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Subsidies galore!!

Europe is scattered with many small airports. It’s hard for them to attract business like their bigger peers. Small airports are generally far away from large urban areas, have a small passenger base and suffer from a weak ground transportation system. As a result, airlines are generally not too inclined to use them.

Often, small airport profitability is not a bad management problem; rather it is a structural one.

In order to overcome their shortcomings, small airports resort to the use of cheap landing fees. Some even pay airlines – through marketing deals – to entice them. Most of these airports are publicly owned, and in them, local politicians see an opportunity to boost the economy of their region.

Under these circumstances many small airports lose money. As a result, they need to be bailed out at the expense of the taxpayer.

The European Commission is investigating these arrangements. Public financial support must comply with EU rules on state aid. Subsidies cannot be passed on to airlines through off-market airport fees. That would be an illegal incentive. European Regulations must ensure fair competition for all.

But airport competition is far from perfect. This business is full of externalities. Government intervention is rampant, and therefore, profit maximization is not on the to-do list for many. Some others abuse their market power and impose prices on hopeless airlines with no alternative runways in sight. We should not forget either that the barriers to entering and exiting the airport business are overwhelming.

The EU regulatory framework allows state aid for investments in infrastructure to be given to small airports. It also allows for very limited start-up aid so that airlines can launch new routes. Nevertheless, providing operating aid to airports is not permitted.

Prohibiting operating aid to small regional airports may mean killing them. All airports, big and small, have to deal with similar fixed costs – for example: Airfield Ground Lighting operating costs are the same for a busy runway as for an empty one. The same applies for the Fire & Rescue Department and many other “fixed” costs.

Since small airports handle fewer passengers, fixed costs – on a per passenger basis – are much higher for them. Balancing their Profit & Loss account by increasing revenues is not that simple. Higher landing fees scare airlines, and it reaches a point where selling more soft drinks and sandwiches to passengers is just not feasible. Often, small airport profitability is not a bad management problem; rather it is a structural one.

The European Commission wants to curb past abuses. Nevertheless, airport operating aid prohibition is not the answer. If the Eurocrats want to control how our public funds are spent, they should focus on something else. Much more money has been squandered in the construction of glorious, vanity-driven empty airports across Europe – a big waste of taxpayer’s money.

 

 

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15/12/2015

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