Austrian Airlines bailout protected by taxes and fare floor
The Austrian government plans to set a EUR40 minimum air fare and to increase passenger taxes on short and medium haul flights. These two measures will disproportionately hit low cost competitors to Austrian Airlines, which has just become Europe's latest beneficiary of state aid.
The growth of LCC competition to Austrian Airlines and its parent Lufthansa Group at Vienna was gathering pace before the COVID-19 crisis, and this threat is likely to intensify.
The Ryanair subsidiary Lauda and Wizz Air have grown rapidly to become the biggest airlines at the airport outside the Lufthansa Group in 2019. Wizz Air and Ryanair Group are also now among the most vocal European airlines on seizing growth opportunities in the post-crisis recovery.
The combination of new taxes and the planned EUR40 air fare floor appears calculated to force LCCs (Ryanair Group and Wizz Air in particular) to raise ticket prices or to operate at a loss in Austria. This may well be subject to legal challenges.
Although dressed up as an environmental measure, the Austrian government's plans look like protectionism.
Summary
- Austrian Airlines is to receive a EUR600 million aid package.
- Austria's Air Transport Levy will increase for short and medium haul passengers, hitting LCCs proportionately more than Austrian Airlines.
- Competitor LCC passenger share at Vienna grew from 5% in 2015 to 24% in 2019. Lauda and Wizz Air are the leading LCC competitors to Austrian Airlines.
- The combination of new taxes and a planned EUR40 air fare floor would force LCCs to raise fares.
Austrian Airlines to receive EUR600 million aid package
The government of Austria has agreed a EUR600 million aid package to support Austrian Airlines. The state will contribute EUR150 million to cover the airline's losses resulting from the COVID-19 crisis and guarantee 90% of a EUR300 million six-year loan from a consortium of Austrian banks.
In addition, EUR150 million of new equity will be invested by Austrian Airlines' parent company, Lufthansa.
Lufthansa and Austrian have given commitments to maintain the Vienna hub for 10 years and also to strict ecological requirements as conditions of the package, which is dependent on EU and shareholder approval for Lufthansa's own state aid from Germany.
See related report: Lufthansa: Europe's first major airline partially renationalised
Sustainability commitments given by Austrian Airlines include moving passengers to rail on short haul journeys (travel time less than three hours), as far as adequate infrastructure is available and direct accessibility to Vienna airport is ensured.
Austrian must also halve CO2 emissions within Austria and reduce total emissions by 30% by 2030, and improve fuel efficiency by 1.5% pa.
No sooner was this state aid agreed for Austrian Airlines than the country announced plans to introduce a EUR40 price floor on air fares, in addition to changes to its Air Transport Levy.
Austria's Air Transport Levy to increase for short and medium haul
Austria's Air Transport Levy currently imposes a ticket tax of EUR3.50 for short haul flights (to Europe, North Africa), EUR7.50 for medium haul (Middle East, the rest of Africa, India) and EUR17.50 for long haul flights.
This structure is to be replaced with a flat EUR12 charge for almost all flights, but a EUR30 charge for flights of less than 350km.
The new EUR30 tax for these very short haul flights is being introduced as an environmental measure to reduce emissions on journeys where other modes of transport are available.
Proportionately, the new taxes will hit LCCs more than Austrian Airlines
However, it cannot have escaped the attention of the Austrian government that the new charges will hit LCCs proportionately more than Austrian Airlines.
The significant increase in the tax covers short and medium haul flights, which are the segment operated by the main LCC competitors to Austrian Airlines. Long haul flights, operated by Austrian but not by its LCC competitors, will enjoy a reduction in the tax.
Moreover, the new charges on short/medium haul will represent a greater percentage of ticket prices for LCCs than for legacy airlines. On sub-three hour journeys, Austrian will be moving much of its traffic to rail and so will not be affected at all by the increased charges.
Competitor LCC share of passengers at Vienna grew from 5% in 2015 to 24% in 2019
The LCC share of passenger numbers at Vienna Airport grew from 8.6% in 2015 to 31.6% in 2019. If Eurowings (like Austrian, a Lufthansa Group company) is excluded, competitor LCC share grew from 4.7% to 24.4% over the same time frame.
See related report: Vienna Airport resurgent: Lauda leads LCCs, Air Berlin is history
During this period, Austrian Airlines' share of passengers increased at first, from 45.6% in 2015 to 48.4% in 2017 (thanks to the withering of Air Berlin Group), but then fell to 43.2% in 2019.
Lufthansa Group share increased from 55.0% in 2015 to 63.3% in 2017, but then fell to 54.7% in 2019.
Vienna International Airport: share of passengers, 2015 to 2019
Lauda and Wizz Air are the leading LCC competitors to Austrian Airlines
Lauda and Wizz Air were the main drivers of LCC growth in 2019. Lauda's share of passengers jumped from 2.2% in 2018 to 8.4% in 2019, while Wizz Air's rose from 1.6% to 6.6%.
EasyJet lost some share in 2019, but was still the number five airline by passengers at Vienna.
Although a pay dispute at Lauda has led to the threat of Lauda closing its Vienna base, there have been some signs of progress. An ongoing Ryanair Group presence at Vienna, whether through Lauda or Ryanair, seems likely in the recovery.
Vienna International Airport: share of passengers, 2019
Austria plans a EUR40 fare floor (including taxes)
More controversial than the new taxes, and also hitting LCCs much more than Austrian, is the planned fare floor.
This would wind the clock back decades to the days of price regulation and prohibit airlines from selling tickets for less than EUR40 (including taxes).
Ultra LCCs Ryanair Group and Wizz Air Group have average fares of less than EUR40 across their entire networks.
Ryanair Group and Wizz Air average fares are less than half of Austrian's
Ryanair Group, which includes Vienna's number two airline by passenger numbers, Lauda, has an average fare before ancillaries of less than EUR37.
The figure is EUR38 for Wizz Air Group, Vienna's number four operator (source: CAPA analysis of results statements for the financial year ended 31-Mar-2020).
Comparable data for Austrian Airlines on short/medium haul is not available, but analysis of Lufthansa Group data for calendar 2019 indicates that the average total revenue per passenger for its network airlines is EUR107 on European routes.
Based on a reported comment from Lufthansa Group CEO Carsten Spohr that 8% of traffic revenue is ancillaries, this suggests an average fare of EUR99 on European routes for the network airlines.
For Lufthansa Group's lower cost subsidiary Eurowings, the average fare is around EUR77.
Austrian Airlines is not as high yield as the other network airlines in the group (Lufthansa and SWISS) and so it probably has an average fare that is below the average for the group's network airlines. However, it is probably above Eurowings' average fare.
An average fare figure for Austrian somewhere between EUR77 and EUR99 seems reasonable.
Even at the low end of this range, it is more than double the level of Wizz Air and Ryanair Group.
EasyJet's average fare (in the year to Sep-2019) was EUR59.
Revenue per passenger and average fare comparison: 2019*
The combination of new taxes and the fare floor would force LCCs to raise fares
With the current short haul and medium haul taxes at EUR3.50 and EUR7.50 respectively, and the ultra-LCC average fares at EUR37-EUR38, a EUR40 minimum ticket price (including taxes) would mean that Ryanair and Wizz Air would still be allowed to sell tickets not very much below their average fares.
They are among Europe's highest margin airline groups and so could still be profitable or could at least break even at prices EUR3.50 to EUR7.50 below their average.
Ryanair had an EBIT margin of 13.2% at Dec-2019 and Wizz Air's margin was 12.2% in the year to Mar-2020, compared with 0.9% for Austrian Airlines in calendar 2019.
However, if taxes rise to EUR12, or EUR30 for journeys under 350km, this will change the equation. Both Ryanair and Wizz Air generated operating profit per passenger of approximately EUR8 per passenger in the last financial year.
Maintaining the same price to passengers with a EUR12 tax would obliterate this margin, so the two ultra LCCs would need to increase their fares to remain profitable.
The sounds of resurgent protectionism are in the air
The EUR40 fare floor (if it survives any legal challenges), in combination with the new tax levels, looks designed to force ultra LCCs Ryanair and Wizz Air into raising their ticket prices, thereby reducing demand for their flights, or to force them to operate at a loss.
Coming right after an agreed state aid package for Austrian Airlines, these moves looks like barely disguised protectionism by Austria.
If the price of supporting flag carriers is to protect them from competition (and there are growing signs of this intent), the wider economy will be the victim. At a time when there are predictions of up to 300 million tourism employees globally losing their jobs, this is indeed a high price to be paying.