Europe's lame ducks fly on

RUSSELL HOTTEN

British Airways showed this week what an efficient airline can achieve without state aid. On top of record profits and passenger numbers, the company also reported a substantial reduction in losses at its two European partners, Deutsche BA and France's TAT. Sadly, such successes are rare in a European airline industry still plagued by lame ducks that soak up taxpayers' money.

Given the number of recent alliances, acquisitions and reorganisations among European operators, it might appear that a badly needed restructuring is under way. In fact it has barely begun.

Partnership deals agreed this year between SAS and Lufthansa, and Sabena and Swissair, are welcome but minimal attempts to address the industry's severe overcapacity. This week's news that Air France may abandon its loss-making routes to Australia underlines the problems but barely addresses them. As Austin Reed, managing director of British Midland, says: "The major changes so far have been to do with prices and products. There have been no great structural changes. No one of any significance has gone out of business. No one has down-sized."

In an industry that has been plagued by too many airlines chasing too few customers, it is odd that economic imperatives have not forced some big changes. France and Spain are carrying massive budget deficits, yet the attraction of throwing large amounts of government money at lost causes remains.

But it is not only Air France and Iberia that refuse to bow to market forces. Olympic, Aer Lingus, Alitalia, and others might easily have gone bust if their governments had not been so determined to prop up national flag carriers.

What angers private companies like British Midland is that these companies often dominate valuable take-off and landing slots at Europe's congested airports, denying the opportunity for more successful operators to start new routes.

Much of the blame can, of course, be put at the door of the European Commission, which sometimes appears only too willing to approve state handouts from governments.

The frustration of British Airways and KLM, which took the pain of rationalisation, boiled over last year with a challenge in the European Court against pounds 2.3bn in state aid to Air France - a subsidy equivalent to the combined losses of world airlines in 1994.

In 1997 the skies over the European Union are due to be deregulated. This will give virtual free access for airlines to fly anywhere and spark a competition war among operators. If the US experience is anything to go by, the liberalisation of Europe's skies will claim many casualties as airlines try to adjust to new market conditions.

But for BA's managing director, Robert Ayling, until loss-making state- controlled, companies slim down there can be no real liberalisation of Europe's air industry. He says the Commission undermines its own case for liberalisation by encouraging airlines to live in an unreal world of subsidies.

Some airlines would like to rationalise but cannot. At Alitalia, the state holding company IRI has refused to provide fresh funds. Instead, the airline had to tap the capital markets, which are far more demanding about where they lend money. But Alitalia is constrained by strict Italian labour laws and attempts to cut employment costs have come to little. A move to bring in 767 aircraft fully crewed by Australia's Ansett airline has only inflamed the industrial unrest.

And then there are those airlines that could rationalise, but just seem reluctant to do so. Iberia has for a couple of decades been propped up by the Spanish government in order to provide jobs and fly the flag on the international stage.

The airline seemed to have defied good financial sense when it compounded its problems by investing in two loss-making South American carriers, Aerolineas Argentinas and Viasa. Both investments, justified as an attempt to gain market share, have been disastrous.

Iberia is currently seeking approval from the European Commission for a further 130bn pesetas (pounds 620m) in state aid. This is on top of the pounds 620m subsidy awarded four years ago under the Commission's own "one time, last time" principle.

Critics of Brussels say the EU has allowed Air France to flout the conditions of its aid, and fear Iberia will also be let off the hook.

It is unclear exactly what Iberia proposes to do in return for its lifeline but there is suspicion that it will not be what is needed: large job cuts, divestment of South American investments, closure of loss- making routes and property disposals. Some even argue that Iberia should be put into administration and be forced to undergo rationalisation by the courts.

The Iberia issue is the first real test for new transport commissioner Neil Kinnock, who is expected to decide next month whether the aid should approved. With the 1997 deregulation deadline approaching, the issue will be an indicator of the Commission's commitment to the free market principles it professes to espouse.