The accession of 10 new states to the European Union will bring profound changes in air transport
This May, enlargement of the European Union (EU) will add 10 new member states. The additions will lift the club's ranks to 25 countries, with another three candidate countries waiting in the wings to join in the not too distant future. A radical shake-up is inevitable, and the European aviation industry is one of many sectors that are bound to change forever. But will the eastward enlargement result in prosperity for airlines and airports in the new - and poorer - countries, or simply create a bigger market for the more prosperous players among the present EU membership?
The agreed accession of Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia will bring EU citizenship to 450 million people. Another 30 million will be added in 2007 when Bulgaria and Romania are scheduled to accede, with a further 70 million if Turkey is eventually admitted to the club. These additions will result in a complex web of air services, with 130 airlines touching down at around 450 airports, with air navigation services across the networks in the hands of 60 providers.
The new members will face tough new legislative and regulatory challenges, such as the vexed issue of state aid and onerous competition rules, as well as certain environmental and safety requirements. Dauntingly, they will not have the luxury of a transition period, as all will have to adhere to the new rules from day one.
However, as dramatic as the new additions may seem, they must be put in context. The accession states add only 5% to the EU economy in terms of GDP and their principal carriers generate collective revenues of under €3 billion ($3.9 billion), only a little more than that achieved by Swiss in 2002. Still, airline consultant Chris Tarry believes that for the incumbent carriers, the opportunities will outweigh the threats.
"While in absolute terms the uplift in GDP is not huge," he says, there will be market opportunities, particularly for Europe's low-cost airlines that are looking to expand to the east. Such carriers as Ryanair, easyJet and others, he says, will take advantage of a broader playing field to generate increases in traffic, initially focusing on the larger markets of Poland and the Czech Republic.
It is clear that carriers from the existing EU membership will gain an advantage in the initial rush to open new links in the expanded Europe. As Tarry observes: "The new environment will be more challenging for new-entrant airlines from the accession countries, because they are starting from scratch." Indeed, LOT Polish Airlines already is facing challenges at home from three new local low-fare airlines, which have also set their sights on the Czech Republic.
Carrier explosion
Tarry, who further explains that the availability of inexpensive aircraft will help swell the ranks of new entrants, is not alone in projecting a possible explosion of new carriers. David Henderson, information manager at the region's club of mainline carriers, the Association of European Airlines, suggests that removing flag carrier monopoly status will create opportunities for new airlines to enter the fray in several countries. This, he says, could destabilise the market in the early years, but it should settle down once the integration process is complete.
In spite of the likely opening scramble and resultant overcapacity, Henderson is convinced that traffic will grow in overall terms. He points to the experiences of Austria, Finland and Sweden, which joined the EU in 1995 and achieved reasonable levels of growth, with the benefits shared by all three countries.
Mike Ambrose, director general of the European Regions Airline Association, which has a membership of 70 mainly regional airlines, including some from the accession states, sees benefits accruing to both EU newcomers and incumbents.
Each side, he says, has been constrained from serving secondary cities by restrictive bilateral agreements, but the impending enlarged liberalisation area will ensure that "new traffic flows will start and expand the market. Routes previously considered untenable will now be opened up." An example is Cracow, in Poland, to Manchester.
Ambrose sees some limitations in opportunities from secondary cities to main hubs, because of a lack of capacity in the latter, but there should be no holding back on point-to-point services between secondary cities, as soon as the EU comes out of recession.
With few exceptions, and even these are being rectified, airports in the accession states have excess capacity, which will create openings for start-ups. But Ambrose cautions that it is not going to be a smooth ride all the way and it may be up to five years before air transport in the enlarged Europe has settled into a new order. "I don't think regional airlines will emerge with the vigour we saw 15 years ago, because we are going through a difficult period and the market is tighter," he says.
Ambrose adds that the remaining manufacturers of regional aircraft have slowed delivery cycles, meaning new aircraft are not instantly available. There is, however, a sizeable second-hand aircraft trading business, although this is largely limited to turboprops.
Low-cost advantage
The price sensitivity of routes to and within the accession countries is naturally suited to low-fare airlines, and already 85% of air passengers in Europe regularly travel at reduced fares. Few doubt, therefore, that it will be the low-cost and regional airlines from both sides that will benefit most, but where will that leave the majors?
British Airways, Air France, Lufthansa and Austrian Airlines are already firmly established in the principal markets of Poland and the Czech Republic. Meanwhile, SAS Scandinavian Airlines has bought stakes in two of the Baltic airlines - Estonian Air and AirBaltic - and is closely watching the possible privatisation of Lithuanian Airlines. SAS has also stated its interest in a 25% stake in LOT Polish Airlines, which recently joined it in the Star Alliance.
Neighbour CSA Czech Airlines is part of the rival SkyTeam alliance, with Mal‚v also thought to be in discussions on joining. However, the networks of the two carriers are largely complementary, so that the struggling Hungarian national carrier, with a recent history of frequent management changes, faces a distinct danger of being relegated to a subsidiary role or bypassed altogether.
With LOT and CSA already the dominant carriers in central Europe and now linked into major global alliances, it is difficult to foresee substantial changes to the status quo after EU enlargement. Both expect to benefit from alliance membership, from the strength of their home markets and from new opportunities on routes to the UK, Germany and France.
Bohuslav Santrucek, CSA director in the UK, confirms the airline is already preparing to add capacity on these routes and introduce larger aircraft. He further states that CSA, critically, has met the challenge of low-fare airlines, which have already descended on Prague.
"We have adjusted our fare structure and have benefited from the increased demand generated by low fares, with load factors on CSA higher since low-fare carriers entered the market," he says, adding that the load factor gains have brought revenue in excess of that lost to lowered fares. Santrucek adds that Europe and the CIS republics are CSA's prime focus, rather than long haul, and there are enough travellers prepared to pay a little extra for a better class service.
LOT's membership of Star has given the alliance a firm foothold in central and eastern Europe and has boosted the Polish carrier's position in the market. On joining Star, chief executive Marek Grabarek said that membership would enhance the airline's ability to build its market share in eastern Europe and beyond through a still closer relationship with fellow members Lufthansa, SAS and Austrian, airlines with which it already has extensive codeshare arrangements.
Lost monopoly
However, LOT's monopoly position within Poland is disappearing fast and it will be interesting to see how the carrier intends to respond. With the largest market of the new EU states, low-fare airlines are converging on Poland. Air Polonia is already making an impact on its London services from several Polish cities and intends to add more EU destinations during this year. Wizz Air, founded by former Malév boss József Váradi, is planning to start services in May to various European destinations, first from Poland and then from Hungary. It may be joined by Get Jet, another start-up ready to take the plunge. Established carriers from the UK, Ireland and Germany are also likely to start serving Poland soon.
The market in the three Baltic states of Estonia, Latvia and Lithuania is tiny by comparison, but may be consolidated under SAS. Slovakia is still finding its independent feet following the break-up of Czechoslovakia, with no strong local airline having emerged from Bratislava. The same may be said of Slovenia, although Adria Airways has proven its resilience in the face of adversity.
Cyprus and Malta are mature but specialised markets focusing primarily on the leisure industry. Both Cyprus Airways and Air Malta are hoping to take a greater share, but may be faced with competition from newcomers. The previous struggle by Cyprus Airways in accessing the potentially lucrative Greek market will be eased, and it can also now challenge the many charter airlines that carry the majority of tourists into the Mediterranean islands. Air Malta has already announced new routes within Europe that do not originate in its home country, such as a flight from London to Catania, Sicily, which it will launch the day after Malta joins the EU.
Bringing down artificial barriers between countries is fine in theory, but airlines from the accession countries will not find it easy to provide increased frequencies into congested hubs like London and Frankfurt: nor, therefore, to take full advantage of some of the region's higher yielding routes from west to east. New rules on slot allocation could help, but are not yet in view. There are far fewer problems of capacity constraint in the other directions, which will consolidate the advantages for airlines from the present 15-member EU.
Bratislava, Budapest, Ljubljana, Prague, Riga, Tallinn, Vilnius and Warsaw still have spare capacity. At the same time, Prague and Warsaw are building additional terminal facilities, with the Polish airports authority close to a decision that could see a new airport for its capital city. These moves are being made to meet the expected rise in demand over the next 10 years, based on expected growth of 8-10% from accession to the EU. Cyprus selected a private consortium in November for its two main airports at Larnaca and Paphos, with the concessionaire committed to invest Û350 million in terminal expansion and improvements.
But capacity will be among the least testing challenges facing these airports from May. Critical issues that have to be confronted are the implementation of directives and other regulations already agreed by existing member states, and the important role European institutions will play in the day-to-day and long-term operation of airports within the accession countries.
To address these issues, Airports Council International - Europe held a workshop in Brussels last October, attended by airports from all 10 accession countries, together with representatives from Bulgaria and Romania.
In his opening address, Dr Laszlo Kiss, president of the European Civil Aviation Conference and director general for civil aviation in Hungary, noted that the European aviation sector had an unrivalled opportunity for expansion, but warned that the "opportunities are matched only by the complexity of issues facing aviation".
The most important of a whole raft of issues that will come under the control of Brussels are ground handling, slot allocation procedures, the environment and subsidies. Mechanisms for slot allocation are under review, and may incorporate measures that would further the belief in Brussels that up to 13% of traffic in the sub-750 km (465 miles) sector could be transferred to rail, freeing precious slot capacity.
Key revisions are being made on ground handling, including raising the minimum number of competitors to three for airports with over 10 million passengers and to four for 20 million-plus airports. None of the airports in the 10 countries fall into this category, but ground handling will have to be opened up to competition. Most are in the hands of government-owned airlines, airports or other state agencies.
Michael Ayral, director for air transport in the European Commission (EC), argues that the involvement of Brussels is justified to ensure no distortion of competition between airports. "Subsidies have previously been considered state aid when they support the operating functions of an airport. We now need to develop clearer rules. The main point is to ensure transparency and non-discrimination," he says. But the Commission is not only wielding its big stick.
Further benefits
It would be wrong to suggest that the actual step of joining the EU will be a leap in the dark for the 10 countries. Trade links between the accession countries and the EU have grown substantially over the past decade and a certain amount of competitive sparring has already occurred. However, there will be further benefits from the single market for the 10, such as the enhanced access to funding and financial resources for infrastructure development which EU membership affords. In addition, most accession countries still have low labour costs and land is cheap, spurring on inward investment and technology transfer, which in turn should boost productivity.
All countries and their airlines will, however, be vulnerable to more intense competition from established EU operators and at home. For many that will be a new experience. How airlines manage these challenges will determine whether they prosper or fail.
REPORT BY GÜNTER ENDRES IN LONDON
Source: Airline Business
