Around 850 million passengers traveled through the EU airports in 2013, making EU one of the largest aviation markets in the world. Despite its size and relatively high proportion of wealthy passengers, the majority of EU airlines have suffered losses for many consecutive years. The main problems of the industry arise from unsatisfactory EU wide regulations, differences in legal and tax regulations from country to country, and divergent national interests; all together impeding market efficiency and consolidation.
To put the issue in perspective, around 80% of the US aviation market (world’s most developed aviation market) is covered by four largest US carriers. In contrast, European market is fragmented and described by cutthroat competition combined with persistent losses. Due to high strategic importance of aviation industry the EU market is highly regulated, consequently, there are multiple interest groups struggling to sway regulations in the direction of their specific needs.
These groups could be distinguished by differences within business models. The first group includes the three global European carriers (Lufthansa, IAG, Air France/KLM) providing airline services around the world. The second group are low cost carriers (Ryanair, Easyjet, Norwegian, etc.) operating mostly short haul flights from smaller airports. The remaining players could be divided in two groups – other EU carriers, non-EU carriers which actively participate in EU market.
Furthermore, not only business interests but also national interests collide in the EU aviation market. For Latvia and for other small European countries it is very important to maintain sufficiently broad range of direct flights ensuring connectivity to cities in Europe and the rest of the world. In the meantime, the big carriers like Lufthansa or IAG are pushing to concentrate passenger flows to their base hubs (Frankfurt and Munich for Lufthansa, Heathrow for IAG). The needs of small countries are obvious – no Latvian of Finn would prefer to travel to Oslo via Munich or London.
Owing to persistent financial pressure many EU airlines have resorted to seeking financial aid from state. Still, according to the EU regulations, unauthorized state aid to any business (including aviation) is prohibited. All state investments have to comply with private investment principle, meaning that the state should act the same way that a prudent private investor would act in the same situation. In case the private investment principle could be violated, the state must seek an official approval from the European Commission (EC).
In July 2014 EC officially approved the state aid measures to airBaltic, which was of course very good news to Latvia and to airBaltic. In the meantime, it is worth viewing this success in context of other recent EC decisions. During the last 15 years the EC Directorate General Competition has initiated more than 70 investigations into an alleged state aid to Europe’s commercial air carriers. Around 80% of the cases were initiated after 2008, therefore one could conclude that EC has focused most attention on European governments’ attempts to invest in their national carriers restructuring during the post financial crisis period.
In the majority of cases the restructuring measures were concluded do not contain elements of state aid (SAS Scandinavian Airlines), or it was found that the state aid had been provided according to the EC regulations (airBaltic, Adria Airways, LOT airlines, Air Malta and Czech Airlines). Nevertheless, there have been investigations lasting longer than the standard 18 months, and there have been negative decisions that have led to liquidation of an airline under investigation (Malev in 2012). For example, in late 2012 an investigation of alleged state aid to Estonian Air was initiated, and the case is still open 25 months after. Since 2009 Estonian Air has benefited from multiple support measures granted by Estonia, including a capital injection of 57 million euro, and a loan of 28.7 million euro in February 2013.
In order to better understand these processes and to evaluate the approved restructuring plan of airBaltic, it would be useful to look closer into the last EC decision regarding the state aid to Cyprus Airways.
The EC has concluded that the state aid of over EUR 65 million to Cyprus Airways gave the company an undue advantage over its competitors in breach of EU state aid rules. The decision published on January 9 requires that Cyprus Airways pays back all incompatible aid received, which according to the EC amounts to EUR 100 million (principal + interest). One of the important considerations that led to such decision was the EC’s finding that Cyprus Airways had no realistic perspective of becoming viable without continued state subsidies (Source: EC Press release No. IP/15/3121).
EC also found that Cyprus Airways' restructuring plan is based on unrealistic assumptions and that the proposed restructuring measures do not appear appropriate to address the circumstances that led to Cyprus Airways' difficulties. In addition, Cyprus Airways has been unable to provide sufficient contribution to cover its restructuring costs – the own contribution of Cyprus Airways is significantly below the level of 50% required by the guidelines.
Looking at the experience of other airlines, it is possible to identify the main goals airBaltic has managed to achieve and prove to the EC:
1. airBaltic has been able to gather the necessary level of own contribution (via investors, banks and leasing companies);
2. airBaltic has proved that its business is viable in the long term;
3. airBaltic is engaged in successful restructuring process and returned to profitability.
To conclude, the competition in EU aviation market (similar to energy market) depends on the various political interests of EU countries, in particular, this phenomena can be observed between “the big” global airlines and “the small” European airlines. So far it has been very difficult for the EC to define the optimal regulations for the aviation market and set a course for the much needed consolidation. At the same time airBaltic and Riga International Airport have successfully navigated in this difficult environment.