Monday, October 11, 2010

Air France CEO Calls for EU Curbs on Expansion by Gulf Carriers

Air France-KLM Group is teaming up with Europe’s biggest airlines to push for European Union action to slow the encroachment of Emirates and other Gulf carriers, saying the region’s status as an air-travel hub is under threat.

“Europe is at the crossroads of international air travel, and this is a role we need to value and defend,” Air France Chief Executive Officer Pierre-Henri Gourgeon said in an interview. “What we’re telling the authorities is that we need a strategy that gives us a chance to resist.”

Gourgeon, British Airways Plc CEO Willie Walsh and Deutsche Lufthansa AG’s Wolfgang Mayrhuber are among executives scheduled to attend a meeting of the Association of European Airlines on Oct. 15 in London. They will discuss a joint push with American rivals for a change to the export-guarantee regime and the trans-Atlantic trade agreement that enshrines it, said Christian de Barrin, a spokesman of the Brussels-based industry group.

For the past two decades, the U.S. and Europe have agreed to withhold export credit guarantees from airlines registered in five countries where Airbus SAS and Boeing Co. airliners are built: Britain, France, Germany, Spain and the U.S. This means many European and all American carriers are denied cheaper government-backed plane financing available to rivals from countries including Gulf states.

‘Home-Country’ Rule

The role of export financing has ballooned since the credit crunch reduced banks’ willingness to lend. The share of plane deliveries covered by government guarantees more than doubled to 34 percent in 2009, Airbus and Boeing figures show.

“Our ability to fund the acquisition of new aircraft is handicapped by the so-called ‘home-country’ rule,” BA spokesman Paul Marston said. “These guarantees are not operating in the way they were intended -- and we therefore urge the EU to amend the rules to remove the competitive distortions that have developed.”

In a policy paper published on its website last week, Lufthansa called for an end to “market imbalances” resulting from export-credit financing, saying “basic rules of regulatory policy are being disregarded.”

Emirates, the biggest Gulf carrier, already pays very little in the way of airport charges or fuel tax at its Dubai hub, as well as escaping many of the social charges that weigh on European companies, Air France’s Gourgeon said. Those benefits could generate 3 billion euros ($4.2 billion) of operating income if applied to Air France-KLM, he said.

No Tax?

“When you’re supported in this way you can offer the end product at very low prices,” the CEO said in the Oct. 7 interview at Air France’s headquarters near Paris Charles de Gaulle airport. “They don’t pay tax -- they don’t even have a word for it.”

“Emirates is run as a fully commercial business, unlike many European carriers,” the company said in a statement. The carrier pays landing charges in Dubai, and “although differently structured, our employee cost base is comparable to other airlines.”

European carriers may also seek action under EU Regulation 868, which imposes protective duties on foreign carriers that use subsidies or other forms of “non-commercial advantage” to undercut prices, the AEA’s de Barrin said.

Emirates overtook Lufthansa last year as the biggest carrier on international flights, thanks to a sixfold increase in traffic since 2000, when it ranked 24th. British Airways, top in 2000, now stands fourth in the International Air Transport Association ranking, which treats Air France and KLM as separate airlines.

‘Level Playing Field’

Airbus and Boeing together have outstanding orders for 102 widebody planes from Qatar Airways, 59 from Etihad Airways and 175 from Emirates, which has already taken delivery of 13 of the 90 Airbus A380 superjumbos it has ordered in total.

The U.S. Export-Import Bank guaranteed $414 million of Emirates bonds last year to fund the purchase three Boeing 777 jets, an example of the cheaper financing that would be off limits for Lufthansa or Southwest Airlines Inc.

“There’s definitely an argument that there needs to be a level playing field in financing,” said Howard Wheeldon, senior strategist at BGC Partners. “Any pressure that France, Britain and Germany can bring to bear makes good sense.”

Air France fell 0.1 percent at 9:32 a.m. in Paris. Lufthansa slipped 0.3 percent on the Frankfurt exchange. British Airways gained 0.2 percent in London.

Manchester Route

European airlines may struggle to maintain efficient connections as Middle Eastern carriers lure more passengers away with new destinations, Gourgeon said. He cited Emirates’s introduction of an Airbus A380 superjumbo flying between Dubai and Manchester, northern England, since last month.

“It will progressively become more difficult for British Airways to have enough passengers to offer the same frequency of flights to Hong Kong,” the CEO said. Traffic through Paris, Milan and Munich would also suffer, he said.

If left unchecked, the competitive imbalance between the Gulf and Europe will eventually lead to a mass shift in stopover traffic, and other economic activities, to Middle Eastern hubs, Gourgeon said.

“I think it’s very dangerous for Europe,” he said. “What they’re trying to do is buy our jobs.”

Source : http://www.bloomberg.com/news/2010-10-10/air-france-ceo-gourgeon-calls-for-eu-curbs-on-expansion-by-gulf-carriers.html

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