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EU Airline Sector

EU airline industry needs reform, not aid

MATTHEW CURTIN  Apr 20, 2010

Europe's ash-stricken aviation industry has quickly fronted up to the European Commission in hope of compensation. But there is no good reason for the sector to get special treatment. The European Union would do better to use the crisis to push for deeper policy reform at home and in the U.S. The prize would be a more genuinely competitive airline sector made up of fewer, stronger regional players, better able to cope with the industry's persistent crises.

As serious as the disruption has been, with 95,000 flights grounded and 8 million passengers stranded, the volcanic ash has caused no physical damage so far. It is hard to see how the sector or individual countries would qualify for EU disaster aid.

True, the EU relaxed state aid rules for the industry after the Sept. 11, 2001 terrorist attacks led to a similar, but shorter-lived, disruption to air travel. British Airways and Air France received support but it ran only into the tens of millions of euros. This time, costs are heavier. A full eight days of disrupted travel would cost British Airways £136 million ($208.6 million) and Deutsche Lufthansa €296 million ($399.2 million), according to Deutsche Bank.

But the crisis isn't yet life-threatening. Airlines have strong cash balances and they're not the only victims. Airports, tour companies, importers and exporters of perishable goods also are suffering and are no less deserving of state aid than the airlines, presenting the EU with a potentially costly precedent and the prospect of unlimited liability.

The ash cloud has highlighted the airline industry's fragility in an era of terrorist threats, global health scares, and volatile fuel prices, not forgetting the perennial problem of bad weather. As a whole, airlines haven't covered their cost of capital for more than two decades, according to industry body IATA.

Structural change is the answer. Despite efforts to liberalize them, 65-year-old rules governing the global industry still impede consolidation and the invigorating wind of competition. Foreign ownership rules persist, notably the 25% limit in the U.S. The EU has only recently conceded the principle of cabotage, allowing an airline to fly local routes in another country. The U.S. hasn't yet reciprocated. Airport landing gates and slots in Europe aren't easily transferable while air-traffic control remains fragmented. Until there is reform, the airline industry will continue to stagger from one crisis to another.

EU airline industry needs reform, not aid
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