Signs of recovery tainted as EC wages regulatory assault

 - October 8, 2007, 10:52 AM

Two years on from the 9/11 terrorist attacks, Europe’s regional airlines are still struggling to recover from some of the toughest business conditions they’ve ever seen. But the European Commission (EC) keeps kicking them while they’re down, according to Mike Ambrose, director general of the European Regions Airline Association (ERA).

“The level of economic turbulence we are going through is not going to be solved in the short term by some sort of bounce-back,” he told AIN. “This is a mature industry and we need to be sure that we avoid regulatory cost burdens that are not justified.”

Passenger volume during the first half of this year grew by a respectable 5.4 percent over the same period last year. However, yields have remained depressed, forcing ERA carriers to shed a couple thousand jobs and ground around three percent of their fleets for several successive months.

“I am not convinced that the employee cuts are over,” warned Ambrose. That said, he added that the ERA member operators now face a wide disparity of business conditions, with some “hot patches” such as Scandinavia doing much better than counterparts in, for example, the southern fringes of Europe.

Just released ERA figures for the first half of the year show the following averages:

  • Revenue passenger kilometer growth–7 percent
  • Available-seat kilometer growth–6.5 percent
  • Seat growth–4.3 percent
  • Hours growth–1.6 percent
  • Landings reduction–0.3 percent
  • Load factor–57.6 percent

Although ERA’s database shows reasonably encouraging traffic growth, the SARS health crisis, outbreak of war in Iraq and prolonged major strike action in France combined to drag the air transport sector back into the mire. It is still struggling to emerge.

Over the past year or so the frustration of the ERA lobbying team has begun to boil over what it views as unmerited new regulations initiated by the EC transport directorate under the leadership of EC vice president Loyola de Palacio. Ambrose has accused EC officials of failing to use any accepted business practices or cost-benefit analyses to test the necessity of the new rules.

On the eve of its annual general assembly, the most menacing bête noire confronting ERA is pending legislation that would require what the association considers excessive and unwarranted levels of passenger compensation for canceled or delayed flights. ERA has said that the European Union faces a “major political embarrassment” if the Compensation & Assistance of Airline Passengers Act becomes law, having just passed its second reading in the European Parliament during July.

When operators cancel flights “and are responsible for doing so,” passengers will be entitled to the following levels of financial compensation in addition to a choice between taking an alternative flight “at the earliest opportunity” (with meals and accommodation provided in the meantime, when appropriate) or full reimbursement of their ticket price: E250 ($275) for flights less than 1,500 km (932 mi), E400 ($440) for flights between 1,500 km and 3,500 km (2,175 mi), and E600 ($660) for flights longer than 3,500 km. But the real kicker for ERA lies in a provision that allows passengers on canceled flights to demand a return trip to the city from which they began their journey–even if it’s on the other side of the world, in the case of interlining services. So, for example, a regional carrier that has canceled (or delayed by more than two hours) a short hop from Rome to the island of Sardinia could find itself paying for a return trip to Tokyo. ERA air transport policy director Andrew Clarke complained that a few cases of this sort could wipe out an operator’s profit margin on the route for an entire month and that officials responsible for drafting the legislation have been unwilling or unable to consider the full implications of the compensation terms.

According to ERA, this return-flight-home clause will completely undermine the viability of interlining services. Carriers will feel unable to accept this degree of responsibility and so will simply remove passengers’ ability to check in for an entire, multi-stage journey, it claims. Higher fares will then cover the elevated financial liability.

ERA has also argued that the language used in the new law is so unclear and ambiguous that it will result in furious disputes between airlines and their customers. Clarke envisions ugly arguments breaking out in airport terminals over canceled flights, followed by an endless stream of legal action. In his opinion, EC officials simply do not appreciate the full consequences of their proposals.

One important lack of clarity, according to ERA, lies in the failure to define the precise circumstances under which an airline may not carry responsibility for a cancellation. Another problem involves the requirement for carriers to notify customers of a cancellation two weeks in advance. Clarke insisted that the law does not spell out what constitutes satisfactory notification, especially given that numerous reservations go through travel agents or independent online booking services.

“There has been no proper consultation or impact assessment by the Commission,” said Clarke. ERA and other airline associations are now imploring the European Union Council of Ministers to tighten the legislation before it makes its way to the statute books, which could happen by year-end. Implementation would follow no more than 12 months later, but possibly much sooner. In a joint letter to the Council, the air transport lobby has urged it “to agree to legislation that is unambiguous, enforceable, proportionate and which, most important, will truly provide overall benefits for Europe’s travelers.”

The new compensation terms also apply to passengers who are denied boarding against their will. In the first instance, airlines would be required to seek volunteers to change flights in return for benefits.

On top of the pay-outs, involuntarily bumped passengers would be able to choose between the earliest available alternative flight and a full ticket refund with a flight back to their point of original departure. They are also entitled to meals and accommodation.

Disabled Access
ERA is now bracing itself for new EC draft proposals on access for “passengers with reduced mobility.” The key issue from the perspective of regional operators centers on the ability of smaller aircraft and airports to accommodate passengers in all circumstances. ERA has expressed concern that the proposals, expected to enter into debate later this year, could include access requirements that necessitate the removal of some seats from smaller regional airliners, squeezing their economic viability.

ERA also continues to complain about what it calls the EC’s determined effort to single out air transport for costly new regulations, while it refuses to impose them on competing modes of transport. EC officials have said that they will push for new passenger compensation and disabled access rules for rail services. However, their ERA counterparts express little confidence that these proposals will materialize any time soon. In any case, the EC has stressed that any changes would apply only to international rail services–leaving domestic train operators with what ERA regards as an anti-competitive advantage over rival regional air services.

The ERA lobbyists have long complained that the EC intentionally discriminates against air transport–allegedly driven by a conviction that rail offers incontrovertible environmental advantages. The group is now preparing a study detailing the degree to which air transport is disadvantaged.

“It will make very uncomfortable reading for administrators and regulators who have allowed the perpetuation of discrimination against air transport,” declared Ambrose. “The study will provide the tools to bring pressure to bear for discrimination to be reduced.”

For example, in 2001 state subsidies for rail services totaled E39.1 billion ($43 billion), having averaged E32.5 billion ($35.8 billion) each year in the period from 1998 to 2001. This is equivalent to approximately seven times the total annual budget for the Eurocontrol air traffic control agency.

“We want recognition for air transport’s actual environmental record and want the Commission to stop making assumptions,” Ambrose added. “We are getting sick and tired of being preached at that rail is better.”

A New Approach
Having expended a lot of energy on protesting alleged unfair treatment by the EC and other European regulators, ERA now wants to try another approach in parallel. It will seek to convince legislators and decision-makers that regional air transport has a lot to offer the continent’s economy.

“We need to be more proactive in promoting what the industry offers and what it will amount to in the future,” explained Ambrose. ERA will be joining with other air transport associations to promote its services. “We want to get the EC to buy into the value we provide,” said the ERA leader. “Our relationship with the Commission should be about cooperation and not just damage limitation, as it has been in recent years.”

Ambrose insisted that the ERA and its members do not oppose change and reform, but that “any restructuring must be driven by market forces, not new regulations.”
He complained that Europe’s politicians have held schizophrenic attitudes toward air transport. For example, the European Parliament has declared itself in favor both of boosting air transport links to regional cities and further reductions in gaseous emissions from aircraft engines that go beyond existing international standards.

EASA Must Deliver
On September 28 the new European Aviation Safety Agency (EASA) starts its progressive mission to assume responsibility for regulating airworthiness, licensing and operations for the whole of Europe. Along with the rest of the air transport industry, ERA holds high hopes for the new body, but has reserved judgment on its ability to achieve the long-sought-after levels of standards harmonization.

“It is vital that EASA delivers on its main objective, which is to reduce the aggregate cost of regulation by eliminating national variants in equipment requirements,” declared Ambrose, who raised concerns that national aviation authority officials–who ostensibly would serve as subordinates of EASA–will still find ways to persist in imposing their own standards and thereby undermine the authority of the new agency.

Ambrose also called for consistency of equipment requirements at an international level, expressing concern that the new European authority may follow past practice in trying to unilaterally enforce standards at odds with those agreed through the International Civil Aviation Organization (ICAO)–as indeed the EC has controversially tried to do over hush kits.

Insurance Costs To Increase
Yet another threatened cost increase now hangs over European regional airlines in the shape of EC proposals to boost minimum levels of third-party insurance coverage. The levels of coverage required would increase by an average of seven times existing minimums.

For example, the EC would require minimum coverage for a 48-seat ATR 42-500 of 80 million Special Drawing Rights ($58.4 million)–up from the current level of 12 million SDRs ($8.8 million). The minimum for a 70-seat Bombardier CRJ700 would rise more than tenfold, from 25 million SDRs ($18.3 million) to 270 million SDRs ($197.1 million). [An SDR is a currency unit derived from a basket of international currency–Ed.]

ERA’s Clarke told AIN that the EC issued the proposals on third-party insurance without any industry consultation or impact assessment. This, despite the fact that the European Civil Aviation Conference (encompassing the civil aviation authorities of 41 states) reviewed third-party insurance requirements for the industry last year (in the wake of the 9/11 terrorist attacks) and decided that no change was warranted. The European Parliament has indicated that it supports the ECAC position, but the EC has not.

Again, ERA has complained that the EC has not sought to increase insurance requirements for competing modes of transport. That said, the EC has also proposed standardizing minimum levels of coverage for passenger accident protection to 250,000 SDRs ($183,000) per person and ERA does not object. In fact, some carriers are already insured to higher levels for both passenger accident and third-party liability coverage through their own choice or due to aircraft lease requirements.

ERA also now anticipates new EC proposals for regulating bankruptcies in the air transport sector. The group is already seeking consultation on these and insists that any new rules should apply to all modes of transport.

Single European Sky Clouded
While ERA welcomes progress toward the Single European Sky concept for borderless air traffic management, it remains concerned over the cost to the industry. By year-end, the EC expects to present draft legislation that would overhaul the weight-based charging formula for en route air traffic control fees–a move that would result in regional carriers paying more.

The EC has commissioned the UK’s Regulatory Policy Institute (RPI) to present policy options, due by the end of October. The RPI report would likely recommend higher charges for using airspace below FL285 on the grounds that such operations generate more work for en route air traffic controllers. ERA opposes this approach on the grounds that many regional operators cannot realistically use airspace above FL285 for shorter routes, especially those served by turboprop equipment.

Instead of the current charging formula calculated directly from each aircraft’s maximum takeoff weight, RPI plans to recommend, as a compromise, the introduction of weight bands. While praising the consultants for listening carefully to ERA’s concerns, the group’s infrastructure and environment director, Barbara Ambrose, said the plan would still result in regional carriers bearing a proportionally higher burden for en route control fees.

The RPI report also will likely advocate offering fee reduction incentives for operators installing new avionics technology– such as datalink capability–ahead of the deadline set by Eurocontrol. Ambrose said that ERA does not oppose the approach in principle but that there must be a flexible approach to the new equipment requirements. For instance, the association has challenged the requirement for mode-S technology as a short-term measure pending the introduction of the more advanced ADS-B system (automatic dependent surveillance-broadcast).

Legislation to establish the Single European Sky system–a process scheduled to start this month–is due to be passed by December next year. ERA supports the creation of the new system, which promises significant increases in airspace capacity and consequent delay reductions. However, the association believes that implementation could face delays due to new political disputes over the division of civil and military airspace and over issues of national sovereignty.

The association is also bothered over the legislation’s proposal to finance the transition from the current nationally based air traffic management system with increased user charges. ERA has insisted that operators should not have to cover this investment with what would amount to up-front payments and that Eurocontrol should instead raise capital from external sources and/or through cost savings.
This issue goes right to the heart of ERA’s disquiet over infrastructure user charges. The association resents the fact that Eurocontrol and the national air traffic management services providers can simply recover 100 percent of their costs from users, regardless of market conditions.

According to ERA, charges have risen even as overall traffic levels have dropped because the service providers have not had to reduce their costs accordingly. Ambrose has called for Eurocontrol to establish financial reserves to cover shortfalls in en route fee revenues during industry downturns, so that operators do not have to pay more at times when they can least afford to do so.

A recent study for Eurocontrol showed that it now costs about 73 percent more to provide air traffic management for Europe than it does in the U.S. for a similarly sized airspace area, despite the fact that U.S. controllers earn about 28 percent more
than their European counterparts. This has prompted Eurocontrol to form a “High Level Group”–including ERA–to draw up practical cost reduction measures, such as aggressively rooting out duplicated effort and setting firm cost targets.

ERA has consistently protested that while Europe’s regulators have been happy to demand greater levels of competition and efficiency from airlines, they have themselves failed to live by the laws of market forces and have tolerated gross inefficiency in officialdom. It now argues for a cap on ATC fees whether or not the service providers are privatized.

At the same time, the EC is pressing ahead with plans for a third package of air transport liberalization (following on from the fifth freedom and cabotage rights that took effect through the second package in 1992). ERA has protested in vain that the industry remains in a fight for survival and that this is not the time to be introducing further market reforms.

Airport Slot Fight Goes On
ERA is still lobbying against the EC’s determination to introduce so-called market mechanisms, such as auctions, for allocating airport slots. It has told consultants studying the envisioned second phase of slot reforms for the Commission that slot auctions would necessarily disadvantage carriers that do not possess the bidding power of major airlines. According to Clarke, the consultants have included ERA’s concerns in their report but, as with all such exercises, the EC can unilaterally ignore them.