily regulated markets had been the norm for so long that a limited access mindset had become entrenched.

Shane was expected to pursue a mostly traditional approach to aviation relations with America’s trading partners, but he was beginning to see things differently. The numbers supported him.  Deregulation in the United States had spawned rapid growth.  Liberalized international markets routinely grew faster than more regulated markets. 

Shane’s position also put him into direct contact with local chambers of commerce throughout the United States. Those encounters left him in no doubt about the impact air connectivity had on businesses, the economy, and job creation.

“At one point, I was asked to explain to business people in Atlanta why the US government was blocking a new daily flight from Zurich that Swissair wanted to start,” Shane recalls.  “We were blocking it, I told them, because US airlines were experiencing some practical, doing-business issues in Switzerland.  They thought it was crazy,” Shane says, “and I quickly Iearned that diplomatic immunity didn’t extend to US chambers of commerce.   The value of that flight to Atlanta, they felt, should have been enough to justify giving Swissair the permission it needed.”

Shane was appointed by President George H. W. Bush as Assistant Secretary at the DOT in 1989.  The position gave him a more visible platform from which to affect policy.  By then, aviation liberalization topped his agenda.

As Shane recalls: “The Administration was promoting greater reliance on market forces in all economic sectors and was receptive to new ideas about international aviation.

 

Fundamental change

The first new idea was what DOT called the “Cities Program.”  It represented a fundamental change for international aviation even though Shane modestly describes it as “an idea whose time had come.”  With traditional bilateral negotiations, when a foreign carrier wanted to fly into a country, the typical response was to wait until that country wanted something in return. In other words, the reply was “let’s wait and see.”

In the new program, if a foreign airline wanted to serve a US city that wasn’t already receiving service from the airline’s home country – and aviation relations with that country were good -- the United States would permit the flight automatically, without seeking any quid pro quo.   Airlines were still sceptical, but airports and communities throughout the US were fully supportive.

KLM was the first applicant, seeking to fly between Amsterdam and Baltimore. Shane remembers attending a ceremony held at Baltimore-Washington International Airport to celebrate the inaugural flight, and particularly his emotional reaction to the sight of a Boeing 747 in KLM’s livery.  “It’s not often that you see so visible a result of a memo you wrote,” he says. 

The success of the Cities Program made clear that it would be possible to depart even further from the traditional approach to authorizing new international flights. Following a detailed analysis by his team, Shane proposed a new Open Skies policy, adopted in 1992. Flights between the US and any country willing to accept the terms of a bilateral Open Skies agreement would be permitted to operate freely, in keeping with commercial airline decisions made according to demand.  There would be no government regulation of fares, schedules, or destinations.  Entry into the market by any airline of either country would be free for the asking.

Shortly after the policy was finalized, US negotiators met with counterparts from the Netherlands and forged the very first Open Skies agreement.

The new agreement led to yet another innovation.  Not long after the agreement was signed, Northwest Airlines and KLM – already joint venture codesharing partners – proposed to DOT that they be allowed to increase their cooperation significantly:   they wanted to act as though they were a single firm.  Given that they were competitors in many markets, US antitrust law made cooperation of that kind impossible.  The two airlines therefore asked DOT to grant formal immunity from the antitrust laws.

It was an unprecedented request.  Because flying in the US-Dutch market was now governed by the world’s first Open Skies agreement, however, Shane reasoned that the proposed Northwest-KLM combination would be disciplined by more effective competition than might have been possible earlier.  He signed the order granting the immunity in January 1993, and an entirely new industry model was born. 

Other airlines took note.  The US suddenly began to see interest in the Open Skies model among its trading partners, as airlines based overseas began to see the benefits of immunized joint ventures.  The US made clear that the main prerequisite to receiving antitrust immunity for a cross-border airline joint venture was an Open Skies agreement.  “You can’t allow two competitors in a market to collude through antitrust immunity unless the market is open to meaningful competition,” Shane says.

The incentive worked.  The US now has more than 120 Open Skies agreements and many more have been concluded by other countries around the world.  A great many airline combinations have applied for and received antitrust immunity based on the Open Skies agreements negotiated in their markets.  Today’s global alliances, SkyTeam, Star, and Oneworld, are all based on the foundation forged in 1993.  The greater global connectivity and efficiency enjoyed by airline alliances, and their competition with each other in markets everywhere, spawned a new surge of industry growth.

It is increasingly an accepted policy around the world, and has opened the door to new, low-cost airlines in a great many regions.  The resulting competition has made flying available to many more people – effectively democratizing aviation – while fuelling dramatic growth in air travel over the decades since.  In recent years, a great many airlines have enjoyed a healthy financial performance – not always easy in the air transport business.

 

Weathering storms

The industry has weathered some serious storms in the past – 9/11, SARS, MERS, volcanic ash, etc.  As serious as those episodes were, Shane says, “they were child’s play compared to what’s going on now.”

Because it may be some time before a truly functioning market for air travel returns, Shane is concerned that the global zeitgeist means governments may begin backing away from liberalization in a post-COVID-19 world.

The United States, for example, was quick to give its carriers financial relief. Access to the money was governed by a table of specified flights, however. “It was almost ‘like channelling the spirit of the old Civil Aeronautics Board, which we abolished in 1984,” quips Shane.

Though US authorities are now easing those requirements, the move demonstrates that government largesse, however essential it is to the survival of many airlines, can be a Faustian bargain.

“Connectivity must be restored in a sensible manner that allows airlines to respond to demand,” he suggests.  Requiring airlines to fly empty airplanes to destinations nobody is traveling to, Shane says, merely exacerbates an already desperate situation.

He also notes that some governments treated their financial support for national carriers as investments for which they received equity stakes in return. Shane worries that, because so many more airlines are now at least partially owned by governments, there could be a resurgence of protectionism.  Governments may seek to ensure a decent return on their investments in the interest of their taxpayers. That may lead to a desire to protect their airlines from competition, a move that Shane believes would only prolong the return to normalcy.  “History teaches that liberalized aviation markets grow much faster than protected markets,” Shane says.  “Governments need to resist the temptation to tinker, even if they feel that their investments give them a reason to do so.”

 

An opportunity

Shane also thinks there could be the hint of a silver lining on this very large cloud.  “Some countries may find that, when the dust settles, they no longer have the indigenous air transport capacity they need to revive their economies,” he says.  “There may be more of an appetite to revisit at long last some of the anachronisms that continue to hold this industry back.”

Shane cites the cabotage restriction as a classic case.  “Why should a country’s domestic air travel market be restricted only to home-grown airlines?” he asks, noting that Australia wisely departed from the rule some years ago.

Similarly, an airline based in any given country is typically eligible for an operating certificate only if it is owned and controlled by citizens of that country.  Shane notes that, where domestic investment is in short supply, legislatures may need to consider whether there is any continuing justification for a citizenship requirement.

He notes, “Of course, then the problem would be that an airline established by offshore investors would likely to be ineligible to fly to other countries because of the similarly archaic ‘nationality clause’ that’s still found in most bilateral aviation agreements – even Open Skies agreements.”  In effect, Shane says, the clause enables one contracting party to enforce a citizenship restriction on the airlines of the other contracting party.

“IATA found a solution to this problem more than a decade ago,” he notes.  He is referring to the forward-looking Agenda for Freedom initiative.  A group of like-minded civil aviation authorities signed a joint statement in 2009 saying they would stop enforcing the nationality clause and other outmoded restrictions in their bilateral agreements on a reciprocal basis.  “The statement is still there and still open for signature by other countries,” Shane says.  “Perhaps this is a good time to dust it off and start promoting it again.”  Shane chaired the two Agenda for Freedom Summits at which the joint statement was adopted.

Whether or not IATA’s Agenda for Freedom is revived, however, Shane remains optimistic about the industry’s outlook.  “I don’t know what the future will hold but I do know that people have an inherent desire to travel,” he says. “Some doomsayers think, now that we all know how to use Zoom and Teams, that nobody will ever travel again,” Shane says.  “I think it’s just the opposite.  Virtual meetings have actually shown us how important face-to-face meetings are in the effective conduct of business.”

Given its growth and transformation over the past three decades, Shane says he sees far more interest in the industry now than ever before.  “It is attracting really excellent people,” he says.  “You can see it clearly at IATA – a young, highly diverse team of some of the most competent professionals I have ever had the privilege of working with.”

New people and new initiatives will form exciting new approaches to the marketing and delivering of air travel, he thinks.  “Aviation is sometimes still characterized as a legacy industry but that is such a misrepresentation,” he says. “One thing I know for sure:  this is an industry on the cusp of great change.”

But it may need a new Jeffrey N. Shane to push that change through.

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