Albeit already in the past, the latest scandal of the European low cost carriers has left a bitter aftertaste for many industry players. Lufthansa has managed to save face and avoid major losses, but Germanwings, Ryanair and TUIfly will have to pay back the previously received subsidies. The scandal spelled bad news not only to carriers, but also toairports now in risk of being dropped by many airlinesincapable to operate without the incentives. All is fair in love and war, but what about the airline business? Experts claim that even though unofficially, many of them do in fact take advantage of indirect government‘s support. How fair is it to decide which carriers should be helped out and which should be left to fend for themselves?
All gains
The Airline Deregulation Act, passed in 1978, provided large carriers with a freedom to act in accordance with the market demands. During the prosperous times, airlines reached many regions and provided service even to the utmost remote airports. However, the latest economic crisis has forced airlines to rethink their cost control strategies, restrict domestic flights and abandon low-capacity planes (such as SAAB 340). Smaller regions which were physically incapable of generating enough traffic, for example Alaska, were the first ones to feel the impact. In such scenario the federal government can provide subsidies and support airlines to secure service. This way an airline receives payment if the actual revenue from the area does not reach the revenue projected. One of the best known examples of a prepaid commitment is the Essential Air Service Program. It is being used by every larger country. Currently there are 115 airports subsidized in the United States alone, for a total of $253 million. Furthermore, on 17 of December 2014, Federal Air Transport Agency has stated that allocation of more than $48 million for Russian carriers (Aeroflot, Transaero, Sibir, Ural airlines, Yakutiya and UTair) to perform regional flights has been fully implemented.
But there are two sides to every coin. Subsidizing a carrier to serve a distant community may lead to an abuse of comfortable circumstances. A common situation would be a carrier serving an airport with more flights than necessary, effectively diminishing the benefit margin of investment in the service. To make the best use of the taxpayers’ money, serviceable areas are assessed regularly and the optimal plane models as well as number of flights are identified.
State aid = shame?
According to IATA, $1 invested in an airline creates a $3.25 worth of demand in the economy, while a single aviation employee translates into 6.1 jobs in other business segments within a region. Therefore, the disappearance of air service first strikes to the prosperity of local small businesses and, consequently, the wealth of the entire area. Essential Air Service, therefore, serves as a proof of the necessity of a carrier supporting an economy in a small region. However, from a wider perspective, what is the role of a carrier in the scope of an entire country? Many developing countries view their major carriers as a strategic element of their national economies. Understandably, weaker airlines are often unable to compete with large aviation enterprises. Then they turn to governments for support, for example, Trinidad Express points that Caribbean Airlines received a $300m fuel subsidy in 2012, and Japan Airlines have received over $143bn of fresh capital in 2010, as Emirates have indicated in a report on airline subsidies. However, even upon being granted such benefits an airline subject to inefficient management may find itself in a situation requiring a much larger intervention. In this case the government is presented with a dilemma of whether to let the exhausted airline meet its end (and expect foreign or private carriers to take the goners’ place), or to bail it out and keep some control over the airline’s activities. For example, the Greek Government aided the country’s local carrier Olympic Airways by writing off €2.6 billion worth of debt in 2008. Malaysia airlines, on the other hand, had to undergo a major restructure and give up the ownership to the investment holding arm of the Government of Malaysia.
While the support for a national carrier may seem like an investment to some governments, others find it more adequate to allow the market regulate itself. For instance, Qantas has repeatedly addressed the Australian government asking to provide a debt guarantee or lift foreign ownership restrictions. The Australian government refused to provide any direct support and was not willing to give up on the national airline. It did, however, consider and implement minor changes to the disadvantageous Sales Act, allowing up to 49% foreign investment.
Meanwhile, the situation is completely different in the Middle East and Turkey, where governments pursue an ambition to turn their aviation industry into one of the main provider of national income. Turkey, for example, appointed $29bn to Istanbul’s megaproject – the third airport, specifically aimed at growing Turkish Airlines, reports Today’s Zaman. In Middle East region, fuel subsidies, although applicable to the whole state, at a time allowed Gulf carriers up to $1000 savings per ton of fuel. Furthermore, in aid to decrease the time US tourists have to spend in queues, writes Arabian Business, Emirati airlines persuaded the government to open preclearance posts, allowing passengers to avoid customs upon arrival to US. Finally, non-existent corporate tax sustains the airlines’ ever increasing expansion. Combined with to-the-point management and a definite vision, major carriers of Middle East are the fastest developing competitors in the field of airlines. Unsurprisingly, the situation has been deemed unfair byby international carriers who find it hard to compete with the heavily supported Middle Eastern providers. For example, Qantas used the situation in the region as a clear example of the necessity for governmental support, while other airlines have publically announced critical areas of fair competition infringement – different taxation, low airport fees, undeveloped environmental regulations and the inequality in labor markets.
Exporting the profit
Another problem comes up unexpectedly indirectly. Given the globalization, it is safe to say, that every industry player is connected. In markets as large as US, clashes happen even between sectors that would seemingly have no issue with each other. This situation comes into play, when an export credit agency subsidizes the purchase intents of foreign carriers, who can even be direct competitors of the national carriers. Recently, Delta’s Chief Executive Richard Anderson voiced his concerns over the insufficiently regulated Ex-Im’s financing practices, suggesting the agency should only support the airlines which truly have no other means to stay in business. Ex-Im Bank has financed deals involving Emirates Airline - one of the fiercest US carriers’ competitors, and has thus incurred a lawsuit from Delta, claiming the support has led to financial losses for the US carriers.
But everyone does it
Should the government be allowed to support an airline directly? Maybe not, if we value fair global competition. But let’s face it – we live in a real world, and countries do support their carriers through all available means since aviation may do magic for national economies (e.g. Turkish economy growth rate has tripled thanks to the development of the aviation segment). And those countries which refuse to provide any support – they may eventually be left with no national regular airline at all, because it won’t be able to compete with foreign carriers. At the same time, even if we assume that many (if not all) governments do support their carriers in one way or another, one should also realize that, for example, UAE, Turkey, the USA, Poland, Belgium or Egypt – each country has different resources and capabilities (due to both legal and economic limitations) to provide such support.
In other words, if everyone does it, why everyone complains? Maybe because some airlines just receive smaller support than others?
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