Regional governments and airports have gone to great lengths to attract new air service in Europe - but have they gone too far?
Since November 2002, when Scotland first established its three-year £6.8 million ($11 million) Route Development Fund, 13 new routes to Scottish airports have been secured. The latest - daily Continental Airlines Boeing 757 service between Edinburgh and New York Newark - was announced by the country's first minister Jack McConnell on 8 September. That was timed to coincide with the city's hosting of the 9th World Routes Development Forum, an event supported from the early days by this magazine.
The effort by Scotland to host the event, which attracted over 1,100 airline and airport route planners from around the globe, demonstrates how crucial air service has become in Europe to regional economic growth. Three bodies came together to bring the event to Edinburgh: the Scottish Executive - the devolved government of Scotland; Scottish Enterprise, the main economic development agency; and VisitScotland, which promotes the country as a tourist destination.
According to Mike Howarth, managing director of Routes, the event's organiser, airport input into airline route planning has come a long way over the past decade. From being a side issue, the "relationship between airlines and airports has moved to centre stage, and is the driving force behind route development", he says.
Since 1993, when Manchester Airport pioneered the concept of a support package to bring American Airlines to the northern English city earlier than the carrier originally planned, regions and airports have created increasingly sophisticated and generous incentives to attract airlines. One of the talking points at Routes was the length to which communities and airports will go to attract air service. And, as the court cases and investigations into the financial support given to Irish low-cost carrier Ryanair in Belgium and France illustrate, some question whether this has gone too far.
In Europe, the rapid rise of low-cost carriers, led by the aggressive negotiating stance of Ryanair, has seen airlines gain some incredibly generous deals from airports. For instance, says Howarth, one airline's opening line at the start of a discussion on route service was: "You pay me £1 per passenger to come to your airport." That may be an extreme example, but there are many deals out there. "If you don't ask, you don't get. Airlines have to have the temerity to ask for them," says Tim Jeans, chief operating officer of MyTravel Airways, and former Ryanair sales director.
Says Gordon Bevan, airline relations director at consultancy Airport Strategy & Marketing: "The Ryanair philosophy is that it views the airport as a supplier, just like any other. It approaches negotiations with an airport in a very structured bottom-line way." It knows its direct operating costs and expected yields on a route, and tells the airport the contribution it needs to make it work, Bevan says.
Many airports have provided support to win service from Ryanair and other carriers pursuing a similar strategy. "A lot of airports went for a land grab, believing it was better to get a low-cost carrier in whatever the price," says Bevan.
Most of these were secondary airports desperate to boost their passenger services. Brussels South Charleroi, for instance, had no regular carriers until Ryanair began building up a hub there in early 2001. The airline now serves 12 destinations from Charleroi, and the airport could handle two million passengers this year.
Mixed picture
Some major airports provide support too, but the picture is mixed. Larger hubs welcome low-cost service, but not at any price. For instance, Ryanair asked Polish Airports State Enterprise (PPL) for a c5 ($5.6) per passenger price for all landing fees and services if it served Warsaw. "This would not cover our costs," says Anna Zebrowska-Dreger of PPL's aviation services sales policy section. The normal price the airport charges per departing passenger is c16.
Warsaw is not averse to designing a support package for low-cost carriers, but wants to develop a system that does not discriminate against its existing customers, she says. One tactic it is considering is opening up a former general aviation terminal for low-cost carriers, she adds. This could be available at lower prices than its main terminal building.
Deals range from reduced landing and ground handling fees to assistance with marketing and promotion. Their availability has greatly influenced the growth of the low-cost market in Europe, but the fundamentals of a strong local market and traffic demand are the most important factors. As Jeans says: "No airport deal will turn a bad route into a good route."
The investigations into some of the deals Ryanair has forged is causing airline and airports alike to take stock of the contracts they have signed, and to re-examine the structure and legality of future deals. The issue came to the fore in December when the European Commission (EC) began investigating Ryanair's agreement with Brussels South Charleroi. It said it had doubts about the measures taken by the airport's owner, the Walloon Region, which "exclusively benefit Ryanair and might constitute state aid".
While this probe continues, a French court ruling has blocked Ryanair from receiving marketing support worth c1.4 million over five years from the Strasbourg region as part of its decision to launch service to its local airport in October 2002. The case was prompted by Air France complaints that "unfair competition" from Ryanair's London Stansted service had forced Britair, its regional subsidiary, off the London Gatwick to Strasbourg route.
The court ruling said the support from the region's Chamber of Commerce and the city of Strasbourg amounted to illegal state aid. At Aarhus, another airport involving Ryanair services, Denmark's civil aviation authority is looking into the discounted passenger fees the carrier is charged.
The question of whether such deals represent illegal state aid is unclear. "Europe's state aid is a pretty vague area because the rule is so general," says John Balfour, a specialist aviation lawyer at the London office of Beaumont and Son. There are also no precedents in European law relating to similar cases, he adds.
The main issue, says Balfour, is whether the terms of the deal are available to all carriers or just one. Deals should be legal if they are freely available, and as long as the assistance is not excessive or is offered too long. In addition, there are exceptions where the areas are singled out for regional development assistance, he says.
Unfair competition
Strasbourg and Ryanair both believe the French court decision is mistaken. However, Ryanair has moved its Strasbourg service across the border to Germany's Baden Baden airport, just 40km away.
"It is fundamentally wrong that secondary airports in France - just because they are owned by government or local authorities - should be prevented from competing with privately owned airports in Europe," says Ryanair chief executive Michael O'Leary. Ryanair also argues that, because the Strasbourg Chamber of Commerce is funded to a large extent by local private business, the support it gets cannot be classed as state aid.
One element of the court's decision said that Ryanair was benefiting more from the deal than the airport. This is not so, says Strasbourg airport's marketing director Marc Nelis, who stresses the airport is only acting as any private investor would to grow its business. Nelis adds that the deal offered to Ryanair is available to any carrier that brings a similar number of passengers.
Frankfurt Hahn, Ryanair's main hub in Germany, is another that has prospered under the Irish carrier's patronage. It also took a close look at the legality of its aid package. In 2003, it will handle over 2.3 million passengers, almost all from Ryanair.
"We negotiated with Ryanair for one-and-a-half-years before we fixed a contract," says Maria Anna Muller, marketing director at Frankfurt Hahn "Our contract with Ryanair was checked over carefully by auditors and lawyers. What we offer to Ryanair we offer to other customers."
Ryanair's competitors have mixed feelings about its approach to airports. "What Ryanair does is, on the whole, good, aggressive competition," says Martin Saxton, director commercial planning of UK low-cost carrier flybe. "We do, however, object to them using their muscle to extract deals from communities such that the communities are unable to offer similar assistance to other carriers because they're dried out. That's the danger," says Saxon, adding: "Many airlines have done deals based around the benefit to the local economy on a per-new-passenger basis." Flybe has such an arrangement with Bergerac Airport in south-west France. But in the view of flybe and easyJet, Ryanair went too far with its Strasbourg deal, and they support the court's ruling.
"We don't look for subsidies, we look at a competitive deal," says Nigel Fanning, business planning specialist at easyJet. "We don't look to keep Ryanair from getting that, but we do look to keep them from getting subsidies."
Although the issue of what does represent illegal state aid in these cases is as yet undefined, there is no doubt of the huge benefit such deals bring to the regions of the airports they serve. Ryanair estimates that, for every one million passengers it delivers to an airport, around 1,000 jobs are created in the local region.
This is a powerful argument to put to the European Commission (EC). "In the Charleroi case it will find in favour of Ryanair because the regional development case is so compelling, and because a similar deal was available to Virgin Express or SN Brussels," believes Jeans. The French situation will also hinge on the regional development issue, he adds.
French airports and regions run the risk of losing the massive economic boost that Ryanair brings if the Strasbourg ruling is extended to the carrier's 18 other destinations in the country. "This is probably more of an issue for France than it is for Ryanair," says the airline. "We have said we will pull out of France if we don't get this sorted out - we'll just expand elsewhere."
The frustration secondary French airports feel over this issue extends to the inflexible rules governing the landing fees they can charge. These make them reliant on the use of marketing support to attract low-cost carriers. Patrick Ravier, managing director of Paris-Beauvais airport, 56km (35 miles) north of the French capital and another Ryanair destination, says that the tariff system has to be changed. "It's crazy. Why should you give the same price to a company bringing 300,000 passengers a year and to one bringing 10,000?" he asks.
Airports argue that if the system is not reformed they are not the only ones that will suffer. "If we can't do such deals in France, low-cost carriers will go somewhere else, and it will be France that loses," says Nelis of Strasbourg.
While the situation in France is still murky, Scotland has carefully thought out the structure of its fund and taken legal advice at all stages. When it consulted the EC's transport directorate to find out what types of support were allowed, it was pointed towards the 1993 Manchester deal with American as one that had passed the test.
"There are very strict principles behind the fund," says Mary McLaughlin, head of transport at Scottish Enterprise, which is used to lower the cost of landing fees. It does not support existing routes or services that are mainly for tourist traffic. The preferred services are daily, and there is a detailed economic analysis behind each route. "We give support to the airport and they reduce the cost to the airline for the first three years - this enables them to do a long-term deal with the carrier," she says.
The idea is not to replace money the airport might already give. "The airport tends to match the money the fund puts in, and may go beyond that," says McLaughlin.
Scotland's fund idea is already being copied. Northern Ireland has just unveiled a £4 million fund that will operate along similar lines to Scotland's, and is designed to attract new routes.
The next few months could prove a crucial time for European countries and the EC as they seek to establish a level playing field for route support. Which-ever way the decisions go, the importance of support for airports and airlines alike will continue to be an important feature of the discussions at next year's Routes event when it lands in Madrid.
REPORT BY MARK PILLING AND RICHARD PINKHAM IN EDINBURGH
Source: Airline Business
