Monopoly board redrawn in the skies over Europe

Date: 26/09/1996

By Tim Jones

CAST your mind back a decade. Although it hardly seems credible now, European civil aviation lived under a cosy regime; cosy that is for the established flag-carrying airlines of the member states.

Until 1987, the national players on the monopoly board scratched each other's backs. Routes and capacity were planned between governments and their airlines, which were - on the whole - state-owned. They benefited from that most precious of monopoly benefits: certainty.

Fares were high and, too often, services were poor.

It was American President Jimmy Carter who put an end to this in 1978 when he opened the skies over the US to competition. Determined to follow the Americans but avoid the ferocious rivalry, job losses and predatory behaviour that ensued across the water, European politicians began deregulating their system in 1987.

Nine years later, European airlines are tottering on the edge of the unfettered market, but with many undotted 'i's and uncrossed 't's still scattered across the deregulation agenda.

It is already becoming abundantly clear, as Transport Commissioner Neil Kinnock said recently, that there will be no “big bang à l'Américaine” in Europe.

“It was highly unlikely that there was ever going to be,” he said. “Structures, relationships, ownership and markets patently were - and are - different on the two sides of the Atlantic.”

In the US, the impact of liberalisation was thunderous. During the Eighties, airlines underwent a binge of investment and indebtedness, and revenues per passenger collapsed. PanAm and Eastern Airlines disappeared, while TWA and Continental filed for 'Chapter 11' protection from their creditors. The survivors indulged in desperate measures to keep afloat and shed 150,000 jobs over five years.

European liberalisation is meant to be a much gentler beast. Politicians do not want to see those kinds of job losses and weaning them away from subsidising their flag-carriers is difficult.

Governments bailed out their airlines (Air France, TAP, Aer Lingus and Olympic Airways) to the tune of close to 6 billion ecu in 1993-94 alone, of which 3 billion ecu went to Air France.

Since then, Kinnock has allowed the Spanish state to inject another 545 million ecu into its carrier Iberia, just 30 months after it received 750 million ecu on the express condition that it ask for no more aid until the end of 1996.

While many would applaud this 'softly-softly' approach, British billionaire Richard Branson would not.

“It would be good for Europe if a carrier were to go bust,” he said this month as he launched his new Virgin Express cut-price service between Brussels and Copenhagen.

“It would free up slots and allow carriers like Virgin Express to get in and offer the kind of service people are looking for.”

This seems unlikely, however, since the political costs are so great that no government would volunteer such a collapse. What seems more probable, as full liberalisation kicks in next April, is a repositioning of Europe's weakest carriers.

If subsidies prove harder to obtain, they will have to shed non-core assets, play to their strengths and (above all) slash their wage bills.

Only when this happens will the dream of the liberalisers come true: open European skies where any airline can compete with any other under the same rules.

Ironically, however, partial liberalisation has queered the pitch for freedom of the full-blown variety. The end of domestic monopolies has seen more airlines charging into high-density routes, such as Paris-Nice and Madrid-Barcelona, to challenge the existing carrier.

As a result, profitable airlines from other member states are not interested in facing the cut-throat competition on routes where they have nothing new to offer.

Small airlines are, however, starting to identify niches in the market. With no on-board meals, ticketless reservations and basic service, they offer prices below those available from the big airlines.

But there are clouds on the horizon. Safety is now back at the top of the transport agenda following a series of horrific crashes. These have had repercussions across the world - even in Europe where the safety record is second to none - prompting Kinnock to launch an initiative to tighten safety procedures.

Costs and delays remain serious problems. Groundhandling, often a key factor when airlines are deciding whether they want to fly in and out of certain airports, has been deregulated but to a minimal extent. Air Traffic Control (ATM) systems remain fragmented across the Union, leading to delays and extra costs for carriers.

Taken together, the challenges facing the industry are enormous. A big bang may not be close, but nobody wants a whimper.