Does European Commission State Aid Harm The Aviation Sector’s Ability to Recover Post-Pandemic?

LONDON – With the recent news surrounding the European Commission’s state aid to airlines, will this harm the sector’s ability to recover post-pandemic?

With such involvement taking place by the mega-institution, it is a fair question to ask, and one where it will have different angles to take.

A Major Help Short-Term


Anna Zvereva from Tallinn, Estonia, CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0, via Wikimedia Commons

For a carrier like airBaltic to receive approval from the European Commission surrounding part of its 45 million EUR equity package from the Latvian Government is set to help the airline recoup some losses caused by the pandemic (Saunders, 2021).

With the airline also being responsible for more than 2.5% of the Latvian GDP, it is a significant chunk of economic value to a country like Latvia, hence why the local and European governments want to ensure that it does not lose any motion competitively (ibid).

Anna Zvereva from Tallinn, Estonia, CC BY-SA 2.0 https://creativecommons.org/licenses/by-sa/2.0, via Wikimedia Commons

Another significant and larger example from such Commission success was the state aid given to Lufthansa, amid risks of a shut-down, effectively wiping out 100,000 jobs (Field, 2021).

November 2021 saw the airline pay back the last 1bn EUR installment of the state aid and cancel all remaining stabilization funds as a result of paying it back earlier (ibid).

For a huge airline like Lufthansa, the repayment times were not surprising, with such repayments completed around 20 months after it was first approved by the commission (European Commission, 2020).

In essence, it does show that in the short-term, and even to an extend mid-term, that the European Commission approving such state aid measures has helped airlines get back on their feet and continue to cope with the effects of the COVID-19 pandemic.

What if airlines continue to struggle?


An Alitalia Airbus A330 seen from above at New York’s John F Kennedy International Airport. Photo Credit: Vincenzo Pace (@aerovincenzo on Instagram)

Everyone is well aware of the Alitalia story, and how it panned out to become ITA.

Despite the European Commission approving €39.7 million of Italian aid to compensate the airline for damages caused by the COVID-19 outbreak, this pandemic was the last thing that put the pin in the airline (European Commission, 2021).

Quite the kick in the teeth was from the Commission finding that €900 million worth of state aid was illegal under state aid rules, with the commission demanding the Italian Government to recover all of that money (European Commission, 2021a).

With the airline entering administration because of this being one of the big reasons, ITA came about.

As AviationSource writer, Alessio Olivetti claimed, “ITA intends to step out of the shadows, pursuing the principle of discontinuity translated into a strong downsizing of operations” (Olivetti, 2021).

Olivetti also added that “the annihilation of the airline [Alitalia] also passes through the brand, which suffers from the commissioner management and the never renewed flight experience” (ibid).

Alessio’s point reflects that despite the woes and mistakes made by Alitalia, that the European Commission may not have helped them that much, especially during the COVID-19 pandemic as the compensation awarded was seen as peanuts compared to the €900 million worth of illegal state aid.

So in this case, whilst the downfall of Alitalia is not completely the commission’s fault, it has to take some responsibility behind this as recovering €900 million worth of state aid was impossible and ultimately sent the airline into administrative-based oblivion.

Do The Benefits Outweigh The Weaknesses Long-Term?


An Alitalia Boeing 777-3Q8ER seen from above at New York’s John F Kennedy International Airport. Photo Credit: Vincenzo Pace (@aerovincenzo on Instagram)

Whilst using the Alitalia example may be extreme, it does highlight points surrounding Commission involvement that may have hindered the progress of the airline industry in certain parts of Europe.

That being said, there has been a lot more good done in terms of saving areas of the sector across Europe, particularly on the Lufthansa front.

If the airline did go bust and had to cut 100,000 jobs, the economic impact would not have just been felt in Germany, but across Europe, especially with SWISS, Brussels Airlines, and other carriers being part of the overall Group.

This, after all, is unclear whether such assistance will be needed beyond 2022 or not, as the Commission mentions:

Photo: Lufthansa Group

“The European Commission has recognized that the COVID-19 outbreak has caused serious disruption to the entire EU economy.”

“The European Commission has immediately reacted by adopting urgent measures to assist EU businesses across the EU with a view to preserving their economic activity during and post the COVID-19 outbreak. It is too soon to know how long these exceptional measures will need to remain in place or whether in the longer term further flexibility of the EU State aid regime will be required.”

HFW.com, 2020

To be honest, now that a lot of carriers across Europe have got the financial assistance they need, the question now is surrounding how it will be repaid.

With revenues and profits rising as well as losses decreasing, the question for each airline (excluding Lufthansa who has paid off their state aid) is the plans to repay the respective governments and commissions.

It can be seen as a beneficial thing for the sector that it is able to receive approval for state aid, and has enabled carriers to focus on the future, including the ordering of aircraft orders.

One example comes recently from the Air France-KLM group where 100 Airbus A320neo Family and four A350 Freighter aircraft were ordered, of which such orders would not have been made unless reaping the benefits of state aid being approved by the commission (Ismaaili, 2021).

A chunk of that order is going towards the low-cost wings of the group, which brings us to the next point about the Future of European Aviation.

The Future of European Aviation


Photo sourced from CAPA.

As has been seen in the industry, the COVID-19 pandemic has worked towards the favor of low-cost carriers across Europe.

Irrespective of whether carriers such as Ryanair appeal state bailouts against the likes of Finnair and Scandinavian Airlines as well as other carriers, such airlines will thrive in this environment due to lower consumer spending (Oniscu, 2021).

This is because of “business travel spending” dropping “76% domestically in 2020 and took $97 billion out of the travel economy” as well as “low-cost airlines” surging “specifically because pandemic passengers” flying differently (Notte, 2021).

Also, according to data produced by Cirium back in September 2020, low-cost carriers “are operating at around 60% of their capacity when compared with the same period last year” – This differed from mainline carriers “operating slightly more than 40% of their 2019 levels” at that time (Cirium, 2020).

With the Air France-KLM group, the order is mentioned above, such groups like those who operate legacy carriers are being forced to look towards the future successes of the low-cost arena in a post-pandemic business model.

This is already being adopted by British Airways through the creation of BA Euroflyer, which is due to commence operations “later in the second quarter of 2022”, with operations taking place from London Gatwick (CH-Aviation, 2021).

Photo: Financial Times

The same has already been announced by Scandinavian Airlines who will be launching two low-cost airlines. Dubbed SAS Connect & SAS Link, operations will commence from early 2022, and “depending on how the business develops, the SAS Connect network could be expanded to Oslo and Stockholm during the course of the year” (Awad-Risk, 2021).

Bringing this point together, of course, means that such state aid approval has enabled airlines to implement strategies that will take such brands into different arenas, thus making better competition, lower fares as a result of this as well as ensuring the survival of some big legacy names in the business.

It also appears that the European Commission would not have handed out state aid willy-nilly to the aviation sector unless they knew that some level of substantial change was to be made.

Overall


For the most part, the European Commission approving state aid for debt-stricken airlines struggling during the COVID-19 pandemic is a significant lifeline.

This is not just for the airline itself, but for jobs across Europe.

There is a big dependent variable that may change the outcome of such findings made in this piece. Long-term longevity of airlines in Europe.

Rather than it being a commission problem per se, governments across Europe reinstating COVID restrictions in the wake of Omicron may encourage more state aid requests to be made to the Commission.

COVID is a thing now that the public believes that we should get on with, and encouraging restrictions going forward would further jeopardize the economics of the aviation sector, meaning that such aid would take longer to pay back and would continue to place airlines in precarious situations.

But the overall benefit of such state aid is that now legacy carriers, in particular, have now been kicked into high gear when it comes to adopting its business models to low-cost subsidiaries, which will help keep the mainline wing of their respective groups alive and bouncing, especially until transatlantic, transpacific and trans-Asian links fully restore to pre-COVID levels going into the future.

If anything, all eyes are going to be on respective governments across Europe as the pressure will be mainly on them to ensure that industries don’t get majorly disrupted from the Omicron variant and so then the industry and others can work towards getting out of this pandemic which has taken too many lives and livelihoods.

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About the author

James Field

James is a passionate AvGeek based in Manchester, U.K who has been actively spotting for years. James is the Editor-in-Chief for the company.

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