Diabolic Digest
Airline
industry set to find more turbulent skies ahead
By Khaled Diab
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 in the US last autumn, which sent the global travel
industry reeling.
July 2002
But persistent customer concerns over security,
terrorism and safety issues have hit bookings hard. And, 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 euro from up to 2.3 billion euro 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."
This article first appeared in the 18-24 July
2002 edition of the European Voice.
© Copyright 2002 The Economist Newspaper Limited. All rights reserved.
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