With airlines around the world struggling to survive the economic downturn, the time should be nearing to break the taboo of consolidation in the sector.

Airlines around the globe face losses of $11 billion in 2009, according to IATA. Margins are expected to fall this year and next, with analysts predicting carriers are likely to struggle for years to reach levels needed to produce an acceptable return for capital market investors.

Societe Generale estimated in a recent note that margins would drop to -3.1 percent in 2010 before recovering to 1 percent in 2011, well short of the 10 percent needed.

Effectively we are back to the ice age of 2001-2.

Eight years ago, the collapse of Sabena and Swissair kicked open the door of cross-border consolidation -- within Europe at least. But while deals like Lufthansa's merger with the Swiss airline allowed for some rationalisation, the merged entities remain hamstrung by national aviation regulations.

Replacing this patchwork of national carriers with viable global companies able to withstand economic shocks is the necessary next step.

The European Union's open skies agreement has shown what is possible. It has allowed M&A to take place within the bloc, and this has led to the creation of four major players -- Air France-KLM, British Airways, Lufthansa and Ryanair.

The challenges now are even greater than they were at the turn of the millennium.

High and rising fuel costs, environmental pressures to reduce CO2 emissions, overcrowded and often inefficient airports, limited landing slots and planning constraints on building new terminals and runways mean yet more financial pressure to reduce the number of planes in the skies and make airlines more efficient.

But despite the pressure on the sector, airline reform is still creeping forward at a snails' pace. Instead of making dramatic changes to the model, airlines are forced to find ways around the rules to eke out savings and to line themselves up for consolidation when it comes.

This is why Air France-KLM, Delta Air Lines and AMR Corp's American Airlines are showing such enthusiasm for taking a stake in loss-making Japan Airlines Corp (JAL) in a bid to expand in Asia via code-sharing arrangements (common ticketing agreements).

For the Japanese government, which is engineering the JAL restructuring after bailing it out, the deal represents an opportunity to push an open skies deal with the United States.

Oneworld and to a greater extent SkyTeam -- which includes Air France and Delta -- are both relatively under-weight in Asia and will seize on any opportunity that comes along. If winning the prize means providing cash to bail out an ailing airline such as JAL, then they see it as a necessary evil.

The barriers to rationalisation are many. Governments love having their "own" flag-carriers. Planes carrying the national flag are almost a statement of a country's prowess.

Airlines do come and go, but part of the problem is that the barriers to entry are low, while the barriers to exit are high.

In the United States, airlines fly in and out of Chapter 11 as their fortunes wane, while in Europe and elsewhere governments cannot resist protectionist intervention to save national carriers and the jobs that go with them -- just look at what Italy has done to keep Alitalia flying -- making market exits the exception.

Open skies agreements are meant to lead to further liberalisation, but nobody is holding their breath for the United States to relax its rules so far as to allow majority foreign ownership -- especially in the middle of a recession.

And attempts by British Airways and American Airways to ink their transatlantic deal have twice foundered at the hands of competition authorities. American is now seeking U.S. approval by next month to form a transatlantic alliance with BA and Spain's Iberia.

The EU has shown that cross-border consolidation is possible if the right structures can be put in place and governments are willing to accept losing economic control. Lufthansa has now bought Swiss, Austrian Airlines and bmi as it battles with rivals Air France-KLM and British Airways.

Japan's restructuring of JAL and the sale of a stake in the country's largest carrier could just be just another case of alliance pass-the-parcel. The brave thing to do would be to let a competitor buy and run the airline.

If nothing else, the economic crisis will force more airlines into alliances. But even the dire predictions for the industry probably won't be enough to get regulators and governments to contemplate fundamental change.

- Professor David Bailey works at the Coventry University Business School. The opinions expressed are his own. -

General Motors announced its exit from Chapter 11 bankruptcy protection on Friday, and pretty speedy it was, too. The firm has quickly transferred its good assets to a new carmaker (”new GM”) which is majority owned by the U.S. government, and the whole bankruptcy process has taken just 40 days.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. While GM is no longer the world’s biggest automaker, by some estimates it still accounted for 1 percent of the U.S. economy before going into bankruptcy. The latter has been not only hugely symbolic of the fate of the ailing U.S. car industry, but has also been of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

The “new GM” that has emerged from Chapter 11 last week is a much smaller and leaner firm which has shed tens of thousands of workers, closed factories, cut loose hundreds of dealerships (further reductions will be needed), ditched several brands, and – with union agreement – changed employment contracts so as to cut costs.

Under bankruptcy protection, GM has shed over $120 billion in liabilities. Its work force will also shrink dramatically, from around 90,000 at the start of this year to around 64,000 by the end of 2009.

“New GM” will include the firm’s best models and R&D and will have scrapped brands like Pontiac, Hummer and Saturn. By 2012, the new GM will comprise the Chevvy, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm

The U.S. government will take a 61 percent stake in the new GM, along with the Canadian government (12 percent), and the United Auto Workers’ retiree healthcare trust fund (17 percent). Creditors to the “old GM” will get just a 10 percent stake.

The Obama government has stressed that it does not aim to maintain a long term stake, and may look to sell off its shareholding as early as 2010, or as soon as the firm is ready list on the stock market.

A key goal for GM is to stabilise things by being able to make money even if U.S. car sales remain depressed at 10 million to 10.5 million vehicles a year. And it urgently has to get new technologies and cars to market quickly, staring with its electric Volt car in 2010. If it can do that successfully, it still has a chance, as long as it can repair its battered brand image.

In essence, the future of GM now depends on its ability to actually produce fuel-efficient cars that people want to buy and which match or exceed Japanese standards for quality. It still faces a massive challenge.

GM will never be the biggest manufacturer again. However, Chapter 11 was anyway about restructuring the firm, wiping clear most of the debts, cutting costs and reorientating the firm towards more environmentally friendly cars. A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

Just before GM entered Chapter 11, GM Europe was split off from its U.S. parent and placed in a trust fund. GM Europe employs around 55,000 workers across Europe, with some 25,000 based in Germany, and 5,500 at Vauxhall in the UK.

The Canadian car parts firm Magna International has emerged as the preferred bidder to acquire GM Europe, although GM has confirmed that it is still talking to other bidders. The German government has promised GM Europe substantial financial support; it has very much called the shots in Magna becoming the preferred bidder, and wants to defend jobs in Germany.

That still leaves some major question marks over Vauxhall in the UK. Concerns remain that UK workers will suffer job cuts if a Magna deal goes ahead, in part because of the financial support coming from Germany to protect jobs there, and also because it is easier to lay off workers in the UK than on the continent. Magna has said it will look for up to 9,000 redundancies in Europe.

Earlier this week GM confirmed a rival bid from Chinese firm Beijing Automotive Industries (BAIC). Whilst Magna has a head start in acquiring GM Europe and is still very much the favourite to acquire the firm, unless a deal is sealed within the next few weeks, BAIC may yet be in with a chance.

It’s not such a daft idea, especially for British workers. BAIC is thought to be looking to cut capacity in higher cost Belgium and Germany rather than in the UK, and to produce GM models in large numbers in China. The Chinese market is growing rapidly and probably offers more opportunity than the Russian market that Magna is thought to be targeting. A BAIC deal would also offer GM more upside benefit with a bigger stake in a new GM Europe.

These developments have added pressure on the UK government to intervene to support Vauxhall production. The government announced a 2.3 billion pound auto support package back in January, yet not a single penny of this money has yet to reach any car producer in the UK, although applications for support are thought to be at an advanced stage now. The government needs to speed this up and get the money flowing soon.

- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

GM declared itself bankrupt on Monday in one of the largest bankruptcies in U.S. history, in an attempt to seek protection from creditors.

The firm has stacked up over $80 billion of losses in the last four years, also swallowing some $20 billion in cash from the Obama administration. It is likely to need another $30 billion before emerging from Chapter 11 substantially slimmed down and free of debts.

A bankruptcy judge will decide who gets what assets. It’s not clear whether during Chapter 11 the firm will continue to function and assemble cars.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. Whilst GM is no longer the world’s biggest carmaker, by some estimates it still accounts for 1 percent of the U.S. economy. The bankruptcy is not only hugely symbolic of the fate of the ailing U.S. car industry, but is of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

Republicans have begun to criticise the U.S. president’s handling of the GM affair, but it is difficult to see what else the U.S. president could have done.

Obama had to give GM time to come up with a credible plan, and I have always thought that the firm would need up to $50 billion of government support to get through the downturn and restructuring.

Under the proposed plan, the U.S. government would get a stake of over 70 percent in GM in return for another $30 billion of state cash, with the United Auto Workers union taking 17.5 percent initially, with the union accepting shares in GM instead of cash owed by the firm for retired employees healthcare cover.

A majority of GM’s bondholders have accepted the offer to swap their $27 billion in debt for an initial stake of 10 percent with the option of buying 15 percent more later. Their agreement to do this should help in speeding GM’s progress through Chapter 11 and avoid expensive legal battles.

Whilst a minority group of bondholders are holding out for a better deal, in reality this restructuring is the only game in town.

Hopefully, the new GM that emerges from Chapter 11 will be leaner, fitter and free of debts. It will include the firm’s best models and R&D and will scrap brands like Pontiac, Hummer and Saturn.

By 2012, the new GM will comprise the Chevrolet, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm.

“GM-Lite” will cut the number of assembly sites across North America, including Canada, to 33 within three years, from 47 at the end of last year.

Eventually, the goal is to float the new firm on the New York Stock Exchange. It will shed some 20,000 or more workers in the U.S., and has also told over a thousand dealers in the U.S. that they are at risk of losing their franchise. GM plans to lose 2,300 from its 6,000-strong network.

In a deal with the UAW which saves the firm $1 billion a year, rules on breaks, vacation and overtime have been changed, retiree benefits have been cut, and the UAW has agreed not to strike until September 2015 at the earliest.

GM will never be the biggest manufacturer again, but Chapter 11 is anyway about restructuring the firm, erasing the debts, cutting costs and reorienting the firm towards more environmentally friendly cars.

A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

The situation here in the UK is rather different. An efficient and world class car industry is struggling given the impact of recession and credit crunch, and the British government has largely been a spectator as GM Europe has been sold off.

That in turn could have a very significant impact on jobs at Vauxhall here in the UK.