Should governments help the airlines? (part 2 of 2)

There’s another problem when governments rescue companies and get them back up on their feet: they may quickly forget the favours they have received. Ingratitude is a fact of commercial life, but there’s no reason for governments to set themselves up for it.   If an important airline collapses, and its assets are taken over, the successor airline may not maintain all the routes to and from the country concerned. So the rescue package may not help national competitiveness after all.

But wait, you say, surely if the route is profitable it will be maintained? No, because the new airline has a finite number of planes and other routes may be more profitable. Also, the new airline may be more interested in feeding passengers to its existing routes or hubs than in maintaining the old route.

 An important option for governments is to go out to tender for air service provision. They can invite competitive bids for a subsidy to operate the route. The lowest bid, if it meets the quality requirements, gets the contract and the subsidy. Countries typically do this to maintain connectivity between the centre and remote regions: the airline in question is paid to maintain the regional route, and this is usually called a public service obligation. In 2019, there were 12 EU countries following this option, for a total of 143 routes. Greece had the biggest number of PSOs at 28, followed by France at 27. In general PSO routes connect outlying islands or distant regions with the capital or other key cities in the country concerned.

But there’s no reason why a PSO can’t be used to maintain or increase international connectivity as well. It can be an easier way to improve national competitiveness than rescuing a whole airline. But in fact, of the above PSOs, only 8 of the 195 were for international routes. Cyprus’s single PSO route was to connect it with Brussels. All of Czechia’s 3 tenders were to connect its cities with other European cities. France had 3 PSO routes connecting Strasbourg with other European cities.

Countries might usefully consider using PSOs specifically to target missing links in their international connectivity, including intercontinental links. A small country that wants better links with another part of the world could go out to tender and see what it might cost. The price might look good in the light of the possible wider economic benefits (tourism, business links, FDI, etc.)

Full disclosure: I took one of these routes last month (In Greece: Rhodes to Karpathos). The plane actually goes on to Kasos, an additional 10 minute flight, which must be one of the shortest commercial flights in the world.

Brexit and the UK Labour Party

Brexit is not yet as viciously divisive an issue within the UK Labour Party as it is within the UK Conservative Party. But opinion is at least as diverse. The lack of clarity in the thinking of the party’s leader, Jeremy Corbyn, is not helping. In an interview the other day, he said that, if elected, a Labour Government would seek “a better deal” and would look to negotiate “a customs union” with the EU. Now, remember that there is an EU customs union, of which Turkey is also a member. For now, the UK is a member. Use of the term “a customs union”, and many Labour speakers employ it, suggests that something other than the existing customs union is envisaged. But this is logically impossible unless the existing one is to be abandoned by the EU. A customs union implies a common external tariff. Is Corbyn suggesting that this be different from the existing one? If not, why can’t he say that the UK would want to stay in the EU customs union. Or does he envisage a new arrangement whereby the UK and the EU would agree a new common external tariff, incidentally requiring renegotiation of all EU trade agreements with the rest of the world?

Mr Corbyn is also concerned about the State Aids rules of the EU. He says that he would be concerned if they interfered with a Labour government taking measures to encourage industry. With some exceptions, state aid rules come into play if a government gives a benefit to a firm in its own country that it denies to others. After Brexit, if a UK firm wants to trade with the EU and has had unfair benefits from the UK government, it will come up against the State Aid rules either immediately as part of whatever agreement is ultimately reached between the EU, or else later on at WTO level.

Corbyn’s position on the EU needs to be more carefully developed. At the moment, it looks a bit as though he shares the Tory Brexiteers’ delusions that the UK can negotiate with the EU as an equal partner, if not a superior one, and that exiting the EU will mean that the UK is free to do whatever it likes.