Europe's low-cost carriers have secured some mouthwatering support packages from small airports keen to join have their share of the low-cost revolution. But with a string of Ryanair deals now under competition scrutiny it may be time to firm up the rules of the game.
There is a certain irony that Ryanair, which has got used to its role championing competition in Europe, now finds itself in the dock on a competition issue of its own. The issue centres on the subsidies it receives from some of the region's more obscure airports in return for the influx of passengers it can bring. In Europe, and perhaps beyond, it raises a question over just how much support is too much.
In the good old, bad old days it used to be so different. Airlines simply decided where they wanted to fly and the airports eventually found out. One European airport marketeer recalls how the first he knew of a major new route from Asia was when the airline made a public announcement, not even stopping to collect its landing fee discount.
Today the stakes are higher. Spurred by the arrival of aggressive new low-cost start-ups, even the remotest of airports can hope to put itself on a route map, enticing airlines with lucrative financial and marketing support. Backed by the local community, that is just what many of Ryanair's destinations have done.
The issue of whether some have gone too far has been simmering in Europe for a while, but burst onto the front pages this summer when a regional French court upheld a complaint from Air France that Ryanair's deal to fly into Strasbourg was illegal. The low-cost carrier promptly announced that it would quit the airport, slipping over the German border into neighbouring Baden Baden. With typical swagger, Ryanair has threatened to pull out of France altogether if its other 18 deals there are outlawed.
Complaints against Ryanair are also now being pursued in Sweden and Denmark, while the European Commission (EC) has also been investigating the deal struck with Brussels South Charleroi Airport.
To an extent, the problem stems from a degree of naivete from airports and regions desperate to be part of the low-cost revolution. Backed by what effectively amounts to public money from local chambers of commerce, getting the contracts right was always going to be crucial to ensure that they did not fall foul of Europe's state aid rules - quite apart from checking that they also made good business sense.
Witness the relative sophistication of the US market, where the competition for air service has been fiercer for longer and the use of support packages are becoming an accepted fact of life.
While federally-funded US airports cannot offer special breaks on aeronautical charges, they have worked with their local communities to find other ways to offer airline support. That includes the $10 million package put up by Portland, Oregon, to bring Lufthansa to the airport. That was in the form of a travel bank, where the community pledges an up front annual spend with the desired airline, in this case to back a new Frankfurt service for the first year.
Or the community could share the risk of a new route with a carrier through a revenue guarantee deal. Typically, a local business group will promise to cover the difference if the carrier fails to meet pre-agreed revenue levels on a new route. Such agreements usually cover the first two years of the service, by which time the route has hopefully matured into a viable service.
By contrast, the European support has looked less like sharing start-up risks and more like the outright buying of service. That in itself is not wrong, but where public money is on the table it has to undergo all the usual checks and balances. The broad rules are fairly well established within Europe, centring on three key tests.
First, the offer of funding has to be available to any European company without discrimination. Tailoring the deal to ensure that only one carrier could apply would seem to cross that line. Second, the level of support must be consistent with that which a private operator would offer. In short, it should be commercially sound. Third, the support should not distort competition, either between airlines using the airport, or even between airports close enough to compete with each other.
The first big test of these rules at European level will be with the decision over Charleroi, which the EC is expected to announce before year-end. At present legal opinion appears to be leaning against the airport, although there will be a good measure of politics at play. As Ryanair often points out, for every million passengers it delivers to an airport, around 1,000 jobs are created in the local region. Such figures come attached with compelling regional development arguments.
In the end, the push for reform may come from the airports themselves, as they acclimatise to the new environment. Already one or two have cancelled deals signed in haste with aggressive low-cost carriers. Experience may yet prove more useful than the rulebook.
Source: Airline Business
