Regulatory scrutiny on cross-border mergers and acquisitions
Airline partnerships have evolved significantly over the past decades, moving from simple interline agreements and codeshares to the more complex frameworks of joint ventures (JVs), all of which have helped give passengers additional options beyond their favored carrier and have made their travels more seamless. In recent years some airlines have coupled equity purchases with their joint ventures, which leads to the acquirer’s interest in the success of the partner airline as a whole, not just the regional scope of the joint venture. However, these partnerships still fall short of unlocking the full value that a controlling stake can provide, as demonstrated by the numerous successful mergers over the past two decades that have fundamentally reshaped the modern airline industry.
Of note, when airline consolidation is allowed to occur, it remains limited to domestic markets or economic unions, while cross-border M&A is largely blocked by strict regulatory constraints. These restrictions perpetuate the fragmented nature of the global airline industry, preventing the sector from realizing the full potential and value that cross-border consolidation could unlock. This thought piece will discuss the potential benefits that greater liberalization could offer to both airlines and consumers, while also analyzing the merits and fallacies of regulatory barriers that continue to impede cross-border mergers.
Benefits to Airlines and Customers
Industry consolidation has demonstrated efficiency gains and economies of scale. For airlines, it has unlocked significant revenue synergies through the integration and diversification of networks, allowing for expanded loyalty programs and broader market access. Additionally, consolidation reduces operational costs through the optimization of fleets and hubs, elimination of redundant processes, and consistent pricing stability. These efficiency gains are crucial in an industry known for its thin margins and vulnerability to cyclical fluctuations. Yet the benefits are not exclusive to the airlines - customers stand to gain significantly as well. A larger airline network means more and better connectivity, offering travelers more flight options and smoother connections. Resultant cost reductions will lead to improved financial health for the airlines but will also enable them to offer better products and services for their customers. Moreover, airline consolidation leads to improved consistency in service levels, both on the ground and in the air, along with broadened loyalty programs that create a more seamless and rewarding travel experience for passengers. Concerns of fare increases due to consolidation have not been validated largely because regulators disallow consolidation when they are concerned that potential resultant price increases will outweigh the customer benefits.
Regulatory Barriers to Cross-Border M&A
Despite the advantages of consolidation, two main regulatory obstacles prevent cross-border airline mergers: foreign ownership and control restrictions, and bilateral air service agreements.
Foreign Ownership and Control Restrictions
Foreign ownership and control restrictions limit the degree to which foreign entities can own and control domestic airlines. Ownership ceilings vary by country, with some as low as 25% (as in the U.S.) and others set at 49%, common in major aviation markets like the EU, UK, Australia, and Canada. A few countries, primarily in South America, have adopted a more lenient "Principal Place of Business" (PPB) requirement, which focuses more on where the airline's operations are based and governed, rather than imposing strict foreign ownership limits. This offers more flexibility in terms of foreign investment while still maintaining regulatory oversight.
Bilateral Air Service Agreements
Bilateral agreements between countries govern international air traffic rights and often include clauses that airlines benefiting from these rights must be owned and controlled by nationals of the states involved. These agreements further complicate efforts for cross-border M&A, as airlines seeking to merge would still face limitations on international routes.
Success stories and attempts
Despite these hurdles, examples of cross-border activity in the airline industry do exist. The PPB approach facilitated the merger between Chilean carrier LAN and Brazilian TAM, creating LATAM Airlines in 2016. Additionally, the concept of "European M&A," as seen in the creation of IAG (International Airlines Group) and the Air France-KLM Group, demonstrates a way around bilateral service agreements using complex holding company structures. However, these successes are rare and often meet significant resistance from governments and local airlines, as shown by the failed attempt of Qantas and China Eastern to establish Jetstar Hong Kong. Despite being compliant with the PPB rule, it appears that local authorities rejected the deal over concerns about foreign influence.
Arguments used for and against regulation
The regulatory restrictions that limit cross-border mergers and acquisitions are supported by several key arguments that should be explored further. This section outlines the most prominent reasons behind these restrictions, along with counterarguments that challenge their validity.
National Security
Many governments impose restrictions on foreign ownership of airlines for national security reasons. Programs such as the United States’ Department of Defense’s Civil Reserve Air Fleet (CRAF) require airlines to provide crew and aircraft in times of national emergencies or conflict. For example, during the COVID-19 pandemic, airlines played a critical role in distributing vaccines and providing essential services. Governments seek to maintain control over these strategic assets to ensure their availability in times of crisis. On top of that, countries may have varying regulatory standards for safety, labor practices, and environmental concerns. A government might be hesitant to allow foreign ownership of a domestic airline due to fears that the foreign entity might push for lower standards, attempt to circumvent local regulations, or cause planes to be unavailable in a time of need.
While concerns about national security are understandable, especially in today’s geopolitical climate, regulators would approve mergers, as they do today, on a case-by-case basis and therefore ensure political and regulatory alignment with the foreign entity at question. Even as a foreign-owned entity, the airline would still be subject to national regulations and contractual obligations, ensuring compliance with requirements like CRAF and adherence to safety, labor, and environmental standards. Therefore, foreign ownership does not inherently compromise national security. Moreover, other critical sectors, such as telecommunications, energy, and financial services, play equally important roles in national infrastructure but face fewer ownership restrictions. These industries have managed to balance openness with regulatory safeguards, allowing foreign investment while maintaining robust oversight. The aviation industry could adopt a similar approach, implementing targeted measures to ensure security and compliance without resorting to blanket ownership restrictions.
Protecting national airlines, labor, and the broader economy
Governments are reluctant to lose control and oversight over the national airlines, as these carriers often represent a sense of pride for these countries, frequently are one of the largest employers of the country, and support a broader ecosystem, such as tourism, airport infrastructure, and other related services. Concerns over potential job losses due to consolidation, where merged entities might relocate operations to lower-cost regions, contribute to resistance against cross-border M&A.
Recommended by LinkedIn
While national pride consideration is commendable and concerns about the economic impact are understandable, the arguments against foreign ownership in the airline industry may not fully account for the realities of modern aviation. Regardless of ownership, most airline jobs - such as pilots, cabin crew, and maintenance staff - must be filled locally due to regulatory requirements and practical needs. Additionally, funding from a foreign source would help lead to stability and growth. Therefore, the arguments that foreign ownership could lead to significant job losses seem overstated. Lastly, allowing foreign investment is more likely to strengthen national airlines by providing access to additional capital, new technology, and expertise from an international partner. Rather than undermining competitiveness, such investments could enhance the airline's service quality, expand its reach, and improve financial stability, benefiting not only the company but also the broader ecosystem it supports.
Protecting competition and consumers
Governments are also keen to protect their domestic airlines from unfair competition. There are fears that allowing foreign ownership could lead to state-backed foreign airlines entering markets and offering fares that domestic carriers cannot match. This could ultimately undermine competition and harm local economies. On the other hand, regulators often express concerns that industry consolidation may reduce travel options and create monopolies in specific markets, ultimately driving up fares.
The fear of monopolistic behavior resulting from foreign ownership may be unwarranted in a well-regulated market. Antitrust laws and competition authorities are already in place to monitor and prevent anti-competitive practices. The aviation industry, with its inherent competition across multiple players and routes, is unlikely to develop monopolies simply due to cross-border ownership. In addition, there are numerous examples of airlines ceasing operations after failed merger attempts, including Ansett Australia, Malev Hungarian Airlines, Olympic Airways and Mexicana Airlines, among others. Recently Spirit Airlines merger with JetBlue was disapproved with the judge citing that he ruled against the merger for the Spirit customers. However, without the equity support Spirit’s financial woes continued resulting in a Chapter 11 Bankruptcy filing on November 18. Perhaps foreign funding would help keep this ultra-low-cost-carrier in the market.
Recent regulatory developments
The already formidable barriers to cross-border mergers have been compounded by a recent wave of regulatory scrutiny, which now increasingly targets domestic mergers and JVs. Several high-profile cases highlight a growing hesitancy among regulators to approve partnerships that could potentially limit competition.
Notable examples include the DOT’s 2020 rejection of the JAL-Hawaiian Airlines JV, followed by the Australian Competition and Consumer Commission’s (ACCC) 2021 veto of the JV between JAL and Qantas. The trend continued in 2023, as the U.S. Department of Justice (DOJ) moved to dismantle the Northeast Alliance (NEA) between JetBlue and American Airlines, and WestJet opted to abandon its planned JV with Delta due to the conditions that would be imposed by the DOT in order to grant the approval. Similarly, M&A efforts between JetBlue and Spirit, as well as IAG and Air Europa, were either terminated or suspended amid mounting regulatory constraints. Even recent approvals, such as Lufthansa's minority stake acquisition (with the intent to lead to majority stake) in ITA and the Alaska-Hawaiian merger, came only after both airlines committed to significant concessions to address competitive concerns.
These interventions underscore regulatory bodies’ prevailing apprehension that airline partnerships may reduce competition on specific routes and drive-up fares for consumers. However, this perspective often overlooks the operational efficiencies and consumer benefits these alliances can create, particularly in cases where struggling airlines like ITA and Spirit could gain much-needed stability through these partnerships. The cumulative effect of these regulatory actions is an industry environment increasingly resistant to consolidation - even in cases where it might bolster financial resilience and enhance service options for travelers.
Path forward
While concerns about foreign ownership and control are not without merit, other industries have found ways to balance national interests with the benefits of foreign investment. The aviation sector could similarly embrace well-crafted regulations that address competition and security concerns without imposing outright restrictions. Adopting measured policies like PPB, along with tailored regulatory oversight, represents a sustainable approach to unlocking the potential of cross-border airline partnerships. This path forward not only respects the realities of a globalized economy but also paves the way for a more competitive and healthy airline industry that is better equipped to serve its passengers.
ASG Strategic Partnership practice area
Seabury Airline Strategy Group (ASG) is an airline commercial strategy advisory firm specializing in airline commercial topics including network planning, revenue management, strategic airline partnerships, and operations. The Strategic Partnership team has an extensive background in airline joint ventures, with several professionals having worked in airline management roles setting up, launching, and managing some of the most complex and largest commercial joint ventures in the industry.
David is a Managing Director and founding member of ASG. He joined ASG following six years at Seabury Consulting and 18 years at Delta Air Lines which included leadership positions in Alliances, Network Planning, Market Development, Sales, Corporate Strategy, and Finance.
David is recognized as an industry expert in airline joint ventures. While at Delta he built, implemented, and managed Delta’s JV with Air France – KLM. While at Seabury he was contracted by JV partners spanning the globe and global alliances to assist in all phases of partnership development. David has led JV workshops at many of the industry’s most prestigious airlines.
Christopher is a Senior Analyst at ASG and joined the firm in 2023 after completing his Master’s degree in Management Analytics from the University of Toronto – Rotman School of Management. During his time at ASG, Christopher contributed on numerous projects, with a focus on airline partnerships, network planning, and revenue management.