A SELECTION OF DEVELOPMENTS REPORTED

IN JANUARY 2000

In January 2000 the Millennium had arrived. The feared ‘millennium bug’ had not disabled air traffic control, reservations, check-in or other systems and rather like the current review of the HN1N1 virus people were asking ‘did we escape because of the precautions we took, or did we spend money unnecessarily?’

The New Year also saw a number of new developments. The European Commission embarked on a radical programme of reform that would lead to co-determination with the European Parliament – a decision that still has great import for European aviation matters. On the global stage the European Union held urgent talks concerning the deteriorating relations with Russia over Chechnya.

European airlines were concerned when the Transport Directorate was merged with the Energy Directorate to form DG Tren although the importance of developing a “Single European Sky” was emphasised.

Within the airline industry the Oneworld alliance was reported to be struggling as American Airlines developed a closer relationship with SAir, Canadian Airlines left following its acquisition by Air Canada, and JAL continued to consider whether it would join.

The UK and the USA continued to negotiate unsuccessfully on a new bilateral agreement to replace Bermuda II with both sides blaming the other for ‘intransigence’.

Air France surprised the other European airlines by the speed of its financial recovery from near bankruptcy and started on the acquisition of a number of small independent French airlines.

KLM and Alitalia continued to progress towards a full merger and to develop their relationship with alliance partner Northwest Airlines as Northwest decide to invest in Continental Airlines with a view to eventual merger.

SAir was weakened by the defection of Singapore Airlines, Delta Airlines, and then Austrian Airlines. In response it made a significant equity investment in the struggling Sabena.

In this context airlines were changing their top management with some frequency and increasingly, as in the case of British Airways, it was perceived commercial acumen rather than airline experience that was the determining factor.

Looking back on this period it may be viewed as a period of considerable turbulence with few people anticipating that within ten years there would be a bilateral agreement between the EU and the USA – replacing all previous national agreements; that SAir, Sabena and many other smaller European airlines would disappear; or that Air France would emerge from the ashes to merge with KLM and then forge one of the major international alliances with Delta - outdistancing British Airways and the Oneworld alliance who are today still struggling with membership and lack of anti-trust immunity.

A personal snapshot of selected events in this period is as follows:

• The new European Commission embarked upon a radical new programme

  • Reforming its relationship with the European Parliament

  • Eradicating corrupt practices (perhaps not that successfully?)

  • Driving for greater efficiency

  • Focusing on a Single Market rather than political unity

  • Enlarging the EU (the start of a major change)

  • For aviation many of these changes were to have a significant effect. The accession of new Members has pushed the political axis of the EU further east and reinforced the significance of the French-German axis. The co-determination with the European Parliament has seen a strong environmental agenda emerge and also greater pressure on the EC in the conduct of international negotiations.

• The new EC structure for the DG TREN gave the Transport Commissioner Loyola de Palacio a strong administrative base from which she started work on her ‘five major objectives’

  • Better functioning of the internal market, integrating national markets and specifically looking to support rail development

  • Investment in infrastructure including new generation air traffic control and satellite navigation

  • Improving inter-modal transport infrastructure with a specific initiative to reduce air traffic control delays

  • Reducing the adverse impact of transport on society, especially in regard to safety and the environment

  • Making the EU more effective in defending its interests in bilateral and multilateral relations and in particular a radical liberalisation of the Europe-North American market

  • It is interesting to see how many of these policies have been realised over the last ten years. Although air traffic delays continue in Europe there is now a real sense that SESAR in co-operation with the US NextGen will see real improvement eventually. Environmental interests are increasingly protected and the European Emissions Trading Scheme is being implemented. New high speed rail links now cover a large part of Europe and have significantly reduced some air traffic demand. There is now a stage one agreement with the USA as a European bilateral, with open access for all airlines to each other’s markets, including London Heathrow. In addition liberal air service agreements have been made with most countries bordering the EU and the Mediterranean.

• An EC hosted ‘round table’ discussion to discuss state aid for EU airlines and the future priorities in regard to what should be permitted

  • This confirmed that the over-riding principle for approving state aid should be the “market economy investor principle”: i.e. would an investor make a similar investment to that being proposed by the state?

  • Of the seven airlines that had recently received state aid six were believed to be showing ‘signs of recovery’. These were Aer Lingus, Air France, Alitalia, Iberia, Sabena, and TAP. Olympic was still perceived to be in financial difficulty. An interesting observation from today is how Air France and Iberia have recovered from their problems of ten years ago – the others have perhaps not been so successful and the question of scale seems very relevant. Scale may also prove relevant to the survival of today’s European airlines and may include the scale of their international partnerships.

  • The EC believed that it would have to supervise another series of state aid when Poland, Hungary, the Czech Republic, Slovakia and other joined the EU

  • The EC revealed that employment was a significant factor in judging whether state aid should be permitted, as the EC did believe that it had a role in facilitating investments that would avoid airline failure – preferring mergers as a way of avoiding closure. This thinking still has resonance today in a much more depressed economic climate.

• The Oneworld alliance was perceived to be struggling

  • American Airlines was pursuing code shares and other agreements with Air France, TAP and the SAir Group as the failure to gain anti-trust immunity for its alliance with British Airways was frustrating its international growth. American Airlines was also seething at the criticism it received from SEPI, the Spanish state-holding company, for its management of Aerolineas Argentinas over the previous two years.

  • The impasse between the UK and US governments over bilateral negotiations was thought to benefit British Airways by restricting access to London Heathrow, but is also influenced the US view that significant slot surrenders would be required for any grant of anti-trust immunity with a US airline.

  • On a more positive note Aer Lingus confirmed its membership of Oneworld and the Irish government advanced plans for privatization. American Airlines and British Airways agreed to take equity stakes in Iberia but JAL still delayed a decision as to whether to join the Oneworld alliance.

• Air France continued to surprise the rest of the industry with its recovery from near bankruptcy – saved only by state aid.

  • The airline under Chairman Jean-Cyril Spinetta reported a major increase in profits and enumerated the three strengths of Air France as

    • Paris- Charles de Gaulle as a hub airport with room to expand

    • The premium class traffic loyal to Air France

    • The benefits flowing from the new alliance with Delta Airlines

  • Air France also continued to consolidate its relationships with other French airlines. It took equity stakes in Proteus, Regional Airlines of France, Brit Air and Corse Mediterranee. This consolidation was seen to be in reaction to the relationships British Airways had with Air Liberte and SAir had with AOM. Air France did not see these regional airlines as important in feeding the Paris hub – the SNCF rail network was seen as far more significant. Air France did, however, wish to restrict the ability of other European airlines taking French regional feed through their hubs.

• KLM continued to implement its planned merger with Alitalia.

  • A significant step forward was the approval for code-sharing on flights between the USA and Italy both direct and as routed through The Netherlands.

  • KLM and Northwest continued to gain approval for code-sharing on a number of services, but did not apply for anti-trust immunity. In part this was to avoid complex regulatory submissions and partly to wait until the planned investment of Northwest Airlines in Continental (and possibly a later merger) had been completed.

  • The SAir group continued to pursue an alternative strategy to the other major European airlines

    • Seeking to enlarge the alliance to repair the damage caused by the loss of Singapore Airlines, Delta and Austrian airlines

    • Merging Sabena into Swissair although probably keeping two distinct operating companies in order to retain international rights

    • Re-engineering all the Swissair competitive IT systems, especially those relating to route profitability and yield management

    • Further investment in devolved businesses such as catering, maintenance and IT

  • It is interesting to look back after ten years and see the significance of the loss of Delta and Singapore Airlines. It is also noteworthy how at this time SAir was probably ahead of other European airlines in seeing the possibility of mergers whilst retaining national rights (as later achieved by Air France KLM) and the paramount importance of yield management in a deregulated market.

© The Management Coach-house Ltd. 2010