sustainable european aviation - novembro 2012

7/28/2019 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.

Sustainable European Aviation


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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


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


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%


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


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%


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


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



16/24

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.



17/24

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.



18/24

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.



19/24

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



20/24

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.


Source:AEA

Annual ticket tax: 5billion


21/24

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


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


22/24

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.



23/24

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.



24/24

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

sustainable european aviation - novembro 2012

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