Mitigating the Negative Effects of Political Influence on the International Airline Industry

Abstract

Political systems negatively influence the international airline industry. Therefore, this interference contributes to overall unfavorable social and economic outcomes. The paper conducts a comprehensive literature review of scholarly materials on the subject with the primary intention of reporting the ways of mitigating this impact. The study delineates four principal means of lessening the effects of political interference. The methods include the liberalization of air transport by abandoning the traditional rules and regulations as subscribed in the Chicago Convention (1944) and promoting bilateral agreements; enactment of efficient tax policies and elimination of unwarranted levies; development of the programs concerning the eradication of war, terrorism, and diseases as well as finally deregulating the government owned airlines. Hence, this would result in increased passenger and cargo traffic, enhanced economic activities and overall economic growth. It would also lead to improved quality of services as a consequence of a greater number of newcomers and stronger competition.

Effects of Political Influence on the International Airline Industry

The airline industry is the main contributor to economic advancement and development. It is connected with over 5 million directs jobs and million others in the supporting industries, namely manufacturing and technology (Ball, Geringer, McNett, & Minor, 2013). It is impacted by restrictions and regulations related to the international trade, competition, and tax policy. Moreover, it is influenced by factors such as war, terrorism and the outbreak of diseases, in particular Zika and Ebola. All of the issues are political and, therefore, require government intervention. The political environment in which the commercial aviation operates is under close control and favors the passengers at the expense of the airlines due to the considerable emphasis placed on the passenger safety (Rhoades, 2016). Nevertheless, this regulation has far-reaching effects on the industry. For example, political interference in terms of unfavorable tax policies and unfair competition creates a hostile environment for the international airlines (Gillen, H?schelrath, & Niemeier, 2016). As such, carriers may avoid those nations thus leading to retarded economic advancement. Terrorism and war, likewise, have wider implications to the industry. The occurrences contribute to unsafe skies causing business and transport interruptions (Abeyratne, 2016b). Tourists and manufacturers would have hard times dealing with the situations. Currently, Qatar-Gulf crisis has seen Qatar Airways banned from operating in Saudi Arabia, Egypt, and the UAE for allegations of supporting terror activities in the region (Subramanian, 2017). Nonetheless, the outbreak of diseases has similar effects on the international airline industry since airlines cancel flights as a primary response to the epidemics (Moll, Reece, Cosford, & Kessel, 2016). Besides, this has happened in the past hence isolating the country from the rest of the world. It is, therefore, paramount to enact practices in order to mitigate the political influence on the international airline industry. Such policies include the liberalization of the industry, adoption of friendly tax policies, eradication of war, terrorism, and diseases by launching special programs as well as deregulation of all government-owned airlines.

Liberalization of Air Transport

International commercial aviation operates within the framework of the Chicago Convention of 1944. Thus, commercial airlines are governed by a sophisticated web of more than 9,000 bilateral arrangements commonly known as the air service agreements (ASAs) (Walulik, 2016). The latter regulate a broad range of issues related to the provision of the international aviation services. The liberalization of the global airline market remains a formidable challenge given that it is dependent on the political will of states. In most times, the ASAs development and enforcement is a lengthy process characterized by constant bargaining and disagreements (Morrison & Mason, 2016). Many of these challenges are ascribed to the parties’ different expectations about the effect of alternative arrangement scenarios or policies. The resulting uncertainty spearheaded by the authorities prevents further opening of skies and vests substantial powers to the national flag carriers at the expense of the negotiation process and private players. Therefore, this, in turn, leads to direct control or political influence on the international carriers (some are flag carriers) thereby eliminating the possibility of fair competition. The political impact on the carriers then contributes to poor services, constant sanctions and subsequently poor performance of the international commercial airline industry.

The World Trade Organization establishes seven critical features that are relevant to the openness or liberalization of the scheduled air services. Furthermore, these embrace the grant freedoms that permit the international airlines to offer services to a designated market; the capacity clause that regulates the frequency and the volume of air traffic; and the tariff approval that stipulates whether fares need to be approved before enforcement (Walulik, 2016). Other features are the withholding clause, which defines the circumstances under which the foreign carrier operates such as ownership; the designation clause that governs the number of airlines permitted to work in the market between two nations. Finally, the statistic clause that promotes the exchange of operational data between countries and the cooperative agreements, which control the cooperative marketing arrangements between states. Bilateral air services, therefore, remain the core to the liberalization of the international air transport for most of the countries that continue to witness the political influence. During the last decade, more than a thousand bilateral arrangements have been finalized, with 60% of them containing some form of liberalized agreements, in particular multiple designations, expanded traffic rights, democratic pricing regimes, free determination of capacity and an expanded airline ownership criterion (Walulik, 2016). The liberalization of the international air transport would eliminate the political impact on the business and would bring unending economic benefits. Foremost, the approach would boost stronger competition, reduce the prices and stimulate the traffic (Fageda, 2016). However, this would be possible after the removal of pricing constraints, route entry, cooperative agreements, and service capacity among the alliance states. The governments would not have any interference whatsoever with the liberalized operations. Thus, the members would compete effectively and operate efficiently hence reducing the costs, increasing the quality of services by introducing the frequent flier program among other advantages. As a result, the air traffic would dramatically improve.

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On the other hand, the liberalization would provide for optimization of the pricing strategy and networks of airlines. The approach would substantially enhance the operational efficiency and the mean load factor. Consequently, the average costs of operations would plummet causing the increase in the quality of air travel services (Fageda, 2016). The process would give rise to mergers and acquisitions since less efficient airlines would be bankrupted. As a result, most of the poor performing airlines are those affiliated with governments or persons with strong influence in the political sphere; moreover, they continue to function only because of the existing political networks. Finally, the liberalization of the air transport and the subsequent formation of authoritative and non-partisan alliances would ensure that airlines are effective even when political tensions between the nations are high but they do not pose an imminent danger to the safety of the airline industry. The non-government affiliated carriers would operate despite the disagreements between the countries (Ball et al., 2013). Nevertheless, this would be achieved when liberalized airlines and member states register their agreements with an international organization or a court to the extent that the airlines are able to function without political interference. Therefore, the liberalization of the international air transport is an efficient strategy for mitigating the negative political influence because it will promote the airlines that are based of economic concepts rather than subjected to the state control.

Enactment of Favorable Tax Policies

International air transport supports employment, trade and economic growth. It is projected that by the end of 2017, the industry and its customers will generate over $120 billion in tax revenues, a sharp increment from $118 billion in 2016 (Morrison & Mason, 2016). Excessive or unwarranted taxation on the international aviation has negative influence on the sector’s social and economic development (Lo, Tang, Hong, & Li, 2014). The tax issues on international aviation are not explicitly addressed in the Chicago convention that leaves a big room for the political players to adjust the taxations on the industry as they wish. Mostly, this leads to over taxing. Nevertheless, the matter of taxation remains a concern that creates an impediment to the advancement of the industry. For instance, air carriers continue to confront situations where the taxes on the use of the commercial air transport contravene the International Civil Aviation Authority tax policy as established in the Doc 8632 (Abeyratne, 2016a). Besides, these taxes are counterproductive since money collected from such scenarios far surpass the economic benefits derived from the reduced use of the air cargo shipment and air travel. In addition, this has been the typical framework over the last two decades with the proliferation of taxes under different names across most of the states. The fees include air passenger duty, air travel tax and air transportation levy, which have ranged from $4 to $300 depending on the class or the destination of the travel (Abeyratne, 2016a). Other taxes such as solidarity charges imposed to combat different types of diseases and illnesses have been common in at least 15 states (Abeyratne, 2014). The solidarity levy clearly hinders the air transport because it is only collected in this sector. In the same period, there has been the introduction of tourism taxes across key regions of the world, in particular, the Caribbean, Latin America and some African countries. The charges have varied between $2 to $60 (Abeyratne, 2014). Regrettably, these taxes are not reinvested in the tourism industry even after the collection. Most states impose the value added tax (VAT) as well as various sales taxes on jet fuel and other products bought within their boundaries but used in the international market, the air navigation charges and consumer user service fees. Other levies include the capital purchases, namely air transactions, importation, excess luggage taxes, and the renowned sales taxes on the value of the air tickets for the commercial transportation in Latin America and the Middle East (George, 2015). Although a number of these charges apply for the tickets sold inside the country or in the instances when the travel originates from that nation, the place of sale remains irrelevant to taxes as the commercial air transport should not be vulnerable to taxation.

ICAO has a clear distinction between a tax and a user charge. A charge is a levy applied mainly to recover the cost of rendering services for the civil transportation or the use of facilities while a tax is constructed to raise the government or the local revenues. Taxes are generally not introduced to the civil aviation on a cost specific basis. Over 90% of the ASAs exempt from the aircraft and fuel taxes on the international air transport, while over 20% permit the reciprocal exemptions from taxes on the revenues from the international air travel (Fu & Oum, 2014). Despite these stipulations, most executive bodies impose hefty taxes on products that by law should be discharged from taxes. Hence, this is attributed to ignorance by the international airline players to the existing taxation guidelines and intimidation by the government on the sectors where players are threatened by political figures. At times, the airlines are subjected to double taxation while the revenues realized are not plowed back into the industry or are misappropriated. Therefore, states need to abolish unwarranted taxes and enact favorable tax policies that do not discourage players or expel them from the market. In doing so, the sector will benefit from the increased cargo and human traffic, enhanced productivity that will see the creation of many job opportunities and improved customer service. The reason is that the generated income will be aimed at acquiring state-of-art facilities and equipment. To some extent, this process will ensure that the existing and new taxation measures are adequately and fairly adopted by considering the social and economic ramifications. It will also eliminate the actions that lead to double taxation and those that unjustly target the sector resulting in taxes not reinvested back to the air transport related infrastructure and services (George, 2015). Therefore, enactment of favorable tax policies will contribute substantially to mitigating political influence on the air transport. Low and justified taxes will see the improvement of the sector regarding productivity, traffic and consumer satisfaction.

Eradication of War, Terrorism, and Diseases

While air travel has been considered as the safest method of traveling, emerging trends are posing a direct danger to the sector. The threats include war, terrorism, and diseases. A war between two or more countries often affects the airline operations directly or indirectly, and airlines often do not operate in the war-torn states such as Iraq because of the fear of shooting down of the aircraft. Besides, this has happened in the past with the recent case of downing of MH17 over Ukraine (Moskvitch & Susman, 2014). Combined with the terrorist activities, these two threats present unprecedented hazard to the sector. The emerging technologies are changing the traditional character of war and taking it to the internet through cyber wars (Baker, 2015). Thus, this has made it particularly difficult for the actors to completely seal the industry from terror attacks and maintain the required safety measures. Airline’s manufacturers are leaning towards the production of fully automated aircraft. Firstly, the technology is a presently hidden danger to the aviation sector because it is rapidly democratizing the capability to inflict large-scale damage with attacks, which were once the purview of the primary states hence becoming conceivable to a wide range of non-actors (Peters, 2015). Secondly, the merging of the physical and the cyber elements exposes the industry to new vulnerabilities. The ability to implement a large-scale terror threat is closely related to the coalescence of the physical and virtual world thereby increasing the possibility of remote terror attacks (Peters, 2015). Consequently, this can cause serious international air transport disruptions as witnessed in the 9/11 attacks.

Most of the civil or commercial aviation systems such as flight traffic management, reservation, access control, passport control, cloud based airline information storage, cargo handling, and departure control are potentially hackable. Nevertheless, the flight control systems, fuel gauges, GPS navigation systems, maintenance computers, cabin pressure systems and fuel consumption recorders can be remotely controlled and are cyber vulnerable. The aviation remains a high-value target and modern wars are no longer confined to the traditional battlefields. Therefore, there is the tendency of expanding to the civilian domains. Since the civilian aviation is related to the smooth functioning of the economy, it tends to remain a tempting target for the assailants. Likewise, an outbreak of diseases has the potential of causing real time air transport disruptions. Recorded cases of Ebola and Zika outbreak in West Africa and Brazil respectively have induced notable airlines to cancel flights to the disease-infested countries resulting in the massive loss of revenues, loss of direct and indirect jobs, and slowdown of the economy (Grout, Howard, Coker, & Speakman, 2017). It is worthwhile noting that the economy takes an extended period before recuperating. The magnitude of these incidences can only be manifested by the near cancellation of Rio Olympics games in Brazil in 2016. The games almost came to a halt following the epidemics. Additionally, this caused animosity and fears of participants and airlines staying away from the events. Therefore, it is essential to enact the war, terrorism and disease eradication programs to boost the industry and ensure continuous production.

When it comes to elimination of the effects of war and terrorism, airlines and the government should think like attackers and not defenders. In that way, they will be best prepared for the future attacks rather than concentrate on preventing of a repeat of the past assaults. Moreover, players should work more like hackers in the endeavor to identify and reframe the existing vulnerabilities with the aircraft systems (Baker, 2015). The individual entities should also recognize that cooperation on security is the only way of elimination of the unseen dangers of the war and terrorism in the commercial aviation industry. Thus, companies should not conceive their resilience to cyber-attacks as a comparative advantage and instead work in close collaboration with the government in formulating the best war and terrorism eradication programs. Finally, the authorities and political players need to establish real time surveillance, in particular, on the disease prone areas. Hence, this will afford them the capacity to detect any emerging illnesses at the evolution level and take appropriate preventive or curative measures. The diseases will not spread to national levels, which would potentially scare tourists, business people, as well as other stakeholders and discourage them from using the international airline services (Grout et al., 2017). Therefore, the government and individual officials should devise war, terrorism and disease eradication programs as a possible way of mitigating the political influence on the industry.

Deregulation

Governments across the globe continue to enforce direct control on the leading international airline carriers. Besides, such is the case with most national flag carriers, which are directly managed by parastatals or prominent individuals. Some of the regulated international airlines include Bahamas Air, Air Algeria, and Egypt Air (Morrison & Mason, 2016). The underlying reasons for this arrangement is to extract more money since the executive bodies have direct access to the carrier’s bank accounts. Other state officials hide under the pretense of providing efficient services by creating a perception that private players cannot render quality services or as a job preservation strategy. Most of the Third World countries rely on their carriers to stimulate the economy since there are no other economic activities, which can produce excellent results to conform to those of air transport (Ball et al. 2013). Consequently, such nations exercise their influence on the sector in order to preserve jobs in tourism, manufacturing, assembly and agricultural industries. In some cases, the states assume the control of the sector after receiving vast sums of money when the carriers are on the brink of collapsing.

Deregulation can make a major contribution to minimizing the effects of political interference within the sector. The act would revert the traditional role of government agencies of determining the routes as well as overseeing the prices charged, and instead, it would provide for a market driven industry where the forces of demand and supply determine the level of service and price (Wang, Bonilla, & Banister, 2016). Air transport deregulation would foster the development of hub and spoke networks. Hubs are strategically positioned airports that used to transfer the flier program points for cargo and passenger traveling from one state to another. They are also the collection points for passengers and cargo traveling from the immediate surrounding to overseas. The advancement of hub and spoke networks would be a milestone in mitigating the negative influence of political systems because the carriers can achieve higher load capacity, lowered unit operating costs, which would reduce the operating fares (Rosenberg, 2015). Thus, the carriers would function independently. In addition, this act would accord the airline with the opportunity to locate and choose their preferred hubs that have established origin and destination of human and cargo traffic. Deregulation would also lead to the introduction of new carriers through the opening of the airline business to newcomers. Hence, this would stir competition thereby changing the conditions of the regulated carriers. Stiff competition would contribute to low cost and no-frills services (Rhoades, 2016). Moreover, the event would cause increased competition among the existing players resulting in the unprecedented economic growth. Consequently, this would suffice the passengers with a choice of more than one carrier, restore the sanity of the business and promote a proportional increase in small and medium sized markets. On the other hand, it would induce spawned discount fares. For instance, the deregulation of the American airlines reduced the fares by as much as 35% (Rosenberg, 2015). Therefore, deregulation would force the airlines to cut prices in order to remain competitive. Nonetheless, the activity would see the growth in air travel since the airline services would be readily available and affordable to even the low-income earners. Finally, this would generate more revenue for the company and the country in general.

Deregulation would almost instantaneously contribute to marketing innovations that might eliminate the need for government input. Particular programs such as frequent flyer programs would reward the regular passengers with free air travel tickets and other travel benefits (Sun, 2015). Nevertheless, this expansion is rarely found in state regulated national carriers. The innovative technological inventions would facilitate greater development and connections of the program with promotions from other industries, namely the credit card industry. In this case, it would become possible to exchange the traveled miles with other services or goods. Finally, deregulation would be of benefit to the invention of reservation systems that can help the industry players and the travel agents to keep track of the service charges and fares. Furthermore, this would allow the provision of state-of-art services since processing of million passengers would be a simple task. In addition, this would provide for code sharing between the international airlines and the regional carriers so that transitioning from one aircraft to another would be much easier. Hence, the passengers and the airlines would assume greater control over their activities and oversee a rapid expansion of the industry. Therefore, deregulation is a viable idea of mitigating the political influence on the airline industry since it may create a market driven aviation industry instead of government controlled estate that would not deliver quality services at an affordable price.

Conclusion

The international airline industry contributes significantly to the economic growth and development of the world economies. However, it is heavily influenced by the political factors. Thus, it is paramount to alleviate these effects by introducing the programs and policies aimed at decimating the political impact. The programs include the liberalization of the air transport in which bilateral arrangements will spearhead the opening of skies. Moreover, this process would ensure the formation of alliances or like-minded mergers that would steer the airline industry away from the political environment. Then the airlines would operate independently that may lead to increased productivity, economic advancement and enhanced traffic. On the other hand, imposing favorable taxes and abolishing unwarranted levies would secure that most of the revenues are reinvested into related industries hence promoting overall productivity. Therefore, this would guarantee that airlines retain high percentage of the profits, which would then be channeled towards improving the customer services. Likewise, war, terrorism, and diseases eradication programs would be highly conducive to mitigating the negative aspects of political influence on the airline industry. In this case, the players would combine efforts in creating preventive measures and devising resilient programs capable of detecting unwarranted intrusion or emergence of any illness and offering precautionary measures before a national disaster occurs. Finally, deregulation has the capacity of minimizing the political effects because it would subject the airline industry to the forces of demand and supply. Consequently, the government would have little or no control over the sector. Some of the impacts of this approach would incorporate improved customer traffic, marketing innovations in the form of frequent flyer programs and code sharing. Therefore, the adoption of the four strategies would contribute immensely to lessening the political influence on the international airline industry.