The truth behind (not so) cheap flights – the immense annual state subsidies to small airports & cheap airlines

In a recent blog, Jacek Krawczyk, who is the president of the Employers’ Group of the European Economic & Social Committee, describes how the current system of  state subsidies to European airports and airlines works – and how damaging its effects are. He says aviation needs to be treated like any other business, a “level playing field” without financial help given to some airlines, and the sector should have less subsidy. In response to the question how Ryanair flights can be so cheap, the answer is that they get subsidies for flying into small regional airports. This artificially boosts demand for flights.  As much as 20% of Ryanair’s revenues are from subsidies, from reduced taxes, preferential ground handling rates and marketing funds.  These subsidies could   be as much as €10 per passenger to the airline.  Krawczyk says almost half of European airports (of which there are too many) generate losses, and more than half if state aid is subtracted from their revenues. The low cost carriers say they get cheap deals with airports by standard business negotiations, while regular airlines get huge amounts of subside direct from governments, from being out-competed by the low cost carriers. “There is a great opportunity here to prepare the first in-depth, complete and PUBLIC report showing how much public aid is pumped into the aviation sector and how those resources are spent.”
..

The truth behind (not so) cheap flights

By Jacek Krawczyk

Jacek Krawczyk is the president of the Employers’ Group of the European Economic and Social Committee (EESC) and rapporteur of the EESC’s opinions on civil aviation.

17.2.2014 (Euractiv)

As the European Commission publishes its new state aid guidelines for airports and airlines on 19 February 2014, Jacek Krawczyk argues that aviation needs to be treated as a business by restoring a level playing field in the sector and stop the race for subsidies.

It’s so nice to leave Brussels for the weekend and fly to Spain or Italy for less than 50 euros, isn’t it? Many of you, Dear Readers, have certainly enjoyed doing that dozens of times. Some of you have probably complained afterwards about the airline’s service, delays and restrictive luggage regulations or other tricks to get money out of you, but still it was great value for money, wasn’t it?

But have you ever wondered how it is possible to travel by plane for such a low price? If you haven’t, let me explain: you’ve paid more for the ticket than you think. The rest was taken from you in taxes

For some time now the European Commission has been due to publish new guidelines for state aid in the aviation sector – a long awaited documents that should lead to a more level playing field in aviation. Long awaited, because the distortions of competition in the sector are – according to key stakeholders – significant.

Legacy carriers are asking for public aid as they struggle with competitors from outside Europe and aggressive competition from low cost carriers. Many airports ask for public financing, as they are not able to cover operational costs. Almost half of the airports in Europe generate losses, more than half if we subtract state aid from their revenues.

New guidelines will for sure restrict state aid both for the airlines and for the airports. Some members of the European Parliament have already opposed that, arguing that regional airports must be subsidised, as they should be treated not just as companies but also as investments in regional development. In reality significant amounts of public money spent for this “regional development” indirectly supplies the very low cost carriers (LCC) which practices are distorting the competition. LCCs take advantage of their dominant position in negotiations with a majority of regional airports. They get such significant discounts in airport charges and other fees that operations are for most regional airports often barely profitable (if profitable at all). Regional airports, instead of investing in development, are fighting for survival and heavily subsidising carriers to fly from them by generating often-artificial demand.

What’s the scale of such indirect subsidies? This is very difficult to estimate, as most of the agreements between carriers and airports are confidential.

According to the Air Scoop’s report on Ryanair’s business model in 2011 approximately 20% of the company’s revenues may come from subsidies. According to press reports, when Air France complained about Ryanair to the European Commission in 2010, they estimated that at least 25 airports gave Ryanair the equivalent of €660 million in financial aid, with measures such as reduced taxes, preferential ground handling rates and marketing funds.

According to Air Scoop’s report, the subsidies amounted to €10-11 per passenger!  Some estimates may not be correct and refer only to the biggest and most dominant LCCs, but it can be assumed that other market players with the same business model  gain from similar arrangements.

The representatives of the LCCs will no doubt retort that they do have preferential rates but they got them in fair business negotiations, while regular airlines get huge amounts from the governments.

I agree with the second part: more and more airlines are asking for government help, arguing that different charges  and LCCs distort competition. They also complain about other burdens due to Europe’s ambitious targets for CO2 reduction, planned only for European companies (which distorts competition even more). As they can’t keep up in the market race, they ask for public aid. This often ends with an investigation by the European Commission and after months of proceedings aid is assessed as unjustified, ruining even the hardest efforts of such carriers to restructure themselves and become competitive again.

Currently, with more than 80% of airports in the EU dominated by one carrier (more than 40% of passengers), it is rather difficult to imagine that such negotiations have an entirely “business” character. Regional airports are fighting to keep a minimum quantity of traffic in order not to go out of business. They do this with the help of more and more subsidies. We have built a lot of airports in the EU using different types of public money just to create enough capacity for certain carriers to take advantage of the fact that there is not enough demand for air transport services there.

I hope that any new state aid guidelines will not only clarify the basic rules on public aid. There is a great opportunity here to prepare the first in-depth, complete and PUBLIC report showing how much public aid is pumped into the aviation sector and how those resources are spent. The EESC has pointed out in its report on the revision of aviation guidelines that such a study is necessary in order to identify  not only the scope of aid but also the different “methods” of money transfer.

If European aviation is to be competitive, we must stop counting on the current “messy” state aid and treat aviation as a business again. Let’s stop the race for subsidies, restore a level playing field and get back to what companies should be best at: offering good service for a reasonable price and making decent profits for shareholders. What is at stake here is mobility of EU citizens. We need sustainable model of EU aviation and this takes more than fighting for next regional “donator”.

http://www.euractiv.com/transport/cheap-flights-analysis-533555

.

.


 

.

Earlier:

European Commission to clarify state aid to airports – making ineligible those with over 3 million passengers per year

Date added: February 17, 2014

Across Europe, State aid to small regional airports has until now been ambiguously regulated by measures that date from 1994 and 2005. Much of the aid has probably been illegal, because it has been operational aid that is used to subsidise airport fees for airlines. These savings are then passed on to customers – subsidising their flights. Budget airlines such as Ryanair have taken advantage of this situation and made a lot of profit on it, as well as encouraging artificially cheap air travel. The European Commission is now to produce new guidelines on state aid to airports and airlines, to be publicised on 19th February. The Commission has 50 pending cases of suspected violations of state aid rules, but none has been acted upon for fear of forcing small airports to close. Large airports and airlines have complained that they are being put at a disadvantage by subsidies to their smaller competitors. It is likely that the new guidelines will only allow state aid for 10 years from now, and introduce a threshold so airports with over 3 million passengers per year are not eligible. Environmental campaigners are angry that the guidelines will legitimise a previously illegal practice. It will cause a growth in air travel, contrary to the aim stated by the EU’s white paper on transport of moving passengers from air to rail.

Click here to view full story…

.

and

.

 

Economist: Proposed EU rules on state aid aim to stem the flow of money from taxpayers’ pockets to Ryanair

19.10.2013Article in the Economist gives a useful set of insights into airport subsidies at small airports across Europe, which are now due to be reduced after consultation. The Economist says Europe has over 450 airports, mostly small and loss-making. About 85% are publicly owned. Local politicians’ enthusiastic sponsorship of airports, to boost regional economies, has in turn contributed to the rapid growth of low-cost airlines, since the airports have used their subsidies to offer cheap landing fees and other sweeteners to persuade the cheap carriers to fly there.  Ryanair is the sole or dominant carrier at many of the airports under investigation, and has been getting effective subsidies of as much as €11 per passenger. There may be as much as €3 billion of taxpayers’ money given in EU-approved aid to small airports each year, and more that is not sanctioned.  EU laws ban state aid if it seriously distorts markets and though there have been many investigations into this, none has yet reached a conclusion. Some smaller airports will find it hard to pay Ryanair and other budget airlines enough to keep them flying there. With tighter rules, some of the 80-odd European airports with under 1m passengers will be at risk of closing.http://www.airportwatch.org.uk/?p=18014

.

and

.

 

Consultation on rules for European Commission state aid to airports and airlines

July 2013Under the European Commission, state aid is granted to various sectors of the economy. However, a key issue is the impact it has on distorting the market, and giving an unfair advantage to those companies or organisations receiving it. Airports and airlines are one sector that receives large amounts of state aid through the EC. The Commission’s DG Competition is tasked with overseeing state aid. There have been earlier sets of guidelines on state aid to airports and airlines, but there is a current consultation – due to end on 25th September (which may be extended). The exact amount of state aid given to the aviation sector is somewhat shady, but is at least €3 billion, for those subsidies that are fully notified.There have been widely publicised cases, such as that of Ryanair at Charleroi airport. Transport & Environment have produced an easy-to-read briefing on the state aid situation, and people are urged to respond to the consultation. The state aid gives the aviation industry unmerited subsidy, and helps to encourage very high carbon travel.http://www.airportwatch.org.uk/?p=17424

 

.

.

.