Aviation: Farewell to the flag, is the era of the national airline over?

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Many national airlines have flown their host countries’ flag for decades, but there’s a debate around whether they still have a place in today’s ultra-competitive market. With the future of Malaysian Airways, Alitalia and South African Airways in doubt, can national airlines continue to thrive in the 21st century?

National flag carrier airlines – a somewhat nebulous term today, but originally describing government-owned airlines in the early years of commercial aviation – are a very 20th century invention. As the aviation industry took off, dozens of countries (with notable exceptions, including the US) established national airlines. From British Airways (established 1974) to South African Airways (1934) and Dubai’s Emirates (1955), these carriers were often either fully owned by the state or supported through incentives, protected markets, and other preferential treatment.

In return, these airlines acted as extensions of their flag countries’ technical capabilities and international standing. To many governments, well-run flag carriers were – and in many cases still are – national brand ambassadors, taking a country’s expression of its best qualities and flying it around the world. ‘Fly the flag’, as British Airways’ (BA) patriotic advertising slogan put it in the 1970s.

These 20th century inventions still form a large part of the aviation market in 2019, but today many national carriers are floundering. The explosive proliferation of budget airlines in the 1990s and early 2000s has given travellers a no-frills alternative to the brand-name carriers, and their business model has resonated with many passengers, to the disadvantage of the old guard. With many flag carriers struggling to stay solvent, governments are increasingly being forced to consider whether ownership (or part-ownership, or financial support) of a faltering national airline is a responsible investment of public funds.

Game over for Malaysian Airlines?
This is exactly the question being mulled by Malaysian Prime Minister Mahathir Mohamad, as his government works out how to deal with its flag carrier, Malaysian Airlines, which lost around $750m last year as it continued to haemorrhage business to low-cost rivals such as AirAsia.

The Malaysian budget airline, like many of its counterparts in Europe and elsewhere, offers affordable short-haul flights in the region, and by 2018 had captured 55% of all traffic in Malaysia. With Malaysian Airlines facing outperformance by budget airlines in Asia and unable to match the luxuries offered by the likes of Emirates, even the country’s highest official is openly questioning the value of continuing to invest billions to prop up the airline.

“Nobody has come up with proper solution that can actually succeed, in our opinion,” said Mohamad at a press conference in May. “The airline business now is very competitive after the emergence of low-cost carriers. Then we have Arab airlines, which provide luxurious facilities and all kinds of perks. I don’t know how they make money, but people cannot challenge them. It’s a very difficult business now.”

The perils of state ownership
Many of the national airlines still going strong today have seen governments stepping back into minority ownership or privatising carriers entirely, as the UK and Spain have done with BA and Iberia, which merged into the International Airlines Group (IAG) in 2011. Beyond mitigating risk, part of the motivation for privatisation is allowing the company’s executive management to make the financial and operational decisions free from political pressure or meddling.

By comparison, some state-owned national airlines are starting to look damagingly outdated. In South Africa, for example, government-owned flag carrier South African Airways (SAA) has been operating at a loss for six years straight while the government keeps it afloat and the airline goes through round after round of restructuring attempts in search of profit. But even SAA’s new CEO Vuyani Jarana, who took over in 2017 to “stop the bleeding”, has said the airline will maintain poor-performing long-haul routes like its service to Hong Kong, to preserve its sole foothold in Asia.

“Why should there be a link to Asia?” said Aegean Airlines founder Antonis Simigdalas in an interview with Skift. “I am sure our colleague at SAA has his own reasons or he has significant pressures from political bosses or whatever. But I am sure if he were to ask private shareholders whether they would like to maintain loss-making routes in their network, I don’t think they would say yes, unless you gave them a promise of profit in the future.”

National pride vs economic reality?
Of course, when decades of national pride is tied to an airline brand, seeing it disappear can be a humiliating prospect. As Malaysian PM Mahathir Mohamad considers whether to shut down the country’s floundering flag carrier, his disgraced predecessor Najib Razak countered in March with a piece of somewhat circular logic that nevertheless sums up this attachment.

“Almost every country has its own national airline, so we must have our national airline,” Najib said.

When Switzerland’s privately-owned flag carrier Swissair went out of business in 2002 following years of mismanagement, the humiliation was clear. In 2007, a former personnel manager with the company described to the BBC the effect on national morale.

“The Swiss were incredibly proud of it,” the former employee said. “They saw it as Switzerland’s international calling card. All those Swiss values – punctuality, efficiency, high quality – were supposed to be embodied in that airline.”

This attachment is the reason that a new Swiss national carrier – Swiss International Air Lines (Swiss) – emerged so quickly after Swissair’s collapse, and why Swiss continues to use branding that draws a direct visual line back to its forebear.

The lure of a prestigious and profitable national airline can present a financial sinkhole in the making. Tanzania and Uganda have revived flag carriers in the last year, and in July 2018 Nigeria unveiled a third attempt to revive its national carrier at Farnborough Airshow. The federal government planned to take no more than a 5% stake in the airline, dubbed Nigeria Air, and keep its distance from management decisions, but just a few months later the plan was suspended.

While many countries in Africa move away from protectionism and towards liberalised air transport markets in which a wider range of operators can thrive, others remain attached to national airlines. Clearly, different approaches will work for different countries, but to some critics, the obsession with flag carriers is a red herring distracting from more productive improvements.

“States should focus instead on improving airports and lowering taxes on airlines,” said Georgetown University School of Foreign Service assistant professor Ken Opalo last year.

Adapt to survive
In some cases, the failure of a national carrier, while painful, can work out well. After the closure of Hungary’s national airline Malev in 2012, the private sector moved in to fill the gap in the market with something more in tune with demand.

Hungary-based ultra-low-cost carrier Wizz Air started expanding at Budapest Airport immediately after Malev’s closure in 2012, and in 2018 the airline carried more than 33 million passengers.

The private sector’s response to the Malev closure may be on the minds of decision-makers in the Italian government, who are trying to broker a future for national airline Alitalia, which went into administration in 2017, costing the country $1.2bn in bridge loans to keep it running. At the time of writing, a last-ditch takeover proposal is being considered by Italian state rail company Ferrovie dello Stato and US-based Delta Air Lines, but with foreign players including Qatar Airways already positioning to expand in Italy, is preserving Alitalia worth the risk?

Of course, there are situations in which national carriers survive and thrive in the modern market, and as Icelandic budget airline Wow Air’s collapse in March proves, flag carriers by no means hold a monopoly on failure. And while state ownership might have proven itself outdated in SAA’s case, other countries have made it work – Ethiopian Airlines, for example, has flourished under public control.

The common thread uniting flag carriers that are flourishing in 2019, whether it’s BA, Ethiopian or Emirates, is a willingness to leave the 20th century behind and approach the ruthlessly competitive commercial aviation market as it is today. While some sense of pride may always be attached to the world’s enduring flag carriers, stripping away the outdated idea that they are national brand ambassadors and refocusing them as businesses ready to adapt to low-cost competition may be the key to their long-term future.

By Chris Lo
Airport-technology.com

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