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WRANGLE OVER STATE AID FOR AIRLINES

The underhand terrorist attacks in the United States, in which several thousand people lost their lives, have hit large parts of the airline industry at a time when they were particularly vulnerable.

The consequences for the industry are far-reaching and will leave a visible dent in the global air transport growth curve: alone in the first 14 days after the "flying bombs" took their toll on New York, Washington and Pittsburgh, the US airlines announced over 100,000 redundancies. Total route coverage in the USA was slashed by ten per cent. Continental and American have cut out 20% of their flight schedules, and US Airways as much as 23%. The regional airline, Midway, is not simply ceasing flying operations but has filed for bankruptcy.

To reduce costs, some US carriers have decided to eliminate meal services on domestic flights, which in any case tended to be rather sparse. This measure is not helpful and is suggestive of panic and a failure to think things through properly. But it is also symptomatic. Such a strategy is aimed not at the customer, who at this time actually needs to be wooed, but at the investor. This way of looking at things only exacerbates the airlines' problems, as it results in measures which will not succeed in winning back the confidence of the passengers. And a further decline in passenger numbers is not actually in the interests of the investors either.

The mistakes of the past have caught up with some of the airlines in a brutal and tragic manner. Instead of building up reserves to cushion them if the economy were to weaken, some publicly listed airlines in the USA have yielded to the pressure of the capital market and pursued financial and corporate policies that are geared towards quarterly results. Airlines like Continental Airlines are paying the price for this now as they struggle to survive the crisis. In Europe, Swissair and Sabena are both in serious difficulties, and if the decline in passenger demand continues for long, they could be forced out of the market.

The call for state financial aid for the battered airlines was not long in coming from those affected. But although some state assistance may be appropriate, individual governments should proceed with circumspection. Public money must not be used simply to iron out past management mistakes.

Michael O'Leary, Chief Executive of the Irish low-cost carrier, Ryanair, has little sympathy for the demands for government aid. He is assuming that such funding would actually be going to smooth over financial problems that were foreseeable even before 11 September. He therefore wrote to the EU Commission in Brussels to state that in his view financial aid for some airlines would be a distortion of competition. Instead of providing help on a selective basis, he argued, financial aid should be planned so that it benefits all airlines, for example through lowering of airport charges.

Unlike the ailing airlines, Ryanair expects to achieve its annual profit target in full. When passenger numbers experienced a short-term dip after the terrorist attacks, the airline reduced its prices again. In England tickets are being offered for direct sale from #9.90 (DM 30). Thanks to its liquid reserves of #700 million (DM 2.2 billion), Ryanair is planning to add eight brand new Boeing 737-800's to its fleet and to open up some new routes in the next few months.

Lufthansa is also less seriously affected than other airlines. Passenger and freight volumes may have dropped back and no doubt the airline's annual results will be well below target, but it has a world-wide route network and does not depend solely on the North Atlantic market. It is an integral member of the global Star Alliance and has a firm grip on its costs, assisted by having a relatively young fleet. Crisis situations are not survived by waiting until they arrive and then taking action, but the groundwork for survival must be laid well before disaster even becomes imminent.

From page 6 of FLUG REVUE 11/2001