Call for 'one last subsidy' as airlines head for sell-off

BY RUSSELL HOTTEN

Airline subsidies are back on the agenda as Neil Kinnock, the new European Commission transport head, faces intense lobbying over Spain's plans to pump £700m into Iberia.

It is the latest in a long list of battles over governments' attempts to defy the laws of economics and prop up their loss-making state airlines. Iberia and Air France have in the past promised that all they need is just one more cash injection to solve their problems. But there are good reasons to think that promises of "one last time'' are worth something this time.

The European airline industry is about to undergo massive change, and last week's news that Swissair is to invest in Belgium's Sabena, and that American Airlines is considering taking a stake in Iberia only underline the turbulence engulfing Europe's air industry.

The UK government and private-sector airlines such as British Airways and Sweden's SAS complain that last year's subsidies to Air France and Greece's Olympic Airways distort the market, and are against the European Union's free trade laws.

But their opposition often has little impact in Brussels, where wider economic issues and trade-offs between member states have to be considered. Seeing the subsidies issue as just a case of pumping taxpayers' money into lost causes is too simplistic. Air France, Alitalia and Iberia are being asked to undergo radical surgery to bring them back to profitability.

European governments may once have been able to afford to keep loss- makers in the air in order to sustain national pride and avoid the political fall-out of big job losses. But those days are over and in Paris, Rome and Madrid there is a growing belief that eventually market forces will have to decide.

France and Spain, which are carrying massive budget deficits, are asking for one last subsidy to help restructure the airlines before they are spun off into the private sector. And at Alitalia, the state holding company, IRI, has refused to provide fresh funds, leaving the airline to tap the capital markets.

The real concern of BA and British Midland is not that Air France may be breaching European trade rules, but that they are going to face a revitalised competitor which they would rather see fail.

In 1997 the skies over the European Union will be deregulated, giving virtual free access for airlines to fly anywhere, a move that will create war between the airlines.

The airlines have been jostling for position for some time, through a rush of alliances and partnerships such as BA's stakes in German and French operators and United Airlines' link with Lufthansa.

Some in the airline industry fear that deregulation will create a bloodbath similar to that seen in America in the 1970s. However, while deregulation in Europe is going to create a tough market, there are good reasons why the consequences will not be as severe as in the US. There are important differences between Europe and the US: geography and demographics, and competition from other forms of transport, such as Eurotunnel.

Nevertheless, the intensity of competition likely to take hold later in the decade means there will be casualties. And with more European airlines set to fall into private ownership there will be less political incentive to bail out the weakest.