PPM dead, ERA looks to new battlegrounds

 - November 26, 2007, 12:12 PM

The economic doldrums have begun to markedly slow the phenomenal growth European regional carriers have enjoyed in recent years. Statistics produced by the European Regions Airline Association (ERA) for the first seven months of the year show that traffic for its members is growing at an average of just below 7 percent–compared with the double-digit expansion commonplace when the group staged its last general assembly at the Swiss resort of Interlaken in September last year.

Nevertheless, the fact remains that ERA carriers are still outperforming the continent’s major airlines, which now average around 5-percent traffic growth, by around 40 to 50 percent. “But performance is definitely slowing,” ERA director general Mike Ambrose told AIN. “This confirms that there is a recession in our market.”

Despite lower passenger numbers some regional airlines are witnessing improved yields. Still, there is increasing concern that struggling major carriers are being tempted to dump anticompetitive airfares on the market in a desperate bid to boost cash flow, regardless of the consequences for profitability.

ERA has asked for vigilance from the European Commission (EC) at a time when formerly state-subsidized flag carriers such as Belgium’s Sabena and Olympic Airways of Greece struggle to stay afloat. “There is no way a regional can protect itself against that kind of action by a more dominant carrier. The fares that are charged have to be realistic,” said Ambrose.

In good times and in bad, ERA has argued that its members contend with the burden of an excessive and inappropriate regulatory environment. For the UK-based association, the past year has unfolded as a classic case of winning some important battles but being far from certain of winning the war.

Three months ago, ERA and its allies scored a major victory when Eurocontrol dropped plans to reform its en route charging formula for air traffic control services. On June 26 the agency’s top management overturned recommendations from its Possible Pricing Mechanism Task Force (PPMTF) to proceed with a charging formula based on a fixed-cost element that would take no account of aircraft size or journey length. The plan would have resulted in substantially higher charges for any aircraft up to the size of a Boeing 737.

ERA argued that the proposed new formula would have definitely resulted in serious fare increases and job losses among its member carriers. In early June the PPMTF team insisted on advancing the plans even after failing to reach any consensus on the issue after no fewer than 14 meetings. According to ERA statistics the introduction of the fixed-cost element in the charging formula would have led to operators of an aircraft such as the Fokker 50 paying up to 97 percent more in en route fees.

Economists advising the PPMTF made no secret of their intention to use the new charging formula as a way to drive “smaller aircraft” out of European airspace to increase capacity for larger operators. The UK authorities were among the leading proponents of this strategy but Eurocontrol’s decision to drop the plans exposed little support from the majority of member states. France, Germany, Italy, Sweden, Austria, Switzerland, Portugal, Norway and Romania overtly opposed the pricing scheme.

“The threat to our members was around E200 million ($185 million) per year if (the PPM) had gone ahead,” said Ambrose. “In terms of cost avoidance this is a massive victory and one that I am sure has not been appreciated by the people who were going to be directly affected in Europe’s regions–not just the airlines, but airports and whole communities.”

Terminal Fees Could
Ruin Regionals

But ERA’s satisfaction at a lobbying job well done proved to be short-lived because the summer saw the publication of an alarming study prepared for the EC’s transport directorate by accountancy group PricewaterhouseCoopers (PWC) on possible changes to the charging structure for terminal navigation fees. The study copied the PPM formula in increasing the proportional amount paid by smaller aircraft for terminal area ATC charges in an explicit bid to persuade airlines to use larger equipment.

According to the report, the costs for an ATR 42 would rise by some E7 ($6.50) per passenger. In ERA’s view the size of the 46- to 50-seat ATR 42 falls below the average size of its membership’s fleets. It estimates that the per-passenger increase for a more typical regional airliner would be E4 to E5 ($3.70 to $4.80), resulting in a total annual fee hike for its member carriers of E320 million ($296 million)–60 percent more than the PPM threat.

“The consultants [at PWC] are trying to tell airline presidents that this is unlikely to affect the viability of any regional service,” complained Ambrose. “Of course it won’t. They won’t have any services left because they will all be out of business.”

Environmental Charges
Loom Large

What’s more, having abandoned the PPM formula, Eurocontrol has begun laying plans for “environmental charges” that would give airlines an “incentive” to operate younger and less polluting aircraft. Ambrose argued that this would prove to be a “cosmetic but costly” burden on ERA members, whose average fleet age has already dropped to 7.3 years.

“Aircraft must have a useful economic life,” he insisted. “If you are buying the latest technology today, you would have no guarantee that in four years time you would not face an environmental charge for using these aircraft.”

ERA is even more indignant that, in their flirtations with environmental charges, Eurocontrol and the EC have shown a determination to favor rail operators at the expense of air transport. Similarly, the association has consistently complained about EU member states directly subsidizing rail services out of a belief that it is the more environmentally friendly option.

“We are doing our best to introduce the latest technology but we are getting no recognition for that,” Ambrose said. “Yet we don’t see the same restrictions applied to competing modes of transport.”

ERA is determined to shatter rail’s status as the environmentalists’ golden child by presenting the Commission with its own research proving that air transport is no worse a polluter. “There is currently an innate prejudice in favor of rail development without any objective assessment of all the modes,” Ambrose complained.

The EC’s protracted efforts to reform the airport slot allocation process within the 15 European Union (EU) member states continues to cause headaches for ERA officials. They have complained bitterly that a first set of proposals that were supposed to consist of largely uncontentious “technical” changes did in fact include controversial market access issues slated for discussion at a later stage.

The technical changes–largely welcomed by ERA–included factors such as the independence and financial viability of slot coordinators. The association now fears that the dispute over the market access issues will stall progress on a practical level.
The proposals, issued on June 28, would allow slot coordinators to exclude aircraft “below a certain size” from airports and give lower priority to scheduled air routes on which “satisfactory service by other means of transport [road and rail] exists.” While forwarding the initial proposals for consideration by the EU Council of Ministers and Parliament, EC vice president for transport and energy Loyola de Palacio also instructed her staff to begin yet another wave of study and consultation aimed at introducing a “market mechanism” for the allocation of slots (most likely a system of auctions or leases). The EC has set no timetable for this more radical second phase of reforms, expected to further favor major carriers at the expense of regional airlines and other smaller operators.

ERA is now lobbying hard to have what it considers market-sensitive proposals dropped from the ostensibly technical reforms and shelved for discussion under the second phase of study and consultation. The association also objects to proposals requiring coordinators to give new services priority over the re-timing of existing services and for preference for “new entrants” on services between congested hubs and regional airports.

According to ERA air transport policy director Andrew Clarke, the EC’s definition of a regional airport  excludes many airports that specifically serve local communities in Europe. Furthermore, the association has alleged, the EC’s declared intent to discriminate against “smaller aircraft” and routes deemed to have satisfactory ground transportation links undermines its plan to encourage new operators. Clarke also complained that the EC’s definition of “new entrant” would effectively exclude the increasing number of European regional airlines that operate in some form of partnership or alliance with major carriers.

The EC has declared its intention to tighten “use it or lose it” rules governing slot allocation, while promising not to make “radical” changes to time-honored “grandfather rights.” At least 12 of the 15 EU member states are understood to have opposed early EC plans to allow heavily deregulated slot trading–leading to the watered-down proposals published in late June.

Airports Fail To
Deliver Capacity

Ambrose complained that the market access conditions outlined in the proposals are “discriminatory” and would have a “devastating effect” on regional airlines in Europe. “It is equally frustrating that the Commission seems to find it more important to concentrate on the revision of a regulation rather than taking positive steps to provide more capacity,” he stated. “The Commission has made no regulatory proposals with respect to ensuring that the air transport industry as a whole achieves best practice and to take action against airports that fail to deliver.”

Many in the European air transport industry have expressed suspicion over disparities in takeoff capacity between airports, suggesting that, in some cases, government-controlled airports may be imposing artificial caps on movements to protect the interests of government-controlled airlines. For instance, as one European regional airline leader told AIN privately: “You might wonder why (London) Heathrow, with only two parallel runways, manages to achieve 82 movements per hour whereas Rome, which has three intercontinental length runways–one of which points out directly over the sea–achieves just 70 per hour. If you put an airport like that in the middle of Texas and called it Dallas II, the Americans would be achieving 120 movements per hour.”

This is not the only respect in which Europe’s air transport infrastructure has been measured unfavorably against that of the U.S. In April, Eurocontrol’s performance review commission reported that the U.S. air traffic control service handles about double the number of IFR flights as its European counterpart for roughly the same level of cost and over about the same land mass.

“We’ve been saying this for years and it makes unpopular reading,” said Ambrose. “I am not criticizing any air traffic controllers. What is causing this is institutional and organizational and it goes right back to government ministers.” The ERA director general accused Europe’s elected officials of failing to show the imagination and political courage to cut through the gross inefficiency of having ATC services duplicated across national boundaries.

Earlier this year EC vice president de Palacio’s so-called “high-level group” issued its “Single Sky” plan on airspace congestion, calling for more aggressive steps to harmonize air traffic management in Europe. ERA supported the initiative but could not conceal its frustration that the EC had taken so long to come to what it regarded as a blindingly obvious conclusion.

“It is extremely frustrating and disappointing that the high-level group’s report is virtually the same as a document produced seven or eight years ago by the European Airspace Users Group (which includes the ERA),” said Ambrose. “Here we are saying the same thing with no action in between.”

In fact, the implementation of the Single Sky proposals has become a hostage to a long-running diplomatic row between Britain and Spain about sovereignty over Gibraltar Airport. Accordingly, they have systematically vetoed any attempt to adopt the necessary reforms. Ambrose slammed this impasse as a “stupid political squabble that is unacceptable, not just to the air transport industry, but to European citizens trying to use the system.”

More Controllers Needed
The ERA director general took the view that the introduction of the much-vaunted new reduced vertical separation minimums (RVSM) in European airspace will bring airspace congestion relief only if enough air traffic controllers are hired to take advantage of the new flight levels. He said that ERA has some concerns about how effectively and efficiently controllers will handle the transition between RVSM- and non-RVSM airspace on the peripheries of Europe.

Overall, Ambrose has seen nothing since last year’s ERA general assembly to alter his long-standing complaint that the European air transport industry has been badly let down by its regulators. “Ten years ago, we were a year away from liberalization and the Commission was encouraging the air transport industry to create a vast expansion of services,” he observed. “Since then it has sat on its backside and has failed to make sure that its action to liberalize has been matched by the creation of sufficient capacity to handle this expansion.” In his view, the infrastructure bottlenecks are likely to worsen as the EU accepts as members Eastern European states such as Poland, the Czech Republic and Romania.

Ambrose also expressed frustration about the lack of progress on establishing the long-promised European Aviation Safety Agency (EASA) since last year. Like many industry groups, ERA has held high hopes that the proposed replacement for Europe’s Joint Aviation Authorities, which enjoys no direct legal power to enforce its requirements, would eliminate the wasteful and uneven enforcement of standards by national authorities.

EASA: A New Layer of Bureaucracy?
However, yet again, failure to reach political agreement on the need to enshrine a pan-European authority has resulted in a diluted plan to launch EASA, with jurisdiction limited to the 15 EU member states. “This is disappointing,” explained Clarke, “but it is being done for pragmatic reasons. The main ERA objective here is that we don’t want to simply add a new layer of bureaucracy and there is a risk of this.”

The association fears that the industry could face a regulatory double-whammy of having to cope with EASA rules that would then be duplicated or, worse still, supplemented by the whims of national civil aviation authorities. All around Europe, national aviation authorities have been fighting a rearguard action to protect their jobs from a consolidation process that would accompany the creation of a genuine Europe-wide regulator with the clout of the U.S. Federal Aviation Administration.
“The proposals (for EASA) by the Commission have nothing in the terms of reference that would compel such an authority to reduce the cost of regulation by the elimination of processes, procedures and functions that are duplicated,” complained Ambrose. “This is simply a structure under which existing state authorities would be left largely untouched.”

ERA is concerned that national authorities will find ways around the EASA prohibition of costly and illogical national variants in the certification of aircraft. It believes that officials at national CAAs would resort instead to using evasive terms such as “supplementary safety modifications.”

According to Ambrose, one possible benefit of EASA, even as now proposed, is its potential to remove the need for the European Parliament to examine technical regulations. “The parliament’s ability to propose amendments to safety and operational regulations is inappropriate,” he commented. Ambrose argued that the alleged meddling by members of the European Parliament and initiatives such as the PWC study on terminal navigation fees are symptoms of a general malaise in the quality of air transport regulation in Europe. “We see too many instances of regulations that are driven by ideas and end goals that do not take adequate account of the economic and operational realities of the industries,” he claimed. “The regulators don’t have the experience and understanding of the industry they regulate.”

Taking his complaints about “the quality of regulation” a stage further, Ambrose complained: “It is quite evident that regulators don’t see themselves as custodians of an industry. The primary motive is regulation to meet externally desirable targets [such as tougher environmental limits].”
Denied-boarding Limits Could Increase
The transport commission has indicated a desire to see compensation limits for passengers denied boarding due to routine overbooking through airline reservation systems elevated to three or four times the fare paid. Ambrose accused EC vice president de Palacio of failing to recognize the move’s negative consequences on the very people she aims to protect.

ERA is now trying to convince EC officials that increased rates of compensation will inevitably result in significant fare increases. It would also lead to more empty seats on aircraft and reduced choice for passengers who could not reserve seats for flights on which there would likely be plenty of space at boarding time, according to the association.

Ambrose said that ERA member carriers currently register a denied boarding ratio as low as 5 out of 10,000 passengers. “This is a sledgehammer to crack an egg,” he argued. “The airlines are responsible, customer-driven organizations. Don’t tell us how to deal with our passengers. We’ve done a better job than the regulators at looking after their interests. We don’t exist if we don’t have satisfied customers.”
Again, the ERA director general insisted that any passenger rights reforms must apply to all competing modes of transport. He complained that the transport directorate hadn’t even contemplated the case for extending denied-boarding compensation to rail passengers.

Service Commitments Should Not Be Law
In fact, ERA has joined with the Association of European Airlines and the International Air Charter Association to formulate voluntary “Airline Passenger Service Commitments,” with signatory airlines agreeing to fulfill 14 “promises” to their customers “to the greatest extent possible.” ERA does not believe that these commitments should become the basis for EC passenger rights legislation, however.
“If we look at the practice in the U.S., some airlines have introduced commitments like these, but they have put exclusion clauses in their contracts as well,” explained Clarke. “If, as we suspect, the European commitments may become the basis for obligatory inclusion in the contract then there have to be exclusion clauses.

“It may not be appropriate for all our member airlines to sign up,” he continued. “Very few regionals have in the U.S. There may be good reasons why some regionals would find it difficult to meet the obligations, such as the number of staff, the size of their operations and the proportion of their operation that is subcontracted.”

Interline Fare Exemption Threatened
ERA has also expressed concern over the prospect of the EC’s refusal to extend the antitrust exemption that allows the International Air Transport Association (IATA) to hold tariff conferences on interline fares for intra-European flights. The exemption is now being reviewed by EC officials and has been extended only until next June.

IATA, ERA and consumer groups are united in their belief that preventing airlines from negotiating with each other on interline fares would hurt passengers with increased prices and reduced choice. “It would mean that interline fares would cease to exist and passengers would pay the sum of the sector fares rather than a through fare,” explained Clarke.

Evidently, at a meeting on the subject last November, the EC accepted the value of interline fare conferences but still felt that they pose a threat to EU competition law. The industry now awaits its final ruling.