Wings Across Europe

Towards an Efficient European Air Transport System

Kenneth Button

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351872713
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Aviation
• Index: Technology & Engineering

Airlines, like most industries, contain a mixture of good and badly managed companies (and perhaps more important, lucky and unlucky companies). More important in the longer-run is the institutional structure in which the companies offer their services. Air transport is a major industry in its own right. But it is also the fastest growing mode of transport for both passengers and freight, a large employer of labour, at the forefront of many technological developments and often a pioneer in adopting such innovations. It is the source of important economic stimuli for local economic development. This book examines the current state of European airlines - mainly, but not exclusively, those within the EU and the European Economic Area (EEA). It seeks in particular to determine if the current institutional structure provides a sustainable basis for the continued vitality of air transport as a facilitator of economic development, and it can serve as an input into wider matters involving the social and political integration within Europe. It also includes material on airports, slots and security. It provides the opportunity to look at factors that currently influence the efficiency of European airlines and to see how the industry has moved to meet these challenges. The book is also designed to be accessible with a glossary at the end, definitions of key terms and concepts, a list of abbreviations and acronyms and two annexes that provide more details of the European air transport market within the wider international regulatory system. The readership includes all concerned with airline and airport management, including regulators and government departments of transportation, and researchers in air transport. While of main interest to those in Europe, it is also important to all who are dealing with similar questions in other continents, and all concerned with inter-continental air transport provision. In the current aviation context the key features of the book are: "

Chapter 1
Introduction

Aims of the book

Air transport is a major industry in its own right. But globally it is also the fastest growing mode of transport for both passengers and freight. As such it represents a large employer of labor, is at the forefront of many technological developments, and indeed is often a pioneer in adopting such innovations. It is the source of important economic stimuli for local and regional economic development and it often provides essential long distance access for more peripheral areas, serving as a key lubricant to the economic system.

At the same time it is a maturing industry with established technology and an accepted institutional structure. Further, it is by most measures the safest way to travel and there are continual technological and managerial developments to reduce any adverse environmental effects. In summary it is a part of modem society.

Air transport has also been the subject of major economic regulatory reforms over recent times. After many decades of fairly strict economic regulation there has been a gradual liberalization process. These changes, however, have not been consistent across markets. While the 1978 US Airline Deregulation Act was at the forefront of liberalization of the US economy, changes elsewhere have been less dynamic and often less complete.

The European Union (EU) was very slow to embody air transport in its Common Transport Policy (CTP). This reflected, in part, the still relatively small role it played in economic interactions in Europe in the formative years of the EU, the 1950s and 1960s. That situation changed significantly in the late 1980s and 1990s when national policies for air transport were gradually brought within the broader framework of EU policy. The need for a coordinated infrastructure policy, especially regarding air traffic control, furthered the role of the EU. This process is an on-going one as matters of authority over external EU policy continue to be debated.

This study seeks to examine the current state of European airlines - mainly, but not exclusively, those within the EU and the European Economic Area (EEA). It seeks in particular to determine if the current institutional structure provides a sustainable basis for the continued vitality of air transport as a facilitator of economic development and if it can serve as an input into wider matters involving the social and political integration within an increasingly politically and economically integrated Europe.

The book does not seek to offer any detailed forecasts for the future of European air transport, nor does it make any effort to identify ‘winning’ airlines in the commercial environment that now determines the world in which airlines live. External factors influencing the industry, coupled with its own internal dynamism, makes such exact predictions impossible. The complexity of the industry and the markets it serves add to the problem of being a seer. Rather the book focuses on the evolving industrial structure and the market for airline services.

The problems confronting airlines

The study comes at a time when many European airlines, like numerous carriers in other markets, have experienced, and some continue to experience, severely depressed markets with negative consequences for their financial performance. This is due to the combined results of regular business cycle effects and as a consequence of the more immediate repercussions of the attacks on the World Trade Center in New York and the Pentagon in Washington in September 2001. The SARS epidemic also had serious adverse effects in Asian markets in particular, and the Gulf conflict has had its own geographical effects. There are also emerging issues that are putting more general pressures on airlines, including increasing demands to fulfill societal environmental ambitions (Upham et al, 2004).

The analysis here, however, is primarily concerned with longer-term trends in European air transport, and in particular how these trends are affecting airlines. Whilst recognizing that periodic shocks to the economic system do occur, it focuses on the more conventional economic forces that affect the sector.

The world’s air transport markets are still finding it difficult to recover from the events of September 2001 as a combination of factors have reduced the willingness of people to travel and a general slowing of the world’s economy has constrained growth in demand for freight services.

In the short-term, a global picture showed that total scheduled air passenger traffic in June 2002 was 11.1% lower than in the previous year. In 2002, a net financial loss of $US12 billion was recorded by member airlines of the International Air Transport Association (I AT A). More specifically for European carriers, passenger traffic was down by 7.8% within Europe and in important markets such as the North Atlantic it was down 18.6%. In terms of freight, while global carriage virtually returned to its June 2001 level within a year, it was 18.6% lower in Europe and 3.8% lower on the North Atlantic. Recovery has been slow and in 2002 scheduled traffic was down a further 13.8 million passengers.

There has been some small relative improvement since that time, although the spread of SARS, and the military action in Iraq, along with poorly performing European economies, introduced new challenges for the airlines. If nothing else the decline was less in 2003 with a further fall of 2.4% in global traffic.

The impacts on individual European airlines varied considerably, and this continues to be the case. The particular mix of markets served can explain some differences in the performance of specific companies - for example, having a strong North Atlantic presence has not always been helpful. But the airlines have themselves responded in different ways in their efforts to cut costs and to attract traffic. In particular, many carriers have significantly cut capacity. Unlike US carriers, very limited public funding was made available to European carriers after September 11^th to compensate for the immediate impacts of closure of US markets, and there was no form of guarantee system to assist in overcoming cash flow problems in the intermediate term.

The outcome has been a severe financial crisis for most major European carriers. Overall scheduled European airlines lost US$3.02 billion in 2001 and US$0.87 billion in 2002. Sabena went bankrupt shortly after the crisis emerged, and other network carriers curtailed some of their operations, contracted, and began a major program of restructuring. There was an 8.7% capacity cut by the major European airlines in 2002.

The situation in 2003 saw little respite and although not all the figures are in at the time of writing it is clear that several major European carriers are taking time to recover: British Airways for example, made a profit of about US$1.0 billion, but Lufthansa experienced a US$1.2 billion loss mainly because of problems in its non-core airline catering and travel businesses, and Alitalia experienced a US$500 million operating loss in 2003.

These are, therefore, trying times for much of the European airline industry. But there is evidence that the current crisis may be a catalyst for bringing forward more fundamental structural problems in the industry. In particular, there have been institutional changes that have affected the way in which air transport services are provided in Europe and the ways in which the airlines interact with their suppliers and customers.

Some of these changes are comparatively recent (such as the ability to offer cabotage), and it is unclear in this situation of transition what the long-term outcome will be. There are, however, experiences from elsewhere and in other sectors that suggest reforms of the type carried through in the EEA may pose long terms challenges to the stability of the European airline market. In particular, there are concerns that airlines as a group will not be able to recover their full long-run costs.

Institutional changes

The most important institutional change that has occurred in Europe has been the phased liberalization of airline services both within the EU and within the countries that have linked into the EU air transport structure. This has opened up the intra-European market for airline services, and involved the EU in efforts to initiate more efficient air traffic control and to modify the ways in which airports have traditionally carried on their business.

A large part of these reforms have been initiated by specific air transport policies (the so-called ‘Packages’) but these have also been entwined with the applications of more generic EU wide policies in such areas as anti-trust. In the wider international arena, many European states have engaged in more liberal air service agreements, most notably in Open Skies arrangements with the US, that have broadened the basis of international competition.

Phased enlargements of Union membership that have been brought about under provisions of the Nice and Copenhagen Agreements, with the first being initiated in 2004. A major challenge for the future will be to ensure that these enlargements will be accompanied by appropriate air service provision.

These institutional developments have also been paralleled by other changes. There have been technology changes, including a move to using regional jets, the transformation of supporting telecommunications infrastructure, and investments in competing modes of transport - notably high-speed rail - have taken place. There have been shifts in the industrial structure of Europe, with a rapid expansion in service industries and in the growth in globalization.

Significant demographic changes are taking place as the populations of many European countries begin to age and the demands for leisure activities change. Business cycle effects, to which the air transport sector is particularly sensitive, have perhaps become more pronounced. Tied to this, the traditional international economic structure whereby at least one of the major world economies (Japan, Germany, and the US) have grown even if the others have been in recession no longer seems to hold. Japan and Germany seem to be afflicted with on-going structural economics problems. These features have added to the uncertainties that confront the air transport industry.

Issues of sustainability

To assess the prospects of the current structure of the European air transport system, and to assess whether it is economically sustainable, requires some notion of how the airline market functions. Indeed, this would also seem to be a necessary pre-requisite for any rational policy-making. In fact, there is still no firm consensus on what the natural market for air transport services is, even though a copious literature from academics, business analysts and policy makers has emerged during the last thirty years.

Numerous ideas have been floated, and sometimes supported for a brief period by empirical analysis, but most of these have proved to be transitory. To name a few, it has been argued that the market is naturally competitive, monopolistically competitive, perfectly contestable, imperfectly contestable, oligopolistic, unstable, and duopolistic. It may well be that there are various sub markets with differing features and requiring different policy approaches - for example, between the full service carriers and the ‘no-frills carriers’. If this is so then it has implications for the larger development of air transport in Europe.

At present, however, given the inability of many carriers to recover their full capital costs there arise discussions about the need for consolidation of the industry. This implicitly assumes that the inability to recover costs is a matter of excess capacity given the current levels of demand. There are also secondary considerations concerning how such consolidation should be carried out. It may, for example, involve natural market attrition, with some carriers leaving the market or shrinking significantly in their operations. It may mean mergers, but it may also mean airlines coordinating their activities through stronger airline alliance structures.

The underlying thrust of the argument is that costs are too high and that excess capacity prevents scale economies of various types from being fully exploited. However, rationalization of this kind, when carried through in the previous severe downturn in the US, did not bring about a long-term equilibrium to that market. Indeed, even in the profitable period of the late 1990s their net profit margins averaged only 2.9%. What may prove more fundamental is the ability of airlines to generate sufficient revenues to recover their costs even if the capacity offered is not excessive.

Non-full cost recovery can, therefore, be viewed in a different way. It may be that there is no competitive structure that allows sufficient returns to be earned to cover all costs. In this case there are issues of subsidies and public service style obligations that come into the debate. But there are other possibilities that are often given less attention. These include giving airlines more market power, and with it the ability to raise more revenues from the consumer through the price structure and to control their capacity. Airlines already deploy a variety of strategies to both extract at least part of what customers are willing to pay (through yield management) and to stabilize their cash flows (through frequent flyer programs). But these seem to be insufficient for full cost recovery under the existing regulatory structure given the competitive pressures in the market.

The approach

This study begins by looking at the role air transport plays in economic development and political integration. For a variety of reasons, but possibly largely because it constitutes less than 1% of the EU GDP in national income accounts, air transport policy has tended in the past to have been relatively neglected. What is clear at the very basic level, however, is that whenever there is a disruption to the air transport system in Europe, be it due to industrial action by air traffic controllers or pilots, or the financial failure of a carrier, there is immediate and extensive public concern. Air transport is important to the citizens and business of Europe.

To examine the sustainability of the current European air transport system, however, requires looking beyond simple aggregate national income data to consider exactly where aviation fits into the fabric of the EU economic and political structure, and the specific roles it can play.

To develop a sustainable air transport policy it is important to understand the key parameters of the industry and some of the current long-term trends. Airlines and cargo carriers are an important element in this picture and some appreciation of the nature of the market for EU airline services is necessary. Although there is no agreement on the exact underlying nature of the airline market, one can isolate some of the key forces that impinge on it, and some of the reactive actions taken by carriers in response. It is also important to try to separate from the short-term situation, the underlying structural changes that are occurring.

Formal, legal institutions are important. The development of EU policies, as they have affected various elements of the air transport sector, has clearly exerted powerful influences on current conditions in the airline market. The embodying of air transport within the CTP came late, but within a period of a decade changed the foundations upon which the sector rests. It is also helpful to appreciate that while there have been major formal institutional changes in the airline market, essentially changing it to one of free market entry and competition, these have generally been less pronounced in other segments of the overall air transport sector.

This provides a basis to outline and assess some of the stresses that are currently being felt in the air transport market and to assess whether the current institutional structure is robust enough to sustain an optimal air transport system within the EEA. The focus is primarily, but not exclusively, on the difficulties many carriers have in full cost recovery. It explores the possibility that there are inherent flaws in the premise that current levels of competition in the airline market are sustainable. But it also considers a number of other issues including the degree to which airlines are encumbered by non-economic controls and regulations.

There is a tendency, although not unique to air transport but certainly pronounced in it, to treat airlines differently. Certainly airlines as an industry do have their peculiarities but they also have features that are generic and found in other industries. Additionally, the European air transport market, while in some ways unique, has institutional and other features in common with other air transport markets. In both cases there are lessons to be learned. Consequently, there is some discussion of developments in other markets. But this discussion is tempered by the appreciation that lessons from the US domestic air passenger market, the one most often compared to that of Europe, inevitably requires caveats associated with them. There are many important differences between the US and the EEA.

The approach of this work is both to provide information about the long-term structural development of the European air transport market, and to examine some of the key challenges confronting the sector, and the various actors within it. Without an understanding of the underlying structure of the airline industry in Europe, and more generally, it is difficult to develop any commentary on the challenges that it faces over the long term. It is also important to understand how the current situation has developed in order to avoid re-encountering the pitfalls of the past and give a context to the industry’s position at the beginning of the 21^st Century.

The book

Each chapter in the book addresses a broad question. This provides the opportunity to look at the factors that currently influence the efficiency of European airlines and to see how the industry has moved to meet these challenges. It also allows for a discussion of the problems that were not always adequately addressed in the previous literature, as well as the newer ones that are emerging. This need is perhaps a reflection of the fluid world in which we now live and illustrates the need for industries such as air transport to keep abreast of larger developments.

The penultimate chapter continues this quizzical theme but rather than simply summarizing what goes before it focuses on more specific matters that would seem to have particular po...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Preface
• 1. Introduction
• 2. Do We Need Air Transport?
• 3. How is the European Air Transport Market Developing?
• 4. Is the Market Segmenting?
• 5. Is the Current Structure Sustainable?
• 6. Conclusions
• Annex I European Union Air Transport Policy
• Annex II Airline Deregulation Elsewhere
• Glossary of Terms
• References
• Index