Revamping the European Airline Market: The Current Measures of the European
Nicholas H. Campiz
Politics of the European Union
Q. What is the European Union doing to help European airlines adapt to the
changing landscape of the airline industry?
A. The European Union, mainly through the Commission, is aiding the
development of a more efficient airline system, as well as a more efficient air
Airlines are a funny creature in the business world. Very few industries are
allowed to operate in the manner many national carriers do. They are traditionally known
as loss-inducing, perpetually-struggling, never-in-the clear companies. Airlines for a
while were controlled for under the auspices of the respective national government, who
controlled, funded or subsidized these airlines as a public service. After several waves of
privatization in the 70‟s and 80‟s, these carriers are still in the same precarious positions,
in theory free of excessive government control. However, once again, airlines are a funny
thing, and they are an industry that banks a great deal on the sentiment of nationalism,
along with a few others such as a telecommunications, defense, and banking.
When the attacks of September 11 occurred in the United States, the federal
government approved billions of dollars to bail out the big national airlines, some already
treading a fine line with solvency, from the hammer blow that was delivered to them.
Some say this was necessary to prevent one or more national carriers from going under in
the time of dramatic losses in passenger revenue. Others felt that a shakedown of the
industry was needed because the US carriers were often-times seen as redundant and
stepping on each other‟s feet. The Big 6 carriers all survived, though not without austerity
measures, and not without talks of blockbuster mergers swirling around the business
world and the Justice Department.
Why did I just give a rundown of the airline situation in the United States? It was
done mainly to juxtapose it with the situation in Europe, one with many more airlines in
the pot, with many more constraints in the system, and many more nationalistic
heartstrings to pull at. Europe also experienced the great downswing in air traffic before
September 11, and it too saw its big airlines struggle tremendously. And unlike in the
United States, there were airlines that did succumb to the adverse business climate.
Swissair, once regarded as one of the finest airlines in the world, was the first to fail, after
it‟s government allowed it to die. As a major shareholder in the Belgian national carrier,
Sabena, the Brussels-based airline lost a major source of funding and it too soon went
under. While national governments did for the most part buttress their “national” airlines,
much to the chagrin of the upstart rivals from privatization, many saw this as a wake up
call to address the needs and issues of the airline industry on a continent-wide scale as the
traditional airline industry was struggling hard to no longer appear as an anachronism.
With the timing purely coincidental, on September 12, 2001, the European
Commission released a White Paper entitled “European transport policy 2010: a time to
decide.” Clearly it was a 10-year plan to revamp the European transport system to better
accommodate its citizens. While the action plan called for the major improvements of the
road ways to reduce congestion and for a renaissance in the railways, which it called
upon to start linking major transport trunks across the breadth of Europe, the section on
airlines was entitled “Controlling the Growth in Air Transport.” Needless to say, on first
reaction, the airline industry was none too happy about the White Paper. However the
plan did point out, in a genial manner, the major restructuring needed by the airline
industry to remain competitive in the new atmosphere of travel. I think the report hit the
proverbial nail on the head (or I should rather say three nails on the head) in what is
needed for the reform of the European sky. This essay will examine the arguments
surrounding the three main points the DG Transport and the EC pointed out. The first is
the need for the reduction of “nationalist” tendencies with the further integration and/or
merger of these airlines throughout the EU. The second deals with a common voice in
dealing with the United States on transatlantic routes – a major source of income and
profit for the big carriers. The third deals with the setting up of a common European sky,
with the hopes of consolidating the patchwork air control system across Europe, and with
the goal of minimizing the inherent safety concerns of the current system while
harmonizing the flow of aircraft through European airspace.
The Commission does not call for anything drastic in its White Paper, and for the
most part only seeks to minimize the redundancies inherent in the European air system.
The first major issue the Commission, as well as many stockholders and industry
insiders, would like to see would be the further integration of the airlines within Europe.
The merger-mania never caught on in the airline industry, and by the turn of the 21 st
century, there were no cross-national mergers of airlines in Europe (The Guardian.
2003). The Scandinavian Air System (SAS), serving as the chief airline of Denmark,
Sweden, and Norway, was probably the closest thing Europe has gotten to this ideal.
However according to SAS‟s website, this process of merger happened in 1946, making
it a long time since Europe has seen a blockbuster international airline merger.
At the turn of the millennium, even before September 11, there was a serious
possibility of a major consolidation of the American airline market, with American close
to a deal on TWA (Winston, 1998), and United and US Airways flirting with one another
(though the Justice Department frowned upon the possibility). This fanned a serious buzz
about the possibility of merger throughout European airlines, though some of it involved
transatlantic pairings (British Airways and American). Swissair was eager to expand past
the Alps, hence the large share in Sabena, though this never materialized because of
September 11. Alitalia had earlier cried out to be acquired, stressing its attractive links to
the Mediterranean, though previous tries with KLM fell through because of an
unattractive bureaucracy and government oversight in Italy (Dienel 1998).
British Airways also eyed KLM, the prestigious, though debt-ridden Dutch
national carrier to further it‟s reach into Europe and provide it with a new transatlantic
hub (expansion at Heathrow is a nightmare), giving it more feeder flights for the lucrative
American market. The deal fell through with the CEO‟s issuing a joint statement which
underscores the difficulty of an intercontinental merger:
"We always recognized that this would be a complex transaction,
involving not only commercial and economic issues, but also
aeropolitical, regulatory and other matters. Although we made
considerable progress, it has not been possible to resolve these."
Speaking of aeropolitics, the inherent difficulties in mergers was seen in the 15
year courtship of BA and American Airlines, as regulators on both sides of the Atlantic
were keen to shoot the deal down, on antitrust grounds. These difficulties sparked a wave
of airline alliances which proliferated around the world, as they had a much easier time
passing through regulators. While these alliances seemed to be a step in the right
direction, they did not fully address the flaws of the European airline industry (Sinda
2001), still leaving segregated national systems with redundancies on intercontinental
flights as well as transatlantic routes skewed to the US (more in the next section). First
off, these alliances, which allowed code-sharing and the pooling of passengers, were
usually formed around a US-European pairing, such as the Star Alliance‟s United and
Lufthansa or the oneworld alliance‟s BA and American (always attached at the hip).
Several other airlines were tacked on to each to further enhance the passenger options,
usually smaller regional airlines. Also these alliances didn‟t address the top-to-bottom
restructuring and fusion a merger would bring. Just recently Air France and KLM
announced that they will soon partake in the first major merger of big European airlines,
though it is not as complete as they would like to see, because of fear of regulatory
reprisals, especially from the United States (Hanson. 2001). The cost cutting nature of a
merger is thus marginalized to address the multitude of issues, not the last of which is the
woeful cry of the Dutch people who claim that the “Air France takeover is a blow to that
„orange feeling‟.” (The Guardian) As one can see, mergers are going to be tough and
tricky and not optimal for quite some time until regulations are agreed upon and
nationalist tendencies are eased.
On the issue of the much talked about “Open Skies” talks with the United States,
Europe is finally beginning to speak with one voice in the matter. For the longest time,
and for the most part still is today, the international air industry was run in a way that ran
against liberal economics (Evenett. 2000). Bilateral agreements were the modus operandi
when it came to determining who‟s planes flew in, where they could land, as well as
when they could land. While the European Union has scrapped that ideal in the bilateral
agreement, the effect of nationalism still pervades, and though airlines are free to fly
between two nations that aren‟t their own, only 3.5% of the flights flown by the national
carriers fell into this category, with about 25% of the low cost airlines flying these sorts
of routes (DG Trans. 2002).
Going back to the issue with the United States, this nationalist tendency managed
to stick around when dealing with transatlantic flights (Scholte), as countries clung onto
their bilateral agreements with the United States. These dictated which airlines were
allowed to fly between said country and the US, as well as where exactly in the US the
airlines could fly. While some dealt with price regulation, frequencies of flights along
with the number of passengers were often addressed as well. For the most part these
partnerships favored the United States, with its multiple “flag” carriers and multiple hubs.
The European nation was often left with one “flag” carrier and one hub to operate out of
(The Economist. 2003)
After these agreements were taken to the European Court of Justice by the
Commission, the ECJ ruled that these agreements were in breach of European law,
because they would often times forbid other European airlines from flying between the
country with the deal and the US. For example, the lucrative German-US market was
reserved for Lufthansa and LTU, violating the concept of establishment, which states that
a European company can compete anywhere in Europe, as well as the customs union.
Therefore the Council of Ministers in 2003 asked that the nations back out of these illegal
bilateral agreements in favor of a common European agreement, to be spearheaded by the
DG Transport and the Commission.
A successful agreement would be seen as a big victory for the European air
market. However successful is a relative term, and both sides differ on how they want the
plan structured. The United States still wants to see a bilateral agreement, just for the
whole of the European Union this time, with the issues such as gateways and airlines to
be set out in the agreement. However, Europe wants a different sort of plan. What they
want is pretty much a free trade zone in the air stretching between America, Europe and
the ocean in between (Economist). Not only that, they want to be able to fly within the
US market, much like the US is able to fly its carriers within countries it has its
agreements with (Gardiner 1998). How receptive the US is to this idea is still a big
question, especially with the prospect of leaving its carriers open to full competition with
the Europeans. However, the Europeans have a few bones to throw to America to
sweeten the deal. The biggest is the allocation of landing slots at some airports, most
prominently London Heathrow, would perhaps be open to market conditions if the
Americans play their cards right, with the benefits of more US airlines (currently only
United and American are permitted to land) flying to Heathrow, as well as more landing
spots than what they have now. These spots are hot commodities and are worth millions
if opened up to market economy.
There are plenty of skeptics to this plan and it will be closely monitored for
nobody really is sure of its outcome. While most believe it will be ultimately successful,
full liberalization will be a tough sell, with the Americans, and with some Europeans with
strong interests. This includes British Airways, who‟d like to hold onto those London
Heathrow landing rights rather than have a power grab under market forces (Nayar). The
airport at Shannon on the west coast of Ireland is guaranteed half of all American flights
entering Ireland in its current deal with the US. There is a very real possibility that the
market would fall through the floor in Shannon if “Open Skies” are implemented and
American carriers fly right past it (O‟Farrell & Guilder. 2004). However, Europe cannot
show cracks in its unity in it‟s first attempt at a unified voice in air negotiations. The
labor unions that serve the airline industry in the United States are a potent force with
precarious jobs, and they would be hard pressed to accept European airlines crisscrossing
American airspace. Needless to say, a big breakthrough isn‟t expected anytime soon, as it
is an election year in the US and the fiery DG Transportation chair will be leaving her
post soon, leaving much of the industry to wonder what is next.
On the home front, another effort is being pushed to help further the productivity
of the European airline market. This cause, however, is more logistical and efficiency-
oriented, rather than business-oriented, though its ultimate goal is to increase the
competitiveness of all European airlines. It is the single European sky initiative, and it
sets out to harmonize the air traffic rules and regulations across Europe, with the goal of
combining all air traffic control into one continent-wide entity. Currently any pilot flying
from Brussels to Geneva must change frequencies nine times to keep in touch with air
traffic control. As national carriers grow, with their hubs swelling, as well as the raft of
new upstart low-cost air carriers that are popping up everywhere, the strain that will be
placed on the system in the near future will be tremendous.
With congestion and delays that rival those of anywhere else in the world,
European air space was known to be an awkward patchwork of air traffic control. And in
one fiery instant, this reality hit home in the summer of 2002, when a Russian passenger
jet collided with a US cargo jet in Swiss-maintained airspace over Germany, killing 71,
mostly teenagers, with the an underlying cause being seen as the seams between Swiss
and German airspace and their differences in procedure and technology.
As of right now the federation of 31 national air traffic controls, the IGO named
Eurocontrol, is what is trying to set continent-wide policy when it comes to air traffic
control. However, the EC wants to take over this role and provide a more coherent plan
with some authority behind it. The proposals seem reasonable and much needed, seeing
the efficiency situation of European airspace could not get much worse (Greaves).
The Commission would use its powers to standardize the airspace above Europe,
with larger blocs of airspace managed by fewer regional service providers, with a greater
consistency in regulations and improvement standards. This would be in the hopes of
reducing the number of transfers each airliner has to pass through, as well as a greater
homogeny when it passes through these areas. Another big aspect of this initiative is the
streamlining of the routes that run over Europe. Currently airlines must divert around
everything from military airspace to black spots, or gaps in service that inherently have
developed throughout the patchwork (DG Trans 2002). These obstacles force airliners
through illogical corridors that increase flight time needed. This initiative has been kindly
received as badly needed, and the Parliament has passed a resolution to voice their
support in 2004. Time will tell on the overall success of the integration, but it looks like it
just might be easier to integrate a couple dozen air traffic systems than it is to integrate
the national airlines themselves.
One last thing I‟d like to mention to reflect the changing landscape of the
European airline industry is the proliferation of the low cost airline. There has been an
explosion of late of no-frills airlines throughout Europe, fueled by the deregulation of
European airways mandated by the Union, leaving national affiliations to the wayside,
and letting carriers fly wherever they want. The leaders in this low cost sector are
Ryanair, based out of Ireland, and easyJet flying out of Amsterdam and Milan. These
airlines are modeled after the Southwest Airlines business models of quick turnaround,
no frills direct flights, making profits in times of yearly losses in the rest of the industry
(Economist). These low cost airlines fly to smaller, fringe airports like Stansted in
London, where they may actually be paid to land, rather than have to shell out for landing
rights. They offer one class of service, and the turnaround times can be frighteningly
quick at 20 minutes. They do not subscribe to the hub and spoke system, which can be a
great agitator to the congestion of airports, rather just saturating the direct flights to and
from more popular airports, without truly timing them to be connecting flights. All these
business practices allow them to cut costs and pass the saving onto the consumers.
These airlines are pushing the national airlines to the limit, when it comes to
short-haul flights the big airlines are responding with low fares of their own or even
starting up and subsidizing their own low-frills carriers, much like BA has done in
Britain, France, and Germany. The threat of the low-cost carrier, as well as the new high
speed rail systems, are pushing national airlines to become leaner and more efficient,
especially in finally taking full advantage of their inherent advantages, such as favorable
landing rights at better airports or their connections with the rest of the world. The efforts
of the European Commission are also going to push national airlines to be more
responsive to market forces, with an attempt to break down the nationalist tendencies of
the current airline system. While full-blown mergers are still tricky and complicated; the
current atmosphere should be more conducive to a few well-managed mergers of the big
airlines. A common voice given to the European air industry when negotiating with the
United States should also produce dividends, as well as an added impetus to merge to
compete directly with the American carriers. Lastly, the streamlining of the airspace
above Europe should shave billions off the operating costs of the airlines as the
idiosyncrasies of the archaic system are phased out in the new single European sky. The
leadership of the Commission looks like they want the best for the troubled industry, now
it‟s up to the airlines to take what is given to them and run, or rather fly, with it.
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