European airline probe will urge deregulation

Far reaching measures to deregulate Europe's beleaguered airline industry are expected to be recommended this week by an independent European Commission committee.

The findings, which are due to be announced on Tuesday, are certain to provoke a new furore among European airlines, some of which feel their existence is threatened.

Formulated after eight months' deliberation, the committee's prescriptions against more state aid and in favour of market solutions will be music to the ears of British Airways and British Midland, the largest British airlines.

But they will enrage competitors in continental Europe such as Air France and Belgium's Sabena, which have consistently argued that an 'open skies' policy risks sending several companies to the wall unless protective measures are taken.

The stakes are high. Last year, European airline losses exceeded pounds 700m. Attempts at promotional fares and the widespread air-miles schemes have failed to stem losses and have often angered the smaller carriers, which cannot make the same economies of scale as their big competitors.

According to the most recent information, 121 million passengers travelled international scheduled routes on European airlines in 1993 - 9 million more than in 1992. In terms of passenger-kilometres, this represented a rise of nearly 8 per cent, a figure in line with the heady days of the late 1980s.

But as the Association of European Airlines noted: 'The traffic growth achieved in a period of continued economic depression was not paralleled by an improvement in revenue as the industry struggles to fill seats in an increasingly competitive environment.'

Consumers complain that despite the advent of the single market and the European Commission's commitment to deregulation of the airways, it is still mostly cheaper to fly to the United States than between many capitals in Europe.

The decline of the industry has inevitably incurred heavy social costs: Air France's planned restructuring provoked a union walk-out and a stoppage so damaging that the company was ultimately forced to revise its plans. Across the industry, there have been an estimated 25,000 job losses in the last two years.

The problems are as much structural as they are economic, and European carriers have responded by splitting into two opposite and hostile camps, mirroring the debate that runs through European industrial policy.

Should the market be allowed to determine who survives or should Europe take measures to protect its own?

It is a measure of the divisiveness of the debate that the Commission found itself unable to rule on the issue, preferring to create a separate committee.

Sir Colin Marshall, chairman of British Airways, has always emphasised the structural problems. He argues that the old system of national monopolies fostered inflexible management and led to problems that were exacerbated by heavy congestion on many routes and high infrastructure costs. He is particularly critical of the high degree of state ownership in most national carriers, which he complains has led to an unnecessary degree of politics in management.

His counterparts at Air France and Sabena take the opposite view. They would like the Commission to freeze capacity levels on existing routes, continue to look favourably on the issue of state aid (conservatively put at pounds 3bn over the last three years alone) and earmark a proportion of European budgets for infrastructure development and restructuring.

The Commission's Competition Directorate, under the Belgian socialist Karel van Miert, has shown some sympathy for these arguments up till now. In December, the Irish carrier Aer Lingus was allowed to put up an extra pounds 175m to finance a two-year restructuring plan in return for certain concessions on the Dublin- Heathrow route.