Snail’s progress in Air France subsidy debate

Date: 11/07/1996

By Chris Johnstone

AIR France's aid dossier will drag on until at least the end of July, or even later, as top-level talks between the European Commission, the airline and the French government intensify over whether the flag carrier has qualified for a final 770-million-ecu cash injection.

The original deadline for a decision by late June has already been missed and Commission officials handling the high-profile case say further slippage from the mid-July target date now seems likely.

“We are doing this meticulously,” says one official. “Nothing is decided yet.”

Sensitivity in DGVII, the Directorate-General for transport, stems from a solid line of private airlines campaigning against the latest cash injection, a lack of manoeuvring space afforded by the Commission's legal services and memory of the loud - if somewhat predictable - attacks on the clearance of Iberia's capital injection earlier this year.

However, officials are keen to play down problems. They say Air France's overall restructuring appears on course, jobs have been cut and Commission-imposed limits on the airline's European capacity appear to have been respected, although they add that some examination of the reforms is still necessary.

The airline recently declared an operating profit of 65 million ecu for 1995-96 - the first since 1989.

No one in Brussels is contesting the favourable spin Air France is putting on a report drawn up for DGVII by UK consultants Haskins on how the airline has honoured its Commission commitments.

“It is certainly not a disastrous report,” says one source. “The report should provide a useful defence for Transport Commissioner Neil Kinnock if the Air France decision follows the same flight path as Iberia.”

One of the most explosive issues to be defused centres on accusations by Lufthansa, KLM, British Airways and SAS that Air France has blatantly breached key conditions set out when the original 3-billion-ecu cash injection was cleared in 1994.

The private airlines say the French carrier has sold cut-price tickets on a range of European routes, especially from France to Germany and Scandinavia, and has also increased its capacity beyond that laid down in the original decision.

“This summer, Air France is increasing by 113 the number of flights to Germany,” says Thomas Kropp, Lufthansa's director of EU affairs, who claims the French airline has illegally drawn on seconded aircraft and crew from subsidiary Aeropostale to boost its fleet.

The conditions set out by the Commission in clearing the 1994 aid to Air France banned the company from acquiring any new aircraft, put limits on its European capacity and fixed capacity growth at below the level of the rest of the market. It also blocked the firm from cutting its fares to below those of its rivals.

KLM and Lufthansa company chairmen have both written to Kinnock citing damage from Air France's low fares. KLM claims it has had to close its Amsterdam to Marseilles route because it no longer makes money.

However, the Commission appears sceptical of a number of the firms' dumping claims. Some of the complaints lack dates for the alleged Air France abuse while several of the dumping charges wrongly compare direct and indirect flights, say insiders.

At the same time, it is admitted that the condition that the French carrier should not exercise price-leadership on any route is impossible to police. Each route can have a dozen different fares which can change daily, weekly or monthly. One fare could suddenly become the lowest simply because of price increases by its rivals.

Air France says it is not worried about the capacity allegations and, together with the Commission, claims that seconded (known as 'wet lease') planes were left out of the 1994 conditions. “In any case, we have cut their number from 19 to 13 since 1993,” said a spokeswoman.

Lufthansa, for one, is convinced of its overall case and is threatening to launch an appeal at the European Court of Justice if the cash injection is cleared.

Legal advice, which means DGVII must take an all-or-nothing approach to the aid, is also holding up clearance.