Can airlines dictate their law to the states?

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The tug-of-war has begun between Ryanair and the European states. The latter, seeing the steady growth in air passenger flows, and thinking they were giving assurances to ecologists, have all taken the path of taxing airlines. In their eyes, this has a double effect: firstly, to slow down traffic volumes, in particular aircraft movements, which are sources of pollution targeted by some voters, and above all to bring money into the public coffers, which badly need it. Taxing passengers is well regarded electorally because they are still in the minority compared to other voters, so why deprive oneself of a source of income that does not seem about to dry up.

But things are not that simple. First of all, the new taxes that companies will have to pay will be fully passed on to consumers, and they are seriously starting to complain. And the transporters have a ready-made solution: since the states do not like them, they simply leave. This is exactly what low-cost airlines are doing. The latter have played an essential role in maintaining the economies of regions neglected by industrial development. Their economies have transformed from manufacturing to services and tourism. And the “low costs” have found themselves in a position of strength in these areas because they have the only model that allows them to bring in consumers to replace declining populations.

Basically, these new entrants play a real role in regional development. So they are beginning not only to threaten to withdraw, but also to take action. This is what is happening in the countries of southern Europe. This is not necessarily going to suit governments. Indeed, the volume of expected levies is likely to be much lower than expected, as the adage “Too much tax kills taxes” appears to be confirmed. In addition, this withdrawal risks leading to a considerable loss for the tourist regions that live off the contribution of these operators’ customers.

On the other hand, these same airlines, encouraged by continued growth and an efficient business model, have ordered a considerable number of new aircraft from the major manufacturers. The only five largest European “low-cost” operators, Ryanair, easyJet, Wizz Air, Vueling and Pegasus, have 1,354 aircraft and 983 on order. Opposite them, the three major groups, Lufthansa Group, Air France/KLM and IAG, certainly have 2,065 aircraft, but only 425 on order. However, all “low-cost” aircraft are short-to-medium-haul, while those of the major traditional operators are mainly used for long-haul flights. That is to say that the “low cost” carriers now hold power over European services, and this will probably be strengthened in the future.

Admittedly, geographically speaking, Europe is a small continent on which surface routes can become fierce competitors to air transport. High-speed rail lines have become very important, and the coaches of large private operators are crisscrossing the motorways and offering fares that even the most efficient “low-cost” operators cannot bear. Does this mean that European states will be able to do without their services if they decide to close ports of call, as they intend to do if governments do not reverse their taxation decisions? This is something that deserves reflection.

The balance of power between the public authorities and the airline operators is fairly even, and governments have no interest in seeing the very serious network of air services, patiently built up by the “low-cost” operators, shrink. The construction of a new motorway or a new high-speed railway is now facing fierce opposition from environmentalists, who will soon no longer have air transport to sink their teeth into. Admittedly, some air operators such as Ryanair have sometimes shown reprehensible behaviour, which is sanctioned by the courts in many countries. They will also have to improve both their social relations and their links with customers. They will have to comply with the compensation rules imposed by the European authorities. But for all that, states must not consider them enemies.

It is time for governments and operators to learn to talk to each other to provide the best service to the population.

Air Transport, Tension Between Carriers and Distributors

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Recently, IATA, the airlines’ organisation and owner of the BSP (Billing and Settlement Plan), has further hardened its position towards travel agents. The information reported by Déplacements Pros is important. It would seem that the tension between operators and distributors has been revived after the period of calm that followed the collapse of air transport during Covid.

It is worth recalling what the BSP is for and why it is essential in the organisation of air transport. Before the invention of this product in 1971 by Brian Barrow, then in charge of distribution at IATA, airlines had to deposit stocks of tickets in travel agencies, which classified them by carrier in standardized drawers. At the end of the month, depending on the agreements made between each company and each travel agent, the latter had to draw up a sales report and pay the amount to each carrier.

The invention of the BSP has revolutionized this practice, which would be impossible nowadays given the volume of banknotes issued. It consisted of using a single stock of tickets, managed by IATA, which receives payments from travel agents and distributes the sums among the operators. This is a huge administrative gain both for airlines, which no longer have to deposit their ticket stocks in travel agencies, and for the latter, who now make only one payment to IATA.

It took more than 20 years for this system to be extended to all countries, each of which uses its own administrative rules. It was necessary to create a BSP for each country or group of countries in the case of small markets. But little by little, this product has become a must for managing the relationship between travel agencies and carriers.

Apart from the United States, for which a similar body has been created, the ARC (Airlines Reporting Corporation), all the other countries, with the exception of those for which IATA considered it impossible to implement the BSP due to administrative and financial rules that are not compatible with international monetary exchanges, such as Algeria, Sudan or North Korea, now have the BSP.

However, the BSP belongs to IATA, i.e. the airlines, and the airlines are constantly repatriating the proceeds of sales held by travel agents as quickly as possible. For the latter, cash flow is an integral part of their economic system. The BSP’s payment methods, between 15 and 30 days after the end of the month of issue, allowed travel agents to have a welcome cash flow, even if it did not belong to them.

This advantage was all the more important as airlines gradually eliminated all commissions from their distributors. These commissions, between 7% and 9%, have been replaced by fees paid directly by customers. What we learn from the Voyages Pros article is that IATA will unify the rules for repatriating money throughout the world.

It goes without saying that this measure is the prelude to a real-time withdrawal of the money collected by travel agents, all electronically. This is the stumbling block. On the one hand, carriers want to collect their money as soon as possible, thinking that it is better in their accounts than with their distributors, and the latter will no longer have the flexibility to give even a few lines of credit to very large companies that pay at the end of the month.

If, as is very likely, IATA succeeds, how then will companies still be able to ask for bank guarantees from travel agents? It is not clear on what grounds they could be justified. Nor do we see why carriers should continue not to pay their distributors, whom they unquestionably need. It should be remembered that direct purchases by customers from airlines represent only 30% of the total, the rest being done via travel agents, including very large consolidators. The generalization of electronic operations has not changed anything.

A period of tension is beginning. The response of distributors will undoubtedly be complicated because they do not have a strike force of equivalent weight to that of the companies. But they will be justified in asking operators to join guarantee funds that will ensure the successful completion of the transport purchased by customers via their travel agents. So far, airlines have managed to postpone the implementation of such a guarantee, but pressure from distributors and customers on political authorities could well lead the latter to legislate on the matter. And we know that in this case they have a heavy hand.

Towards the Transformation of “Low Costs”

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Very interesting to follow Southwest Airlines’ earnings. It is the benchmark airline in the world of “low cost.” It was both the first to enter this field in 1971, with a huge expansion during the liberalization of the American skies in 1978, and it is also the largest in terms of turnover: $27.5 billion, even if the European Ryanair carries more passengers.

The fundamentals of the model are based on a few intangible principles: a single type of aircraft, faster turnarounds, densified aircraft capacity, no subcontracted distribution, very low call prices, a very stripped-down product with all services paid, all served by a young, enthusiastic, and sufficiently well-paid staff.

With this model, Southwest Airlines has been at the top of American domestic carriers with remarkable results. And then time did its work. Staff aged, became less efficient, and demanded and obtained benefits that were ultimately comparable to those of traditional carriers. The results paid the price. Not that the company lost money, but profits fell and, more seriously, the stock price began to decline with great regularity, which did not suit shareholders, especially investment funds. They demanded a change in management, and the latter adopted a very different strategy.

In fact, the new managers have evolved the pure “low cost” model toward a hybrid system. To begin with, distribution was extended to travel agents via GDSs; then the company entered into interline agreements, which had never been seen before. The product has improved and costs, as a result, have also increased. In total, the results were also badly affected, with a drop of 42%. And surprisingly, the stock price has soared more than 70% from its low, and the company is valued at 46 times expected earnings. Compared to Air France/KLM’s results, this would value the group at $16.3 billion instead of the current $3.63 billion, and let’s not even talk about Emirates Airlines, whose valuation on this basis would exceed $230 billion.

In other words, the stock market, which anticipates future results, has full confidence in the change in strategy of “low cost” carriers, whose product will gradually move closer to that of traditional airlines, which have gone the opposite way. Admittedly, after reaching the bottom just before Covid, the revenues of incumbent airlines are tending to rise. This was necessary because, even if their product was degraded, operational costs continued to increase, and customers no longer hesitated to leave for competitors who clearly displayed the simplest service.

It is therefore easy to imagine that the American example will be followed, albeit with some delay, by European and then Asian carriers. We are also starting to see the European leader Ryanair no longer hesitate to cancel services as soon as their profitability is no longer assured. EasyJet is taking the same path. This is how many small European airports will lose what kept them alive, as “low cost” operators have taken advantage of tax increases, decided somewhat lightly by government authorities, as a pretext to reduce their sails.

It is necessary to emphasize once again the lack of understanding in government policies which, in order to please a certain electoral clientele who will not be grateful to them, have consisted of taxing air transport in favor of railways, even going so far as to eliminate access to planes by administrative means, as we have seen in several European countries.

Meanwhile, orders for new aircraft, admittedly less polluting and more efficient, have multiplied. More than 16,000 aircraft are expected in the coming years, not counting new orders that continue to pour in.

Where are we going to put them if governments reduce access to major airports and if regional services can no longer be profitable because they are too heavily taxed? How will air transport, with its “low cost” components, be able to continue its beneficial role for the global economy and for bringing people closer together?

The next competition will no longer be in in-flight service, or even in fares, which we can expect will gradually be displayed more rationally than in the past, but will be played out in airports. The latter have become the main obstacle to air transport, which is poorly suited to the necessary fluidity of traffic, because if “low cost” carriers abandon small airports, there is no doubt they will strengthen their offer on the major platforms.