Guest Post: How EC Revised State Aids Policy Represents a Shock for the LCC Industry

Guest Post: How EC Revised State Aids Policy Represents a Shock for the LCC Industry (Brian Leon on flickr)

Claus Berger from Air Scoop discusses how the European Commission revised state aids policy affects the LCC industry.

At long-last, European Commission has made public its revised guidelines for the future state Aids in the civil aviation industry. These guidelines primarily address short-haul, medium-haul market as they seek to limit the use of State aids by regional airports to maintain their economies virtually in shape. Although expected, the updating of the guidelines will completely upset the market. The industry stands now at the brink of a new day: what will be the potential consequences of this new deal?

Redundant airports to die, regional niche to become more competitive

Unlike what most of the mainstream media inferred, UE state aid policy will not jostle aside small, medium airports. On the contrary, the current version of the guidelines chooses to safeguard smaller infrastructures as most aren't able to bear their own operating costs. For instance, airports with less than 1 million passengers a year could receive financial aids from the public powers for up to 75% of their operating costs (the percentage then decreases gradually as the passenger traffic grows).

However, the receiving of subsidies, albeit authorized, will have to be conducted with transparency and according to a genuine business plan. As our office proved in the past, this hasn't been the case for many an airport in Europe.

Conversely, the EC will show no mercy to airports located in the same "catchment area" (representing the geographic market set at around 100km or 60mn travelling time by car). Basically, this measure means to effectively "kill" redundant, unprofitable airports. As a consequence, from 2014 to the next ten years, the number of secondary airports shall inescapably decrease.

For airlines, two immediate effects could result from this change of paradigm:

– With a slump of subsidies and a lessening of airports, regional market will likely develop into a competitive brawl. The niche every airline would eye at in the past might turn into a less appealing market by 2014 as the opportunities grow scarce. As a matter of fact, the change doesn't augur well for Flybe, which hardly remains afloat as for now, but also for heavyweights such as Ryanair. Indeed, the Irish company has almost exclusively built its business model on low airport charges and state aids.

– Less airports, more passengers and the urge to fly for important fleet – form a dangerous mix. Travel routes might experience saturation as a result and airports should face overcapacity (12% according to Eurocontrol by 2015), thus proving right the fears of Sir Stelios regarding future developments in the industry.

Last but not least, on the long term, airlines may also face stiffer competition from the railed industry as it remained cheaper and well-aided. This is a definite risk that ELFAA pointed out.

New guidelines, bad news for the industry?

At this point, airlines and airports may feel like the proposed guidelines mean bad news, although from a very objective point of view, EU simply set straight a mechanism that had drifted astray. However, this vision seems far too restrictive as some positive outcomes may emerge from the future European aviation order. By diminishing the state aids, the airlines may eventually find innovative ways to profit and quit their status of "sick men of aviation". Besides, the fares should generally even up – which shall fuel the traffic rise and help the LCC market into maturity. Ultimately, the shareholders, provided at long-last with a clear and transparent vision of the industry, could also invest massively into the most successive firms.

Of course, the future will not be all milk and honey for some companies: the likes of Ryanair or Wizz Air will face higher operating costs and definitely suffer more than the rest. Nevertheless, this remains a fair price to pay to ensure fair competition. At last, the bases on which this new industry will be built finally broke free from the threat of an ever-hanging sword of Damocles. Time to start anew.

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