Low-cost airlines. Grounded?

Date: 31/01/04

Trouble for the market leader

RYANAIR, the most aggressive of Europe's low-cost airlines, saw its share price plunge by 30% on January 28th, following reports that the European Commission is about to clamp down on cut-price-deals which it has with relatively out-of-the-way airports keen to lure tourists. This came along with warnings that the airline's growth was slackening as its expansion collided with rising costs. It has increased capacity by 50% a year since 2001. Even so, the EU decision should not break the business model of Ryanair. At most, says Chris Avery, airline analyst at J.P. Morgan Chase, it will clip two percentage points off operating margins.

The European Commission is supposed to be promoting new jobs, competition and travel between EU countries. Deregulating internal aviation and boosting low-cost travel are, arguably, among its greatest achievements. That is why it is odd that it is poised to take a decision that will hurt Ryanair, an Irish airline whose rise has helped slash the cost of travel, and created thousands of jobs - many at under-used airports in depressed areas.

Ryanair's deal with one such airport is the source of the trouble. Charleroi, a city with a 30% jobless rate 45 minutes by road from the commission's home in Brussels, welcomed Ryanair with open arms. Too open, says the commission. Its transport directorate has all but finalised a ruling that will declare that special deals struck by Ryanair with the local government in Charleroi amount to illegal state subsidies.

These deals include a 50% reduction in landing charges and generous subsidies for training and the recruitment of staff. Some in the commission are uncomfortable with a ruling that will force the Belgian state to try to reclaim many of these “subsidies”. But they appear to be in a minority. The commission will probably approve the ruling next week.

The commission is being tough, not least because it is a legalistic organisation that feels that it must be seen to uphold EU law - however perverse the results. Even so, it is not exactly unheard-of for political considerations to influence a decision on illegal state-aid.

Last year, the commission was soft in its treatment of Alstom, a huge French engineering group, following French government pressure. Ryanair lacks such political clout, however. And although Michael O'Leary, the airline's boss, can wow the press, he does not always do so to good effect. The commission reacts badly to being bad-mouthed in public.

Is there any better way to resolve this issue? One proposal, which would greatly reduce the chances of any state subsidy distorting the market, would be to privatise Europe's many publicly-owned airports. Such a solution, alas, is almost certainly a flight of fancy.

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