Kinnock ready to block all new airline subsidies

Date: 15/04/1999

By Renée Cordes

THE European Commission is poised to reject all future applications for national subsidies to airlines, urging struggling carriers to form alliances or restructure to cope with mounting competition.

In a communication scheduled to be adopted by the full Commission by the end of this month, Acting Transport Commissioner Neil Kinnock will insist that government hand-outs to airlines are obsolete now the EU's air transport market has been completely liberalised.

" The Commission authorised state aid as a one-off measure to help national carriers to restructure during the transition to the liberalised single market," states his draft report. "This transition is now over and European airlines will have to continue adjustment without state aid."

Although Kinnock has repeatedly declared his opposition to allowing further state aids to the aviation industry, a written pledge by all 20 Acting Commissioners would be the most significant anti-subsidy statement since state aid guidelines for the sector were adopted five years ago.

Since 1991, the Commission has allowed subsidies totalling €10.9 billion to be paid to seven airlines in Portugal, Belgium, France, Spain, Italy, Greece and the UK, in the face of opposition from private sector competitors.

Airlines which overhauled their businesses and cut costs long ago, such as Deutsche Lufthansa, British Airways and KLM Royal Dutch Airlines, have thrived in the liberalised market. But the new Commission strategy makes it clearer than ever that latecomers to restructuring like Air France, Olympic Airways, Iberia and Alitalia will have to sink or swim without subsidies.

" Most of the big carriers have prepared for the eventual removal of this kind of support and are ready to stand on their own feet," said Thomas Koebel, an airline analyst at Frankfurt's BfG Bank AG. "But it will be difficult for several other companies."

David Henderson, spokesman for the Association of European Airlines, said it was high time the Commission viewed state aid as an anachronism.

" The last awards are just working their way through now," he said. "I do not think anyone is really seriously contemplating new ones. This is the end of a process which is essentially over."

Spain's national carrier Iberia and Greece's Olympic are currently pressing the Commission to approve new cash injections, with Madrid in particular putting pressure on Kinnock to live up to his promise to approve the second stage of an aid package for Iberia which totals €120 million.

The Acting Commissioner is also examining whether Alitalia has met the conditions he set in return for clearing €1.5 billion worth of state aid two years ago. He has to decide by June whether Alitalia's revised accord with the Italian transport ministry governing flights to non-EU destinations complies with the terms he laid down in 1997.

Kinnock will have to ensure that his conditions have been met in full following last year's embarrassing decision by the Court of First Instance to overturn the Commission's 1994 approval of aid worth €3 billion to Air France.

The new draft report also recommends that airlines should do more to bring down air fares - a key goal of the phased liberalisation of the EU's civil aviation market, which was opened up to full competition two years ago this month. The report says that although liberalisation has brought down fares, they have not fallen enough.

A recent survey by American Express found that fares in western Europe increased by between 1% and 3% over the second quarter of last year, although they were flat year-on-year.

However, it found that there was a widening gap between tourist fares, which fell by 2% over the year, and high-volume business tariffs, which remained unchanged overall but rose noticeably on Italian and British routes.