Europe's lame ducks fly on


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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
'We will fix it': mice in the 1970s children’s programme Bagpuss
Life and Style
2 Karl Lagerfeld and Choupette
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?