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Are the major US carriers being unfairly subsidised?
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| 16 July 2002 |
By Phil Butterworth-Hayes
There are growing concerns in Europe that the US government's support of its airline industry, following 11 September, could soon be putting European carriers at a competitive disadvantage.
This support was initially focused on the Air Transportation Stabilization Board (ATSB) scheme to support US carriers who would have been forced into bankruptcy had not Washington intervened. But there are now fears that, on top of this, the US government's policy of underwriting some new security costs will further widen the cost gap between the two sides. Speaking at the recent International Air Transport Association, AGM Lufthansa’s CEO, Juergen Weber, said he was expecting a dramatic distortion in security costs between European and US competitors. According to Weber new security measures, such as cockpit door monitoring cameras, could cost as much as US$200,000 per aircraft, presenting Lufthansa with a bill of around US$50 million.
But is Weber right? How far has the US government supported US airlines, and is it now in danger not just of ensuring their survival at a time of crisis but laying the foundations for unfair competitive advantage when the market returns to normal?
Contrasting airline subsidy programmes
Up to the start of May 2002 the US government had paid out US$3,937,008,506.60 to 380 airlines under the provision of the ATSB Act. The Department of Transportation had also received over 300 applications for compensation in a second round of prospective payouts. In June, the US Senate voted 91–4 to fund US$10 billion of federal loan guarantees for this financial year. In contrast, state-aid in Europe has been limited to compensating just for the period when traffic was halted.
These subsidies are starting to worry the European Commission. While most industry analysts say the immediate US$5 billion of emergency grants have not distorted competition, the US$10 billion loan guarantee programme is more unsettling.
US subsidies – fair or unfair?
US airlines are still counting the costs of 11 September. According to Delta CEO, Leo Mullin, the current bill looks something like:
• loss of customers following imposition of tighter security: US$600
• million passenger security tax: US$266 million
• war-risk insurance (without government support): US$250 million
• inadequately funded regulations for cockpit door strengthening, ramp and caterer security, postal and cargo restrictions, new screening procedures: US$175 million.
The probable fact is that competition between US and European major airlines has not, so far, been distorted by the ATSB provisions. Given the current dire economic position of the US airline industry – according to the Air Transport Association of America's Office of Economics losses are likely to exceed US$7 billion in 2001, even with the cash from the ATSB – it is unlikely that US airlines still in the initial stages of recovery will gain any immediate competitive benefit from the provisions.
However, were these provisions to remain in force for any length of time and were transatlantic scheduled carriers, beyond US Airways, to start making claims then competitive issues certainly would arise.
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