The truth behind (not so) cheap flights
As the European Commission publishes its new state aid guidelines for airports and airlines on 19 February 2014, Jacek Krawczyk argues that aviation needs to be treated as a business by restoring a level playing field in the sector and stop the race for subsidies.
Jacek Krawczyk is the president of the Employers' Group of the European Economic and Social Committee (EESC) and rapporteur of the EESC’s opinions on civil aviation.
It's so nice to leave Brussels for the weekend and fly to Spain or Italy for less than 50 euros, isn't it? Many of you, Dear Readers, have certainly enjoyed doing that dozens of times. Some of you have probably complained afterwards about the airline's service, delays and restrictive luggage regulations or other tricks to get money out of you, but still it was great value for money, wasn't it? But have you ever wondered how it is possible to travel by plane for such a low price? If you haven't, let me explain: you've paid more for the ticket than you think. The rest was taken from you in taxes…
For some time now the European Commission has been due to publish new guidelines for state aid in the aviation sector – a long awaited documents that should lead to a more level playing field in aviation. Long awaited, because the distortions of competition in the sector are – according to key stakeholders – significant. Legacy carriers are asking for public aid as they struggle with competitors from outside Europe and aggressive competition from low cost carriers. Many airports ask for public financing, as they are not able to cover operational costs. Almost half of the airports in Europe generate losses, more than half if we subtract state aid from their revenues.
New guidelines will for sure restrict state aid both for the airlines and for the airports. Some members of the European Parliament have already opposed that, arguing that regional airports must be subsidised, as they should be treated not just as companies but also as investments in regional development. In reality significant amounts of public money spent for this "regional development" indirectly supplies the very low cost carriers (LCC) which practices are distorting the competition. LCCs take advantage of their dominant position in negotiations with a majority of regional airports. They get such significant discounts in airport charges and other fees that operations are for most regional airports often barely profitable (if profitable at all). Regional airports, instead of investing in development, are fighting for survival and heavily subsidising carriers to fly from them by generating often-artificial demand.
What's the scale of such indirect subsidies? This is very difficult to estimate, as most of the agreements between carriers and airports are confidential. According to press reports, when Air France complained about Ryanair to the European Commission in 2010, they estimated that at least 25 airports gave Ryanair the equivalent of 660 million euros in financial aid, with measures such as reduced taxes, preferential ground handling rates and marketing funds. Some estimates may not be correct and refer only to the biggest and most dominant LCCs, but it can be assumed that other market players with the same business model gain from similar arrangements.
The representatives of the LCCs will no doubt retort that they do have preferential rates but they got them in fair business negotiations, while regular airlines get huge amounts from the governments. I agree with the second part: more and more airlines are asking for government help, arguing that different charges and LCCs distort competition. They also complain about other burdens due to Europe's ambitious targets for CO2 reduction, planned only for European companies (which distorts competition even more). As they can't keep up in the market race, they ask for public aid. This often ends with an investigation by the European Commission and after months of proceedings aid is assessed as unjustified, ruining even the hardest efforts of such carriers to restructure themselves and become competitive again.
Currently, with more than 80% of airports in the EU dominated by one carrier (more than 40% of passengers), it is rather difficult to imagine that such negotiations have an entirely “business” character. Regional airports are fighting to keep a minimum quantity of traffic in order not to go out of business. They do this with the help of more and more subsidies. We have built a lot of airports in the EU using different types of public money just to create enough capacity for certain carriers to take advantage of the fact that there is not enough demand for air transport services there.
I hope that any new state aid guidelines will not only clarify the basic rules on public aid. There is a great opportunity here to prepare the first in-depth, complete and PUBLIC report showing how much public aid is pumped into the aviation sector and how those resources are spent. The EESC has pointed out in its report on the revision of aviation guidelines that such a study is necessary in order to identify not only the scope of aid but also the different “methods” of money transfer.
If European aviation is to be competitive, we must stop counting on the current “messy” state aid and treat aviation as a business again. Let's stop the race for subsidies, restore a level playing field and get back to what companies should be best at: offering good service for a reasonable price and making decent profits for shareholders. What is at stake here is mobility of EU citizens. We need sustainable model of EU aviation and this takes more than fighting for next regional “donator”.