EC says no to state aid

COLIN BAKER LONDON

Europe's airlines followed close on the heels of their North American counterparts in announcing cutbacks in the wake of the terrorist attacks in the USA. The exact extent of support they will receive remains to be seen, however.

European Union (EU) finance ministers agreed guidelines for member states to offer 30-day renewable emergency war-risk cover from 25 September, heading off the threat of a mass grounding of European fleets in response to hikes in insurance costs.

The European Commission (EC) is keeping a close eye on the situation to ensure implementation is harmonised, says Gilles Gantelet, spokesman for Loyola de Palacio, the transport commissioner.

The European Council of Transport Ministers will meet in mid-October to discuss the wider ramifications of the crisis. Technical work groups have been formed and one Brussels insider says meetings are taking place round the clock and agendas are "very fluid".

Three main areas will be discussed by the transport ministers. Firstly, they will look at relaxing competition and slot rules. It is possible that carriers will be allowed to share capacity and ensure that they keep any unused slots, which might otherwise go back into the slot pool under the "use them or lose them principle".

Gantelet says Brussels is "very open" to these proposals but that compensation for losses occurred in the immediate aftermath of the tragedy is "not a priority". The same goes for airline demands that they should receive similar aid to their US counterparts. US carriers are expected to receive grants ranging from $930 million for American Airlines to $300 million for Southwest, with regionals getting around $10-20 million each.

The question of extra security costs will also be discussed. Brussels is firmly of the opinion that member states should foot the bill.

Proposals on denied boarding compensation are likely to be delayed for at least a few weeks to help protect carrier share prices. Commission officials stress, however, that the proposals will still go ahead - noting the two-year lead time to implementation.

While these issues are being examined, Brussels is clear on one thing. "There will be no state aid," Gantelet says. Some have expressed fears that struggling flag carriers will use this opportunity to engineer a bail-out from their governments.

Brussels insiders say that it is taken for granted in the EC that some flag carriers are unlikely to survive. They make it clear that the transport directorate will urgently push the case for cross-border mergers and, with this, the need for a Transatlantic Common Aviation Area (TCAA) covering the EU and USA.

All this is happening against the background of a well-publicised period of crisis for the European airline sector, with a spate of lay-offs and cutbacks. Virgin Atlantic and Aer Lingus are the two most heavily exposed carriers on the North Atlantic, which is likely to be the worst affected market, although analysts say that the Irish flag carrier has a healthy cash reserve from the boom years prior to the downturn.

Among the major flag carriers, British Airways and KLM are heavily exposed, although the substantial catering and ground handling units of Lufthansa and Swissair are also vulnerable. What is clear, however, is that European carriers were struggling prior to the events of 11 September. The results for the June quarter clearly demonstrate this. "Airlines are facing probably their toughest challenge ever, and were already in bad shape as economic recession loomed," notes a report from Schroder Salomon Smith Barney, which expects a 10% fall in long-haul traffic and 5%drop in short-haul traffic in the 12 months from the fourth quarter.

Low-cost carriers, meanwhile, report that bookings are back to normal after a slight dip in the wake of the attacks - and are vocal in their fears that Europe's struggling flag carriers are seeking another state bail-out.

Source: Airline Business