"Airlines to set a course for consolidation"

Friday, June 13, 2003

On Europe: Airlines to set a course for consolidation
By Deborah Hargreaves in London
United Kingdom - The London Financial Times


The international airline industry is one of the most heavily subsidised and
protected businesses in the western world. Even the US has cushioned its
carriers with state aid and few governments are prepared to give free rein
to the forces of competition.

However, much-needed consolidation in the sector could be on the cards after
the European Commission recently won the mandate to negotiate rights to
transatlantic flights on behalf of European Union governments.

The Commission's hard-won power comes after almost a decade of wrangling
within the EU over so-called "open skies" arrangements with the US. While
there is no EU-wide agreement, many countries have individually negotiated
treaties with Washington over transatlantic routes.

However, after the European court ruled against the bilateral arrangements
earlier this year, the Commission finally convinced national governments to
allow it to sit down at the negotiating table with the US administration.

Commission officials are heralding this development as the forerunner to
widespread consolidation in the fragmented European aviation industry. They
believe this could happen in months rather than years.

Officials' hopes are probably a trifle optimistic. There is no doubt that
Europe has too many airlines providing too much capacity that has been
growing faster than demand. But the idea of a carrier that flies the
national flag is an emotive issue that most governments will try their
utmost to protect.

An agreement between the EU and the US on transatlantic flights could pave
the way for the creation of pan-European carriers. This would improve the
dire state of profitability among the leading airlines, which are set to
make money this year, but not much.

The Commission wants to go further and is pressing for a full-scale
liberalisation of the US/EU airline industry. This extends to removal of the
restrictions on foreign ownership of carriers. Overseas investors are
allowed to own only 49 per cent of a US-based airline with 25 per cent
voting rights.

Brussels officials are even gunning for the US to abandon its Fly America
policy that means government employees must use only national carriers.

The US, on the other hand, is not so ambitious and wants to restrict
negotiations to discussion of routes on an EU-wide basis. But even this more
limited ambition could lead to a shake-up in the EU airline business. It
would mean, for example, that airlines with a base in any EU country could
fly from there to the US rather than being restricted to transatlantic
routes from their own country.

British Airways could fly to Washington from Charles de Gaulle airport in
Paris where it currently operates some European flights, rather than just
from London's Heathrow and Gatwick.

The fact that transatlantic air traffic has been fragmented along national
lines has been a big obstacle to cross-border consolidation in the EU
airline industry. When British Airways and KLM, the Dutch carrier, tried to
merge three years ago, their plan was partly scuppered by the fact that the
Dutch airline would lose its rights to fly across the Atlantic from Schiphol
in Amsterdam, if it became classed as a UK carrier.

A pan-European open skies policy with the US would remove that obstacle to
cross-border airline consolidation. However, it would not extend to routes
elsewhere such as flights to Japan and South Africa.

The hope is that these countries will re-negotiate their own arrangements.

Open skies will also not solve one of the most intractable problems - how to
free up more capacity at Heathrow, Europe's busiest airport.

Under the UK's current understanding with the US, only four carriers - US
and American Airlines, BA and Virgin - can fly from Heathrow to the US.

Although a wider agreement would open up more routes, this would be
difficult to implement as capacity at Heathrow is already stretched.

A truly efficient European aviation industry would probably consist of only
a handful of transatlantic carriers operating as EU-wide businesses. It
would improve the bottom line for the large carriers and enable them to
compete with the low-cost operators.

However, while the EU has taken a small step in this direction, widespread
consolidation may still be some way off.

 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dc/dcboard.php

*****************************************