| Author (Person) | Davies, Eric | ||||||||||||||||||||||||
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| Publisher | ProQuest Information and Learning | ||||||||||||||||||||||||
| Series Title | In Focus | ||||||||||||||||||||||||
| Series Details | 7.10.01 | ||||||||||||||||||||||||
| Publication Date | 07/10/2001 | ||||||||||||||||||||||||
| Content Type | News, Overview, Topic Guide | In Focus | ||||||||||||||||||||||||
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An International Air Transport Association press release issued on 25 September 2001 stated:
With many European airlines announcing redundancies and significant cuts in services and fleet sizes, both industry and policy-makers are under pressure to resolve the crisis. Background Air transport in the European Union has grown significantly over the past few decades:
However, the airline industry in Europe is financially vulnerable. In a 1999 Communication, The European airline industry: from Single Market to world-wide challenges [pdf], the Commission pointed out that 'historical evidence shows that profits are thin and volatile and the outlook of individual airlines is not secure.' This can be largely attributed to the importance of size as a factor in airline efficiency; Europe's large number of relatively small operators 'may partly explain the limited profitability of the European industry'. Whilst Europe's largest airlines are similar in size to the largest American ones, there are also a significant number of small airlines with worldwide operations. In 2000, the UK boasted the largest number of scheduled passenger airlines in the EU (22), followed by Italy (19), Germany (18) and France (15). Austria, Belgium, Greece, Ireland, the Netherlands, Portugal and Spain each had between 4 and 8. Flag-carriers Part of the economic problem lies in countries' attachment to 'flag-carriers'. In February 2001 BusinessWeek commented: 'Europe's airlines long were considered extensions of foreign ministries, responsible for flying the flag, not running a business. During the first half of the 1990s, European governments handed out $9 billion to prop up money-losing carriers from Air France to Greece's Olympic Airways.' Flag-carriers are symbols of national pride (witness Swiss reactions to the perceived damage to their country's image abroad caused by Swissair's sudden collapse). However, Europe arguably has too many such symbols: speaking in February 2001, KLM's Leo van Wijk told CNN
In a similar vein, an
Impact of the terrorist attacks of 11 September 2001 The Commission's Communication [pdf] quoted above, also includes the following passage:
The terrorist attacks in the United States were just such a major event, and the sharp drop in demand since 11 September 2001 has highlighted the precarious nature of the environment in which Europe's airlines operate. Although the last decade has seen considerable improvements in productivity, both liberalisation and globalisation have increased competition, and the sector is still relatively fragmented and financially fragile in comparison with its main North American competitors. In a recent article, CNN identified the problems facing Europe's airlines as: the collapse of major flag-carriers; consumer concern about flying; a broad recession in the aviation business; the European Commission's unwillingness to allow state aid; and overcapacity (see Which of Europe's airlines will survive?). In Survival of fittest for Euro airlines, the BBC reports that flag-carriers will fall one by one into bankruptcy, merger or takeover. The former head of Olympic Airways is quoted as forecasting that the number of flag-carriers will drop from the current 30-40 to between four and seven over the next decade. Between 50,000 and 70,000 jobs could be lost, with further losses in related industries. Europe's three biggest airlines - BA, Air France and Lufthansa - are thought likely to survive the crisis, as will low-cost carriers Ryanair and Easyjet. In addition to the problems at Sabena and Swissair (which is not an EU airline), other airlines have announced cost-cutting measures:
The Single European Sky and liberalisation Another problem hampering airlines' profitability in the EU is the fragmentation of the European market. In order to improve coordination of air traffic in the region, a number of European countries created Eurocontrol. Established in 1961, Eurocontrol is an international organisation responsible for organising cooperation between national administrations and for managing air traffic in part of the airspace of Germany, Belgium, Luxembourg and the Netherlands. There are still significant problems associated with congestion, and the European Commission has therefore proposed the creation of a 'Single European Sky'. In a 1999 Communication entitled The creation of the single European sky [pdf] the Commission states the aims of the initiative:
Both the Commission and airlines want a Single Sky as soon as possible. However, although Commissioner Loyola de Palacio declared that 'The single sky is one of the priorities for the European Commission, and I hope that now we will be able to make rapid progress', the Commission's legislative proposals must wait for agreement on the application of legislation to Gibraltar airport, and the Single Sky project is unlikely to start before 2004. Liberalisation of air transport in the EU to date has been undertaken in three stages. A series of measures adopted in December 1987 initially opened the market; the process continued in June 1990 with the adoption of a second legislative package; a third tranche of measures became operational in January 1993. Thus far, liberalisation has concentrated on air services operating within the EU. Flights between Member States and third countries are still subject to restrictive bilateral agreements, which require services between two countries to be operated by airlines that are majority owned and controlled by nationals of the countries concerned. Because the right to operate a particular route depends on a carriers nationality, there is little incentive for airlines to change ownership. It is also difficult for EU airlines to compete effectively with American carriers, as they can generally fly to third countries only from their own Member State, rather than from anywhere in the Union. For Europe's airlines to compete effectively, there is therefore a pressing need to negotiate new agreements with third countries. (In passing, it is sobering to note that, on a webpage entitled 'So far so good', the Commission's Energy and Transport DG states:
State aid State aid to airlines is rapidly becoming one of the most contentious issues in the crisis. In the early 1990s reduced demand highlighted many airlines' overcapacity, low productivity and high costs. Forced to restructure, some sought financial assistance from their governments. In response, the European Commission adopted rules aimed at ensuring that aid from governments didn't distort competition. According to the Commission's 1994 guidelines, state aid can be granted to airlines only under certain conditions. Amongst other requirements - including that a government must play no part in managing an airline - the aid:
Although seven EU airlines have been granted state aid since 1991 (Air France, Aer Lingus, Alitalia, Iberia, Olympic Airways, Sabena, TAP - Transportes Aereos Portugueses), the European Commission believes it is no longer appropriate. The assistance given to Sabena and Swissair by their respective governments, coupled with the United States' decision to make available some $15bn worth of financial support to airlines, has put additional pressure on the European Commission to approve similar support throughout Europe. The Irish government has announced that it is prepared to save Aer Lingus, which has lost 80% of its transatlantic traffic. A spokesman for the Irish general workers' union Siptu, reported in The Independent said it is 'inevitable' that the EU will decide to grant aid: 'The EU might be beginning to accept the fact that if they don't put aid into airlines in Europe, particularly in the transatlantic areas, whenever there's a pick-up in the aviation industry the only airlines left flying will be the American airlines.' The Chief Executive of Ryanair, quoted in the same article, also seems to believe that state aid will be allowed. However, on 20 September 2001, Commissioner Loyola de Palacio told the Association of European Airlines that the Commission would not accept measures which would create competitive distortions between States and between airlines. She did agree, though, to consider possible compensation and said that most of the security-related costs should be borne by governments. With reference to airlines' difficulties in obtaining appropriate insurance cover, some governments have intervened to enable air services to continue operating. The UK Government, for example, is providing an indemnity for third party war and terrorism liabilities above the $50 million most insurers are now offering (see press release). Such arrangements are, however, subject to a brief series of guiding principles on intervention for insurance problems by airline companies issued at an Informal Ecofin Council on 21-22 September 2001. Other reactions to the crisis In a press release of 24 September 2001, the European Commission outlined the measures taken to tackle the growing crisis in the air transport industry. The statement outlined the various measures taken to tackle security, the current economic position of airlines, problems with insurance, and the need for a 'single sky'. The preface to the press release stated:
The Commission has established a working group to study the economic measures needed to support Europe's airlines. An initial report should be presented on 10 October 2001. Although shocking in their suddenness and severity, recent reductions in capacity and the associated redundancies are symptomatic of Europe's inability to make air travel financially viable. The Chief Executive of Europe's largest low-cost airline, Ryanair, has attacked his competitors for seeking government assistance, and has accused them of using the attacks in the United States as an excuse to cut jobs. [...] I think the industry is more reflecting what would have happened anyway', he said. The Chairman of EasyJet, a low-cost rival to Ryanair, voiced similar sentiments: 'Businesses in trouble, regardless of the cause, need to rationalise and remodel to survive not receive government handouts to keep on repeating the same mistakes.' There is little sympathy for Swissair and others in a similar position:
The Managing Director of Aviation Economics told BBC News Online 'The commercial reality is that even before 11 September 2001 those carriers' days were numbered [...] Some are financial basket cases; only a very few are not vulnerable.' Further information within European Sources Online: European Sources Online: In Focus
European Sources Online: Financial Times
Further information can be seen in these external links: Belgium: EU Presidency of the Council European Commission: DG Press and Communication
European Commission - Energy and Transport DG
Council of the European Union BBC News Online BusinessWeek CNN The Independent
10 Downing Street Association of European Airlines (AEA) Eurocontrol International Air Transport Association (IATA) Further and subsequent information on the subject of this In Focus can be found by an 'Advanced Search' in European Sources Online by inserting 'terrorism', 'air transport' etc in the keyword field. Eric Davies Following the terrorist attacks in the United States on 11 September 2001, which have led to public uncertainty about air travel, the airline industry in Europe appears to have entered a period of crisis threatening services and jobs. |
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| Subject Categories | Mobility and Transport | ||||||||||||||||||||||||
