EU aviation Strategy – “Fair” competition with the Gulf carriers: a win-win situation? Is there a need for financial transparency?

The EU has been a model for the World with regards to aviation liberalisation and competition in the last 30 years. Ryanair and EasyJet are well established economic realities in today’s European Skies and most European citizens have benefited from it.

Let us starts but saying that we don’t believe in protectionism; we are committed supporters of an open, free and fair market. Competition is certainly good for consumers. In our view, competition should be based on full transparency in order to guarantee it is fair and make sure it isn’t distorted. This should also be the case in the aviation sector.

In Catalonia, it was the Catalan Government which promoted and opened the Girona airport to Ryanair, and therefore breaking Iberia’s monopoly. Today, Ryanair is Spain’s first carrier, as in other European countries.

National legacy carriers in Europe have changed and still need to undergo drastic restructuring plans in order to become more efficient. Companies such as Air France or Iberia are aware that times have changed and that they cannot depend any longer on their respective State to survive in times of economic troubles. Becoming better performing airlines is their only chance to survive.

The aviation liberalisation has indeed been a European success story and we certainly welcome this. In the last decades, more people in Europe had the opportunity to fly and could fly cheaper thanks to this market opening.

However today, it is not so much competition among the EU which is raising the greatest questions and concerns but rather competition between European carriers and third country airlines, in particular with airlines from the oil rich Gulf States. This situation has evolved very fast because of the incredible growth of these airlines and the appetite for European customers as part of their aggressive strategy to capture world air traffic from Europe to Asia.

The companies of the Gulf are State owned organisations which were created and established thanks to the support of the States of this region, like many European legacy carriers have enjoyed major government funding in the past and still in part today. This is certainly no news and not a bad thing in itself; in fact public subsidies in aviation are almost as old as air transport itself. (1)

What is quite spectacular is the rate and speed of growth of these Gulf airlines and the way they affected European markets. The Gulf increased the control of the air transportation market between Europe and Asia/Middle-East from 22 to 34% between 2008 and 2014, to the detriment of the main European and Asian airlines, which recorded respective declines of 23 down to 16% and from 15 to 11% of their share of the same market. (2)

This disproportionate growth in the Gulf airlines’ transport capacities is forecast to be three times that of the world GDP growth rate between 2012 and 2020. In the Emirates, transit capacities of over 300 million passengers are planned for 2020 with the development of existing hubs (quadrupling in Abu Dhabi, and multiplying five-fold in Doha (+15% in Dubai) and the construction of Jebel Ali.

According to the Robert Schuman foundation:

“The State companies of the Gulf have already captured a massive share of the traffic between Europe and Asia, as they doubled their market share to India, South-East Asia and Australia between 2008 and 2014 and now turning their attention to the Far East. (3)

The Gulf countries’ strategy has also been effective on the European market and their growth in transport capacity is more than significant: between 2004 and 2015 traffic between Europe and the Gulf increased by 430% with 140 daily flights (80% of which was undertaken by their companies). There are more seats offered between Europe and the Gulf than between Europe and China, Japan and South Korea together, whilst the GDP of the latter is 250 times that of the UAE and Qatar together. (3)

To our eyes it has become obvious that the concept of “level playing field” between EU airlines and the fast-growing Emirates, Etihad Airways, and Qatar Airways is under question to say the least. We do feel that market distortions are taken place and that all actors cannot compete on the same basis. (4, 5, 6)

Let us start by saying that the carriers of the European Union are subject to enforcement of a strict State aid regime, perhaps the only trading block in the world which has such a regime. The EU has indeed chosen to go beyond the WTO’s anti-subsidy provisions; it made a policy choice to be more strictly prohibitive with regard State aid. Thanks to these stringent measures, companies need to operate efficiently under market conditions knowing they cannot depend on the State to be saved.

Gulf carriers have been under fire from both sides of the Atlantic, American carriers on one side; and Lufthansa and Air France on the other side, have been among the more vocal actors denouncing the kind of unfair competition, in their eyes, coming from the Gulf. (5) Alleged massive government subsidies are what have enabled the three fast-growing, Gulf-based airlines – Emirates, Etihad Airways, and Qatar Airways – to expand in the U.S., Europe, and elsewhere.

It is argued $42 billion in cash and unfair benefits have been given to these carriers in the past decade. (6) Of course all three Gulf carriers deny benefiting from state subsidies and see nothing wrong in their respective Government massively financing their airlines.

All these accusations would be more easily confirmed or not thanks to financial transparency, in particular with full transparency of accounts of the Gulf carriers.

In this regard, according to the Economist:

“Transparency is another issue. Proponents of the Gulf model often note that airlines in America benefited from the Chapter 11 bankruptcy protection system after the 9/11 terrorist attacks. This, they claim, amounted to a back-door subsidy, propping up the domestic sector while its debts and costs were trimmed. But that is an unfair comparison. Chapter 11 restructurings do not involve equity injections by the taxpayer. They are restructurings conducted under the watchful eye of an independent judiciary.

By contrast, decisions about the organisation of Gulf-carrier balance sheets are taken behind closed doors, by dynastic rulers who have no accountability to their citizens. Unless Qatar and the UAE can demonstrate that their flag-carriers abide by competitive norms in the private sector, the American government is entitled to impose bilateral restrictions—just as most governments in Europe and the Middle East have done.” (6)

We do believe that the European Commission should make it an absolute priority to obtain full transparency of accounts in the future comprehensive aviation agreement if Council will give its mandate to the Commission in March 2016.

Further market access to Gulf carriers should be linked to these transparency elements. Accepting these elements of greater transparency would clearly show that Gulf airlines have nothing to hide with regard government subsidies and are competing in a fair manner.

Of course given the economic situation in Europe, the EU welcomes and is in need of third countries investments. However in our view, it should not come at all costs.

We firmly believe that while welcoming the contribution of Gulf carriers to the EU economy, the Commission should emphasise the need to engage into a comprehensive agreement with the EU that will combine elements of market opening with certain safeguards to guarantee open and fair competition. Transparency is a key element of such fair competition element. (8)

Commissioner Bulc should not forget that the Gulf carriers need our 500 million citizens to fill up their planes at least as much as the EU needs foreign investments in its economy. Therefore, we believe that the comprehensive agreements between the EU and the Gulf States can further expand benefits and become a win-win situation only if full transparency is guaranteed.

Moreover we welcome the intention of the Commission to come up with interpretative guidelines on the application of Regulation 1008/2008 with respect to ownership and control of EU airlines. We do however deplore that these will only be published towards the end of 2016.

Clear example of the need to clarify rules can be found in Article 4.f of this Regulation which states that:

“Member States and/or nationals of Member States own more than 50 % of the undertaking and effectively control it, whether directly or indirectly through one or more intermediate undertakings, except as provided for in an agreement with a third country to which the Community is a party;”

It is evident that in the Case of Etihad/Air Berlin deal and Etihad/Alitalia deal, despite respecting the 49% ownership rule, the “effective control” rule is not respected as the control is no longer in Member States hands but in UAE hands. This is a clear example where the EC should respect its law and be guardian of the Treaty or change the regulation. The Status quo is not an option as our own credibility is at stake.

These new guidelines and clarifications are urgent and should go in parallel with the revision of Regulation 868/2004 on protection against unfair pricing practice in air transport sector which has been announced for early 2016.

In fact, Regulation 868/2004 has proven inadequate and ineffective at its scope. As European Parliament, in our recent 2015 aviation resolution (7) we asked:

“… the Commission to issue an analysis of the causes of its non-implementation by November 2015 at the latest; calls on the Commission to revise Regulation (EC) No 868/2004 in order to safeguard fair competition in EU external aviation relations and reinforce the competitive position of the EU aviation industry, prevent unfair competition more effectively, ensure reciprocity and eliminate unfair practices, including subsidies and state aid awarded to airlines from certain third countries that distort the market; stresses that the aim should be to improve the political strategy at European level in order to quickly resolve this conflict, based mainly on the application of a transparent ‘fair competition’ clause; calls also on the Commission to address the concept of ‘effective control’ of airlines;”

To conclude, we do believe that in order to guarantee free, non-distorted aviation competition as understood from its widest possible angle, the EU must demand all actors’ full financial transparency.

To our view it is legitimate to take into account as areas of concern all subsidies, loans, equities granted to airlines. There is a need to keep watch on developments in global alliances, or potential cross-border mergers and acquisitions, to ensure the resulting carrier combinations do not engage in activities that constitute an abuse of market power.

The mechanism to deal with this, however, is through the application of competition law. It should be addressed in the upcoming comprehensive agreement and the EU should work with international organisations such as (ICAO, WTO) to define a global framework on fair and open competition.

The future of competition between EU carriers and third country carriers should be based on financial transparency reciprocity to guarantee that all investors act according to normal market conditions.

Published on EP Today.