Another flight of fancy in the airline industry

The Air France-KLM merger is forged out of adversity: two weak carriers huddling together for warmth

Who is doing more for European integration, the European Commission or Ryanair and easyJet? And if you agree with me that the budget airlines could win on points, where does this leave the alliance between Air France and KLM?

This linkup, which may well turn into a merger if regulations permit, is forged out of adversity: two relatively weak carriers, one weaker than the other, huddling together for warmth. In industrial terms the story is a simple one. Airlines have become a more competitive market, thanks in part to the new budget airlines, but also to the blip in air travel after the terrorist attacks. The weaker airlines need to consolidate and, as in every industry on the globe, a merger is an obvious way of cutting costs and increasing economies of scale.

But there is another aspect to this story, which I think is fundamentally more important. If Europe wants to become any sort of effective competitor to the US it needs both cheaper communications and greater cultural integration. One of the barriers to both has been an antiquated airline structure, with companies that should have gone under years ago propped up by governments for prestige reasons.

Most airlines in Europe are odd relics of that distant age when countries tried to have national champions in the different industries. British Airways remains a merger of BOAC and BEA, and dates back even further to Imperial Airways, established to link the empire together by air: hence the "Empire" flying boats. Insiders claim the separate international and European cultures persist to this day.

Virtually all European airlines were founded by governments - the French still have a controlling interest in Air France. Unsurprisingly the nationalised industry culture persists in many European airlines - and the case of Air France the French cultural approach to customer service, too. As a result, airlines have tended to divide Europe, rather than bring it together. Because it was so expensive to get around - typically double the price as a journey of similar length in the US - European air travel was dominated by two types of traveller, business people who were paid by their companies and tourists who travelled on charter holidays.

The result has been an economic and social catastrophe. Businesses need to move people around and high airfares added to their costs. The bureaucrats' answer has been to develop a high-speed railway network, which has been helpful in integrating the economies of northern France and the Benelux countries but does nothing for the rest of the Continent. In any case rail travel is only useful for city to city journeys and most travel, even business travel, now originates outside large cities as companies move their headquarters to out-of-town sites.

Of course the high cost of air travel has been only one of many reasons for Europe's lack of competitiveness vis-a-vis North America, but at the margin it has been an added burden. In the world of business the extra half per cent on costs has an enormous cumulative effect. A city such as Berlin, which used to have particularly expensive air connections, suffered greatly in economic terms as a result.

But in some ways the social costs to Europe were even more damaging, for Europeans developed distorted visions of each other. Leisure travellers took charters. The charter airlines needed volume so could only fly to established holiday destinations. As a result, for two generations, most northern Europeans' main experience of the rest of Europe was a Spanish beach. The great riches of European culture, encapsulated in its cities, required an effort. You did not pop over to Prague for a weekend, because it was too expensive to do so.

The budget airlines have changed all that. Prague is heaving with British stag parties. Apparently the price of beer is sufficiently low that provided you drink enough you can pay for the cost of your airfare. Now that might not be quite the ideal of cultural tourism that will, over the generations, help bind Europeans together, even if Czech beer is a traditional example of European excellence. But even some of the stag party enthusiasts might drop into a church for a concert.

The big point here is that budget airlines are opening up an entirely new market for European travel, and that must have a huge role in binding Europeans together. Without the low prices people would not have travelled less frequently to European cities; they probably would not have travelled at all. They would not have bought weekend cottages near airports served by Ryanair and easyJet. They would not now be travelling to Latvia and Estonia.

Of course the bureaucrats in Brussels do not like this. The small regional airports that give special deals to Ryanair to encourage them to open up new routes are being challenged and in one instance Ryanair has been forced to relocate its flights. If a municipality reckons the additional business brought to the community will cover the subsidy it gives to the airline, you might imagine that Brussels would welcome the initiative. Apparently not. It is OK to subsidise farmers but not travellers, just as it is OK to subsidise rail travellers but not air travellers.

The good news is that when politics and economics clash, economics eventually wins. The national carriers are being forced to adapt to the new world of competition. Some, including British Airways, seem to be doing so quite well, often offering as cheap flights as the budget carriers. The internet has not only enabled airlines to cut their ticketing costs; it has enabled customers to shop around for the best deals. As a result the national carriers have been forced to adopt some of the efficiencies of the budget ones.

The internet has done something else, with intriguing social consequences. It has created an element of serendipity in European air travel. Most people make up their minds where they want to go and then look for the best combination of price and convenience. But some people don't care so much where they go and simply look for good deals. The result is that places that would not naturally attract travellers can do so by encouraging airlines to open up cheap routes. Economic activity follows, for visitors spend money, buy holiday homes, tell their friends. The way to boost a region's economy used to be to try to attract foreign investment, with governments paying large subsidies to companies to create a few not-very-high wage jobs for a few years until production was shifted to China. Now the rather more durable way to do so is to get Ryanair to open up a route to your municipal airport.

So where does this leave Air France and KLM? They will scramble on. Something called KLM will probably survive and something called Air France will certainly do so. There will be other consolidation of European airlines, with weaker ones being allowed to keep their brand names in exchange for loosing management control. A very few may be allowed to go under, when the fiscal pain of propping them up becomes greater than the political pain of letting them go. But if you really care about European economic efficiency and social integration, thank the new airlines, not the old ones.

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