FLUG REVUE August 2002: US airlines get state help

US AIRLINE STATE AID DISTORTS COMPETITION

By Volker K. Thomalla

Shortly after 11 September the US government set up an Air Transportation Stabilisation Board (ATSB) tasked with checking the entitlement to government-funded financial assistance of American airlines that had got into financial difficulties as a result of the terrorist attacks. Until 27 June the ATSB had little to do, as only one airline, America West, submitted an application for aid. This application was approved, and America West received a loan guarantee which saved it from almost certain bankruptcy. Then on 27 June suddenly the airlines were clamouring at the ATSB's doors, as Friday 28 June was the last day on which applications for aid could be submitted. As well as a number of regional airlines, some major carriers also submitted last minute applications for state assistance.

While smaller airlines such as Denver-based Frontier Airlines were content to apply for guarantees in the order of $70 million, big carriers such as United Airlines proved less modest: United is seeking guarantees to the tune of $1.8 billion, while US Airways needs around $1 billion.

These figures show the extent of the problems with which the airline industry is having to contend. But not all the problems are actually due to external factors. In fact the impression gained by an observer attempting to book a transatlantic flight at present is quite different: nearly all the flights are overbooked and utilisation has in some cases reached levels that are bordering on discomfort for passengers. To passengers taking one of these flights, and to would-be passengers who are unable to get on the flight they were aiming for due to overbooking, it is incomprehensible that the carriers are not making a profit.

Yet this contradiction is quickly explained when one examines the passenger and capacity figures. For example, while the number of transatlantic passengers carried by airlines that are members of the Association of European Airlines (AEA) was down by 16.2% in May 2002 compared with the same month of the previous year, at the same time the available capacity has contracted by 19.9%. This means not only fewer passenger miles but fewer flights as well. This shows that the airlines responded correctly to the reduction in demand by rapidly adjusting capacity.

On the other hand, those airlines which are now attempting to generate extra business with cheap fares are reacting in the wrong way. In fact they are only accelerating the loss of revenue and unnecessarily increasing the financial pressure that they are already under. To call for state aid in such a situation, which is partly their own fault, is out of order in my view. In the United States, due to the lack of a functional railway infrastructure air travel is the only practical mode of transport for journeys over 300km. It is therefore extremely important for the US government to stabilise the financial situation of the airlines. However, the resources allocated for this should not be used to fund a hidden price war in a trade-distorting fashion. Such an approach will cause irreparable damage to the airline industry all over the world, because airlines that offer sensibly-priced tickets are placed at a disadvantage while carriers that fill their seats primarily with enticing offers that do not cover their costs continue to be supported by the state. The result will be distortion of the competition not only on domestic American flights but above all on international routes on which the American airlines are competing with airlines that are not in receipt of state assistance. I hope that the ATSB will bear this in mind as it considers the applications for loan guarantees that are before it.

From page 4 of FLUG REVUE 8/2002

Last updated 11 July 2002

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