How long can this go on? At this rate UK APD and EU ETS will be the straw that breaks the camel’s back

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By TESTCustomwebLP TESTCustomwebLP October 13, 2010 10:51

How long can this go on? At this rate UK APD and EU ETS will be the straw that breaks the camel’s back

When Canada drew a line in the sand this week and said enough is enough to the UAE’s demands for more routes into the country they threw into the spotlight once again on the burning issue of the past five years: Just how much longer is the EU and the US going to stand by and watch as the Gulf State carriers grow ever more powerful in their own back yard? In fact news from Tim Clarke today (see APAC/Airline news) that Emirates requires 120 A380s does pose the question: How are they going to fill all these aircraft and where are they going to deploy them? The logical answer is that these aircraft are for new routes in the future, or maybe Emirates has plans on being a lessor? Who knows.

Gulf State carriers are afforded the benefits of a political system engineered to help the airlines become world beaters. This is a good thing. Airlines within Europe and North America look on green with envy at what could be if they were in the same political situation and the playing field were levelled. But this is not the fault of the Gulf State airlines, on the contrary, they have taken full advantage of the ludicrous levels of bureaucracy and layers of taxation that hinder US and European carriers. Gulf State carriers for the most part do not need to worry about fuel costs, corporation tax or passenger tax, and they do not need to worry about planning permission, airport expansion problems or strikes either. Life in the Middle East for an airline is, for the most part, easy. Only when Dubai came close to being flushed down the economic lavatory did Emirates flinch, even then it was always clear that Abu Dhabi would come to the rescue.

On the other hand airlines within the US and Europe still cannot get funding to meet their expansion needs. For the most part the screen shutters are still down on the banking sector and Basel III will only make this worse as banks will need to retain more funds. So while the airlines in the US and EU live in a world of low liquidity it is not hard to see that they would become slightly irate at the cheap money flowing towards the Middle East Gulf State carriers who continue to enjoy the benefits of export credit assistance on top of those qualities of life already mentioned. Bob Morin at Exim has literally been driving the market forward now for over 15 months while airline CFOs based within the home countries of Boeing and Airbus look on with their head in their hands. “Export-credit agencies are doing the job of banks now,” said Christian McCormick, chief executive of Natixis Transport Finance at the Munich Istat conference.

Exim will argue that Middle East orders have been supported by unsecured debt, lease agreements and Islamic financing but the fact is that much of this is driven by the export credit guarantee in the first instance. In Europe airlines remain hooked on ECA support having been driven into this corner back in late 2008; this will not change as commercial banks will not see capacity return to pre-2008 levels for some time yet.

The credit crunch has only highlighted a problem that has been growing for many years. The export credit limitations were drawn up in a different world at the outset of globalisation. A change is needed, and if airlines are going to make an impact and force the hand of governments then now is their chance and they know it. Governments cannot be seen to let jobs flitter away due to bureaucracy in this depressed marketplace. A silver lining though is that the airlines of the EU and US are working together and getting a strong PR message out on this subject for once. There will be an announcement from EU and US based airlines this Friday on the subject.

Export credit is only half of the story though. If export credit has been a shackle of late then the millstone around the neck of airlines in the EU and US is political bureaucracy on a level not seen anywhere else in business. Airlines endure a terrible lot with competition investigations, planning permission, taxes and inter-governmental agreements all holding them back. Of particular concern is the impact that the EU emission trading scheme (ETS) will have on airlines based within the EU. If the EU cannot force other airlines based outside of the EU to pay the fees, then this will serve as yet another serious problem that airlines such as those in the Middle East will be able to gain ground from.

Airlines within the UK have another problem to worry about: UK Air Passenger Duty (APD). This huge increase in taxation on airlines is due to come into effect on November 1, 2010. Everyone flying out of a UK airport will pay it. The further you fly, the more you pay. So a family of four going to Australia will be hit with a £340 APD bill, up from £80 in 2006. Short haul flight tax will cost up to £48. This could well be the tax too far for the UK government and could see the UK domestic airlines and airport operators hurt by competition on the continent.  It will be far cheaper to fly short haul out of the UK to Dublin, Paris or Amsterdam and then get a long haul flight from there. Aer Lingus should be well placed to offer flights linking Gatwick and Heathrow with the US via Dublin at significant discount to rivals for example. Many will argue that people do not want transfers they want direct flights. It is a possibility though that for many transferring to another aircraft in Amsterdam, Paris or Dublin to continue a long haul flight becomes the norm if the saving is great. Moreover many businesses will look at the cost difference and force employees to transfer outside of the UK to their long haul flight.  Air France KLM should be the big winner from the UK APD. These are extreme examples but nonetheless they are likely. Aer Lingus should be gearing up for a campaign as should Air France-KLM if they have any sense. Make no mistake the big loser will be Virgin Atlantic and the like, keep an eye on them over the next six weeks.

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By TESTCustomwebLP TESTCustomwebLP October 13, 2010 10:51
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