09-Dec-2015 6:53 PM

New EU Aviation Strategy avoids key issues as Asia Pacific and Middle East claim the future

Analysis

Europe is still an important aviation region. But it is diminishing in importance and its position as one of the two leading world regions (with North America) has been surpassed by Asia Pacific. Moreover, it is clear from orders for widebody aircraft, the main agent of competition between the regions, that the future belongs to Asia Pacific and the Middle East. In this respect, Europe and North America are becoming 'also rans'.

That said, Europe is home to globally significant airlines and other aviation companies, and these players are anxious to participate in the growth offered by aviation markets to the east. The European Union's new Aviation Strategy document, published on 7-Dec-2015, recognises this: "The EU aviation sector must be allowed to tap into the new growth markets where significant economic opportunities will be generated in the decades to come".

However, all six associations representing Europe's aircraft operators issued a joint response calling for more specific and far-reaching remedies. In a rare display of unity, AEA, EBAA, EEA, ELFAA, ERA and IACA* said that that the strategy "lacks ambition". It certainly seems to duck some key issues.

* AEA (Association of European Airlines), EBAA (European Business Aviation Association), EEA (European Express Association) ELFAA (European Low Fares Airline Association), ERA (European Regions Airline Assocation), IACA (International Air Carrier Association)

Summary

Europe's position as a leading aviation region is diminishing, with Asia Pacific taking the lead.
European aviation companies are eager to participate in the growth of aviation markets in Asia.
The European Union's Aviation Strategy lacks ambition and fails to address key issues.
The strategy acknowledges the economic importance of aviation and the benefits of liberalization.
Challenges faced by EU air transport include environmental constraints, infrastructure limitations, competition from new players, and ownership and control restrictions.
The strategy proposes negotiations for EU-level air transport agreements with countries experiencing rapid air travel growth, such as China, ASEAN, and the Gulf countries.

There was always going to be a degree of motherhood about a policy that had to reconcile so many different and often conflicting needs. To that extent, there is nothing untoward in the strategy document.

See related reports:

Widebody jets on order by region as at 9-Dec-2015

The EU Aviation Strategy underlines aviation's economic importance and the benefits of liberalisation

In its new Aviation Strategy document, the European Commission starts, rightly, by reiterating the economic importance of air travel. Aviation directly employs 1.4 million to 2 million people in the European Union, and supports a total of 4.8 million to 5.5 million jobs. It contributes EUR110 million to EU GDP and its overall economic impact, through the multiplier effect, is EUR510 billion, says the document.

The European aviation sector has benefited significantly over the past 20 years from the liberalisation of the internal market and the growth of LCCs, whose development was the direct result of this liberalisation. The sector has also benefited from the liberalisation of market access between the EU and third countries through EU-level aviation agreements.

For example, the document says that the number of passengers to/from the Western Balkan States has almost tripled since the signature of the EU Air Transport agreement with those countries, while passenger numbers to Morocco have doubled. Agreements with the US and Canada have helped to stimulate an increase of more than 3 million in passengers between the EU and these markets .

But EU air transport faces challenges

However, EU air transport faces a number of significant challenges, which stand as potential barriers to its further development and its ability to compete with other regions. These include environmental constraints and targets, infrastructure constraints both in the air and on the ground, intense competition from new competitors on long haul routes, and barriers to investment arising from limits on non-EU ownership and control of EU airlines.

These challenges must be met while continuing to ensure that EU aviation places safety at the top of its priority list, addresses issues of consumer rights and employment legislation, and embraces technological developments. The EU Aviation Strategy document touches on all of these areas.

Challenges posed by environmental priorities

The EU Aviation Strategy document notes that the "future competitiveness of the European air transport sector and its environmental sustainability go hand-in hand". No one would dispute this assertion, although many in the industry have disagreed with the EU's inclusion of aviation in the bloc's emissions-trading scheme. The International Civil Aviation Organisation (ICAO) aims to develop a global solution through a 'Market Based Mechanism' that would aim to achieve carbon neutral growth in aviation from 2020.

The European Commission supports this, saying at the ICAO Assembly in 2016 that Europe should push the rest of the world to find a "truly global mechanism", although the strategy document is short on the details of such a mechanism. One part of the solution to the problem of carbon emissions is to reduce the amount of fuel burnt as a result of infrastructure inadequacies.

The Single European Sky is still up in the (multiple) air

The Single European Sky project has dragged on for more than a decade without reaching its goal of implementing a truly unified ATM system across the continent. The project, if completed, would increase the effective capacity of airspace, improve safety, reduce costs and cut unnecessary fuel burn resulting from detours and holding patterns.

In the Aviation Strategy document, the European Commission gives its backing to the Single European Sky (SES 2+) proposals, calling for their swift adoption by the European Parliament and the European Council.

The benefits of the Single European Sky

Whether this call will make much difference to the project's progress is doubtful, given the poor track record of member states and their air navigation service providers in working together on the single sky.

In a wonderfully understated piece of diplomatic language, the strategy document notes that the level of cooperation on the project "is still far from optimal". Meanwhile, the costs of the EU's fragmented airspace are estimated at EUR5 billion annually.

More than 20 airports will be congested by 2035

Airport infrastructure constraints are also a growing problem. Eurocontrol forecasts that, by 2035, 2 million flights will be lost to airport capacity shortages in European airports. More than 20 airports will be capacity constrained for six or more hours a day, compared with three such airports in 2012 and this will add an average airport-related delay of five to six minutes per flight. These capacity constraints could cost 434k to 818k jobs and EUR28 billion to EUR52 billion in EU GDP by 2035, according to the document.

Airport capacity remains an issue for national and regional governments, and the European Commission's attempts to facilitate development in this area are set out in the document. They include a commitment to assessing "the necessity to review the Airport Charges Directive", which sets out principles governing the regulation of airport charges in the EU.

The Commission also recognises the importance of airport connectivity, suggesting steps to monitor both intra-EU and extra-EU connectivity in Europe and to "identify any shortcomings and the appropriate measures to be taken". Again, this is short on detail and, anyway, the EU is limited in its ability to take action to increase connectivity at specific airports.

Market access, ownership and control, unfair competition: Gulf targets?

The strategy document contains a number of proposals around the issues of market access, ownership and control and ensuring that competition is on a so-called level playing field. Of course, it is important for any aviation strategy to establish broad principles in these areas and the EU has a broadly liberal position.

However, these parts of the document appear to be aimed at, or at least inspired by, fighting competition from the Gulf-based super connectors. "For the EU aviation industry to remain competitive, it is essential that market access is based on a regulatory framework which promotes EU values and standards, enables reciprocal opportunities, and prevents distortion of competition," it says.

It does not mention the Gulf airlines, but the Strategy does use the term "level playing field" that is most often used by those who complain about what they claim is unfair competition from Emirates, Qatar Airways and Etihad.

Again, however, it avoids fully confronting the issue, merely saying rather blandly that it will "negotiate effective fair competition provisions in the context of the negotiation of EU comprehensive air transport agreements and consider measures to address unfair practices from third countries and third country operators".

There is already an EU regulation, Regulation 868/2004 to be precise, that deals with subsidies and unfair pricing, but it is considered to be ineffective and has never been applied. How it will be replaced is not yet clear, but, in addition to the suggestion that terms be included in individual air transport agreements, the Commission suggests that ICAO should play a role, and that it may propose new EU measures in 2016. It seems that the Commission is reluctant at this stage to take sides on the debate over unfair competition with Gulf airlines, perhaps understandably so.

New EU-level air transport agreements proposed

The Commission is more specific in identifying countries and regions with which it proposes the negotiation of EU-level air transport agreements. These are generally countries and regions where growth in air travel is rapid: China, ASEAN (Association of South-east Asian Nations), Turkey, Saudi Arabia, Bahrain, UAE (United Arab Emirates), Kuwait, Qatar, Oman, Mexico and Armenia.

If signed, these agreements would increase the proportion of passengers to/from the EU that are covered by external aviation agreements from 42% to 72% (based on 2014 passenger numbers).

EU-wide air transport agreements Dec-2015

Relaxing restrictions on traffic rights between the EU and these destination markets would provide EU airlines with increased growth opportunities. They also include all the nations that are home to the super-connector airlines (Turkey, UAE and Qatar) and so would give the EU the opportunity to include terms dealing with any unfair competition, if it felt this to be necessary.

The Commission also recommends new aviation dialogues with important aviation partners such as India, presumably with a view to negotiating more liberal EU-wide air transport agreements in the future.

Ownership and control restrictions: 'relax with reciprocity' means no change

Market access goes hand in hand with ownership and control, an area in which CAPA has frequently argued for further liberalisation. Within the EU, airlines can be owned by any EU nationals with no limits, while non-EU nationalities are limited to 49% ownership of an EU carrier.

In this area, the European Commission's new strategy document combines the pioneering liberal attitude that led to the total removal of intra-EU restrictions on ownership and control with a more cautious approach that is likely to mean that, in practice, there will be little or no progress on relaxing O&C rules when it comes to other regions.

The document promises that the Commission will "continue to pursue the relaxation of ownership and control rules", but only on the basis of "effective reciprocity through bilateral air services and trade agreements with the longer term objective to do so at multilateral level".

Many other regions and countries also have a 49% foreign ownership limit, although the US has a 25% limit. It is difficult to see how what is effectively a global ban on majority foreign ownership (treating the EU as a single nationality for this purpose) will ever be lifted unless someone takes the lead and acts without reciprocity. The European Union has a proud tradition of leadership in the liberalisation of aviation and should take a bolder stance now.

Meanwhile, a recent spate of investment in minority stakes in EU airlines (eg Etihad in airberlin, Alitalia and Air Serbia; Delta in Virgin Atlantic) has led to some questioning of what exactly constitutes control. The EU launched investigations into these cases in 2014 and these investigations are ongoing.

However, in order to provide more clarity for both investors and airlines, the Commission now proposes to publish "interpretative guidelines" on the application of the appropriate regulation.

The 'social agenda': more dialogue

With respect to employment issues (the so-called 'social agenda'), aviation creates jobs and demands high levels of competence, with implications for standards of training and the monitoring of skills, particularly given the pace of technological change. For these reasons, regulatory authorities tend to take an interest in labour issues and are often tempted to intervene.

Labour is one of the two biggest costs for most airlines (the other being fuel) and so - operators are continually under pressure to find ways to reduce staff costs. Of course, safety regulation must be uniformly enforced, but there is no evidence to support the view put forward by some that working practices often adopted by low cost airlines are inherently less safe. There is however plenty of evidence to demonstrate that they are more productive in fact, when compared with legacy airlines.

The 'Social Agenda' in EU aviation

Such practices include the recruitment of local staff on local terms that may differ within the same airline, the recruitment of staff from outside the territory where the airline is licensed, the use of agency staff and so-called pay-to-fly schemes.

Partly in reaction to increased competition from LCCs that have adopted these practices, some legacy airlines, including those in the US, have sought to promote the social agenda to raise regulatory barriers to competition. In addition to insinuating that there are safety concerns, these legacy airlines have stirred up fears that labour protection laws are being undermined by employing crew in jurisdictions with different labour laws.

In order to address these concerns, the European Commission has expressed its support for a social dialogue and for further analysis on aviation jobs and employment in the EU. It also plans to publish a practice guide on applicable labour law and the competent court, and to "consider the need for further clarification" in these areas.

What this means in practice is unclear. Again, the Commission appears to be attempting to steer a path between the two (at least) sides of this debate.

Passenger rights: revision of regulation is still pending

On passenger rights, the revision of the controversial Regulation 261/2004, which deals with denied boarding, long delays and cancellations, is still going through the necessary legislative process. Meanwhile, the existing version applies, but the Commission urges the European Parliament and Council to adopt the revision swiftly.

There is much sitting on the fence in the Strategy…

The EU Aviation Strategy document underlines the economic importance of the EU air travel sector and the need for its participants to access the world's growth markets. Unfortunately, a number of its proposals appear to sit on the fence about how to achieve this in practice. In particular, the Strategy ducks issues such as the elimination of restrictions on ownership and control, so-called unfair competition with Gulf airlines and employment legislation. At least this is positive in that it does not outright accept the harder line positions on these thorny topics. But on the other hand it falls short of emphasising the substantial economic and consumer benefits they could or do deliver.

The Strategy is still at the proposal phase, with two further phases - negotiation and implementation - still to come, involving a significant action plan (see table below). There may still be time for the more concrete proposals sought by Europe's six airline associations. It is rare to see these associations speak with one voice, although the industry is crying out for unified representation.

The importance of the EU Aviation Strategy has clearly galvanised the airlines into a closer dialogue, despite a number of disagreements between them on issues such as liberalisation and Gulf competition.

EU AVIATION STRATEGY INDICATIVE ACTION PLAN

COMPLETION OF INTER-INSTITUTIONAL PROCESS
2016	Revision of slot Regulation N°545/2009
2016	Revision of Regulation N°261/2004 on passenger rights
2016	SES2+: Revision of Single European Sky framework
2016-7	Conclusion of the ratification process of EU accession protocol to Eurocontrol
COMMISSION LEGISLATIVE PROPOSALS*
2015	Revision of basic aviation safety regulation N° 216/2008 including introduction of provisions on drones.
2016	Measures to address unfair practices (revision Regulation 868/2004)
COMMISSION IMPLEMENTING ACTS
2017	Revision of the air traffic management network functions, including the selection of the Network Manager
2019	Revision of performance scheme (gate-to-gate)
INTERNATIONAL DIMENSION
2015	Authorisations to negotiate comprehensive EU level air transport agreements
2016	Authorisations to negotiate bilateral Air Safety Agreements with China and Japan
2016-7	Launch of new aviation dialogues with key partners
GUIDANCE DOCUMENTS
2016	Guidelines on air passenger rights
2016	Guidelines on ownership and control
2016	Guidelines on Public Service Obligations
2016-7	Best practices in minimum service levels in airspace management
FITNESS CHECK (REFIT)
2018	Computerised Reservation System (CRS) code of conduct on the distribution of airline product
STUDIES AND EVALUATIONS**
2017-8	Regulation (EC) N°1008/2008 on common rules for the operation of air services
2016-7	Regulation (EC) N° 996/2010 on aviation accident investigation
2016-7	Regulation (EC) N° 2111/2005 on the EU airlines safety list
2016-7	Airport charges Directive 2009/12/EC
2017	Ground handling services Directive 96/67/EC

… but there are positives to be found

On the more positive side, the Commission's call for EU-level air transport agreements with many of the world's more important growth markets is welcome, as is its clear backing for the Single European Sky (even if it can do little to expedite the project other than express this support).

Moreover, the document does identify a number of the key factors that allow the successful development of international hub airports and airlines: "The availability of suitable infrastructure, the nature of economic, fiscal and regulatory regimes, and historic, cultural and trading links all play a part."

To a large extent, these factors are not in the hands of the European Union or its institutions, but are mainly influenced by national governments.

The playing field can be levelled, but not by protectionism

Furthermore, it is these factors that have been clearly prioritised by national governments in the fast growing aviation markets in Asia Pacific and the Middle East, in sharp contrast with governments in Europe. The absence of suitable infrastructure and the sometimes punitive nature of economic and fiscal regimes at the national level in Europe often outweigh the benefits of the historic, cultural and trading links between many European nations and countries in other parts of the world.

This is significant in the context of the ongoing debate about "unfair competition" from Gulf airlines. More than alleged subsidies to, and price dumping by, the Gulf airlines, Europe's infrastructure constraints and its economic and fiscal regimes have the greatest impact in distorting competition and create an 'unlevel' playing field between European airlines and their counterparts in the Middle East and Asia.

Between now and the implementation of the EU Aviation Strategy, the European Commission must continue to resist pressure to use the exercise as an excuse to raise protectionist barriers against Gulf competition.