Monday, September 19, 2005

Chapter 11 and state aid

There is an old adage in the aviation industry: if you want to make a million pounds, start with ten million, and run an airline. The aviation industry has lost quite staggering amounts of money since 2001, as a consequence of the threat of terrorism, SARS, high fuel prices and sundry other problems.

Actually, this isn't entirely true. It would be more precise to say that the aviation industry in North America has lost loads of money. Across the world as a whole, the industry has not fared too badly. But what this hides is the variety of financial performance.

In North America, the biggest four players in aviation - American, United, Northwest and Delta - are all in Chapter 11 bankruptcy protection, having probably lost more money between them than the rest of the industry has made. This means that they can continue to operate but being protected from their creditors. Which means in turn (in effect) that they can ignore their liabilities. In the meantime, airlines like Southwest are bucking the trend by making money and expanding.

In Europe, the days are finally passing when state airlines can be bailed out by their government. The major casualty in this regard so far is Sabena - the Belgian national airline - which made a profit in one year out of over 50. Swiss continues to try and repackage itself out of financial danger; other notably vulnerable airlines are Alitalia, Olympic (which has also never made a profit, I believe) - I understand that the status of payments made to these two airlines are currently being investigated for their legality - and Cyprus Airways. To get some idea of how bad the industry in Europe has been, Air France was given a "one-time" payment at one stage, I believe, that amounted to £5 for every person in the European Union.

However, in difficult times, although across Europe as a whole airlines are roughly breaking even, what is really happening is that there are a stack of airlines that are making significant losses whilst other airlines (British Airways, Ryanair, Easyjet) make healthy profits.

So the playing field is far from level. North American airlines are allowed to continue operating, preventing competition in key market places (one such being flights between the US and Heathrow, for example), whilst actually failing to make money but being protected from the consequences of this. European state airlines (though less so now) have inefficient practices but are still able to use their privileged position to stifle competition. It is hardly surprising that the success stories in the industry have carved out new markets for themselves, given the stranglehold that the legacy operators had over the existing ones. Of course it is important to have mechanisms to protect jobs - union agreements, bankruptcy laws and so on - but these laws weren't ever meant to prevent efficient companies competing with companies that were unable to be competitive.

Caught in the middle are independent airlines - unable to get fair access to the markets that they know they can make money on. The list of airlines that have failed in the last four decades is long. For the most part, it wasn't due to any particular flaw in their business model, except for the fact that they assumed that there might be a level playing field.