Airline industry set to find more turbulent skies ahead

Europe's embattled commercial airline industry is currently navigating some rough skies. It has been mounting a concerted effort to reverse the knocks it took following the Twin Tower attacks.

But persistent customer concerns over security, terrorism and safety issues have hit bookings hard. While airlines have been scrapping for their share of a smaller pie, insurance and security costs have soared. “The biggest challenges facing the airline industry are cost control and restructuring to face intensifying competition,” René Fennes, the public policy head at the Association of European Airlines (AEA), told European Voice.

Although passenger bookings had begun to pick up earlier this year, following their post-11 September free-fall, Fennes says they are still some 8-9% lower than last year's levels. Shrinking markets and competition from budget air companies are compelling national carriers to rethink their business models. “Intensifying competition in Europe is pushing airlines to consolidate and privatise,” Fennes said.

But industry insiders argue that regulations are holding back mergers. “Competition rules in Brussels make it very difficult to consolidate,” said Andrew Cahn, director for government and industry affairs at British Airways. Cahn called for a public dialogue between the EU, airlines and passengers to promote reform that will lead to consolidation and higher efficiency.

Last year's terrorist attacks served to deal a knockout blow to already troubled airlines, sending several, such as Belgium's Sabena and SwissAir, belly up and forcing government bail outs and resurrections under new identities. Across the world, airlines have shed hundreds of thousands of workers in recent months.

Industry bids to lure back customers have been dampened by the recent spate of air disasters and terrorist scares, plus the economic slowdown.

Despite some increases in fares on flagship carriers since last year, Fennes insists that the airline industry is bracing itself for an all-out price war. “Airlines are slashing their prices. This is partly due to the competition from budget airlines and partly due to maintaining market share,” he explains.

Budget giants easyJet and Ryanair, in contrast to most of the industry, posted healthy profits and appear to have taken advantage of the downturn in their bigger rivals' fortunes with an aggressive pricing drive.

Nevertheless, several large carriers are pursuing a hybrid business model that aims to match the budget airlines at their own game. Not to be outdone, mid-price carriers, such as Virgin, are going full throttle to compete on traditional flag carrier routes. But national carriers contend that costs imposed from above are rising too fast. They complain that governments have left them to foot the bill for increased premiums and tighter security measures.

“We have the feeling, as an industry, that we're becoming a bit of a milking cow,” Fennes said.

A number of insurers, including Lloyds of London, have been investigated for alleged price-fixing following the terrorist attacks; war risk cover plummeted earlier this year to €57 million from up to €2.3 billion before the attacks.

Left vulnerable, the European air industry is in the process of setting up its own mutual fund to help it weather any future terrorist attacks. But member governments are reluctant to share the costs which, airlines argue, has been giving their American rivals an unfair advantage.

Cahn insists the airlines are not seeking subsidies but compensation for damage to their business. “State ownership or state subsidies to airlines are not good,” Cahn said. “But helping cover security costs is not a subsidy. Protecting a population from the threat of terrorism is a national responsibility.”

However, Cahn argues that there needs to be a level playing field, both within the EU and across the Atlantic, to pave the way for deregulation. “We are fully in favour of the European Commission getting more involved in the aviation industry and seeing the liberalisation process through,” Cahn said.

The current situation raises the spectre of a new chapter in the ongoing trade war between the US and Europe.

The Commission is currently exploring imposing punitive duties on US airlines based on complaints by European carriers that over $5.5 billion in direct government grants and $16.5 billion in loan guarantees were giving their transatlantic rivals an unfair edge. “We support the Commission's investigation,” Fennes said. “But, more importantly, we need help to control costs.”

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This article first appeared in the 18-24 July 2002 edition of The European Voice.