In the event of another Gulf conflict, the signs are that there will be little financial assistance for carriers on either side of the Atlantic

One issue now tops the agenda for any airline boardroom: what are the implications of a US-led war in Iraq to topple Saddam Hussein? Carriers on both sides of the Atlantic have been pressing their respective governments to try and establish exactly where they stand in the event of a conflict, and possible terrorist attacks.

After 11 September, there were different responses from Brussels and Washington as to how much support the industry should receive. The European Commission (EC) restricted compensation to damages inflicted in the four days after the attacks, while Washington set aside a $15 billion aid package.

This divergence angered many Europeans, and there is little sign of a co-ordinated response this time. But there are clear signals that little money will be on offer on either side of the Atlantic.

This is because the attitude of the Bush administration has changed and is now similar to that of Brussels, where EC transport commissioner Loyola de Palacio insists state aid is off the agenda.

Sensitive to the political atmosphere, US airline executives have trimmed their wish list, but may end up being disappointed given the retaking of the Senate by deficit-conscious Republicans and increased public suspicion of corporations and corporate aid in the wake of recent financial scandals.

The primary goal of US airlines now is tax relief and a federal commitment to pay for more of the industry's increased security costs. But the tax aid request has received a chilly reception from Jeffrey Shane, the Transportation Department associate deputy secretary. Shane says: "The administration's position, I'm sure, is that tax relief is not an appropriate measure to take at this particular moment." Major US carriers have lost a total of $19 billion during the past two years, estimates Shane. But he notes that five of the nation's seven low-fare airlines reported profits in 2001, and the sector remained profitable during 2002.

Low-fare models

Members of Congress increasingly see the low-fare sector's survival as the argument against aid. Senate commerce committee chairman John McCain, the Arizona Republican, suggests that the tighter cost controls of the discounters should be a lesson for larger airlines. Spurred by continued low public esteem of the airlines, Congress seems far more attuned to the message of "get your own house in order before coming to us".

American Airlines chairman Don Carty, after outlining his company's cost- cutting measures, was told by McCain that wholesale austerity might be necessary before any additional Congressional aid can be considered. McCain says: "The aviation industry may simply need to adjust to the new realities of air travel before we can take any further significant action."

Democrats share McCain's attitude. "We've got most of the airlines broke and the rest of them begging," says South Carolina Senator Ernest Hollings. "We've got to see real fixes with real results, not a system of booms and busts that overcharges customers in good times and asks for handouts in bad times."

In Europe, airlines have seen over the past 18 months that Brussels is unwilling to allow state support beyond the immediate aftermath of an incident such as those on 11 September, and seem to have accepted this. "We do not want financial aid. We only ask for compensation for direct damage," says Rene Fennes, general manager public policy at the Association of European Airlines (AEA). "We are presuming there will be a limited war. This will hurt, but it should not be that bad." A longer war, or terrorist attacks, could hurt a lot more. "A catastrophic failure in market demand would be a different matter," says Fennes. "We will cross that bridge when we come to it."

On security costs, European member states have been unwilling to increase funding, and even in the USA, where the federal government takes on far more responsibility in this area, Congress is signalling there will be no further support. The AEA wants to see common guidelines. "We would like to have a level framework. We would like to see the USA and Europe co-ordinate their approach," says Fennes, noting that the multitude of agencies on both sides is a complicating factor. The AEA is working to ensure that new security measures are "realistic and pragmatic", says Fennes.

Meanwhile, airlines can just hope for the best and prepare for the worst. Mike Powell, financial analyst at DKW, says carriers are building their cash reserves. KLM has been the first carrier to increase its security surcharge and Finnair is increasing its fuel hedging for the first quarter from 50-60% to 70%. There are few certainties, but betting on significant state handouts may not be the best move.


Source: Airline Business