sustainable european aviation - novembro 2012
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November 2012
A position paper by the Association of European Airlines and Seabury
Sustainable
European Aviation
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Sustainable European Aviation Page 2
Dening a sustainableEuropean Aviation policy
The European aviation industry plays a vital role
in the European economy, by promoting trade and
tourism and acting as a vehicle for employment
growth. European aviation policy should reect this
and therefore have as an objective to preserve and
enhance the competitiveness of European airlines.
Their most powerful global competitors benet from
such comprehensive transport policies within their
national administrations.
In creating a European single market for aviation,
the EU has created a new multilateral frameworkfor air transport albeit within regional boundaries.
Within these boundaries, the concepts of 3rd, 4th, 5th
freedom no longer apply, there are no restrictions on
ownership and control, provided a majority ownership
and control of EU nationals is maintained.
Consumers have benetted from a much wider
range of routes and products, and very substantial
efciency gains have been passed on to them in the
form of lower prices. However, the failure to extend
single-market principles to the rest of the aviation
value chain means that these benets are notunderpinned by an economically strong airline sector.
The network airline business model is the benchmark
for worldwide travel. The European network carriers
offer unparalleled services and connections to EU
business and leisure travellers all over the world.
They comprise long-established and highly-respected
global brands but their competitiveness is eroded by
a combination of factors specic to Europe to the
extent that the long-term sustainability of the business
is in doubt. The plethora of taxes, levies, charges and
regulatory burdens at national and EU level imposed
on the airline industry has turned this enabling
industry into a cash cow for governments.
In addition, liberalisation has allowed for partial
consolidation in Europe and stronger international
partnerships but has not been extended to other
actors in the value chain. A number of rapidly
increasing external costs could be reduced with the
help of adequate EU policies.
In dening an external aviation policy, the European
Union should very rightly take into consideration thepositive aspects which have arisen from European
liberalisation, and develop practical modalities
for integrating European multilateralism into what
remains a bilateral-driven global framework.
In this respect, relaxation of ownership and
control rules, within necessary safeguards, offers
opportunities for further loosening the bonds of
bilateralism, as well as generating new sources of
capital and facilitating the further consolidation that
the industry needs.
However, exercise of an external-relations policy
must be founded on the basis of a level playing-eld
for European airlines with the understanding that
this does not exist at present. By addressing the
constraints and distortions within Europe, policy-
makers will create a fertile soil in which the European
airline sector will be able to ourish, and so will be
able to better represent the interests of European
airlines in negotiations with third countries and the
interests of European consumers and European
employees.
Executive Summary
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The 2010 European Commission White Paper
on European transport acknowledged thatmobility is indispensable to Europe. Air transport
plays a unique role in providing global networks
connecting people, countries and cultures. It
provides access to global markets, generates
trade and tourism and also brings the developed
and developing countries together.
As a result of rising consumer demand for travel,
increased competition and global trade, air
transport has become one of the fastest growing
global industries. Furthermore, commercial air
travel is the most adaptive and exible form
of movement that exists: a link between cities
can be established with minimal investment in
infrastructure.
Airlines play a vital role in the European economy.
A 2012 study carried out by ATAG in conjunctionwith Oxford Economics, suggests that the direct
benet of commercial aviation to Europe is
approximately 132 billion through the direct
provision of 1.9 million jobs.
The total contribution of air transport to European
GDP, including direct, indirect and induced
benets, is estimated at 365 billion and 5.1
million jobs. Adding the catalytic impacts of travel
and tourism to these gures increases them
signicantly. Worldwide, the European region
generates more than a third of all aviation-related
GDP benet.
Direct and indirect benets of aviation to the European economy
Aviations value to the European Union
The European network carriers currently provide
the vast majority of this economic benet to theEU, both for passengers and cargo.
Although low cost carriers have a growing share
of the market in terms of seats and serve some
major markets within Europe and the surrounding
regions, they do not connect Europe to the rest of
the world, which is important for global trade, and
they have virtually no share of the cargo market.
As such, on aggregate, low cost carriers
contribute approximately 10 % of the total valueof the European aviation industry to the European
economy, whereas the network and cargo carriers
contribute the remaining 90%, split between
the network carriers (77%) and the all-cargo
operators (13%).
Allocating value between the European network carriers, low cost
carriers, and all-cargo carriers
The European network carriers contribute 280 billion to the European economy
and provide 3.9 Million jobs in total.
The European network carriers, which include the worlds three largest
international operators, offer unparalleled opportunities to, from and within the EU
for passengers and cargo.
I.
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A sustainable business delivers adequate
customer service, treats its employees fairly interms of wages, working conditions and social
contributions and remedies the damage that it
causes to the environment.
From an economic perspective, a sustainable
business pays for its operations, pays its social
costs, and provides a reasonable return on the
capital employed over the long-term.
Judging and measuring whether an airline is
sustainable across all of these metrics is complex:
the rst set of issues are qualitative and not easilymeasured, and the second set are quantitative
and subject to wide annual variations. The two
measures are, however, closely linked: operating
results will reect the customers value sentiment
towards any individual airline as well as the
results of managements decisions on labour, the
environment and local communities.
If an airline can also compensate its investors
consistently, then it will have fullled the majorcriterion for sustainability.
Specically, an airline needs to earn a cumulative
operating prot and pay for its social costs and
capital over the entire economic cycle. One of the
simplest metrics to measure whether an airline
is economically sustainable is Return on Capital
Employed (ROCE).
For the European network carriers to continue to
provide hundreds of billions of dollars of economic
benet to Europe, a majority of carriers mustremain economically sustainable. A regulatory
framework and a competitive environment that
does not allow European network carriers to
produce a sustainable ROCE will eventually
squander the benets of a healthy EU airline
industry.
What is a sustainable airline?
Is commercial aviation sustainable in Europe?
ROCE is a simple measure that can be calculated
quickly. At its most basic it is operating prot
divided by (total assets less current liabilities), the
gures for which can easily be found in any set of
accounts or summary of accounts.
Moreover, these three key gures are relatively
difcult to inuence, particularly over a cycle
and particularly for airlines. They basically sum
up what an airline is: assets are almost entirely
aircraft and operating prot is the revenues andcosts of ying and lling those aircraft.
For a European airline, a reasonable return on
capital should be in the range of 7 to 10% of the
capital employed. This range allows the airlines to
pay their social costs and corporate taxes, service
the debt taken on to fund aircraft purchases and
provide some return to equity holders, either
through cash payments or through sensible re-
investment decisions.
Why ROCE?
II.
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1: IATA Financial Forecast Downward pressure starting to ease September 2012
Sustainable European Aviation
By analysing public nancial statements of
European carriers over the last decade it quickly
emerges that although several have achieved the
7% ROCE threshold in a single year, very fewhave met the minimum threshold of economic
sustainability of a 7% median return on capital
over the extended period.
Often it is the positive contribution of other
segments, such as maintenance & engineering,
catering activities or IT services, which tip the
balance of the collective outcome, with the airline
segment in isolation posting negative returns.
AEA and the International Air Transport
Association (IATA) regularly update their State
of the Industry assessments and forecasts.
Since the 2008 global nancial crisis, these
assessments have been at best moderate, andoften downbeat, in tone. IATAs most recent
forecast is that the global commercial aviation
industrys 2012 EBIT prot margin will be just
+1.6% . The worst performing region in IATAs
global forecast is expected to be Europe.
Based on this, one must question the economic
sustainability of Europes commercial aviation
sector under the current economic and regulatory
conditions.
How have European carriers fared?
1
The European Commission and the Member
States have taken note that many of Europes
network airlines have been struggling for years to
maintain economic sustainability, while the major
low cost carriers, which offer only point-to-point
services, are making better returns.
In its public statements, the Commission has
made it clear that it sees a connection between
the struggling network airlines and the prot
making point-to-point airlines. It questions
whether Europe needs network airlines, and has
suggested that the larger, full service carriers are
operating an outdated business model: in short
that they are dinosaurs heading for extinction.
How have European regulators interpreted these results?
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Commercial aviation is made up of two
complementary components: the point-to-point
market and the connecting market. By combining
these two components in a single operationorganized around a hub, the network carriers can
offer more direct services from a larger number of
cities to the hub than point-to-point carriers.
Customers value travel differently: not all
customers are willing to pay the same price to
travel between any two markets. An airline that
manages its revenues effectively will accept
different prices for carriage from different
customer segments. A network airline has
more products to sell, as it has other markets in
addition to the point-to-point market from the hub.If two airlines (one offering only point-to-point
services and the other also offering connecting
services) have the same cost structure and
revenue management capabilities, the network
airline would be more protable. In reality, it
costs more to operate a connecting service
than a point-to-point service. However, in the
above case, the difference in costs need not
be signicant and the variety of customers that
a network airline can tap into will provide more
opportunities to nd customers who are willing to
cover more than the incremental cost.
The evolution of airlines and commercial aviation
across the world has followed a similar pattern of
development. The operating model for the largest
low cost carriers in the United States (Southwest
Airlines, Frontier Airlines, Spirit Airlines), Asia
(Air Asia), Australia (JetStar) or Brazil (Gol) is a
network model.
In Europe, the low cost carriers broke this mould:
there were enough sufciently mature markets
that they could serve without needing to offer
connecting services, partly because those wereadequately covered by the network carriers,
thereby reducing their costs. However, this is the
exception, rather than the rule.
In Europe, it is not possible to identify the cost
differential between a low cost (network) carrier
and a purely point-to-point carrier of similar size
because the two major low cost carriers are both
point-to-point carriers.
In all markets, the entrance of a low cost carrier
offering lower fares stimulates passenger trafc,while simultaneously putting signicant downward
pressure on prices. Eventually (or immediately)
the incumbent relatively higher cost airline
will have to lower its fares and match certain
elements of the low cost airlines fare structure.
These new lower fares tend to remain in the
market for an extended period of time. Even
if network carriers are capturing the top end
segments, the increased capacity and lower price
impacts all segments and can drastically reduce
unit revenues. In the presence of permanent
competition, to make a service protable again,
network carriers need to distinguish their product
while simultaneously lowering their costs.
Is the operating model the real problem?
The rst thing that has to be highlighted is that the
network model is the dominant model worldwide
and that the largest carriers in each region, even
if they have different competitive environments,
different operating models, different mixes of
point-to-point and connecting trafc and different
service levels, are all network carriers.
The second thing is that, contrary to what we
have seen in Europe and despite being faced with
erce competition, these leading network carriers
have all been able to show ROCE that meet or
are close to the threshold for sustainability:
What is the situation in other regions of the world?
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Beyond what appear to be positive results it is
important to note that most of these carriers are
also operating in a very different environment to
the European network carriers :
Emirates operates a long haul network from
a single hub in close coordination with the
airport and under very favourable regulatory
conditions. The city state structure of
Dubai more rapidly advances infrastructure
construction to accommodate the neededgrowth and efciency of Emirates than do
European governments with their airlines and
airports.
SingaporeAirlines, to a lesser degree,
operates in a similar environment.
Delta and United both operate in the largest
domestic market in the world, with several
hubs. They were both forced to restructure
their operations and dramatically reduce their
costs under the Chapter 11 process before
merging with Northwest and Continental
respectively.
Generally European airlines, including most LCCs, generate insufcient returns
to be sustainable
The network model is the predominant model for airlines across the globe
Unlike their competitors in the rest of the world, European network carriers do
not benet from a comprehensive transport policy nor do they have a forum for
organised restructuring
Source:Seabury analysis of public statements
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Median
Emirates 7.0% 9.8% 13.3% 15.4% 12.3% 12.2% 14.3% 7.9% 9.6% 12.2% 12.2%
LAN 5.5% 10.0% 13.8% 9.7% 14.8% 14.9% 17.5% 10.7% 13.5% 9.5% 12.1%
Cathay Pacific 10.8% 5.1% 11.2% 8.5% 8.5% 11.0% -12.7% 7.3% 14.5% 6.7% 8.5%
e a . . .
Singapore Airlines 6.4% 4.6% 4.1% 7.4% 6.6% 6.3% 10.3% 4.8% 0.4% 7.1% 6.3%
Qantas 7.4% 4.6% 8.9% 8.3% 5.1% 8.4% 11.3% 1.5% 1.9% 3.0% 6.2%
UnitedContinental 3.6% 6.9% 5.2%
ReturnOnCapitalEmployedforselectedglobalcarriers
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Within the EU, the liberalization of air transport
has allowed a certain degree of consolidation and
has seen the formation of the Big 3 European
majors: Lufthansa Group, Air France / KLM, and
International Airlines Group (IAG).
Furthermore, airlines have moved rapidly into
alliance agreements. In 10 years the number of
EU airlines members of an alliance has grown
from 9 to 25 (including Turkish Airlines).
The industry has changed dramatically
How have the European Unions regulatory
changes impacted Europes commercial
airlines over the last 10 years?
Consumers therefore have more choice, benet
from easier booking and ticketing processes, and
can maintain their frequent yer status with their
home airline. For their part, airlines have more
origin and destination markets to access and
manage.
Liberalisation also favoured the rise of low cost
carriers which have accounted for nearly all of
the growth of air travel in the intra-European
environment since 2002. Consequently, yields on
intra-European routes have declined signicantly
over the last ten years (even in nominal terms).
III.
Source: Innovata
Sky Team
oneworld
Star Alliance
Non-Alliance
Number of airlines in
Alliances: 25
Sustainable European Aviation
AlliancemembershipasofApril2012
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It should however be noted that intra-EU capacity
growth is more complex than in other parts of the
world and should not be viewed in isolation. The
high speed train connections in France, Germany,
Spain, Italy and the EuroTunnel have moved a
signicant amount of capacity from previously
high density air trafc routes to this mode of
transport.
The International Union of Railways (UIC) states
that the modal split obtained by high speed train
in relation to air travel is 80% for journey times of
less than 2.5 hours. Madrid-Barcelona, formerly
Europes busiest air travel city-pair, saw the
opening of a high-speed rail line in 2008 which as
of 2011 had a market share of 45.6%.
High-speed rail does achieve dominant market
share on short routes and the marginal cost of
travel and greenhouse gas emissions are lower,
yet the full cost of the infrastructure neededto implement high-speed rail in Europe is not
borne entirely by the rail travel companies.
The construction of the infrastructure also has
signicant greenhouse gas implications that are
normally ignored in studies.
The EU has liberalised certain elements ofintra-EU airline activity, notably market access
and pricing, but most of the other links in the
value chain (airports, ground handling, global
distribution systems and air navigation service
providers) still benet from monopolistic and
oligopolistic market structures.
A quick review of the protability of Europesmajor airport groups vs. Europes major airlines
shows that major airports are consistently
protable, while the results of their customers
(airlines) uctuate wildly. If the air navigation
service providers published their nancial
statements, a similar result would be seen.
Other sectors almost at a standstill
Note: AEA revenue - pax rev + other rev excluding cargo revenue for Total Europe; LLC
= Ryanair and Easyjet, igures are based on their nancial year end. Current unit
revenue gures are not adjusted for ination
Source: AEA research, ATI
120
140 LCC
80
100
40
60
Unitrevenue/paxforTotalEurope
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Externally, the EU has signed air services agreements with the US and Canada. These have
facilitated stronger Europe/US partnerships and the emergence of transatlantic joint ventures that give
consumers an unprecedented choice of destinations and services while at the same time enhancing
competition
In a more ambitious integration initiative, agreements have been concluded with ECAA countries and,
within the framework of the neighbourhood policy, with Morocco, Jordan and Israel.
Liberalisation in the EU has allowed a degree of much needed consolidation in
the industry
Most of the added value goes to other actors in the value chain
EU air transport agreements with the US and Canada have facilitated further
transatlantic cooperation
Note: 1 Return on capital employed
2 Manitenance, Repair, Overhaul
Source: AEA, IATA WATS, Aerostategy; Reuters, Airline Business, Thomspn Financials,
Company Annual Reports
Source: AEA
TypicalaveragesROCEforairtransportsector%
2012vs.2006(June) Frequency Totalseatcapacity ASKs
TrafficbetweenEU27andNorthAmerica +3.6% +4.7% +5.5%
Sustainable European Aviation
1
20%20%
Typical ROCE1
ranges, 2004-
2007
8% 11% 5%9%6%
0%
10%
20%
11%15%
13% 11%
-14%-20%
-10%
Legacy carriersDistribution GDSAirportsMROAircraft lessorsAircraft OEMs
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A widely-shared view, including among European
regulators, is that the troubles facing the network
carriers are due to their attachment to outdated
business models, and not because they are
subject to regulatory burdens or an inadequate
regulatory framework that disproportionately
benets their partners in the value chain. Facts
clearly show that this is not the case and that
in fact the network carriers are going through a
permanent adaptation process.
The most important measure of nancial
performance for an airline is the difference
between unit revenues and unit costs. This
difference the unit margin has been largely
negative for all EU network carrier groups over
the last ten years. Margins have also declined
signicantly for the low-cost carriers.
What progress have European network
carriers made to improve their economic
sustainability over the last 10 years?
IV.
As seen above, the structural changes in the
European aviation sector over the last ten years
have led to a signicant decrease in the price
of air transport within Europe, while costs have
continued to escalate.
Over the last 10 years, European network carriers
have seen intra-Europe real yields decline by
44%, while ination reached 22.6% and the price
of jet fuel (per barrel in USD) increased by 336%
Activities undertaken to increase unit revenues
Source: AEA data; Company records
Note: EU annual avg. ination rate, avg. yields (USD Cent) are for Total Europe
Source: AEA research, Eurostat
NetmarginperASKformedianairlineincarriergrouping
NetmarginperASKformedianairlineincarriergrouping All AEA carriers
+1.1
+1.8
+0.3+0.3+0.4
+0.5+0.4
+0.7
-0.7
-0.9
-0.8
-0.3-0.5
-0.7-0.7-0.8-0.8
0.0
: ;
.
201020092008200720062005200420032002
Sustainable European Aviation
n ex = ear
400
450 Jet Fuel Price
(USD/Brl)
250
300
350
100
150
200
European UnionInflation Rate
0
50
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Real Yields
(USD Cents)
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In order to cope with this weaker pricing environment, airlines are only able to increase unit revenues
through a reallocation of capacity, and through improvements in their selling and marketing practices.
Over the last 10 years, European airlines have reacted to market forces by concentrating their growth
into long haul operations.
Network carriers have also invested signicantly into advanced pricing and revenue management
systems in order to optimise their revenues. These investments in better demand management
solutions have resulted in improved passenger load factors.
Source:AEA, Company presentations
RelevantcapacitySeats departed, million, 2011
Intra-EuropeSeats departed per annum, million
MiddleEastandAfricaSeats departed per annum, million
104
2%95106
1%
845
17%
37%
1%810
19%
34%
19%
27%
2%708
20%
24%
3%
648
21%
20%
2%
2%
38%
16%
873814
20%
3%
30%
2%
32%
19%
1%606
21%
17%
3%
581
20%
13%
3%
1%
854
2%755
27%
8%
9%
71
29%
8% 22%
9%10%
10%
8%
22%
9%8%
62
31%
8%7%
60
9%
31%
8%
9% 2%
24%
9%
9%
7%
3%
24%
8%
6%
3%
78
8%
2%
54
31%
8%
6%
2%
3%
52
7%
7%
3%
2%
36%
39%
2%
38%
2%
28%
16%
09
29%
15%
05
36%
18%
04
38%
18%
10
17%
28%
11
31%
0703
41%
19%
30%44%
20% 16%
0806
34%
17%
02
50%
06
52%
10
48%
09
48%
11
49%
05
49%
04 08
47%
07
49%
03
50%
02
49%
1%
22%
49%
6%
3%1%
16%
Seats departed per annum, million Seats departed per annum, million
106
12%
6%5%
99
12%
5%
6%
12%
7%
5%95
12%
6%
6%93
12%
6%
6%88
11
101107
6%
6%
12%
98
7%7%
12%
5%
81
4%
5%
81
4%
5%
5% 19%
7570
18%
66
18%1% 18%
71 1%
21%
77
22%
611%
57
86
1%52519%
9%
9%
20%
12%
17%
39%
38%
39%38%
37%
38%
38%
38%
39%
38%
37%37%
39%
36%
38%
36%
37%
41%
10
39%
40%
10
36%
18%
24%
37%38%
25%
18%
39%
25%
17% 19%
23%
39%
19%
21%
38%
21%
39%
25%
17%
17%
40%
25%
16%
42%
24%
15%
17%
41%
25%
15%
17%
1%18%
21%22%
38%
28%
1110060504 0807 090302 11080706 09 1005040302
MiddleEastandAfricaAmericas AsiaEurope
Medium FSC
Small FSC/Regional
LCC
American carriers
Middle Eastern and African carriers
Asian carriers
Large FSCCharter
Capacitybydestination
Source:Innovata
AEAmemberairlineshaveimprovedloadfactorby5%pts,howevertheystillstand10+%
ptsbehindLCCs
PassengerloadfactorIntra-Europe
81.9%85%
Ex-Europe
70.1%70%
75%
60%
65%
Sustainable European Aviation
Passenger load factor %
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A realistic maximum ceiling for sustained system-wide load factors for network carriers over the course
of a year is 85%, for two main reasons: seasonality and no-show passengers. The main AEA network
carriers are nearing the upper limits of load factors worldwide:
However, the constant decline in yields clearly shows that these efforts have only been able to slow the
general downward trend.
Internalcosts
Because of the declining yield environment and
the increase in fuel and other input prices, the
AEA member carriers have all recognised the
need to reduce their internal cost base in order
to compete effectively in a difcult revenue
environment.
Like their US counterparts, over the last ten
years they have made great efforts to reduce unit
costs, albeit without the benet of the instruments
that their external competitors can use, such as
Chapter 11 in the US.
Non-fuel unit costs have decreased signicantly
over the last 10 years as all AEA carriers have
signicantly improved their performance through
resolute actions in the following areas: aircraft
utilisation, staff productivity, optimisation ofprocesses, and reduced commission to travel
agents.
Behind unit cost reductions
Source: AEA research, ATI
Passengerloadfactors BA
AF
DL
UA
Selected AEA airlines, o a sc e u e
84%82%
80% 80%
78%80
85
LHEK
74%72%
76% 76%
73%
70
75
60
65
20112002
Sustainable European Aviation
Passengerloadfactors,2002vs.2011
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Fuel
Fuel unit costs for AEA carriers rose by 108% between 2002 and 2010. The AEA carriers haveachieved signicant efciency improvements on aspects that are within their control, but progress
towards reducing fuel unit costs is being hampered by delays to the Single European Sky project.
Otherexternalcosts
Air navigation charges:
The failure of the EU and the Member States to
implement the Single European Sky project has
had a dual impact on airlines cost structures:
rstly, airlines are not beneting from the single
most effective way to reduce fuel usage and
carbon emissions. A fully-implemented Single
European Sky will lead to a signicant increase in
operational efciency, reducing aviations carbon
emissions by 16m tonnes of CO2 per year and
eliminating unnecessary fuel burn worth 3.7bn attodays prices. In terms of reducing greenhouse
gas emissions, this annual saving would be
equivalent to the total power consumption of Paris
for 99 days or the power consumption of Brussels
for 3 years, 10 months and three weeks .
Europes slow progress on the Single European
Sky is having a terrible environmental impact.
Secondly, because of air space congestion
and longer ying times, navigation costs have
increased over the last ten years. Passenger
inconvenience has also increased.
2
2:AEA Calculations
Source:AEA
CASKdevelopment CASK - All AEA carriers
7.5
8.0
-
6.0
6.5
.
-19%
4.5
5.0
5.5
2002 2003 2004 2005 2006 2007 2008 2009 2010
CASKDevelopment
UnitfuelcostofAEAcarriershasdoubledsince2002
UnitfuelcostAll AEA carriers
2.0
2.2
2.4
1.4
1.6
1.8
+108%
0.6
0.8
1.0
.
Source:AEA
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Page 15
Taxes:
In 2011 Austria introduced a ticket tax of 8 for
short haul passengers and 35 for long haul
passengers, expecting to raise 90 million a year
for government austerity funds. Germany made asimilar move, rising to 961m in 2011, despite a
potential impact of 10,000 job losses and the loss
of 5 million air passengers per year. In April 2012
the UK government increased its Air Passenger
Duty by twice the rate of ination, with rates now
as high as 184 per departing passenger, a rise
of 360% in 7 years. The British Chambers of
Commerce estimates that APD could cost the UKeconomy 10bn in lost growth and up to 250,000
jobs over the next 20 years.
Airport charges:
Despite the entry into force of the EU Airport
Charges Directive in 2011 many major airports in
Europe have (and are continuing to) consistently
increase their airport charges. Europe is by far the
most expensive region when compared to other
areas of the world (Asia, Middle East, Far East,
USA). Between 2007 and 2011 the airline industry
has witnessed increases of between 10% and
100%.
Not only do most of European carriers fail to
generate adequate returns on capital, but globally
they lose money and are not economicallysustainable.
Without a sustained period of signicant
economic growth and capacity restraint
for Europe as a whole, a stable revenue
environment, and further cost reductions in the
order of at least 15%, European carriers will be
unable to generate sufcient prots to become
economically sustainable.
This cost reduction can be achieved through a
combination of further consolidation in Europe
and by reducing the costs arising from certain
inefcient oligopolistic market structures (e.g.
such as the air navigation service providers).
What should be done?
Carriers have drastically reduced their internal costs.
However they have no control over other costs, which are steadily increasing.
An EU policy should help control these external costs.
Note: Airport and navigation costs are for AEA airlines
Source: AEA research
8.9
+56%
2012F
2000
5.75.0
+235%
0.0
1.52.0
ETSTicket TaxesAirport & Navigation
Europeanairlinesselectedannualexternalcosts
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Page 16
It has been suggested that low cost carriers could replace network carriers on the intra-EU market,
and eventually even expand to the intercontinental market, or that foreign-based carriers could replace
them on long haul services.
Are the EU network carriers expendable?
Within Europe, network carriers operate a broad
network from their hubs across Europe. Many
of these ights connect with long-haul inter-
continental ights, which need some element of
feeder trafc. However, domestic and European
ights are also important as a stand-alone
business, connecting Europe. Malevs cessationof operations provides an interesting example:
22 routes from its former hub in Budapest are no
longer served. Furthermore, services to Europes
main hub airports, important for alternative
connectivity to long-haul ying, fell by 16%.
Long-haul ights generally have between 15%
and 85% connecting trafc, with the average ight
having between 40% and 50% of connecting
passengers. Therefore, if LCCs were to replace
network carriers entirely on intra-European
routes, the wider impact on long-haul ights
would be dramatic. Potentially passengers could
self-connect onto long-haul ights, but this would
introduce a signicant level of complexity for the
ying public and it is likely that fewer long-haul
intercontinental routes would be sustainable.
In all cases the operation of intra-EU services
exclusively by LCCs would automatically deprive
business and leisure travellers of connections
with extra-EU services, since EU LCCs have no
such operations. Should they choose to enter
into cooperative arrangements with international
carriers in order to respond to customer demand,
this would add another level of complexity,with associated costs. In the absence of such
arrangements connecting long haul travellers
would no longer benet from inclusive fares for
their entire journey.
Finally, one must keep in mind that at present all
major international airlines have local/regional
networks to feed into their long-haul operations.
Even Virgin Atlantic, which is based at the largest
long-haul airport in the world, requires feeder
services for 20 to 25% of its trafc. Without
connecting trafc EU network carriers would
lose the 40 to 50% of their overall trafc needed
to operate their long-haul routes and therefore
would be unable to sustain their present level of
operations.
Intra-EU services
LonghaulEUlowcostcarriers
Today long-haul low cost is very much in its
infancy. Air AsiaXs exit from the Asia-Europe
market is the most recent example of the difculty
for these carriers to operate on a sustainable
basis.
The main reason that low cost long haul has not
worked on a broad basis is because fuel accounts
for a disproportionate share of total costs: being
low cost on the other cost items is not sufcient
to enable them to charge low fares. While there
is a certain competitive differentiation on cost
structures, the most important difference is the
ability to deliver high quality service to premium
customers. The channels that are effective in
selling to short- and medium-haul customers are
wholly insufcient for selling to the high-yielding
business, government and leisure customer
segments: these customers expect higher levels
of service and personalisation of the in-voyage
experience.
Extra-EU services
V.
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Page 17
Foreign-basedcarriers
In 2012, 92 foreign carriers offer non-stop
medium/long haul services from 134 points to
87 points in Europe, while AEAs 33 members
operate non-stop from 65 points in Europe to 204
points worldwide.
The replacement of the EU network carriers by
foreign-based carriers would have the following
consequences:
EU hub cities would see a dramatic reduction
in the number of non-stop services to the
rest of the world, as foreign carriers are not
likely to replace all the services operated by
European carriers.
Non-hub cities might see a reduction in the
number of services to the largest cities asthese would be redened to take into account
the disappearance of the connecting trafc
which, in some cases, is the prime reason for
the existence of these services.
In both cases business travellers would
no longer enjoy the benets of a global
commercial offering, but would be forced to
use several different airlines to reach their
destination.
Connecting leisure travellers would be
deprived of single fares, which would likely
cause average fares for journeys to increase.
As EU destinations would be merely spokes
in the hub system of non-EU carriers, the
continuity and the level of services offered
would be subject to their global strategy,
irrespective of the consequences for the local
economies.
Reduced levels of service to Europe from abroad
would have a spillover effect on the EU economy.
More generally, the replacement of EU network
carriers by foreign carriers would eliminate
hundreds of thousands of highly skilled EU jobsincluding aircrew, maintenance workers, ground
staff and airline handling agents, as well as
related jobs at hub airports and local airports.
Given the fact that each airline job creates 5.8
indirect jobs, many more jobs than those provided
by European carriers would be at stake.
Disappearance of EU network carriers should not be tabled as possible EU policy.
It would mean: Fewer routes operated and fewer connections available
Loss of activity for EU airports
Massive loss of EU jobs with a spillover effect on the EU economy
The majority of long haul operators prots come
from these late buying customers. Therefore, the
long haul, low cost model will not work in Europe
for the time being because the low cost airlines
will not easily make the leap to servicing the
higher yield, premium long haul trafc.
The low cost carriers recognise their inability
to make long haul markets work for them
under current market conditions. Ryanair has
investigated the possibility of long haul for years,
but every time they revisit the business case the
result is the same: it does not make sense for
them to enter this market because of their limited
ability to differentiate based on costs.
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Page 18
Equaltreatmentfordifferentbusiness
models
The Commission and the Member States should
fully enforce, in a timely manner, existing regulation
with respect to State Aid, compliance with social
legislation and the use of transparent, market based
structures for airports to subsidise air services.
The airlines of Europe compete ercely with each
other and this competition ultimately benets the
consumer. However, when national governments
or local authorities are allowed to use part of their
resources as additional balance sheet support for
certain airlines, the internal market for transportation
is destabilised and the overall health of the rest of
the commercial aviation industry is damaged.
Governments at a regional or national level may
have strategic interests in supporting air services
between certain regions or in building a link to a
larger hub. If the market will not support this air
service in a sustainable way, then it may makesense to implement a public service obligation
structure.
To further implement the Single market with respect
to social issues, a regulation has been adopted
by the European institutions which nalises the
coordination of social security systems for mobile
workers in the aviation industry. The regulation
provides for the use of the home base as the
criterion for the determination of the legislation
applicable to aircrew members.
Enforce existing regulation in order to fully implement the internal
market and avoid overregulation
What policy steps should Europes air
transport policymakers take?
VI.
In its 2010 White Paper on Transport, the Commission
clearly set out its ambitions for a decade of sustainablegrowth, jobs, innovation and decarbonisation. The
European airline industry is an enabler of these
ambitions and is in need of a comprehensive and
integrated European transport policy.
In spite of the continuous efforts of individual airlines
to address their business challenges, Europes
commercial aviation industry is struggling. Europe
should support the future of its aviation sector with
a comprehensive policy, regulatory framework and
leadership decision making. If Europe wants an
aviation industry that leads the world, it is high timeto increase the global competitiveness of Europes
carriers, and create the fertile soil needed to enable
industry growth and sustainability.
The European Union must recognise the importance
of a sector that has a 365 billion per year impact on
EU GDP, and take the necessary steps to preserve
and enhance the competitiveness and leadership of
the European aviation industry.
The European regulators have a vital role to play
through the elaboration of new approaches that
should be put in place simultaneously within the EU,
where they have full capacity to enforce pro-industry
policies, and with the rest of the world, where theyshould promote, bilaterally and/or multilaterally, a new
regulatory framework based on fair competition in
open markets.
Action is therefore urgently needed on four closely
related priorities:
1. Enforce existing regulation in order to fully
implement the single internal market;
2. Provide efcient infrastructures;
3. Address global issues at global level;
4. Create a level playing eld in international aviationmarkets;
5. Dene, and implement, an external aviation policy
for European aviation, coordinating more closely
within the EU, by:
a. Liberalising ownership and control issues
between like-minded countries;
b. Implementing an External Aviation policy
which strengthens European airlines and
European hubs.
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Page 19
Equaltreatmentfordifferentmodesof
transport
Europe requires an integrated transport policy which
combines the specic advantages and costs of each
form of transport into one transport system.
Over short distances of less than 500 kilometres,
rail travel is more time efcient for passengers than
air travel. However, the cost of the infrastructure
needed to deliver rail travel between any two points
is signicantly higher than the incremental cost of
adding another runway and airport terminal capacity,
which can handle multiple destinations that can be
changed at will.
The AEA has estimated that accomplishing the
EU aim of replacing high-volume short-haul air
services with rail services would require infrastructure
investments of 3.7 trillion, and still it would only
reduce ight demand by 4.6%. Rail subsidies
therefore may not be the most rational allocation ofresources.
Moreover, the fact that railway companies do not pay
for the full cost of this infrastructure, while airlines
do, heavily distorts competition between the different
modes of transport. The ECs European Environment
Agency identied direct subsidies to rail of 73bn a
year and to road of 125bn, mostly for infrastructure
and fare discounts. Aviation infrastructure is nanced
entirely by airlines through user charges. In addition,
liberalisation of the rail sector in Europe is still far
behind schedules and objectives.
Another area which justies regulatory attention
is the inefcient structure of the aviation value
chain which allows infrastructure, ATC and other
service providers to maintain cost levels which
are detrimental to the airline industry. Liberalising
the markets of these service providers could
introduce more market pressure, potentially
resulting in a decrease in costs and improvedservice levels.
Also, Europe is signicantly under-investing in
airport capacity. Europes future economic growth
should not be sacriced for a false promise
of a better environment. European airlines
have already committed to halve their carbon
emissions by 2050 by other means (including
SES) and are working in cooperation with all
parties involved to reduce noise.
Provide efcient infrastructures
Environment
Europes effort to reduce the environmental
impact of aviation through the EU ETS is turning
into a major political and commercial conict.
Retaliatory measures are under way in other parts
of the world, and the impending confrontation
may even provoke an international trade war (as
evidenced by the reactions of Russia, China,
India, Brazil and the United States).
The recent stop-the-clock of the ETS application
on ights to and from the European Union is
a step in the right direction, although a global
solution must be reached through ICAO before
signicant damage is done to the EU industry.
Address global issues at a global level
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Page 20
Taxes
Most EU governments have realised that
imposing fees, duties, levies or taxes on air travel
is an easy way to raise money; AEA estimates
that these different taxes amounted to 5 billion in2011 (5.3% of AEA carriers operating costs).
Air travel has no real substitutes and demand
is relatively inelastic, especially for the higher
value customer segments. Duties on air travel
are not reported as a cost item in the nancial
statements, but they are passed directly on to
consumers through higher ticket prices and
remitted to the national taxation authorities.
These duties or departure fees are set
independently by national governments across
Europe and impact airlines differently.
Should these taxes/departure fees be removed,reduced or rationalised, it is very likely that
airlines will see a direct improvement in margins.
This is supported by what occurred in the summer
of 2011 when the US failed to re-authorise certain
aspects of the Federal Aviation Administration.
During the time that the FAA authorisation was
suspended, carriers did not reduce airfares
accordingly. They set ticket prices based on an
estimation of consumer demand for travel at a
certain (all in) price point, and kept the difference.
This illustrates the micro-economic principle that
the amount of revenue available in the marketis related to its price: there is no such thing as
passing along a cost increase in the short-term
as it results in reduced demand. All fare increases
impact overall consumer demand.
Any cost reduction resulting from reduced taxes/
fees would ow directly to the airlines balance
sheets. As an example, the removal of APD alone
would have made the difference between British
Airways (now IAG) reaching the ROCE threshold
for long-term sustainability over the last 10 years.
Sustainable European Aviation
Source:AEA
Annual ticket tax: 5billion
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Page 21
In addition to the state aid issues addressed
above, the playing eld for European airlines is
distorted in a number of areas, putting them at
a clear disadvantage vis--vis their competitors
from the rest of the world.
As an example, the situation of the Arabian Gulf
carriers, which benet from the close coordination
of the state economy has resulted in unheard of
growth rates for these airlines.
Create a level of playing eld in international aviation markets
The contrast between the government support
for airport capacity in Beijing and Dubai to that
of Frankfurt and London is striking. Europe
has made a false connection between the
environment and growth.
Traffic(RPK)growthY-o-Y 2006 2007 2008 2009 2010 2011
TotalofEmirates,QatarandEtihad 34% 29% 12% 22% 19% 12%
AEA 6% 6% 0% -5% 4% 8%
2012airportcapacity Currentplannedairportinfrastructure
investment
Plannedairportcapacityinthefuture
London
(5airports)
Frankfurt
(1airport)
Beijing
(2airports)
Dubai
Source:AEA research
Sustainable European Aviation
Annual ATM ineff iciency of nearly 5Bn
ETS 2012 2020 total cost of 18Bn
plus 40 50M/ year admin istrative costs
Annual ticket taxes 5Bn
DBC costs 5Bn per yearThe volcanic ash crisis of 2010 brough t AEA airlines
additional care and assistance costs of 200M
Insuff icient airport infrastructure investment: Highestairport charges in the world, AEA airlin es 2012F airport
cost 3.3Bn
Social security of employers contribution reaches 20 30% of staff cost in Eu rope (annual cost of 5 8Bn)for AEA airlines vs. 8 15% in other parts of the world
EuropeanAirlines
Source:AEA
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Page 22
Local government providing a supportive structure
for the growth of a vital industry is not illegal and
should be commended. Other cases are not to
be commended: while EU airlines are obliged to
comply with EU competition law on state aids, a
large number of non-EU carriers have beneted
from massive subsidies over the past 10 years,
including airlines that y to Europe from China,
India, Malaysia, and Bahrain.
Regulation (EC) 868/2004, which is supposed
to protect EU industry against subsidisation and
unfair pricing practices which would cause injury,
is not an appropriate response to these situations.
Among other things its exclusive focus on fares,
an area where evidence of unfair practices is
extremely difcult to nd, and its reference to
community interest has made it almost impossible
to use. Given these uncertainties the EU carriershave therefore been reluctant to le complaints.
Moreover, the scope of the regulation is too
narrow to cover other behaviour that impacts the
competitive position, or even the mere presence,
of EU carriers especially in the territory of non-EU
countries.
Taking into account the aws in the present
regulation as well as the nature of the threats, it
appears that an efcient instrument is essential to
protect EU interests. Such an instrument could be
dened on the following basis:
a competition rather than a trade regulation,
as trade instruments designed for goods are
not really suitable for services;
a scope large enough to encompass all
potentially anticompetitive behaviours,
including state aids and non-tariff barriers to
entry or operation, by any public or private
entity of a non-EU country;
an instrument available to all EU interests,
including airlines and airports, that may be
impacted by third party actions on a collective
or individual basis;
a large choice of possible remedies, includingrestrictions on market access, that could be
targeted at competing airlines but also at
associated entities, including stakeholders,
and would be enforced on an EU-wide basis
the possibility for relief measures to be put in
place as soon as the complaint is found to
be valid.
The EU should restructure its external aviation
policy in a way that allows the European airline
industry to repair its balance sheets and improve
its performance, paving the way for a consistent
policy framework and legal environment which
recognises the trans-border nature of the aviation
industry.
Dene and implement an External Aviation Policy
a) Liberaliseownershipandcontrol
issuesbetweenlike-mindedcountries
The present ownership & control rules restrict
the possibility - in most countries - for foreign
nationals to acquire majority ownership or
effective control of an EU carrier.
Ownership & control rules should evolve over
time and be liberalised so as to make it easier
for airlines to access additional capital, to enable
much-needed further consolidation in the airline
industry, and to allow EU airlines to benet from
the growth generated in developing economies.
Moreover, liberalization of ownership and control
would allow all EU-based airlines, irrespective
of the EU nationality of their owners, to operate
under the same regulatory framework, thereby
preserving jobs in the EU.
Airlines need capital to fund their expansion or
their restructuring. A disadvantageous change
in the EIB policy as regards nancing of eet
renewal made investments even more difcult for
EU carriers. The EU policy should create better
opportunities for foreign investments.
Beyond these general objectives however some
fundamental principles must be respected.
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Page 23
b) Implementanexternalaviation
policywhichstrengthensEuropean
airlinesandEuropeanhubs
While capital controls may be lifted rst, further
liberalisation of market access should take place
only after a careful evaluation of the benets
and the beneciaries of opening the market. The
external aviation policy should provide benets
both to Europe and Europes airlines and bring
signicant added value for the EU airlines
compared to the existing bilateral agreements.
It should also aim to dene non-conicting, and
if possible compatible, rules on safety, security,
consumer protection and state aids.
Finally, this policy should be part of a broader
approach at the multilateral level to push forward
the EU vision of the future of aviation.
On this basis a new external policy should be
based on the following key principles:
to preserve the position of the EU airlines andairports as world leaders;
to adopt a pragmatic approach to adapt the
specicity of each market;
to enhance cooperation and consistency of
the approach of individual Member States in
order to safeguard overall EU interests;
to dene a minimum level of regulatory
convergence that should be a prerequisite
for any further opening of the third and fourth
freedom EU market;
to favour an approach that guarantees that
on its home market the EU industry will not
be faced with competitors operating under a
radically different regulatory regime;
include a safeguard clause to preserve theinterests of EU operators;
take into account the specicities of all-cargo
operators;
select potential targets (equivalent aviation
markets, economic unions(s)) through an
open process involving all stakeholders from
industry and Member States in negotiations
between the EU and third countries;
actively promote its vision of the future of
aviation in the international organisations.
Key actions to be included in a new aviation policy
Fully enforce existing EU regulations
Take necessary steps to provide efcient infrastructures
Provide global answers to global issues
Impose rules guaranteeing a level playing eld at both intra and extra-eu level
Implement a pro-industry external aviation policy
While ownership & control rules are no longer
an issue with regard to consolidation between
European carriers, they are still problematic in
non-EU countries because of their link with trafc
rights. The following issues should therefore be
taken into account:
unilateral liberalization of ownership & control
rules in Europe would destroy the incentive
for third countries to change their own rules;
even a reciprocal liberalisation of ownership
& control rules may be unbalanced in cases
where a non-EU country has only state-
owned national carriers;
investment of sovereign funds in the
European market economy need to be
carefully scrutinised
It does not make sense to liberalise the
ownership & control rules to allow majority
equity investments from abroad without full
reciprocity.
The potential consequences could include:
Inuence on the European industry by
investors whose main strategic interest
lies outside Europe, without a reciprocal
opportunity for European airlines;
the risk of unfair competition within Europe.
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The Association of European Airlines is a non-prot industry organisation,
bringing together 33 major European airlines as the trusted voice of the
European airline industry for 60 years.
Based on its extensive knowledge of the industry, AEA is an essential
industry platform and is relied upon by policy-makers as a trustworthy
contributor to the debates around the decision-making process.
AEA works together with the institutions of the European Union and other
stakeholders in the value chain to ensure the sustainable growth of the
European airline industry in a global marketplace.
www.aea.be
Seabury Aviation & Aerospace is the largest global advisory rm
dedicated to commercial aviation and its related businesses.
The experience of our 180+ professionals in strategy, operational cost
reduction and restructuring is unparalleled.
Our unique team structure sets us apart from other advisors. We
integrate the analytics of top-tier strategy consultants, the functional
depth of technical experts, the nancial acumen of top bankers and the
experience of former senior executives.
As a result we hit the ground running and inspire trust in our clients by
demonstrating expertise and understanding from the rst day.
www.seaburygroup.com
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