The EU’s “open skies” policies brought low-cost flying to millions and gave a valuable shot in the arm to some countries’ regional development, says Boeing’s Herbert Lust. But now it is damaging its own success story with the misguided mantra “rail is good, air is bad”


Ryanair’s Michael O’Leary secretly likes Brussels. For all his shouting about its interference, there would be no Ryanair or any other low fare airline if it hadn’t been for the EU’s bureaucrats. The question now is whether this happy if tempestuous marriage can continue.

The success of low fares airlines is undeniable, and they have very aggressive growth rates. Even in these days of high oil prices, they easily outpace the legacy carriers. Ryanair carried only 745,000 passengers in 1990 and is likely to have flown around 35m people by the end of this year. A low cost revolution has taken place and is still continuing. But when it comes to profitability, the picture is not so clearly in favour of the low fare airlines.

The low fare airlines’ recipe of success is based on simplicity. Half of the recipe is well known; take only one aircraft type and install as many seats as possible. Next, provide no frills whatsoever and use the aircraft as intensively as possible. Maximise bookings through the internet. Fly from cheaper airports, and do not get distracted by long-haul ambitions. The low-cost business model means region-to-region links, by-passing big city hubs. Passenger traffic is growing quickest at the smaller "secondary" airports, where operators can win good deals from local authorities.

The other half of the recipe is less well known, but is equally important. Revenue from other sources than ticket sales has helped the low fare airlines significantly. This type of revenue comes in different guises and from a variety of directions. Airports and economic development agencies in the areas that low fare airlines fly to understand the potential for them and increasingly offer incentives to a newcomer airline. Advertising and co-branding is another useful source of income, as are the low fare carriers’ own websites with hotels and rental car companies paying to advertise on them. The inventiveness of the carriers seems endless, with some of them now looking into on-board gambling as a new revenue boost.

The importance of all this ancillary revenue is, of course, that in years to come it will probably account for an increasingly large proportion of the low fare carriers’ total earnings. Michael O’Leary has frequently spoken of his vision of eventually free flights funded by non ticket revenues.

The economics of low cost flying and the availability of other sources of revenue mean that passengers can enjoy low fares. But the low cost revolution's biggest beneficiaries aren't always the ticket payers because low cost airlines bring such significant benefits to the areas they fly to. A standard industry measure is that every extra million passengers in the sky brings 3,000 jobs on the ground. Take the example of Katowice in Poland, where the arrival of low fare carrier Wizzair has seen passenger traffic rise by 44% to 4m people a year, making a substantial contribution to economic growth there. In financial terms, a study of the impact of low cost flying into the airport of Carcassonne in southwestern France revealed that the extra air traffic was worth €415m to the region.

There has been much discussion and also a couple of state aid referrals to the EU’s competition watchdogs on the issue of airports using financial incentives to attract low fare airlines unfairly. In view of the positive impact of low fare flying on local economies this might seem surprising. And it is even more surprising if one takes into account that every single rail journey taken in the EU is subsidised to the tune of between €2.4 and €7.7.

It was the move to create a liberalised internal market in the EU that made low fare airlines possible. Few members of the European public may remember this, but before the EU intervened with three packages of aviation liberalisation, fares and capacity on routes were set by bi-lateral agreements between nation states. Entering a market depended on whether governments would allow an airline to fly a particular route.

Brussels made it possible for airlines to fly to the airports they wanted to and to wage fare wars. In short, O’Leary would not be where he is without the Eurocrats. So, the question is whether Brussels will keep on providing the right climate for low fare airlines to operate in. Are low fare airlines becoming the victims of their own success or – as some claim – should the EU close some of the loopholes that benefit the low fare carriers?

On the one hand, the EU is continuously expanding the liberalised aviation market by providing airlines with new, untapped markets. Enlargement of the EU has meant that countries like Poland have been enjoying a 10% year on year growth in air travel. And effects of liberalisation, however, go far beyond the EU itself; the Union is signing more and more “liberal” air traffic agreements with neigbouring countries that open new perspectives for low fare airlines. The recent announcement of the first low cost routes to Morocco is a perfect example.

But on the other hand, the EU is increasingly looking at what it sees as the inefficiencies in the European aviation system. Some of them are quite striking for a body that was the driving force behind civil aviation’s liberalisation.

The Commission now seems to be of the opinion that a modal shift from air to rail needs to be regulated for. This misses the point that direct air services are a far greater stimulus to the development of regions than rail links. It also misses the point that for many regions of the EU-25 rail infrastructure is either inexistant or simply not practical.

Does the Commission’s thinking stem from a continued belief that trains are environmentally preferable, or is it all just due to pressure from state-owned rail companies? If it is the environmental argument, then they are mistaken; trains and airplanes are today equally fuel efficient, with the most modern aircraft targeting fuel efficiencies below 3 litres per 100 passenger kms. It is a little-known fact, but modern aircraft are significantly more efficient than cars, as the current generation of aircraft produce 80 grammes of CO2 per passenger kilometre whereas for cars the automobile sector is targeting 140 grammes by 2009.

This is not to argue that the aviation industry doesn’t need to address the issue of environmental impact, but it is worthwhile putting that impact into perspective. The idea that aviation is the most polluting form of transport is a myth; it is simply not true. And the mantra “rail is good, air is bad” is, to say the least, simplistic. If one takes into account all the subsidies I’ve mentioned, rail is very expensive.

But it is a mantra that is still chanted by the Commission. A good example of the unequal treatment of air and rail can be seen in the denied boarding compensation legislation now in place in the EU. Under the legislation, airline passengers have a right to compensation when their flights are seriously delayed, yet the same rules do not apply to rail passengers. On top of this, the Commission and the European Parliament decided that air passengers should be entitled to compensation that in the case of many low fare airlines is a ridiculous multiple of the price paid for a ticket. But only if you fly, not if you go by rail.

Brussels liberalised the airline market in the EU, and allowed airlines to fly where they want and set their own prices. So the growth of low fare airlines should be seen as a prime example of the benefits of the EU’s internal market both for consumers and for a growing number of Europe’s developing regions. That the same liberalised model is now being exported to neighbouring countries should also be applauded.

For all that, the EU should be wary of damaging its own success story. Recent legislation has targeted aviation and low fare airlines with little reason. The spectacle of the EU Commission and a low fares champion like Michael O’Leary hugging one another may take a little getting used to after some of the hard words they’ve exchanged, but from a policy perspective they have been brothers in arms, and should remain so.