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European Affairs
Economy and Business
The EU Wants Free Skies over the North Atlantic
By Michel Ayral
Whether in the European Union, the United States or elsewhere, governments have always given the airline industry special treatment to shield it from foreign competition. Over the years, this special treatment has taken many different forms, ranging from price controls and restrictions on market access to tax breaks, discriminatory treatment and straightforward subsidies.
Despite all this cosseting, however, the industry's economic record is far from impressive in terms of long-term profitability. Various studies have shown that its average return is structurally lower than that of its suppliers, subcontractors and corporate customers (shippers, tour operators etc.). In the long run, it appears that the industry is incapable of covering the cost of its capital. In other words, on average, airlines have failed to earn enough income to provide adequate returns to investors.
This poor performance is simply not sustainable. It is all the less acceptable in that the airline industry is particularly capital intensive, compared to many other economic sectors, but its access to capital markets remains constrained by regulation. Perhaps that is why, when the airlines hit hard times, they look to governments for support and expect taxpayers to rescue them. And it is here that an unexpected divergence has recently emerged between U.S. and EU reactions.
In the European Union, despite substantial losses of income due to the economic downturn, the 9/11 terrorist attacks, the war in Iraq and SARS, the airline industry has received no financial support, except for some very limited relief in the immediate aftermath of 9/11. Limited state backing for insurance coverage was authorized, but only until the commercial insurance market was restored.
The U.S. authorities have reacted more generously. Since 9/11, U.S. airlines have received billions of dollars in direct financial support and very substantial public loan guarantee support. Today, U.S. carriers still enjoy significant financial aid for insurance coverage, the installation of strengthened cockpit doors and refunds of various security-related costs. The latest aid package approved by the U.S. Congress for the airline industry amounts to slightly more than $3 billion.
The European Union and its member states do not believe that this is where the future of aviation lies. It cannot be right that an industry should operate in a protected economic environment, be chronically insufficiently profitable and be unable to survive exogenous shocks without receiving public money.
On both sides of the Atlantic, there are now airlines operating that are not only efficient but also unquestionably the most profitable, and the most consistently profitable, of the sector. These are commonly referred to as no-frills carriers.
It is striking that in the United States, Europe and Australia these carriers have one major point in common: the markets in which they choose to operate are deregulated and they manage to extract the maximum benefit from them. This shows that liberalization and market forces are the best guarantee of increased economic efficiency and consumer benefit in the medium to long run.
EU governments and the Commission want to help the airline industry recover and become profitable. They do not believe, however, that this can be achieved by providing the airlines with further financial support. The answer is to enable the industry to become more flexible and competitive, and to widen the area in which deregulation applies.
This is why the Commission has been mandated to enter into negotiations with the U.S. government. The main objective is to agree on a single, straightforward set of rules to replace the complex web of air service agreements currently in force between the United States and the 15 (soon to be 25) EU member states. The transformation of 25 different bilateral arrangements into a single EU-U.S. agreement will in itself mark an important step toward simplifying the regulatory framework. But the objective is to go further, and reshape the entire future of the industry.
The European Union and the United States in fact share the same basic philosophy toward airline industry regulation. Both have fully liberalized their domestic markets. In concluding an EU-U.S. agreement, we should aim to extend the benefits of this liberalization to the global market.
We should focus on the core responsibilities of public authorities in the field of civil aviation. Those are to maintain and enforce the highest standards of safety, security and environmental protection and to ensure fair competition in the market. All other matters traditionally, or sometimes, covered in air service agreements must be carefully assessed to determine whether they are really necessary.
The common goal of the United States and the European Union must be to free the airlines from the shackles of protectionism. In particular, I am convinced that the traditional "ownership and control clauses" that are common to almost all air service agreements are no longer necessary. They require airlines to be majority owned and controlled by nationals of their home State and thereby prevent commercial aviation from operating like any normal industry.
I believe not only that these clauses are no longer necessary, but also that they adversely affect the U.S. and European industries. We all know that the industry has no need of unnecessary, harmful obstacles. Furthermore, in today's world there is no longer any sound economic justification for measures such as restrictions on market access or the preferential treatment of carriers on non-economic grounds.
It is believed in Europe that the United States is the right partner with whom to agree on a new and liberal regulatory environment for international aviation. Not only have we both applied a largely similar philosophy to our domestic markets, but our respective markets are also the two most important world markets and are comparable in size. There is no reason, however, why an agreement should be restricted to these two partners. I do not want to close the door to other countries.
This is the objective of the Open Aviation Area that the Commission has been mandated to negotiate with the United States. I am confident that we shall succeed and that, in establishing such an area in the North Atlantic, we shall set a new standard for the rest of the world, in the best interests of the industry and its consumers.
A first round of negotiations is already scheduled to take place in early October 2003. I believe that momentum is building on both sides of the Atlantic and that we should soon have a new framework that will reorganize air links between our continents and free them from unnecessary constraints.
As in the United States, the European airline industry is still making heavy, if not sometimes catastrophic, losses. It is essential that all our energies should be devoted to achieving regulatory reform and getting our industries back on the flight path to prosperity.
Michel Ayral is Director for Air Transport in the Energy and Transport Directorate General at the European Commission. Since 1997, he has been responsible for developing and implementing European air transport policies in the fields of internal market, state aid, competition rules, air traffic management, air safety, environment, protection of passengers and working conditions. He previously served in a number of senior positions at the Commission, including Director for Industrial Policy and Director for Energy Policy.