Southern European carriers will struggle as recovery continues in the north. The efforts of the southern European majors in bridging the divide with their resurgent northern counterparts will dominate the aviation calender in the year to come. Any restructuring will be heavily influenced by the attitude of a new-look European Commission to state aid, while in the background Brussels continues to introduce checks and balances into the single aviation market. Externally, the Commission, through the conduit of US policy, will come under pressure from all sides to allow greater access to an expanded European Union - a process that could finally define the limits of Brussels' competence in aviation. A dramatic reshuffling of alliances and increased competition, especially from rail, should reshape the face of European aviation in the latter half of the decade.

Northern European majors should continue to reap the benefits of cost cutting and productivity improvements, but yield management will take on greater significance as sustained profitability is likely to make labour resistant to further concessions. The management of the struggling flag carriers in southern Europe can use the returning financial health in the north as a stick in negotiations with the trade unions.

Alitalia is likely to seek membership of the growing state aid club, while Iberia has initiated an application which would see it dipping into Spanish state coffers before its previous state aid programme has run its course. The arrival of new political appointees at two out of the three Commission portfolios with the greatest influence on state aid decisions, bodes well for the anti-state aid lobby: the Luxembourg Commission president, Jacques Santer, and UK transport commissioner, Neil Kinnock, should prove more politically neutral than their predecessors. Correct interpretation of the state aid guidelines should not hinder any application from Alitalia, but Iberia will need to use some extremely convincing arguments.

In regulatory terms, the Paris/Orly market access case is likely to be a precursor for more Commission intervention. Restrictions at Milan/Linate could be the next to come under scrutiny from Brussels, while the block exemption on slot allocation is also up for review and the Commission is known not to be happy with grandfather rights 'in principle'. Implementation of the new groundhandling directive, aimed at freeing up competition, could yet cause further headaches for airports and dominant national carriers, alike. The publication of a study on the competitive effects of codesharing, towards the end of the year, will lay down markers for the Commission's approach to a marketing tool which has already provoked some disquiet in Brussels.

The addition of three new members to the European Union could swing the balance of power towards the pro-liberalisation countries, in terms of the internal market. But externally, the new arrivals could make or break the Commission's efforts to win block negotiating rights for air service agreements. With Austria, Sweden and Finland joining the EU, the US proposal of 'open skies' with nine smaller European nations now extends to six of the fifteen EU members. Unless a common approach can be found, the ensuing policy split would weaken the Commission's position. But if a strong argument can be made for the potential distortion of the internal market caused by lopsided access, the Commission may yet get its mandate. Switzerland is likely to be joined in its efforts to gain access to the single aviation market by central and eastern European states, using the US offer as leverage.

The demise of old alliances and the rise of new ones will also mark 1995 down as a year of change, especially for the northern European carriers which can now look beyond restructuring to long- term strategic objectives. With western aircraft integrated throughout the region, eastern Europe should also experience further alliance activity.

Expect more deals like the route-specific codesharing agreement between American Airlines and LOT. Market access and revenue growth should drive decisions, rather than the questionable advantages of a western equity partner, in the light of the failed Air France-CSA partnership and the low key Alitalia holding in Malev.

Meanwhile, the growing instability in Russia at the start of 1995 leaves the CIS countries in limbo.

One other major factor in western Europe will be the performance of the Channel Tunnel rail link and its effect on two of Europe's major trunk routes. The high profile rail services from London to Paris and Brussels could have a major impact on passenger perceptions in the busy European shorthaul markets.

Source: Airline Business