B Explanatory
memorandum by Mr Breen, rapporteur
1 Background
1. Air transport directly accounts for about 2.5% of
European Union GDP, maintains over 3 million jobs, and contributes
more than €30 billion to the region’s trade balance. The sector’s
indirect impact is even greater: according to the Association of
European Airlines (AEA), it supports around 8% of Europe’s GDP.
Based on projected growth, air transport could contribute an additional
1.8% of GDP over the next twenty years, equivalent to €200 billion
annually. In fact, as European integration has progressed, it has
become clearer than ever that efficient air connections boost productivity
and employment, help to attract investment and act as a spur to
innovative, high-value development and growth. The airline industry
is thus one of Europe’s most valuable assets, its structure and
network built up over a long period of growth, but now subject to
many challenges.
2. In the most challenging economic period of modern times, the
industry is naturally under severe pressure. This report will examine
the extent of the downturn and the strategies being adopted in response.
In addition, the industry faces a multitude of further operational
and policy challenges, some of which are global and some specific
to Europe, and which the report will also outline. It should be
noted that the report focuses on the air transport industry rather
than on the aircraft manufacturing industry, although they both
form part of the same value chain. The latter is of course complex
enough to provide the subject of a separate report.
3. The rapporteur would like to thank all those who gave their
precious time to provide their valuable insights into the present
condition of the European airline industry, including the Chief
Executive Officers of Ryanair, Mr Michael O’Leary, and of Air France/KLM,
Mr Pierre-Henri Gourgeon, and the staff of the European Civil Aviation
Conference (ECAC), set up in 1955 as a result of a Parliamentary
Assembly initiative and today comprising 44 member states – all
the members of the Council of Europe except Andorra, Liechtenstein
and the Russian Federation.
2 Introduction:
the shape of European aviation
4. In recent years, as the global airline industry has
expanded, differing regional approaches to regulation and competition
have developed. In Europe, a single market was established for aviation
in 1992, which now encompasses the 27 members of the European Union,
plus Iceland, Norway and Switzerland. This process has brought profound
changes, boosting the industry’s size and at the same time reshaping
it, bringing new opportunities and challenges. It has also brought
a unified approach to aviation standards and safety, with all airlines
obliged to register in a place where they do a substantial part
of their business, and to comply with national, European Union and
international standards. This compliance is audited and checked
by the European Aviation Safety Agency (EASA).
5. In general, airline deregulation has encouraged trade and
economic growth, while offering increased choice and lower prices
for consumers, especially through the growth of “low-cost”, point-to-point
airlines. More than 60 low-cost operators have been launched in
Europe over the last decade, pioneering the use of direct web-based
sales, based upon a “Days to Go” price curve and ancillary charging,
while often serving smaller destinations, adopting off-peak schedules
and using secondary airports.
6. Today, there is a low-cost airline choice on 30% of European
routes, rather less than in the United States but much more than
in Asia. While vulnerable to cash-flow difficulties, several – in
particular Ryanair and EasyJet – have been successful by pursuing
aggressive expansion. Their profitability lies in cutting out intermediaries
such as travel agents, achieving high load factors that improve
efficiency and in carrying fewer associated costs; excluding fuel,
their costs per passenger are around half that of traditional airlines.
As a result, Ryanair – which is now Europe’s biggest short-haul
airline – and EasyJet have the strongest balance sheets of any carriers
in Europe today.
7. As the low-cost segment has expanded, Europe’s traditional
network operators have been forced to cut their own costs, improve
efficiency and lower short-haul prices. Moreover, they have sought
to redefine themselves by focusing on the more profitable aspects
– long-haul flights, premium business travel and freight – so far
unaddressed by low-cost operators. In a booming world economy and
with the industry growing at 6% annually, this worked well. With
buoyant credit markets, they were able to raise funds for investment.
And once established as stand-alone businesses, airlines have undertaken
a wave of takeovers and mergers – most significantly, between Air
France and KLM – and cross-shareholdings, with Lufthansa and SAS
particularly active in taking stakes in smaller airlines. British
Airways and Iberia have merged to form Europe’s third largest airline.
Ryanair even took a stake in a network carrier, Aer Lingus, as part
of a takeover attempt. In addition, carriers have made joint training
and servicing agreements and many have signed up to network alliances,
in particular Oneworld, Star Alliance and Skyteam, to obtain a wider
marketing presence and global routings.
8. With the industry in Europe consistently growing at between
5% and 6%, this pattern allowed carriers of all types to achieve
big profits. Ryanair and EasyJet recorded profits of €451 million
and £201 million respectively in 2007, while Lufthansa, British
Airways and Air France made operating profits in excess of €1 billion.
Indeed, by 2007 the international airline industry as a whole had
more than recovered from the shock of September 2001, achieving
net profits of nearly US$13 billion, and with passenger and freight
revenues up by around 50% since the year 2000. Despite rising oil
prices, this buoyancy continued into 2008; but the prolonged financial
crisis, which triggered a sudden collapse in consumer confidence,
brought about the most severe recession encountered in the era of
globalisation, unprecedented in scale and speed. Given its sensitivity
to international trade, the airline industry was immediately affected.
3 The impact of the
economic crisis
9. In the final quarter of 2008, airlines scrambled
to revise their business models and reduce capacity. Cuts were sharpest
in Asia, where the early effects of the crisis were most severe,
and on American domestic routes, with reductions in excess of 10%.
In Europe, however, where the slot regulations in force hindered
the adjustment of carrying capacity,
Note demand fell substantially faster than
supply. And while overall passenger traffic was somewhat bolstered
by pre-bookings, premium business traffic declined by around 40%
in the space of a few months and cargo volumes fell by more than
22% in December 2008 alone.
10. According to the most recent estimate of the International
Air Transport Association (IATA), published in March 2010, airlines
lost some US$15.9 billion in 2008. And while European carriers were
the least financially impacted in that year, they fared the worst
of any region in 2009, with losses reaching US$3.8 billion, out
of a global total of US$9.4 billion, and US$2.2 billion net loss
in 2010 out of a global total of US$2.8 billion. Amongst the key
reasons for the poor performance of European carriers, IATA cite
their exposure to the decline in premium long-haul travel, the delays
in reducing capacity, and the slow economic recovery in the region.
11. Nevertheless, IATA reports that a rebound in international
traffic has been evident since the end of 2009. Cargo volumes –
seen as a “leading indicator” of economic growth – which fell by
1.2% in 2008 and 11.1% in 2009, were expected to grow by some 12%
in 2010, although in December 2009 they were still expected to end
the year below their 2007 levels. Following a decline of 2.9% in
passenger traffic in 2009, IATA forecasts growth of 5.6% in 2010,
bringing passenger numbers almost back to their 2007 level. However,
for 2009 as a whole, airline revenues remained 15% lower than in
2008, business travel (which accounts for less than 10% of the airline
industry’s passengers but is often up to 30% of its receipts) down
by some 17% and overall yields per passenger kilometre down by 14%.
12. Unfortunately for Europe (and North America), these improvements
are largely centred on Asia and Latin America, whose emerging markets
are driving the global economic recovery and whose airlines are
benefiting accordingly. As IATA Director General and CEO Giovanni
Bisignani puts it: “We are seeing a definite two-speed industry.
Asia and Latin America are driving the recovery. The weakest international
markets are North Atlantic and intra-Europe which have continuously
contracted since mid-2008”.
Note Indeed, among
the “network carriers”, mostly national airlines, represented by
the AEA, passenger boardings were down by 5.8% in 2009 over the
previous year. This represents a loss of around 20 million passengers
surpassing by far the 14 million traffic loss recorded in 2002 in
the aftermath of 11 September.
13. The AEA Secretary General, Ulrich Schulte-Strathaus, commented
in December 2009 that “2009 has been a disastrous year for European
airlines, but the traffic and capacity figures tell less than half
the story. The real damage has been inflicted by the collapse in
revenues, to which falling ticket prices, particularly in the premium-travel
segment, have contributed far more than depressed traffic levels.
The marginal traffic increases we are beginning to see will scarcely
impact our revenue base as long as yields continue to wallow around
15% below last year’s levels. The only effective source of relief
is in mitigating costs and a number of service providers are already
putting up their tariffs for next year, knowing that the airlines
have no alternative but to pay. The political will to encourage
airlines to continue to deal with temporary overcapacity in the
market, through slot flexibility, seems to be lacking”.
Note In February 2010 he added: “We
have seen, quite clearly, that airlines and their passengers cannot
sustainably be treated as a cash cow by national treasuries, to
be taxed and taxed again. This lesson … must be taken on board by
our regulators. We have adapted, in the face of the downturn. There
has been an increase in the tempo of the consolidation process.
The importance of economies of scale, of coherent networks and optimised
fleet structures, has been re-emphasised. For niche markets, the key
is a consistency of service, tailored to the specificities of the
market. We understand these priorities; it is important for our
regulators to understand them too”.
Note
14. From a global perspective, IATA reports “a much stronger recovery
in demand seen by year-end gains that continued into the first months
of 2010. Relatively flat capacity translated into some yield improvement
and stronger revenues”. However, IATA has warned that some 1 300
new aircraft are due for delivery to airlines in 2010, raising capacity
by 2.8% and maintaining downward pressure on fares. In March 2010,
the chief executive of Air France/KLM revealed that the airline
had still not reached break-even point, but that he expected the
airline to return to profitability in the spring of 2011.
15. Unfortunately the prospects for recovery will not have been
helped by the disruption of air traffic caused by the volcanic eruption
in Iceland, resulting in huge economic losses in general and for
the airlines in particular. IATA’s initial (and “conservative”)
estimate of the financial impact on airlines is in excess of US$200 million
per day in lost revenues. In addition to lost revenues, airlines
will incur added costs for re-routing of aircraft, care for stranded
passengers and stranded aircraft at various airports.
Note The rapporteur considers that national
and international civil aviation authorities should better co-ordinate
emergency responses to such events in future.
4 How the crisis
is reshaping the industry
16. Although long-term forecasts for aviation growth
remain bullish, the nearer-term view is therefore still relatively
gloomy, at least as far as Europe and North America are concerned.
Moreover, the industry faces a host of associated challenges, in
particular the cost of fuel and access to credit. As the Chairman
of the AEA, Ivan Misetic, put it, “this is not a cyclical feature
in an industry which is used to business cycles. It is a structural upheaval,
and we must adapt structurally”.
Note
17. In winter 2008-09, low-cost airlines with strong cash positions
responded aggressively with drastic fare cuts, and the offer of
“free” seats. Indeed Ryanair, which now achieves 20% of its revenue
from ancillary charges, expected to increase traffic by 10% in 2009,
and continued to launch €1, €5 and “free” seat offers throughout
that summer and into the autumn. At the same time, it continues
to find creative ways to cut costs and raise charges, with measures
such as the abolition of free airport check-in. Despite recording
its first net loss since flotation, due to hedging costs and the
declining value of its Aer Lingus stake, it still has underlying profitability
and still plans to double passenger numbers and profits between
2007 and 2012. EasyJet, whose passenger volumes rose 2.9% over the
winter 2008-09, also hopes to remain in profit for the year. Recently, both
carriers have taken advantage of their operational flexibility to
reduce routes and frequencies, and continued to update their fleets,
so that they seem well positioned for the future. Alongside its
interest in Aer Lingus, Ryanair has even suggested that it plans
to start a long-haul airline of its own. All the same, in a sign of
the sector's difficulties, even Ryanair had third quarter year-on-year
losses of €101.5 million in 2008 and €10.9 million in 2009. It recently
called off negotiations for a major new aircraft order from Boeing.
18. Network carriers have accordingly been forced to cut prices
further, despite their high fixed overheads and heavy “legacy” costs,
such as pensions. On the one hand, they see dramatic falls in premium
and long-haul traffic, while on the other they are forced to maintain
less profitable short-haul services so as to maintain their connectivity.
Meanwhile, cross-shareholdings have declined dramatically in value
to those who bought them and often represent additional demands
for cash. Therefore, at Europe’s major carriers, substantial restructuring
is under way:
- The continent’s
largest airline, Air France/KLM, which announced its first loss
since its merger six years ago, is reducing its headcount by around
3 000 and has announced a further 1 500 voluntary redundancies.
It is also deferring placed orders and is among a number of airlines
to have delayed taking delivery of the A380 superjumbo. The first
was nevertheless delivered on 30 October 2009 and is operating between
Paris and New York, substituting for normal-capacity aircraft and
thus saving on fuel and carbon emissions. Cargo capacity was cut
by 15% and passenger capacity by 5% over the winter of 2008-09,
involving a reorganisation of flights within Europe and to North
Africa and the Middle East. With business class revenues per passenger
having fallen by 27% in the first part of 2009, the airline is considering
scrapping business class altogether on short and medium-haul routes.
- At British Airways, the chief executive has spoken of
a “fight for survival”. Usually, some two thirds of BA’s profit
comes from North Atlantic routes, much of it from premium customers.
But in the last financial year, BA recorded its worst-ever loss:
£401m, £331m of which was chalked up in the first three months of
2009. By then, BA had cash reserves of less than £1.4 billion and
obtained guarantees from its pension fund and issued bonds to investors,
so as to ensure operations into 2010. During the summer of 2009
some 800 staff agreed to work for a period without pay, but some
5 000 jobs are likely to be lost this year, while working conditions
and benefits are being tightened. A major strike was only just averted in
December 2009, but following the breakdown of negotiations in March
2010 flight attendants staged intermittent walkouts. The company
was expected to report a loss of some £600 million for the year ending
31 March. BA cabin staff salaries nevertheless increased by 5% in
2009, according to the British Civil Aviation Authority. Meanwhile,
a variety of savings and charges have been introduced, including the
removal of further short-haul capacity and fees of up to US$90 for
advance seat selection.
- With its intra-European business down more than 30% in
2009 and premium traffic down 15%, Lufthansa is reported to be planning
to reduce its headcount at its parent company, which both manages
the group and operates Lufthansa jets, by 15%. Meanwhile, the airline
has been compelled by court action to take up its option to complete
the purchase of British-based BMI, but has already opened up BMI’s
books to rivals and is believed to be open to the sale of all or
part of the business. This is highly significant, given that BMI’s
original attraction to Lufthansa was its 11% share of landing slots
at Heathrow, until recently worth US$25 million each.
19. As larger airlines restructure, analysts expect that global
alliances such as Star, Oneworld and Skyteam will expand, deepen
in scope and become more meaningful. While the original focus was
on linking flight systems, frequent flyer schemes and through-ticketing,
there is an increasing emphasis on management co-operation and cross-shareholdings.
Air France/KLM now shares profits with Delta on those routes where
they carry each others’ passengers, and this sort of integration
is expected to become widespread, with greater sharing of staff
and materials, and even joint purchasing of services and aircraft.
20. Over the last year and a half, many airlines have taken the
opportunity to retire older aircraft – though it is often expensive
to phase out planes that are still being paid for. In the United
States, ironically, the advanced age of many airliners has made
capacity reduction easy; in the space of a few months, United Airlines
were able to ground nearly 100 fully-depreciated Boeing 737s. And
while some aircraft orders – placed at the height of the boom –
have been deferred, worldwide deliveries are still running at around
100 per month because of high cancellation penalties. This means
that the global airline fleet has in fact expanded during 2009 and capacity
has been cut by reducing the utilisation of each aircraft, which
increases unit costs and is a worrying sign for future profitability.
As pointed out above, this trend is set to continue in 2010.
21. To pay for these previously committed orders, it is estimated
that airlines had to raise some US$25 billion of capital in 2009.
Given the state of credit markets, new orders have unsurprisingly
fallen sharply, with up to 40% of deliveries by Airbus in 2009 being
supported by finance guaranteed by the French, German and United Kingdom
export credit agencies.
Note But there is a compelling case for
airlines to optimise the fuel efficiency of their fleets. The first
signs of economic recovery – particularly in Asia – triggered a
relatively steep rise in oil prices, the prospects for which we
will examine in the next section. Earlier in 2009, lower prices
obviously helped the industry, but not by as much as had been hoped,
and the benefit has been further limited for European carriers insofar
as the dollar, in which oil is priced, strengthened against the
euro and other currencies in the last quarter of 2008 and the first
six months of 2009. Also, because many carriers had “hedged” their
fuel costs at previously high rates, they are now carrying this
extra cost. And meanwhile, the continuing credit crunch has increased
the difficulty of servicing any debt taken on as part of fuel-price
hedging.
22. In fact, tight credit conditions pose many dangers for a debt-intensive
business such as air transport. There are obvious risks for those
with cash flow difficulties; but it is also harder to obtain finance
for restructuring, and even large United States airlines with healthy
balance sheets have found it expensive to raise debt, American Airlines
and Southwest Airlines paying up to 11% on secured debt and United
Airlines 17%. In Europe, as IATA has pointed out, the previously
strong cash position of Europe’s larger airlines has so far enabled
them to raise capital – and so long as restructuring is pursued,
there is cautious optimism that this credit-worthiness can be maintained.
In fact, the shares of major airlines have rebounded worldwide,
as investors show greater confidence in their survival.
23. But the problems for other airlines are still acute, particularly
for smaller national carriers without partners, and low-cost operators
with weak cash positions. These airlines find themselves squeezed
between the larger airlines and aggressive low-cost operators, with
little ability to raise credit and therefore unable to obtain working
finance. During the summer of 2009, the AEA protested at a decision
in principle by the European Investment Bank (EIB) to cease funding
for the airline industry, while the European Regions Airline Association
(ERA) applied, on behalf of its 65 members, for access to EIB loans,
as enjoyed by other hard-pressed industries such as car-making.
However, as EIB President, Philippe Maystadt, explained to the Assembly’s
Committee on Economic Affairs and Development on 19 March 2010,
according to its statutes, the EIB can only finance investment projects,
and not bail out industries. The EIB could, for example, finance
the research and development of new, more environmentally friendly
engines.
24. The small island national airlines such as Air Malta, Cyprus
Airways, Icelandic Airlines and Aer Lingus appear particularly vulnerable,
since they may be seen as maintaining an essential lifeline to mainland
Europe and elsewhere but are subject to seasonal variations in demand
from tourism, with strong competition from low-cost and charter
carriers. Their ability to access credit has been strongly curtailed
by the crisis. Partnerships, code-sharing, leasing out of aircraft
in low season and the development of strategic routes and hubs to
the Middle East and Asia may help alleviate their difficulties.
25. For a small island like Ireland with its export-dependent
economy, the abrupt downturn in civil aviation has had an immediate
severe impact and serious implications in the short term for connectivity
and sustainability of the country’s aviation infrastructure. In
competing directly with the largest and most successful low-cost
carrier in Europe, Ryanair, the key Irish flag carrier, Aer Lingus,
had been sustained in recent years by profitable growth of long
haul operations on North Atlantic routes. The combined effect of
the sudden jolt to traffic growth from the latter part of 2008 followed
by rising fuel costs and falling business class numbers on the primary
revenue-earning routes in 2009 has brought on the latest round of
cost cutting which the Aer Lingus management have pronounced as
essential to the sustainability of the carrier. The extent of the
adjustments required to bring the airline to competitive fitness
is underscored by Aer Lingus initiatives to restore a hub operation
in the United Kingdom, to reactivate proposals for opening a transatlantic
base in the United States, and recruitment there of lower-cost in-flight
crews.
26. Already some operators, such as Sterling, Zoom and FlyLAL,
have ceased flying, while others have been sold or merged. In a
flurry of recent deals, Olympic has been sold to an investment group,
Air France/KLM has taken a 25% stake in Alitalia, which had already
been partially sold and partially merged with Air One, and both BMI
and Brussels Airlines have been taken over by Lufthansa. At one
stage in winter 2008-09, there were rumours that Lufthansa would
also take over SAS, as it struggled to divest itself of its subsidiary,
Spanair (in which it now holds only a minority stake). Globally
in 2009, according to IATA, 30 airlines went bankrupt, 14 of which
have disappeared
27. Further consolidation in the industry seems inevitable, with
some predicting that Europe will eventually have only two or three
major network carriers and a handful of low-cost operators. While
painful and disruptive in the short term, this consolidation has
the potential to create a more robust and prosperous industry in
Europe after the current crisis, so long as route coverage and competition
are maintained. But in developing their forward strategies, airlines
face a number of operational and policy challenges that affect their
business model. We will now look at some of the most important,
beginning with the environmental impact questions the industry faces,
and particularly its dependence on fossil fuels.
5 Operational challenges
faced by Europe airlines
5.1 Environmental challenges
28. There is no doubt that aviation poses a number of
environmental challenges, especially in a continent with a high
density of population such as Europe. Substantial progress has been
made to reduce noise levels, with modern aircraft around 75% quieter
than the first jet planes, a reduction of around 20 decibels. More
work is being undertaken, especially with the increasing frequency
of flights expected in future at major airports. Current European
efforts should reduce noise by a further 6 decibels by 2010, and
10 decibels more by 2020.
29. Understandably, the expansion of airports, though sometimes
necessary to meet higher traffic levels and accommodate larger aircraft,
is unpopular and requires great sensitivity. Given this, a public
commitment to improving management techniques and technology, and
a clear track record of success in reducing local impacts, is essential.
It is worth noting that such questions are playing a part in shaping
Europe’s aviation industry today, with recent capacity increases
at the hubs of Star Alliance and Skyteam in continental Europe giving
these alliances an advantage over the Oneworld group, whose main
regional hub is the capacity-constrained Heathrow, where government
plans for a third runway have been set back by a judge’s order for a
new inquiry into its impact on traffic congestion and climate change.
30. Indeed the most fundamental issue is greenhouse gas emissions.
In 2003, flights departing from the EU’s then 25 member states accounted
for 3.4% of their total CO2 emissions, according
to the AEA. Given the industry’s previous and projected growth,
addressing this is a major goal. With improvements in materials, technology,
handling and route-planning, modern aircraft are as much as 70%
more efficient than thirty years ago and each new generation of
aircraft represents an improvement of 15% to 20%. So the current
surge in the retirement of old planes should have a strong positive
effect.
31. In addition, airlines are changing operational techniques
to reduce fuel usage at airports and reducing superfluous weight
carried by aircraft. To develop new technologies, European airlines
are working with governments and manufacturers, committing up to
14% of their turnover to assess the potential of ideas such as alternative
fuels, which was recently trialled by Virgin Atlantic. There are
several joint programmes under way to organise research, in particular
the “Clean Sky” initiative, one of the largest European research
projects ever created. With a budget estimated at €1.6 billion,
shared between the European Commission and the industry, it is intended
to speed up breakthrough technologies and their implementation over
a five year period.
Note
32. Although aviation emissions were not specifically addressed
at the Copenhagen Conference on Climate Change in December 2009,
IATA members had already put forward a set of industry proposals
at the UN climate change summit in September, including commitments
to improve fuel efficiency by an average of 1.5% annually to 2020,
and to stabilise carbon emissions with carbon-neutral growth from
2020, so as to cut overall industry carbon emissions by 50% by 2050,
compared to 2005 levels. This is to be achieved by the new-generation
aircraft and technical innovation just described, plus improved
operations management and flying techniques. It will also be spurred
by the introduction of global emissions trading, which IATA embraces,
though it expects this will add around US$5 billion a year to costs
and it may have perverse effects such as encouraging airlines to
fly to Asia via Middle East hubs (see paragraph 61).
33. In addition, IATA is looking to the development of algae-based
fuels as a substitute for today’s kerosene-based ones – which they
believe could eventually reduce carbon emissions by up to 80%. Several
test flights have taken place using such bio-fuels, and their certification
for aviation is expected in 2010, which should lead to a rapid increase
in use. Of course, there are still issues to resolve surrounding
sustainable bio-fuel production, and questions over how effective
such fuels will really turn out to be, but the effort is surely
worth making. Tackling airline emissions is not only the right environmental
choice, it is also a win-win commercially, with the industry’s reliance
on expensive, finite, high-intensity crude oil being its greatest
long-term challenge.
34. Following the inconclusive outcome of the Copenhagen conference
on the issue of aviation’s contribution to global warming, the AEA
confirmed that its members remained firmly committed to a powerful and
meaningful programme to halve the industry’s carbon footprint on
a global scale. “The airline sector went to Copenhagen with a clear
vision of halving current CO2 emission levels
by 2050”, said the AEA Secretary General, “with interim targets
for consistent emissions efficiency improvements in the short term
and carbon-neutral growth from 2020. An intensive development programme
for new technology aircraft, engines and fuels, backed by market-based
measures, has put aviation ahead of any other emitting sectors in
making genuine commitments to powerful and meaningful targets”.
The airlines, he said, would continue to press for a Global Sectoral
Approach for aviation and seek to arrive at the same political consensus
within the International Civil Aviation Association (ICAO) as they
had achieved within IATA.
Note
35. In this regard, the AEA highlights the European Union’s planned
inclusion of aviation in its regional emissions trading scheme by
2012, which it believes will cost airlines up to €7 billion, and
points to the external competitive pressures faced by the industry,
which we will look at in section 6. It suggests that rather than implementing
this scheme unilaterally, Europe should lead calls for a global
carbon “cap and trade” system in the framework of the ongoing international
negotiations on climate change, and seek to incorporate the European
scheme within it. This is in line with the proposals made by IATA.
5.2 Fuel costs
36. In the first part of 2008, soaring oil prices had
driven fuel costs up from around 20% of an airline’s budget to around
35%. By the end of the year, oil had fallen back sharply, trading
at around US$40. By the end of 2009, however, the price had recovered
to just under US$80 and IATA’s most recent financial projections
have assumed a US$79 average price for 2010, up considerably from
the US$62 average for 2009. Given that each extra dollar on the
oil price adds US$1.6 billion to costs, the cash pressures on airlines
are likely to be intense, forcing them to try to push up fares or
increase charges.
37. Furthermore, there are predictions that, driven by growth
in emerging economies, prices could exceed last year’s levels once
economic recovery is attained. Many forecasters suggest that this
pattern, with periods of high prices interspersed by periods of
extreme volatility, will become routine as demand increases and reserves
appear to decline. At the least, the increasing volatility and uncertainty
of oil prices is a huge management challenge, with the inability
to predict its price being potentially more detrimental than the
price itself.
38. Fuel price hedging has recently become a popular “insurance
policy” against rising prices, but experience in 2009 highlights
the risks involved. Iberia, for instance, overspent by €118 million
on fuel, due to hedging arrangements set up in 2008, and both Ryanair
and EasyJet have been similarly impacted. At Air France, losses
arising from hedging will continue into 2010, and the company is
not currently undertaking any hedging operations. Moreover, as previously
suggested, not only is hedging risky, but continuing weakness in the
credit markets makes it difficult to do.
39. Despite the airlines’ emphasis on fuel economy, not all of
what can be done is within their control. In Europe, flight diversions
and capacity delays are estimated to cause up to 18% of emissions,
and the poor co-ordination of air traffic control accounts for up
to another 7%. Improvements in these fields formed part of the climate
change proposals made to the UN conference. We will now look at
steps being taken to address these issues, along with other developments
in Europe’s regulatory framework.
5.3 Regulation and
infrastructure
40. It is not only the airline industry that will need
to adapt to new circumstances, but also the institutional and regulatory
environment and the physical infrastructure they rely on. Although
the airlines themselves now form a single market, the context in
which they operate has remained in some cases fragmented, inefficient and
unaccountable. The industry therefore welcomes a series of initiatives
under way that should improve their prospects, and has some further
recommendations to make.
41. The industry has long been concerned by the waste and duplication
involved in having some 60 air traffic control areas operating across
Europe. Therefore, it warmly welcomed the launch of the “Single
European Sky” in 2004 and its revised version adopted by the EU
Council on 7 September 2009, which will reduce these to 9 “functional
airspace blocks”, with co-ordinated planning and agreed performance
targets. This should help to ensure that flights get the clearances,
routes and altitudes they request, which will improve punctuality
and reduce fuel consumption. It should also replace monopoly pricing
with an independently agreed charging system, though airlines regret
that this will not begin until 2012. For as traffic levels have
dropped, various air traffic control authorities across Europe have
compensated by raising their charges. Early in October, for example,
the Polish navigation service announced increases of 32% for flights
across Poland, and 62% for flights using Polish airports.
Note
42. With the European Union expecting that air traffic in Europe
could double over the next fifteen years, an increasingly harmonised
approach to air safety issues is clearly desirable. Following an
agreement reached in March 2009, the European Air Safety Agency
(EASA) is set to increase its role, becoming the “one-stop-shop” of
safety strategy. From 2012, it will assume responsibility for the
rules governing the European Union's air traffic management and
navigation services, and from 2013, it will also oversee airport
safety procedures. The aim is to have a focused, comprehensive approach
to safety management and to overcome regulatory gaps and duplications
by means of a single certification process. In due course, EASA
will also assume the current functions of Eurocontrol, which will
in turn become operationally responsible for implementing the “Single
Sky”.
43. The AEA, which supported the creation of EASA, has welcomed
the extension of its responsibilities. However, it has warned against
any tendency by EASA to “reinvent the wheel”, pointing out that
many previous safety agreements work perfectly well and do not necessarily
need to be redrafted from scratch. It also suggests that EASA has
become a particular target for lobbying by the unions, and cites
recommendations arising from a recent study on flight time limitations
for aircrew, which could, for instance, result in two co-pilots being
required rather than one in some cases. The current recommendations
have the support of bodies such as the International Federation
of Airline Pilot's Associations and the Flight Safety Foundation,
although airlines suggest that some long-haul routes could be rendered
uneconomic. In France, for example, the airline trade body suggests
that up to 25% more pilots might be needed, without any quantifiable
increase in safety standards. EASA, though, maintains that operational
details will require resolution between the unions and airlines
themselves, and points out that its own draft proposals have still
to be issued. It expects a blueprint for new rules to be ready by
mid-2011, following public consultation, so as to be implemented
in 2012.
44. Fees and charges levied by individual airports are an increasingly
important issue, especially for network carriers. While low-cost
airlines can negotiate on the basis that they can move, or suspend
their flights – which several have done – the network carriers tend
to be tied to specific, major airports. Some of these have responded
to reduced business by insisting on higher fees. Frankfurt, for
example, announced increases taking effect from January 2010, although
these were deferred to later in the year on account of the difficult
financial situation faced by the airlines. For their part, the airlines
have welcomed an EU directive that will force transparency on such
charges and will subject them to the scrutiny of an independent
regulator, while expressing disappointment that the directive is
not due to come into force for two years.
Note
45. Under the long-standing “use it or lose it” rule, airlines
have been unwilling to reduce flight frequencies during the downturn,
in case they lose that particular airport slot altogether. For the
2009 summer season, the rule was suspended by the European Commission;
and although bodies such as IATA feel that the continent’s carriers
were damaged by the lateness of the decision, it all the same enabled
some reduction in capacity. No decision was made to continue the
waiver for the winter season, a move for which the airlines urgently
pressed. This lack of flexibility in planning ahead and responding
to markets represents a competitive disadvantage for European operators
over those in other regions, such as Asia, which were able to curb
capacity rapidly during the downturn, and are now expanding again.
46. As was pointed out at the ECAC Plenary Session in Strasbourg
in July 2009, it is vital that Europe can also successfully plan
for long-term expansion. Given future projections for global air
travel, the need for more capacity will be unavoidable, if gridlock,
inefficiency and a loss of competitiveness are to be prevented.
ECAC members underlined that in many states, the complexity and
slowness of the planning system presented at least as much difficulty
as the raising of capital for new projects. Much depends, in their
view, on being able to identify and make use of spare capacity in
the system, and innovations such as Single Sky will also make a noticeable
difference, but there nevertheless remains a need for new infrastructure.
This includes additional airport and transit facilities, as well
as investment in navigation and control technology. ECAC emphasised
the need for European authorities to think through the consequences
of this, and to factor these into their regulatory approaches, given
the lead times commonly involved in such projects, so as to meet
future capacity needs.
47. Although some contest this, many in the industry feel that
air travel attracts both too much taxation, and is the subject of
too many individual tax initiatives. The AEA points out that air
transport entirely finances its own infrastructure costs via taxes
and charges levied, and is frequently a net financial contributor
to states, unlike other forms of mass transit. In the case of Germany,
it suggests that air transport pays back around €10 per 1 000 km
travelled, while rail requires a net public subsidy of €50 per 1 000
km. It has therefore been vociferous in opposing additional passenger
taxes; over the last couple of years, such taxes have been withdrawn
in Denmark, the Netherlands and Malta, while a planned tax in Belgium
was shelved.
48. However, there is now pressure on governments to find revenue
to pay for the national stimulus packages introduced to alleviate
the crisis. In Ireland, the introduction of a €10 air travel tax
has been the subject of much debate since it was introduced in December
2008 in response to the country’s worsening financial situation.
Three airlines, Ryanair, Aer Lingus and CityJet, issued a joint
statement protesting against the tax. The Irish Government’s Tourism
Renewal Group has urged the minister for tourism to abolish the
tax, claiming that the departure tax has damaged competitiveness.
The impact of the tax has been felt very much at Shannon Airport,
with Delta Airlines, US Airways and CityJet already ending their
services from the airport. Ryanair also has plans to pull 75% of
their routes from Shannon Airport, citing the travel tax as the
main reason for their decision. This comes at a bad time since,
by agreement between Ireland and the United States, Shannon is the
only European airport that now provides full US Customs and Border
Protection pre-clearance facilities for transatlantic flights to
US destinations. A second station is scheduled to open at Dublin
Airport towards the end of 2010.
49. It has to be said that the subject of competition between
airports, in particular regional airports, in seeking to attract
airlines has been fraught with controversy, with airlines and airports
involved in mutual recrimination. For example, Air France has complained
to the European Commission that Ryanair flouts competition rules
by receiving "subsidies" from at least 25 French regional airports
in return for agreement to service them. Such "subsidies" can take
the form of fee reductions, marketing aids or other preferential
treatment. Ryanair points out that such reductions are perfectly
legal according to the European Court of Justice and are based on increase
in traffic frequency. Such problems have beset Strasbourg Entzheim
International Airport. Passengers wishing to travel to and from
this hub of European activity were particularly disappointed when,
as a result of an Air France complaint that Ryanair was receiving
favoured treatment from the airport, the low-cost airline decided,
allegedly in response to inducements, to move its operation to Baden-Baden.
This included its popular London connection set up in competition
with Air France. Air France, having thus succeeded in ridding itself
of its direct competitor, has since ceased its direct flights between
Strasbourg and London. Such manoeuvres can only be described as
an abuse of the monopoly position of a major European airline, harmful to
passengers and to European competition and efficiency of air transport.
The question also remains whether Europe's largest low-cost airline
is not abusing its position in seeking favoured treatment from European regional
airports at the expense of the established carriers.
50. Overall, industry bodies are calling for the rapid implementation
of European Union legislation, and a carefully considered approach
that maintains competitiveness, efficiency and flexibility. As the
AEA’s Chairman described to the European Union Transport Commissioner
in a meeting in summer 2009, “The airlines want to manage their
own way out of the crisis, and that means removing barriers and
creating pathways back to prosperity”.
Note
51. Nevertheless, the European Union institutions have not been
deaf to the plight of the air transport industry. Thus on 17 December
2009 the European Economic and Social Council published an opinion
“on the European aviation relief programme”, calling attention to
the effects of the crisis at all steps of the value chain.
6 Emerging threats
and opportunities for European airlines
52. The airline industry has become increasingly competitive,
both within regions and inter-continentally, and also faces competition
from other travel providers. Several of these competitive trends
are worth examining in more detail, since they have a direct bearing
on the industry’s position in Europe.
53. Within the continent, airlines face an increasing challenge
from long-distance, high-speed rail services. These are generally
part of state-subsidised networks, where the infrastructure is at
least partly paid for, and no additional taxes apply to travellers.
They can therefore offer reasonable fares and are understandably popular,
especially given their image of being “environmentally friendly”.
The AEA points out that short-haul air travel can be competitive
with rail in carbon terms, particularly when the local source of
power generation relies on fossil fuels, and suggests that efforts
to improve mass transit arrangements to and from airports would improve
this still further. All the same, the success of high-speed rail
seems assured, and this will force airlines to abandon some short-haul
routes, to maintain them as connection services, or – as Air France
is considering – to operate rail connection services of their own.
In any case, the expansion of high-speed rail will further add pressure
on airline profitability, as Iberia has found in the case of the
new Madrid-Barcelona line. Thus while it is true that high-speed
rail threatens to undermine air travel, it also represents an opportunity
for combined air-rail solutions, such as reaching Strasbourg via
Roissy-Charles de Gaulle airport and then onwards from the TGV rail
station.
54. Although it seems that public resistance to full body scanners
now in use and planned at many airports may not be as high as expected,
in particular after the attempted bombing of a transatlantic Northwest
Airlines flight on Christmas Day 2009, questions are certainly being
asked about the human rights, health, and cost-benefit implications.
As the United Kingdom Equality and Human Rights Commission has pointed
out, their use may infringe discrimination law if specific or vulnerable
groups are singled out, and may contravene passengers' right to
privacy under the Human Rights Act. Moreover, doctors are apparently
particularly concerned to know what passengers undergoing such scans
are being exposed to and what the effects of such exposure might
be. In economic terms, the cost of full body scanners is very high,
in regard to both purchase price and maintenance. European airlines
and their passengers will be particularly concerned by the fact
that in Europe such security-related costs are passed on to passengers,
whereas in the United States security costs are borne by government.
This represents a further distortion of competition.
55. European airlines still face many restrictions on their operations
outside Europe and particularly in the United States. Although the
United States market has been deregulated for domestic carriers,
barriers are still in place for foreign operators, and the continuing
lack of a level playing field in EU/US aviation represents a particular
threat to Europe’s liberalised industry. After years of negotiation,
a first-stage “open skies” agreement was signed in 2007, ending
the artificial constraints on transatlantic slots, and this is credited
with expanding traffic by 8%. But while United States carriers are
now allowed to operate intra-EU flights, European airlines are not
permitted to operate intra-US flights. And foreign ownership of
United States carriers is still restricted to 25%, even though American
firms can take up to 49% of European airlines.
56. The European Commission and the region’s airlines are united
in seeking further progress, so that open skies can be fully achieved,
and so that the United States market becomes as accessible to Europeans
as the European market is to them. In March 2010 it was announced
that the United States-Europe agreement had now been expanded to
include more co-operation on security, safety and competition, providing
also greater protection for United States airlines from local restrictions
on night flights at European airports and including a provision
on the importance of high labour standards in the airline industry.
The terms of the 2007 agreement were confirmed indefinitely. However,
the revised agreement does nothing to change existing limitations
on foreign participation in ownership of United States airlines.
The rapporteur believes that the European Commission should immediately
step up its efforts to ensure that European and United States airlines
compete on equal terms. European airlines should have the same access
to the United States market as American airlines enjoy in Europe,
notably in terms of investment and landing rights.
57. Restrictions on cross-ownership and other regulatory hurdles
have done much to determine the loose nature of today’s global airline
alliances, as airlines do what they can to improve connectivity.
And this trend, as one analyst has described it, of “moving from
domestic efficiencies to global efficiencies”, is still restrained, with
American Airlines, for instance, having now waited more than a year
for federal approval of a flight-sharing agreement with British
Airways and Iberia. But an interesting example of the potential
that exists is Lufthansa’s 2008 acquisition of a 19% stake in the
United States domestic low-cost carrier Jetblue: as part of the relationship,
Lufthansa pilots are trained on smaller aircraft in the United States,
while Lufthansa has helped Jetblue to establish a cargo operation.
And in August 2009, the carriers signed a flight-sharing agreement
that will cover 180 Lufthansa destinations worldwide and 12 JetBlue
cities in the United States and Puerto Rico.
58. In recent years, there has been substantial investment in
aviation capacity in the Middle East, particularly in the Gulf.
Indeed, this has been the only region in the world to continue to
register strong growth in airline traffic during the recession.
Without the constraints of planning laws and environmental restrictions,
with substantial state investment and with strong partnerships in
place between airlines and airport operators, several important
new hubs have been established enjoying high load factors, so that
the Middle East now accounts for more ex-region intercontinental
connections than Europe. This traffic is likely to continue rapid growth
in future years, helped by the introduction of larger aircraft,
and a much lower charging and tax base than is available at European
airports. Europe therefore risks an accelerating loss in share of
its premium intercontinental traffic.
59. Under the terms of Europe’s emissions trading scheme, a carrier
will incur a lower charge by flying from Europe to Asia via the
Gulf, despite the increased emissions involved, because the second
leg of the journey will be exempt from European Union charges. Similarly,
a carrier linking New York and Bombay will avoid all charges by
transiting in Dubai rather than Europe, despite the extra emissions.
On top of this, the additional distance-cost incurred by the airline
will be offset by the fact that fuel is substantially cheaper in
the Gulf than in Europe. There will therefore be an incentive for
European services to use the Middle East as a hub point, and for
extra-European services to avoid Europe altogether, creating a considerable
competitive disadvantage for European carriers and for European
business in general. Airline capacity is likely to shift more quickly toward
the Middle East, encouraging multinational enterprises to choose
the region as their operating base.
60. This development underlines the expansion and rebalancing
of the intercontinental travel market, which is likely to be even
more striking as recovery takes hold, and which Europe will need
to address if its airlines are to remain world leaders and the continent
is to retain its place as a key global hub.
61. The threats and opportunities outlined here point the way
to aviation’s future. Competition will of course be a key element,
with emerging economies playing an ever greater role in driving,
and hosting, international traffic; consolidation will also be a
priority, with airlines needing to join forces to tackle the challenges
they face and become more efficient. And international co-operation
will therefore be increasingly important in managing the expansion
of this complex industry, while guaranteeing safety and spreading
best practice. In late 2008, ECAC signed a Joint Work Programme
with the Arab Civil Air Commission, including provisions for economic information
exchange and joint workshops. Similar agreements have since been
drafted for signature with the civil aviation authorities in Latin
America and Africa, and this must be seen as an important step in
planning for the growth of an industry which, while extremely vulnerable
to economic shocks, is vital for economic development.
7 Conclusion
62. The European civil aviation transport industry has
developed over many years into a major and vital asset essential
to the growth of the European economy and to Europe's competitive
position in the world at a time of continuing globalisation. The
European region is characterised by dense passenger and freight
traffic carried by a wide variety of airlines supported by a vast
network of airports and other aviation-related infrastructure. The
European air transport industry could be described as the very lifeblood
of Europe's economy, and it is not surprising that it has suffered
a considerable setback as a result of the recent recession. Nor
is it surprising that Europe’s economy has suffered huge losses
as a result of the air traffic disruption caused by the recent volcanic
eruption in Iceland, further weakening the airlines’ already fragile
financial situation.
63. Unlike the production of cars, the response to reduced demand
for passenger and freight transport cannot be an immediate reduction
in the number of goods produced. Service must be maintained even
if capacity is reduced. Fixed overheads are therefore high and the
temptation is to undercut competing airlines by offering cut-price
seats, further reducing yields. This illustrates the particular
vulnerability of airlines in recessionary times, and explains the
difficulties that airlines have faced over the last two years.
64. Although prospects have improved with the recent recovery
of economic activity, there are emerging and intensifying challenges
in the form of increased competition from the Middle East hubs,
United States airlines and other forms of high-speed transport,
environmental, safety and security concerns and increased fuel costs. The
answers to such challenges will certainly include industry consolidation,
alliances and cost-reduction as well as fine-tuning the response
to demand, all in the context of a supportive and co-ordinated European regulatory
framework. The rapporteur therefore proposes that the committee
and the Assembly endorse the recommendations outlined in the draft
resolution accompanying this report.
