But this from FT.com:
Brussels unwilling to offer airlines aid
The European Commission appears unwilling to offer aid to Europe's troubled airlines. But the sector is also struggling with fixed costs and overstaffing,
says Michael Skapinker
Published: October 9 2001 20:01 | Last Updated: October 9 2001 21:59
FT.com
The airline business has seen crises before, including the 1970s oil shocks and the Gulf war. But not since the end of the second world war has it endured
a month this harrowing.
Four of its aircraft were used as flying bombs in the September 11 attacks in the US. Public confidence in air travel was badly shaken. In the week after the
attacks traffic on US airlines fell by 35 per cent and in the rest of the world by 20-25 per cent, according to the International Air Transport Association.
Airlines worldwide have made about 120,000 employees redundant. Two European airlines, Swissair and Sabena, face collapse and are being kept alive
only by emergency injections of government aid. British Airways has said it cannot pay an interim dividend this year and may not be able to pay a final dividend
either. Iata expects the world's airlines to record losses of more than $10bn (£7bn) this year.
The US government is offering airlines a $15bn package to compensate them for the four days US air space was closed after the attacks - but also to ensure
the carriers' survival. The European Commission will today announce its proposals on how to save the industry, including what subsidies governments will be
allowed to pump into failing airlines.
In a draft paper seen by the Financial Times, Brussels said it did not want to prevent the consolidation of Europe's airlines, which were far smaller than their US
counterparts, but European carriers should not be disadvantaged by the US government's bail-out of its own airlines. The Commission may also reassure
airlines that they will not lose airport take-off and landing slots that they have failed to use because of the disruption.
But September 11, while traumatic and financially damaging, was not the cause of the airline industry's problems. The attacks accelerated an industry crisis that
has been unfolding since the US began deregulating its skies in 1978. The freeing of the US airline business lowered fares and led to the emergence of
Southwest Airlines, the world's leading low-cost carrier. The creation of a single European aviation market in the 1990s also produced a new generation of
cut-price carriers, such as Ryanair and EasyJet.
Worldwide passenger numbers have grown by an annual 5 per cent on average over the past five years, to reach 1.6bn last year. But the international airline
industry has been incapable of generating profits on a sustained basis. The industry last year recorded an average operating profit margin of just 3 per cent.
During the buoyant 1990s, operating margins did not exceed 6 per cent. Airline shares have regularly underperformed the market.
The industry's costs are so high that a fall in passenger numbers drives airlines into loss; and a severe crisis, such as the one experienced after September 11,
would drive them out of business altogether were it not for government assistance.
Robert Ayling, former BA chief executive, argues the industry has failed to devise a structure that would ensure long-term profitability. "The airline business is
structured in such an appalling way," he says. "It's highly capital intensive. When revenues evaporate, the costs don't. There needs to be a new model that
allows airlines to shed costs as quickly as they shed revenues. We need a much more flexible method of providing aeroplanes."
The current system, under which airlines lease their aircraft or own them outright, is too inflexible, Mr Ayling argues. Leases commit the airlines to holding on to
aircraft for specified periods, regardless of market conditions. While airlines with excess capacity store their aircraft in the US desert, what they really need to
be able to do is decide each week how many aircraft they need.
Someone else should take on the risky business of owning aircraft, he says. No one has shown much appetite for doing so. When Mr Ayling ran BA, he asked
Boeing and Airbus to come up with new ideas for providing BA with short-haul aircraft. He said BA wanted to be able to fly the aircraft without owning them.
Boeing and Airbus failed to come up with any proposals.
Another factor undermining the industry's viability is what Chris Tarry, aviation analyst at Commerzbank, calls aviation's "distorted pay structure". A strike, or
even the threat of one, results in passengers deserting an airline for its competitors. Threatened with industrial action, particularly from pilots, most airline
bosses cave in quickly. After a three-day strike this year, Lufthansa awarded its pilots a 15 per cent pay increase. Delta Air Lines and United Airlines gave its
pilots substantial pay increases. Delta suffered an 89-day strike at Comair, its regional subsidiary, but the pilots there eventually walked away with rises of up
to 20 per cent.
Many airlines have reacted to September 11 with the level of redundancies they have been longing to make for years. But many in the industry regret that the
US government did not make its $15bn package dependent on fundamental reform of the industry's industrial relations.
But then governments have long been part of the industry's problem. In spite of all the deregulation of the past 20 years, they have insisted on retaining control
of the industry. The US deregulation was extensive but it was for US airlines only. No foreign company can own more than 25 per cent of the voting stock of any
US airline. And while the US government has signed "open skies" agreements with countries around the world (with the notable exception of the UK), these
merely allow foreign airlines to fly to any airport in the US. They do not allow foreign companies to set up domestic airlines in the US, the world's biggest aviation
market.
Europe will also not allow foreign control of its airlines, limiting stakes by non-European Union shareholders to 49.9 per cent. While EU airlines are allowed to
fly anywhere within Europe, the bilateral agreements with the US mean carriers can fly across the Atlantic only from their own airports. Lufthansa cannot fly to
New York from London; Air France would not be able to start services from Frankfurt to Los Angeles.
The foreign ownership restrictions have prevented worldwide mergers of the sort that have taken place in the pharmaceuticals and oil industries. Instead,
airlines have been restricted to forming alliances that, while allowing them to sell seats on each other's flights, have not allowed them to cut costs.
Another problem has been governments' refusal to allow their national carriers to go bust. No one argues that every country needs a national retailer or
shoemaker or umbrella manufacturer. But most countries retain a fervent belief that an airline is as important to their identity as a flag or a national anthem.
The US has allowed airlines, including Pan American, one of its most illustrious, to disappear. But even the US has insisted it needs a national airline policy.
Its "Fly America" programme means travellers on government business have to use a US airline.
The Europeans have resisted the idea of their airlines going out of business at all. The Swiss government has provided Swissair with an emergency
SFr450m (£188m) cash injection. Yet Swissair is renowned for its customer service. If the airline were allowed to go bankrupt, someone would want to
take over its brand and routes. Sabena, which has been promised a loan of E125m (£78m) by the Belgian government, would be less of an attraction;
but Brussels, an important airport hub, would not be short of services for long.
The European Commission will today make it clear what government support for airlines it is prepared to tolerate. All European governments whose airlines
are struggling will be watching.
Mr Ayling urges Brussels to abandon its "watered down and woolly approach" to subsidy. "It's got to be tough on members that have a predilection for state
support. They've got to make short-term sacrifices for long-term advantage."
