Regionals struggle to recover from April’s volcanic fallout

 - September 28, 2010, 10:32 AM

One of the primary responsibilities of the European Regions Airline Association (ERA) is to do “everything possible to ensure that things do not get worse [for members] before they become better.” So said ERA policy and regulatory-affairs deputy director-general Simon McNamara at the group’s April 2010 conference in Edinburgh after two years of “most challenging trading conditions” had left European regionals flying through metaphorical clouds in an economic, commercial and regulatory storm.

But even as he spoke, a literal cloud of volcanic ash arrived overhead from the eruption of Mount Eyjafjallajokull in Iceland; immediate closure of vast areas of European airspace followed, grounding many regional-airline chief executives for days, while some–including the ERA secretariat–turned to long-distance international rail services.
Five months later, European airlines are working hard to establish procedures for addressing the financial effect of such crises, such as “grossly inappropriate” claims for passenger compensation under 2004 regulations that regional airlines have always opposed. The ERA sees this year’s experience as further confirmation that European Union states do not recognize the importance of air transport in providing links to the region’s outlying communities.

Following the most recent recession, Europe’s regionals had seen “cautious recovery, [albeit] from a low base,” according to McNamara. Now, the volcano grounding has inflicted “massive” damage on airlines’ performance. “Airlines are holding back on capacity [growth], so passenger load factors [are] rising slightly, but yields are still down,” noted McNamara.

Demand remains depressed and pressure on costs persists. The regional-airline group estimates that the net financial effect on its member airlines has totaled €250 million (about $300 million).

For ERA director-general Mike Ambrose, the past three years have seen the European economy getting progressively worse: Mediterranean states such as Greece and Spain have suffered severe economic anguish and social unrest, he noted, and the euro has been losing value. The recession has put jobs at risk, leading to a drop in demand for air travel. “Banks have had problems” and companies are more “desperately concerned [for] their economic survival,” said Ambrose.

All this worries Ambrose, who conceded that the industry likely will remain a target for states needing to increase taxes. Ambrose cited a proposal from George Soros, a member of the United Nations high-level group (HLG) on climate change financing, to impose a 5-percent tax on airline tickets worldwide. “This could raise $20 billion [a year] that would do nothing for the environment, but would be a source of income,” he insisted. To encourage participation, Soros has suggested states keep 50 percent of the tax proceeds and give the balance to a central fund for climate adaptation. The HLG panel expects to issue its report this month.

Cost-control Measures
Alarmed at potential further invasion of the airline industry, Ambrose wants to see a proper business-like approach to European states’ spending. “One should compare a government to the board [of directors] of a normal business,” said Ambrose. “They not only ask ‘Where can we cut costs?’ but also ‘Is this action really necessary? Does it help, or are we creating a cost burden?’”

While he acknowledged that certain European countries such as Germany, Greece and Spain seek to cut costs, Ambrose said he wants to hear European Commission (EC) president Jose Manuel Barroso question the necessity for proposed EC legislative programs. “The EC should cut every [plan] that increases bureaucracy and costs,” said Ambrose. “Instead, with the EC and the European Parliament (EP), it’s been business as normal, and this is inexcusable.”

“The volcanic eruption and consequent closure of European airspace have made a bad situation far worse,” added Ambrose. “To say Europe and its transport infrastructure were grossly unprepared is an understatement,” he said.

Citing previous biological, chemical, gas or nuclear accidents and incidents, Ambrose argues that Europe has been “placing far too much emphasis on volcanic ash, not [just] with respect to [its] disastrous effects, but because [it] is not the only form of contamination to which we remain vulnerable.”

McNamara said he believes it was “absolutely right” that European airspace closed due to the volcanic-ash cloud, but that regulators had proved themselves tardy and states inconsistent. “Decisions were taken, based on agreed safety plans, but it took five days to get a solution,” he said. “Nothing really changed in that time. The region was not [sufficiently] prepared. Lack of urgency was the real problem.
“The other [issue] was fragmented implementation of the eventual solution. [It] should have been Europe-wide, but different states were doing different things,” according to McNamara.

The ERA wants airlines to retain greater operational responsibility so that they can decide where and when to fly based on the best available information. “Operators will need to show they have taken account of all factors and (yet-to-be-agreed) procedures,” said McNamara. Ambrose sees the Icelandic eruption as a “fundamental milestone” that acted as a wake-up call from which “Europe must learn and react because we are still vulnerable.”

The volcano could erupt again at any time, so airline associations are cooperating to stimulate progress on such procedures. “We want to work as constructively as possible with the European Crisis Coordination Cell (EACCC) in Eurocontrol to develop a more cohesive, reactive and constructive crisis-management routine. The volcano demonstrated a lack of unanimity and consistency that still exists in Europe,” said Ambrose. (The EC and Eurocontrol created the EACCC to address future pan-European crises affecting aviation beyond the normal environment of operations.)

But the loss of revenue caused by airspace closure has not been the biggest problem. That direct financial impact has been aggravated by the application of passenger compensation regulations under circumstances that Ambrose argues should lead to operators themselves being compensated.

“There [are] reasonable grounds to say governments control airspace; they were unprepared, [and] so, to our minds, there is a case for damages,” he said. “Individual carriers, ERA and other [airline] associations have made several requests to the EC for economic assistance. ERA has proposed assistance measures, such as suspension of Eurocontrol charges to offset financial hardship according to the hardship experienced by [individual] carrier[s].

“[The EC] promised assistance in a blaze of publicity, but we have not seen a single euro. Now that the volcano crisis is out of the headlines, they don’t want to know. To our knowledge, only Denmark and France have provided [any] assistance. Denmark confirmed–for a limited period–its willingness to back [airline] bank loans taken to [ease] cash-flow problems. Some airlines have lost as much as £500,000 [about $750,000].”

To the ERA, the greater proportion of such costs has arisen from the grossly inappropriate application of EC Regulation 261/2004, which covers passenger compensation and assistance in the event of denied boarding, cancellations and long delays. “We warned the EP and EC in 2003 that this regulation would not be appropriate in a system-wide crisis and we were ignored,” said Ambrose. “Now the industry [faces] unlimited liability, which is completely unacceptable and is not imposed on any other transport mode, or even any other product as far as we are aware.”

Ambrose also expressed concern about the potential for injustice arising from implementation of the European emissions trading scheme, because this year’s fuel consumption will drive future emissions allowances. Because different regions suffered different effects from the volcanic ash cloud, individual airline operations will not have suffered equally from the associated airspace closures.

“The crisis led to a significant drop in [flights and therefore] emissions for some carriers, but not all,” said Ambrose. Some airlines could face “an unacceptable cost penalty,” so the ERA has requested that the EC accommodate that disparity when calculating emissions allowances.

It has proposed the exclusion of six weeks of operations, offset by an equivalent period of average fuel burn. Ambrose said EC climate-change commissioner Connie Hedegaard greeted the suggestion with a “dismissive” response.

Finally, the ERA wants to see the EC apply its own policy for fairness and equal competition by ensuring that it treats all transport modes in the same way, and to remove the unlimited liability imposition on airlines. “The Commission does not have experts, so there is a moral obligation to listen [to us]; they have to work with the industry,” said Ambrose, who has renewed his call for the EC to make use of the industry’s expertise. “They can no longer go forward blindly thinking that they know everything and have it right.”