Thursday, 22 April 2010

Should the EU reimburse ash-stricken airlines?

Things are slowly returning to normal here in Europe, with air travel resuming across the continent. Thousands of passengers are still stranded in various destinations, but already the finger-pointing has begun for this enormously costly fiasco. And all of the chaos and recrimination has some asking the question - would a pan-EU aviation authority have averted this mess?

Flights have just gone back to 100% operation this afternoon. But the embarrassing reality is that they are not resuming because the ash has suddenly disappeared, but because a continued air travel ban was no longer economically sustainable. Now everyone is holding their breath to see if one of them falls out of the sky. So far, so good.

It's looking increasingly likely that an investigation will conclude that the flight ban, the biggest disruption in the history of civil aviation, was an unnecessary overreaction. If that is indeed the case, then the fight over who should shoulder the burden for the enormous losses the airlines have suffered is going to become fierce. A heated argument was developing yesterday between Ryanair and the EU over whether the ultra-budget airline would reimburse passengers for the hotel and meal costs they incurred while stranded by the volcanic ash cloud. CEO Michael O'Leary told Irish newspapers yesterday that it would refuse to comply with EU rules requiring airlines to reimburse passengers for these costs in the event of flight delays or cancellations.

For Ryanair, whose fares can be as low as €15, this has meant reimbursing passengers thousands of euros, dramatically more than the price of the ticket. The EU has the power to fine airlines hundreds of thousands of euros if they don't comply with the reimbursement rules.

The airlines are furious about the ban, saying a lack of planning and coordination amongst European air travel authorities is to blame for an overreaction that is estimated to have cost over a billion euros. "Why, exactly, are the airlines expected to be reimbursing people's hotels, meals and everything else when the governments are the ones who made a balls of this?" O’Leary told the Times. And Ryanair is not the only airline suggesting that it is the governments that are at fault for the chaos and therefor the governments which should pay the stranded passengers' expenses. But many are going a step further, saying the EU should reimburse European airlines for the estimated €1 billion they lost during the shut-down.

But, as the commission has been at pains to point out today, the EU has no centralized air travel authority. This is a competency which falls to member states, who each have their own national aviation authorites which make independent decisions. Critics suggest that what happened in the early days of the eruption is that a sort of ‘peer pressure’ occurred amongst European countries. Once the first national aviation authority shut down airports, others in the ash path blindly followed suit, without adequate scientific evidence to justify the shutdown. Once the ash continued and showed no signs of stopping, governments panicked. They couldn’t suddenly lift the travel ban while the ash was still in the air after they had already said it was unsafe to fly in it, but at the same time leaving a travel ban in place for the duration of the eruption, without solid scientific evidence to justify it, was not tenable either.

There would be two options for government reimbursement to airlines. One would be that EU funds are used, on the basis that it was the lack of coordination by the EU that caused this problem. It’s a hard argument to make, however, because it was the lack of action at EU level that would be at fault, and it’s hard to blame the EU for not taking the initiative to act in an area they don’t have supranational authority in. Granted, the EU’s response to this crisis was abysmal – I think we didn’t even hear from the commission until three days into it. But it’s hard to make the argument that this was the EU’s fault rather than that of member states.

The far more likely option is that member states will individually bail-out their own airlines in the amount that they lost during the crisis. But even this is unlikely as states are cash-strapped at the moment. Any such state aid would have to be approved by the EU because of anti-competition rules in the common market (Britain can’t give its airlines an unfair advantage over, say, Spanish airlines). Such aid would have high hurdles to climb.

But what will happen if nothing is done to compensate the airlines. Considering that airlines are already not doing well at the moment (Ryanair has even resorted to charging passengers to use the toilets, another issue which they are about to go to battle with the EU over), it is conceivable that several budget airlines in Europe could go out of business as a result of this and major airlines will be forced to hike ticket prices. Combine this with the fact that in two years airlines will have to buy carbon credits in the EU Emissions Trading System and you’ve got a recipe for astronomically high air travel prices in Europe within just a few years. So, from a taxpayers perspective, it may be a question of pay now (to keep the airlines afloat) or pay later (for your €400 ticket from London to Berlin).

Many commentators have pointed out that this kind of travel chaos would be unlikely to happen in the US, because they have a centralized air travel authority that would have been very cautious about grounding so many planes. The US Federal Aviation Administration has a contingency plan for shutting down airports in the event of volcanic ash, and analysts have said this incident would not have met that threshold. Apparently the national European aviation authorities did not have any such contingency plan.

Perhaps this will serve as a good illustrative example in making the case for a pan-EU aviation authority, or at the very least a coordination body such as the Single European Sky plan proposed by the commission. But I can tell you, despite all the outrage over this incident in the British media, that is not an idea you will see floated on that side of the channel any time soon.

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