EUROPE: TAKING FLIGHT FROM COMPETITION. - Europe's protectionist airlines are reluctant to face the reality of deregulation.

by Roger Eglin
Last Updated: 31 Aug 2010

Europe's protectionist airlines are reluctant to face the reality of deregulation.

Over the years Europe's state-owned airlines have wrapped themselves in the protective cocoon of a remarkable monopoly. Almost every scheduled route, bar a couple of dozen, has been operated by two airlines which have carved up the traffic, revenues and capacity between them with impunity and the backing of their government owners.

This cosy protection has created a high-cost industry riddled with inefficiency. Flying much the same sort of aircraft as American airlines, European costs are about half as much again. Wage costs are often spectacularly high. A Lufthansa pilot gets $152,000, almost twice as much as one at BA, and well above the $95,000 a pilot at American Airlines enjoys. Even this palls beside the $209,000 an Iberia pilot flies off with. And fat pay scales apply across the board. With the exception of BA among the big European carriers, cabin crew, maintenance and sales staff generally get paid 50-100% more than their US counterparts.

High costs show in the fares the Europeans charge. It is almost three and a half times as much per mile to fly from Paris to Munich as to travel from Los Angeles to New York - and greater competition means fares on transatlantic routes are around one-fifth the level of those on busy intra-European routes.

Given this sort of overcharging, the big European carriers ought to be able to make some sort of profit. But recession has left them woefully exposed. In 1992, the Community's flag carriers had a net loss of over $1.6 billion. If BA's $298 million profit is taken out of the equation, the real loss figure is close to $2 billion. Without the backing of their government owners, it is difficult to see how airlines like Iberia (loss $340 million), Air France ($617 million) and the gaggle with losses running at around $200 million or worse, such as Aer Lingus, TAP and Olympic, can keep going.

The panic climb-down of the French government when the unions blocked the runways at Charles de Gaulle in protest over a proposed reconstruction package is an extreme reaction but other governments, particularly in Spain and Italy, are still reluctant to come to terms with the crisis. What has frightened the protectionists is the fact that deregulation is now an established fact in the European Union and more competition is a certainty.

Since January 1993, Europe's airlines have been free to fly and charge as they wish on international routes. From 1997, this freedom will spread to domestic routes. BA, for example, could fly passengers from Milan to Rome, and Alitalia, should it so wish, could fly Rome-London-Glasgow. The protectionists - the French, the Italians and Spanish in the forefront - are having to be dragged kicking and squealing into this new era.

Britain, meanwhile, has been a model of good behaviour (reflected by the fact that scheduled air fares to the Continent tend to be cheaper than the other way round). BA has certainly changed its spots since the days it guarded the status quo as zealously as anyone and it is revelling in the present situation. As a prelude to privatisation, it was forced to improve profitability and, with the honourable exception of national rivals like British Midland and Virgin, now finds itself in the enviable position of competing against a squadron of bloated monopolists.

Most of the Europeans have copied BA by seeking to create an alliance of some sort. Thus while BA has links to USAir, Qantas and TAT (a French regional airline), Air France owns a third of Belgium's Sabena (and has absorbed France's two other scheduled airlines, Air Inter and UTA), Lufthansa has a partnership with America's United while British Midland is partly owned by SAS. KLM, Swissair, SAS and Austrian Airlines tried, but failed, to build one of the biggest partnerships of all, Alcazar.

Partnership is fine as far as it goes. Alcazar would have saved on costs but while links with American airlines help European carriers overcome the barriers to tapping the big US domestic market, regulators like Britain's Civil Aviation Authority are suspicious that some partnerships may be just another means of muting competition.

Salvation lies not in copying BA's strategy of global alliances but in emulating the cost-cutting which made its privatisation - and subsequent flight through the recession - such a success. This month a committee of 'wise men', set up to look into the European airline financial crisis, is due to report. In an interim report, published at the end of last year, they insisted the time for debate was over and the airlines must get down to cutting costs. It was not what France et al wanted to hear.

Unless Brussels can keep the pressure up, the protectionists will continue to duck and dodge. Officials must question every merger, challenge every plea to approve financial help for reconstruction and force home the truth. If they don't, European taxpayers and travellers will be paying through the nose to keep the monopolists aloft.

Roger Eglin is associate business editor of the Sunday Times.

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