Brussels rejects big bail-outs for struggling airlines

Aviation in Crisis: Carriers press for relaxation of ownership rules to ride out the turmoil caused by last month's terrorist attacks on the US

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The European Commission yesterday ruled out massive bailouts for airlines affected by the events of 11 September but said they should be eligible for limited subsidies to cover cancelled flights and increased insurance and security costs.

The move was welcomed by UK airlines which had strongly urged the Commission to reject big state-aid packages to rescue failing national carriers such as Swissair, Sabena and Aer Lingus. But there was concern that the limited measures likely to be permitted by Brussels did not guarantee a "level playing field" between European carriers and their US counterparts which have been offered a $15bn rescue package by the Bush administration.

Announcing the aid measures, Loyola de Palacio, the European Transport Commissioner, also indicated Brussels was likely to relax its "use it or lose it" rule governing airport slots. She also said that mergers were inevitable and that the aviation industry may have to think in terms of creating a single European carrier.

With its strict anti-monopoly rules, the Commission says it cannot permit the airlines to use the crisis to win state subsidies to paper over problems which pre-dated 11 September. But in its package of measures, which will be considered by ministers next week, the Commission proposes that governments should be able to compensate for the direct losses incurred during the four days after the attacks on the US, when transatlantic flights were grounded.

Action taken by EU governments to underwrite the massively increased insurance premiums should also be approved, and probably extended until the end of the year, perhaps with a new fund to cover such eventualities in future. Ms de Palacio added that the costs of some increased safety measures "should be borne by public authorities".

Significantly, the Commission is using the crisis to call for greater powers at an EU level, in particular to negotiate landing rights with the US on behalf of the 15 European states. At present, individual member states negotiate air service agreements bilaterally. Brussels has challenged this and the European Court of Justice is expected to side with the Commission in a ruling due by the end of this year, which will pave the way for the EU to negotiate landing rights with the US en bloc. Similarly, Ms de Palacio called for a new push to achieve the Commission's objective of a single European air traffic control system.

The Association of European Airlines has said the impact of the terrorist attacks will cost its members 2.5bn euros in profits and 3.7bn euros in revenues by the end of the year, putting up to 40,000 jobs at risk. Officials say it is impossible to put a price tag on the aid package because EU governments will determine how much subsidy to offer. But Ms de Palacio said: "No direct cash, no aid, no state subsidies. On that matter, we've said 'no' very clearly. We've said 'yes, compensation for the four days' loss of American airspace', but we've said 'no' to any other type of aid."

That theory faces a direct test next week when the Commission will rule on whether to approve a 125m euros Belgian government bridging loan which has given a stay of execution to its loss-making airline, Sabena.

New security measures recommended, for which the tax-payer is likely to foot the bill, include measures to ensure that all bags going on to airlines are screened. In addition, at least 10 per cent of hand luggage should be searched manually as well as checked by x-ray machines. New standards of sensitivity would be recommended for airport detectors used to screen passengers to ensure that they register anything over 5g of metal. There would also be an agreed list of weapons which would be barred from airplanes.

Sir Michael Bishop, the chairman of BMI British Midland, the country's second biggest scheduled airline, welcomed the measures but urged the Commission to go further and remove the restrictions on ownership that prevent consolidation among European airlines. He said: "Despite the considerable progress that the Commission and member states have made in liberalising aviation markets to new competition, a number of national carriers have been given a special status that has protected them from normal market forces, and the fragility of this policy is now painfully obvious." He said failing carriers should not be allowed compensation that enabled them to continue operating in an artificial environment and distort the true forces of supply and demand.

British Airways also supported the Commission's stance on general bailouts for airlines but it said there was an urgent need for further liberalisation. BA's director of government and regulatory affairs, Andrew Cahn, said: "The terrible events of 11 September could either be a catalyst for the change the airline industry desperately needs or it it could be the excuse for sitting back and doing nothing."

But if the airline industry is to be genuinely liberalised, this will require action at international and European level. At present, non-EU nationals may not own more than 49 per cent of an EU-registered airline. In the US, the limit on foreign ownership is at 25 per cent. But what scuppered the proposed takeover of KLM by BA was a rule granting landing rights to airlines on the basis of their nationality. Had BA acquired KLM it may not have been allowed to operate services from Amsterdam to the US because KLM was no longer a Dutch-owned carrier. Advocates of liberalisation, such as Sir Michael Bishop, believe that the "tectonic plates of the airline industry" shifted when the US was attacked. Faced with a crisis of passenger confidence, mounting losses and demands for state bailouts, logic dictates, he says, that airlines be allowed to merge. The most obvious way to achieve this, he adds, would be for the three big alliances, OneWorld, Star and Skyteam, to, in effect, become single companies with common shareholdings. Others fear that is merely a recipe for less competition, higher prices and domination of the world aviation industry by an oligopoly of carriers with overweening market power.

What everyone is agreed on, however, is that after 11 September, the airline industry will never be the same again.