15 October 2001
It has been a traumatic five weeks for the aviation industry since the terrorist attacks on the World Trade Center and the Pentagon last month. The use of planes as flying bombs has badly shaken public confidence in air travel and the already struggling sector is reeling from the crippling costs arising from grounded aircraft and increased security and insurance cover.
It has been estimated that airlines worldwide have already made in the region of 120,000 employees redundant in the wake of the terror strikes. British Airways (BA) announced that it was letting 7,000 of its staff go, as well as cutting 190 flights a week. On the Continent, Belgian airline Sabena appears to be close to collapse while Swissair has already suffered that fate. Aer Lingus, the Irish national carrier, looks set to become another victim after announcing that it cannot afford to pay for the redundancies it needs to make.
The dire plight of the aviation industry raises a familiar question: should governments be allowed to bail out ailing industries? George Bush did not hesitate in his response, pledging $15bn (£10.35bn) to US airlines. But on this side of the Atlantic, the European Commission (EC) has long made clear its opposition on state aid to airlines, and at the time of going to press it was preparing guidelines for acceptable state action to help carriers to recover from the effects of 11 September.
Is Brussels really prepared to let five or six national flag carriers such as Swissair simply disappear? asks Dermot Scully, head of the aviation group at Harbottle & Lewis. "There might well be a commercial argument for that, but I'm not sure that people are psychologically prepared for it to happen," he says. "In the same way, I'm not sure that people in Britain are prepared to see British Airways disappear."
All the major UK airlines were quick to rule out an extensive programme of state aid in the immediate wake of the tragedy. Sir Richard Branson, chairman of Virgin, says that there should be no handouts "to fly empty planes across the Atlantic". It is not often that BA agrees with its rival, but on this point it made an exception. Martin George, director of operations at BA, calls for "a level playing field, not a bail-out".
Unsurprisingly, the low-cost airlines have been even more trenchant and sought to capitalise on the troubles of their larger competitors. Ryanair chief executive Michael O'Leary said that, "contrary to the spin" of certain airlines, "the world as we know it is not about to end".
"There is little doubt that tragic events in the US are being used by a number of European flag carriers as an excuse upon which to blame their longstanding cost problems and an opportunity to look for subsidies and handouts," O'Leary continued. At the same time, the airline announced the release of a million tickets priced under £10.
Such sentiments are echoed by EasyJet, which has denounced plans by the Belgian government to keep Sabena alive with public money as "contrary to European Union rules".
A general prohibition on state aid exists under the Treaty of Rome. But as Christian Ahlborn, an assistant solicitor in Linklaters & Alliance's EU and competition department, points out, there are exceptions that can be applied at the discretion of the EC - for example, where state support is directed as regional aid, environmental aid or rescue and restructuring aid.
Ahlborn reckons that over the years the exemption, and not the prohibition, has become the general rule. As he puts it: "In the high-profile cases, the government normally manages to get the aid through, never mind what the law says." However, he points out that more recently there has been a "tightening" of the application of the state aid rules in the airline industry.
"The commission's got fed up with governments coming back every couple of years looking for more money for their flag carrier," observes David Marks, a partner in CMS Cameron McKenna's commercial department. Consequently, Brussels has adopted a 'first time, last time' policy. "What they hate is just allowing a tap to drip and never really repairing it," Marks explains. "What they want to see is some definitive restructuring [as opposed] to just keeping on writing blank cheques."
Of course, the industry was already having problems prior to 11 September. According to Trevor Soames, a partner in Norton Rose's competition and EC department based in Brussels, a number of European airlines were "sick" for a number of different reasons. For example, he says that Swissair "has been destroyed by nothing other than management incompetence"; whereas other airlines, such as KLM and Alitalia, were struggling because they were not part of an effective international network.
Another aviation law expert is more blunt. He claims that Sabena was a "walking disaster" and that Swissair, despite its efficiency, made "a really stupid decision" by buying 49 per cent of Sabena, marking "the beginning of their downfall". The Swiss government has thrown their airline a £188m cash lifeline and the Belgians have provided £78m.
The EC has so far taken a tough line on the idea of such handouts. For example, European Transport Commissioner Loyola de Palacio pulled no punches in a recent interview. Her view was that state aid would not help the transport sector in the long run. "A restructuring of the industry was overdue, and very necessary, and that hasn't changed - on the contrary, in fact," she says, a comment which no doubt was music to the ears of the likes of Ryanair and EasyJet.
According to Richard Gimblett, a partner in Barlow Lyde & Gilbert's aviation department, there will be a "tension" in Brussels. "On the one hand, it doesn't want to see viable airlines with solid businesses being irreparably damaged because of what is not only a wholly unexpected, but maybe a temporary, phenomenon," he says. "But on the other hand, they don't want to return to the days of massive state aid."
Richard Venables, head of the aviation and travel department at Lane & Partners, argues that if the EC accepts the principle of a bail-out - "a difficult principle to accept in the first place," he notes - the next question is how it would be organised.
As he explains: "BA can say that it lost a number of flights across the Atlantic while US airports were closed immediately after 11 September, but other airlines can say that it's had an impact because people are less willing to fly now." In the end, he says, it is a problem that is "more political than legal" in substance.
Gimblett at Barlow Lyde anticipates that the EC will take the view that, whatever state aid is likely to be sanctioned, it must be "proportionate" to the losses. Brussels looks set to allow aid for quantifiable and specific losses. Gimblett cites by way of an example government-backed transitional war risks insurance programmes, put in place as the result of a decision by insurers to remove cover above $50m (£34.5m) for third-party war risk. "That's a direct result of what happened at the World Trade Center," he says. "No one ever perceived before that third-party ground risks were going to outstrip the losses that were going to be suffered in the air."
Another area of government support that could be allowed will flow from the losses suffered by carriers as a result of the four-day close-down of US air space. Such an event is totally unprecedented, Gimblett notes. "A lot of carriers had their aircraft grounded inside the US, Canada, Mexico and the Caribbean, and they'll have lost money, been forced to put passengers up in hotels and charter replacement aircraft," he explains. BA put its own costs for those four days alone at £48m. The EC has also flagged up additional security costs as an expense that governments might meet.
Soames at Norton Rose detects a possible change in heart at the EC in a recent communication considering its position on the decision by Belgian authorities to grant a bridging loan to Sabena to enable it to stay in business. "The commission seems to be suggesting that even if 'one time, last time' applies, and even if the exceptions don't apply, nevertheless Sabena can apply for a rescue package, and that's an important development," he notes.
As Gimblett points out, many industry commentators see the present crisis as "an opportunity for consolidation". Certainly, that is the way the likes of EasyJet see it. "Governments should use the current crisis afflicting the industry to push through measures to completely liberalise flying," it argued recently. The airline also called for the abolition of the rules stipulating that most airlines cannot be more than 49 per cent owned by an airline from another country.
Venables advised Air UK, which opposed the French government propping up Air France in the mid-1990s. "There's a strong argument to say in this particular industry that if you deny state handouts that has a beneficial effect in bringing state airlines to their senses," Venables reflects. "A lot of people say there's over-capacity in the industry anyway and if you leave market forces to operate, you have a shake-up that in the end will work well for the consumer."
Certainly, it is a grim time for airlines - and for aviation lawyers. Scully at Harbottle reports that his firm's aviation department is as busy as it was prior to 11 September. "We're not doing aircraft acquisitions anymore, which is a big part of our practice, but we are doing an awful lot of restructuring," he says. He reckons that the impact on the industry is comparable in scale to the problems it suffered at the beginning of the 1990s as a result of the combined effect of the Gulf War and the recession. However, his long-term prognosis is optimistic. "At the end of the day, people have to fly," he states.
Venables is anticipating a tough road ahead for both the industry and its lawyers. "We'll be expecting and we'll be pleased to share in the agony with the airlines," he says, adding that he anticipates a cut in the firm's rates in response to the crisis.
These are "worrying and disturbing" times, reflects Soames. "We have a lot of clients in the industry," he says. "Airlines are going out of business, people are losing their jobs and, even worse, people are losing their lives." Norton Rose acts for many airlines, including United Airlines, which lost planes and staff in the attacks.
When the first plane crashed in the US, Soames rang up a friend at the airline and was put through to a colleague in the disaster room where he heard the ensuing panic as the tragedy unfolded.
"It is a very, very upsetting time," Soames says. "These aid issues are important, but ultimately they're a relatively small element in what is generally a bloody disaster."