EC airlines still clinging to state subsidies: Tim Jackson on the changes that should result from increased competition among national carriers

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The Independent Online
TRAVELLING by air in Europe today is a miserable business. Airports are crowded. Swarms of planes circle above the continent, their timetables in tatters thanks to out of date air traffic control technology.

And prices are astronomical: last winter, it was possible to buy a month's flying all over the United States, 2,500 miles from coast to coast, for pounds 228 - almost exactly the same price as one economy class return ticket for the 217 miles between London and Brussels.

No wonder European airlines have acquired the most colourful acronyms. Alitalia, the state- owned Italian carrier, is Always Late In Take-Off, Always Late In Arrival (and sometimes Aircraft Lands in Tokyo And Luggage In Athens). Sabena of Belgium is Such a Beastly Experience, Never Again. Even British Airways, greatly improved though it may be, is to some of its passengers still just Bloody Awful.

Ten years hence, new technology and new airports should ease the queues and delays. And little by little, prices should fall as the pressures of a single European market are brought to bear. All EC carriers will be free to offer services first between one European country and another, then inside other countries. European flying will never be so attractive as in the roomier US; but things should look very different from at present.

It is competition that is likely to bring the most important of these changes about. Until now, the woes of European passengers have been mostly due to the way the carriers have operated like giant civil services - full of employees doing not very much, and determined not to let upstart competitors turn air travel into a real business. EC governments have treated their flying citizens not as a market, argues John Steele, formerly in charge of the European Commission's transport directorate, 'but as a resource to be bargained for'.

Just as with telephones, opening up the market to competition has a traumatic effect. It forces flabby airlines to get rid of excess staff in order to break even at lower prices, and it encourages them to invest in new aircraft and reservation systems for fear of losing passengers to companies that can offer more comfort or more convenient booking.

In theory, the airlines that come out on top of Europe in the early 21st century should be those that do their jobs best, that provide prompt service and good food at a reasonable price. But that can happen only if all comers fight on equal terms. Will they?

At present, the answer appears to be no. All over Europe governments are giving hidden subsidies to their state-owned airlines, in the hope of giving the national carrier an advantage for when the real battle begins. A recent summary by the European Commission of the main state aid to airlines - based on the incomplete information given by governments - ran to 60 typewritten pages.

Until now, Mr Steele explains, state aid to airlines has not mattered much. Prices were fixed, so there was never pressure from more efficient airlines that offered lower fares; and in some extreme cases the two airlines that plied the route between one capital and another would actually share the profits. But as the single market takes shape, these hidden subsidies are coming to count for more and more.

Governments are also under more pressure to give them. Over the past two years, the airline industry has gone through miserable times, losing in total some pounds 3.4bn worldwide. And the drab performance of stock markets and lack of enthusiasm among investors for air-related businesses has made it hard for airlines to raise money themselves in the private sector. The failure of a recent public offering by GPA, an Irish firm that is the world's leading aircraft leasing company, is a reminder of why European airlines have been so keen to turn to their own governments for money.

If it wants to, the European Commission has the power to outlaw unfair subsidies, just as it is already beginning to do in scores of industries all over the Community. But air travel is a bit special: while most other sectors come under the remit of Sir Leon Brittan, the combative competition commissioner, air travel counts as transport and is thus in the bailiwick of Karel van Miert, the Belgian transport commissioner.

Last month, Mr van Miert asked his 15 Commission colleagues to approve a restructuring plan presented by Iberia, Spain's state-owned airline, that included a cash injection of pounds 657m. Sir Leon protested: let Iberia have the money, he feared, and it will use it to buy market share elsewhere in Europe and to make things harder for fledgling private carriers like British Midland.

Much better, he counselled, to tell the Spaniards that Iberia should take a dose of the same medicine that British Airways swallowed when it was privatised. That meant a sharp reduction in the number of its staff (BA fired some 20,000 out of its 59,000 staff, according to one of its Brussels lobbyists), and a pulling back from the routes where it was haemorrhaging money worst.

Sir Leon was in a minority of one. Although the figures in Iberia's plans were massaged for the good by assuming growth in demand almost twice as optimistic as most industry estimates, the Commissioners followed Mr van Miert's suggestion. Iberia got its money; all it was asked to do was to promise that this was the last time it would come cap-in-hand to the Spanish government, and to abandon any plans it had to use the money to buy a hefty stake in TAP, the Portuguese carrier.

The Iberia decision was just the last of a number of nods and winks the Commission has given to airline subsidies. Only once - in the case of Sabena - has it seriously curtailed an EC government's attempt to bail out a loss-making state carrier.

In the short term, of course, state aid is good for the consumer. Every franc given to Air France by French taxpayers means lower ticket prices for everyone, or more money for new aircraft. But in the long term, the story is different: as well as keeping leaner competitors out, state aid perpetuates the problems of inefficient carriers. They are under less pressure to catch up. Moreover, their governments are consequently still less keen to see free markets: competition will increase a bad airline's losses still further, and increase the size of the cheque that has to be written.

Paradoxically, that may be a reason for optimism. If they are to qualify for the planned single European currency, EC governments will have to spend less overall, and reduce outstanding debts. 'Bailing out an airline is an expensive proposition,' says Catherine Day, one of Sir Leon Brittan's advisers.

This pressure also makes privatisation a more attractive option. Little by little, governments all over the EC are coming to realise that the fact that British Airways is the continent's most profitable airline might just have something to do with its also being the continent's biggest private carrier.

(Photograph omitted)