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AIR TRANSPORT: QUARTERLY REPORT NO.15 2Nd QUARTER 2007 (April to June)

The unique Beach Airport is here being served by this DHC-6 Twin Otter in compliance with a Public Service Obligation.

AIR TRANSPORT: QUARTERLY REPORT NO.15 2nd QUARTER 2007 (April to June)

1 OVERVIEW...... 2

2. HIGHLIGHTS AND KEY DEVELOPMENTS...... 3 2.1 REGULATORY...... 3 2.2 ...... 4 2.3 AIRPORTS...... 11 2.4 SAFETY AND SECURITY ...... 14 2.5 ATM...... 14 2.6 MANUFACTURERS ...... 15 2.7 THE ENVIRONMENT ...... 16 3 PUBLIC SERVICE OBLIGATIONS ...... 17 3.1 USE OF THE PSO ...... 17 3.2 CONDITIONS IMPOSED ...... 20 3.3 FARES CHARGED ON PSO ROUTES...... 20 3.4 PSO TENDERING PROCESS ...... 21 3.5 TYPES OF AIRCRAFT USED ON EU PSOS...... 23 3.6 LEVELS OF SUBVENTION...... 25 3.7 ENFORCEMENT OF PSO RULES ...... 25 3.8 THE COMMISSION'S PROPOSAL TO REVISE THE THIRD AVIATION PACKAGE ...... 26

Cranfield University: Quarterly Report Q2 2007 for DG TREN 1 1 Overview

An event with likely far-reaching consequences for the development of transatlantic air services, and eventual consolidation in the industry, took place with the signing of the EU US aviation treaty in April. The first stage becomes effective in March next year, and allows any EU or US to provide air services between any EU city and any city in the US Also in April, guidance on the interpretation and implementation of the process of imposing public service obligations on routes was delivered by the EC. This followed an investigation which came about because two low-cost carriers complained that onerous conditions imposed by the Italian authorities effectively excluded the airlines from the selection process for routes between mainland and Sardinia. Section 3 of this report examines in some detail the way PSO routes are administered. PSO routes apart, LCCs continued to develop their networks, with the arrival of summer schedules including 440 new routes announced by thirty airlines. While most of these routes will be successful, a number will be dropped. This is a manifestation of the ease with which airlines can enter and depart markets, creating a measure of volatility which saw in the twelve months to June 2007, over 340 point-to-point city- pairs lost to the European network, to be replaced by some 640 new city-pairs. AEA airlines reported passenger traffic up by 4.5% overall in the three months to end June 2007. Average load factors were up in all regions except the North Atlantic, where capacity growth outstripped increases in demand (RPK). Of major European carriers, and both saw solid increases in capacity on their passenger services coupled with load-factor growth of around two percentage points. Q1 covers a quiet period, particularly so when, as in 2007, it does not include Easter. However, airline financial results were generally good, reflecting the traffic results above. Air France and Lufthansa were both ahead, while fell back to join , Austrian and SAS in posting negative net results. Finnair, , Swiss and Turkish all reported positive results, with Swiss performing particularly well. Among LCCs, was in positive territory while and Air Berlin recorded negative operating margins. Ryanair’s takeover of was blocked because of concerns that Irish consumers, in particular, would suffer if the country’s two largest carriers merged, while Aeroflot quit the race to acquire a stake in Alitalia. ACI’s forty-five European airports were up 6% in passenger throughput in April, against a 5% increase in the association’s world-wide airports. January to April growth in passenger traffic among the largest European airports was particularly strong at , , Malpensa and Munich, fuelled to some extent by the activity of LCCs but also by new airport capacity coming online. Growth in traffic did not lead to a deterioration in flight delays, as AEA airlines reported year-on-year improvements in key measures of on-time performance at the majority of the largest airports.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 2 2. Highlights and key developments

2.1 Regulatory In Washington on 30th April Jacques Barrot, Vice-President of the Commission, signed the first-ever aviation treaty between the EU and US, the first stage of which will come into force on 30th March 2008. A strictly defined timescale for the second stage of the new treaty and a list of priority items have already been agreed. Signs of the impact of the new bilateral are already apparent, with further changes in the supply of transatlantic air services widely anticipated. In June the EU signed a “horizontal” aviation agreement with the Kyrgyz Republic removing nationality restrictions in the bilateral air services agreements with Member States. In all, twenty-seven such agreements have now been established, which together with changes agreed by individual Member States has brought some 500 bilaterals into conformity with European law. In April the Commission authorized public service obligations on sixteen air routes linking Sardinia to the Italian mainland, following a formal investigation initiated in August 2006 into the PSOs imposed by Italy on these routes (IP/07/539). The Commission did not question the principle of imposing PSOs on the routes in question. However, their application is authorized only if several conditions imposed by the decrees governing them are revoked or amended. In particular, the first stage of the PSOs must remain open to any operator that complies with them; the time period chosen to ensure continuity of services must be reasonable and not exceed one year; the authorities must not prevent airlines from providing services on the routes concerned that beyond the minimum requirements; the authorities cannot make the right of an air carrier to provide services on one route conditional upon the obligation to provide services on another route; and the need to maintain PSOs and the extent of the obligations on each of the 16 routes should be reassessed at least once a year and each time a new carrier starts operating or notifies its intention to operate on one of the routes. The Italian authorities are required to notify the Commission of the measures taken to implement the decision no later than 1st August. The investigation was prompted by complaints from easyJet and Ryanair, both of whom had been prevented from operating specific Italian domestic routes as a consequence of the PSOs being imposed. The consultation process to examine the possible revision of Regulation 2299/89 which establishes a Code of Conduct for computerised reservation systems (CRS) closed on 27 April. The consultation paper gives an overview of the most recent market developments and invites all interested parties to provide their views and comments on the raised questions in order to assess the need for revision of Regulation 2299/89. In April the Commission decided to delay the introduction of rules on maximum cabin baggage size until May 2008 in order to reassess their advantages and disadvantages particularly in respect of security and passengers’ comfort. The rulemaking, adopted as part of the review of EC Regulation 1546/2006, sought to limit the maximum size of cabin bags to 56cm x 45cm x 25cm.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 3 In April the Commission announced that it was giving airlines and Member States another six months to make Regulation (EC) 261/2004 dealing with air passenger rights work effectively. There are two main reasons why there have been difficulties in implementation, namely: the use of imprecise text in sections of the regulation and ineffective enforcement in some Member States. For example in the case of the former, passengers and airlines are sometimes unable to distinguish between a cancelled flight and one subject to a long delay. An example of the latter is that airlines frequently do not inform passengers of their rights during periods of disruption. The Commission intends to hold meetings with National Enforcement Bodies in order to clarify the regulation and tighten up and strengthen enforcement procedures. Updated information relating to passengers’ rights has now been made available by the Commission. In May the Commission published the results of the consultations it had initiated on general aviation in the Community. A Discussion Paper was published on 1st February which analysed the need for and possible means of improving EC policy making in respect of general aviation and asked interested parties to comment. Some 74 contributions were received on a range of issues including the following topics: more systematic data gathering, including safety trends; the position of European General Aviation manufacturing in world markets; access to infrastructure and airspace; the future impact of new aircraft types on the capacity of the European air transport system; and the environmental impact of general aviation. In April the Commission decided not to raise any objections to two investment projects being undertaken at Tallinn airport by Tallinn Airport Ltd, which is being co- financed by the Cohesion Fund. As the investments are co-financed by Tallinn Airport Ltd from its own resources without state intervention, the Commission considered that the investments do not constitute state aid. In June the Commission announced that it had approved start-up aid to promote the development of Antwerp airport. Airlines may get aid for three years for starting new services or operating additional flights to existing destinations served.

2.2 Airlines

2.2.1 Charter carrier news The merger of and MyTravel Airways will now go ahead following KarstadtQuelle’s acquisition of MyTravel Group being approved by competition regulators in May. Some 2,500 – 2,800 jobs will go as a result of the merger, with the aim being to generate cost savings of around £95 million. In June it was announced that Thomas Cook and MyTravel will merge their UK charter airlines under the Thomas Cook Airlines brand. The other recent large tour operator merger involving TUI and First Choice was also given approval by competition regulators in June, following TUI’s offer to divest its Irish business, Budget Travel. Air Berlin is to acquire a 49% shareholding in Swiss charter carrier, Belair. Icelandair Group is to purchase Czech charter airline, Travel Service.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 4 New charter carriers Spanish start-up began operations in May with a using the AOC of its wet lease sister company, . Turkish charter airline Fly Air was re-launched in June with a fleet of two Airbus A300B4. Operations had been suspended in September 2006. Greek air taxi operator Euroair acquired two MD-83 aircraft in May and began operating services on behalf of Pescara- based . JP Air of Estonia began operations in April using a single MD-83.

Ex-charter carriers No charter carriers withdrew from the market this quarter.

2.2.2 Routes Comparing the number of city pairs linked by scheduled airlines in June 2007 with the situation twelve months’ earlier, it is clear there is a relatively high of volatility in Europe’s air transport network. The table below considers services dropped and those started between and within a region comprising the EU plus Iceland, Norway and Switzerland.

June 2006 v 2007, gains and losses in scheduled city-pairs and weekly frequencies

gains losses balance

city pairs 644 347 297 flights per week from 4,150 2,343 1,807 gains and losses Source: OAG

Many of these changes to the network are the result of LCCs taking advantage of the ease with which they can enter the market, quitting if they are unable to generate sufficient demand. The following table provides a measure of this activity, listing the new routes announced for start-up in the second quarter of 2007. The second quarter saw some significant developments in the European LCC market: • completed its takeover of BA Connect, taking on many existing routes as well as starting some new ones. All of these are considered ‘new’ routes for Flybe. • opened a base at Durham Tees Valley during Q2, in effect replacing who pulled out of the airport at the end of last summer. • Germanwings opened its fourth German base in Dortmund in June with the five new routes from the airport. • The hlx (Hapag Lloyd Express) brand disappeared as TUI merged the scheduled hlx and charter hapagfly into a single airline TUIfly.com. At the end of June TUIfly opened a base using just one aircraft at Allgau Memmingen, a previously unused airport north of Munich.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 5 New LCC routes started in Q2 2007

Airline (March) April May June Total Air Berlin 18 18 Blu Express 2 2 4 bmibaby 4 4 8 Centralwings 3 3 6 Click Air 2 9 10 4 25 easyJet158822 Flybe 21 7 15 43 Flyglobespan 10 23 2 35 FlyMe711 9 FlyNordic 1 1 Germanwings 17 11 6 34 Helvetic 6 6 Iceland Express 2 4 6 jet2.com1028121 Monarch Scheduled 2 7 9 MyAir 4 1 6 11 niki 1 1 Norwegian386118 OnAir (*new*) 4 1 5 Ryanair1288836 SkyEurope 18 2 15 35 SmartWings 1 2 6 9 Sterling514 10 9 1 10 Transavia France (*new*) 1 5 6 TUIfly (*new*) 12 4 7 23 Vueling314917 WindJet 3 3 4 5 9 Total 131 66 152 91 440 Note: March routes are those started after 24 March as part of the 'summer' timetable. Routes started earlier in March are listed in the previous quarter's report. • MyAir created a base at Bucharest Baneasa airport. • Ryanair launced its Bremen base in April with flights to ten destinations. • SkyEurope opened a base in Vienna at the end of March. • Barcelona-based Vueling opened its first foreign base at Paris CDG, and by the end of Q2 was operating to twelve destinations from the new base. During the Q2 of 2007 there were a number of new entrants into the EU LCC market: • is to start scheduled services from Verona. • OnAir is a new Italian LCC designed to attract tourists to Pescara. Its services are provided by other carriers who have been contracted to fly from various Northern European destinations. • Transavia has created a subsidiary to be based in Paris Orly, and owned 60% by Air France and 40% by Transavia. Slots have come from Air France partly by reducing frequency on the key Strasbourg route, where demand should fall dramatically following introduction of high-speed TGV services.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 6 2.2.3 Capacity and traffic Passenger traffic carried by AEA airlines in the three months to the end of April 2007 was up by 4.5% on the same period 2006, totalling over eighty-three million passengers. 78% of this traffic was carried on intra-European sectors, but these routes accounted for only 30% of total RPK. Air services between Europe and North America generated 24% of total RPK, while Europe and Far East/Australia-Pacific routes contributed 21% of AEA airlines’ output.

Scheduled services of AEA members, February – April 2007

Passengers ASK RPK Load Factor

thousands millions millions % Domestic 26,493 21,842 14,423 66.0% Cross-border Europe 38,300 59,659 39,848 66.8% Europe / N Africa Mid East 2,835 11,291 8,329 73.8% North Atlantic 6,195 53,683 42,434 79.0% South/Mid Atlantic 2,989 28,490 24,376 85.6% Europe/rest Africa 1,903 16,631 12,848 77.3% Europe /Far East, Australasia 4,494 44,806 36,917 82.4% Other 134 99 107 TOTAL 83,247 236,482 179,224 75.8% Source:AEA

These carriers also increased intra-European capacity (ASK), but by less than the rate of increase in RPK, producing a growth in average passenger load-factors on these services of 1.1 percentage points for domestic services, and just over one-half a percentage point on cross-border European routes.

AEA members, February – April 2007, growth over same period 2006

Passengers ASK RPK Load Factor

thousands millions millions change (points) Domestic 1.3% 0.1% 1.7% 1.1% Cross-border Europe 6.5% 6.8% 7.7% 0.6% Europe / N Africa Mid East 7.5% 5.1% 9.2% 2.7% North Atlantic 2.8% 3.6% 2.9% -0.5% South/Mid Atlantic 6.5% 7.1% 7.2% 0.1% Europe/rest Africa 5.5% 3.1% 5.7% 1.9% Europe /Far East, Australasia 6.2% 1.5% 4.9% 2.6%

TOTAL 4.5% 4.1% 5.3% 0.9% Source: AEA

There were higher load-factor increases in other markets, with the Asia Pacific routes improving by 2.6 percentage points. On the highly competitive North Atlantic market traffic increases did not keep pace with the growth in capacity, leading to a load- factor of 79%, down by just under half a point.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 7 Ten largest AEA members, February – April 2007, RPK growth over same period 2006

Air France

Lufthansa

British

KLM

Iberia

Virgin 2007 Alitalia 2006 SAS

Turkish

Austrian RPK m illions

0 10,000 20,000 30,000

Among AEA member airlines, Air France and Lufthansa increased capacity by 2% and 5% respectively while managing to increase revenue passenger kilometres at significantly higher rates. British Airways was less successful, recording a 2% drop in RPK while increasing very slightly the capacity offered. The result was healthy increases in Air France and Lufthansa passenger load-factors of around two percentage points, while British Airways lost over 1.5 points. RPK at both SAS and Austrian fell by around 4%, but while Austrian reduced capacity by a higher margin, SAS did not, resulting in a one point drop in load-factor. Virgin opened a number of new long-haul routes, increasing its capacity by 12% and RPK by 15%.

Air freight traffic AEA members, February - April 2007 vs same period 2006

Freight (TFTK)

millions change Domestic 29 -6.7% Cross-border Europe 186 -3.8% Europe / N Africa Mid East 289 -3.9% North Atlantic 2,565 0.9% South/Mid Atlantic 1,020 10.5% Europe/rest Africa 825 3.5% Europe /Far East, Australasia 4,169 -2.0% Other 47 TOTAL 9,083 0.4% Source: AEA

Air freight carried in the three months showed some growth over the same period one year earlier, up less than one-half a percentage point. Domestic and cross-border European markets represent only around 2.5% of total freight carried by AEA airlines - but both showed weak performance, as did the much more important Far

Cranfield University: Quarterly Report Q2 2007 for DG TREN 8 East/Australia routes. This weak performance of the Asia/Pacific markets took the shine off the good performance recorded between Europe and South America, where freight tonne-kilometres were up over 10%.

2.2.4 Financial

European carriers Results for the first quarter of calendar year 2007 were available for the majority of larger EU airlines, and are shown in the table. This quarter covers the quieter period after Christmas, and did not include the Easter holiday All the major European airlines produced healthy operating profits for this quarter with the exception of Alitalia, Austrian and SAS. They were joined by British Airways as the only airlines with a net loss after tax. BA were helped by a large pension add back, but also took a hit of almost as much for possible settlement from the competition authority investigations: it made a pre-tax profit, but moved into loss as a result of a high tax charge (the result of low investments over recent years). Swiss was the major success story, reporting a healthy operating and net results, and an 11.2% margin on sales in what is normally a difficult quarter (reflected in margins from most of the other airlines). Its average load factor increased by 2.5% points on higher capacity and with stable yields. Lufthansa’s difference between net profit and operating profit indicated more than normal financial accounting items: the additional item was the after-tax profit of EUR499m from the sale of their leisure travel division (Thomas Cook) to KarstadtQuelle, which gained competition authority approval in March 2007.

Financial performance of major EU carriers for January to March 2007

Revenues Operating Net result Operating Net margin ($m) result ($m) ($m) margin % % Air France-KLM 7,086 12 57 0.2 0.8 Alitalia 1,395 -141 -193 -10.1 -13.8 Austrian Airlines 766 -25 -38 -3.3 -5.0 British Airways 3,776 61 -242 1.6 -6.4 Finnair 704 18 12 2.6 1.7 Iberia 1,722 11 16 0.6 0.9 Lufthansa Group 6,180 47 728 0.8 11.8 Ryanair 639 38 77 5.9 12.0 SAS Group 1,976 -47 -7 -2.4 -0.4 Swiss 883 99 96 11.2 10.9 Total above 25,127 73 506 0.3 2.0

Source: Airline Business, July 2007 and airline annual reports; exchange rates averaged for calendar year from OANDA.com

The US dollar averaged 0.763 to the Euro for the first three months of 2007, compared to 0.832 for the same period in 2006, or a depreciation of 8%. This gave European carriers an advantage when translating dollar denominated costs such as fuel into Euros, but at the same time disadvantaged airlines such as BA which had significant US dollar revenues.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 9 Other European airlines reporting their first quarter results were Air Berlin (an operating margin of (-16.3%), Icelandair (-0.7%), Turkish (20.9%), Vueling (-17.3%). World average jet kerosene prices advanced in February, March, April and May after a 9% drop in January 2007 (Airline Business, July 2007). The world average spot price was 202.5 US cents in May 2007, 3.8% below its May 2006 level. A further round of fuel surcharges was introduced by major EU network carriers in May.

USA and Asia network carriers The US majors together recorded an operating profit of USD758m for the first quarter of 2007 (or 3% of revenues), compared with a loss of USD394m for the previous year. Total revenues were up 3.7%, and the net result before special items moved from a loss of USD1.26 billion to a small profit of USD44m. Only Alaska and UAL failed to make an operating profit, with Delta and Northwest moving into the black with operating margins of 3.7% and 7.0% respectively. Of the low-cost airlines, Southwest (included in the majors) generated a 3.8% operating margin, AirTran 0.5% and JetBlue 10.5%. Not many Asian airlines report quarterly financial results, but of those that do, Singapore Airlines made an operating profit of SGD334m for January to March 2007 (up from SGD255m), or 9.1% of revenues. Revenues were up by 8.3% compared to the previous quarter and its profit for the quarter was SGD656m, up from SGD284m, boosted by SGD90m from the disposal of aircraft. Japan Airlines, by contrast, reported a net loss of JPY162 billion for the full twelve months to end March 2007, but forecast a return to profitability for FY2007/08 with a small net profit of JPY70 billion on operating revenues reduced by 5% to JPY21,970 billion. Air Asia’s revenues were up by 53% for the period January to March 2007 compared with the same quarter in 2006, with an operating profit (EBIT) of MYR73m compared to MYR26m for the same quarter in 2006. Its latest operating margin was 18.4% and its net margin was 21.9%.

Acquisitions and disposals In May 2007, the Board of Directors of Iberia was informed by the consortium formed by TPG Capital LLP on behalf of TPG Partners V LP, British Airways Plc, Vista Capital de Expansión S.A., Inversiones Ibersuizas S.A and Quercus Equity S.L., that the above companies have reached an agreement to work together on an exclusive basis to investigate the possibility of making a formal offer for Iberia and have shown interest in analysing the information requested formerly by TPG as soon as possible. SAS announced its intention to dispose of its non-core businesses bmi, , Air Greenland and Newco (Spanair’s ground handling company) in order to focus on air transport operations in Northern Europe. Marsans group (majority owner of Aerolineas Argentinas) intends to bid for Spanair and has not ruled out bidding for Iberia. Alitalia has begun to develop contingency plans for a new business strategy in the event that its privatisation process fails. Alitalia's board has been asked by the Italian government, which holds a 49% stake in the carrier, to put together a sustainable business plan for the next three years. The two remaining teams bidding for Alitalia are backed by MatlinPatterson and Italian carrier .

Cranfield University: Quarterly Report Q2 2007 for DG TREN 10 At the end of June, European Commission regulators confirmed they have blocked Ryanair’s proposed takeover of fellow Irish carrier Aer Lingus, concluding that remedies offered by the airline fail to head off its competition concerns. Ryanair intends to appeal against this decision to the European Court of First Instance. TAP Portugal's acquisition of Portugalia secured final approval in June from local competition authorities. The two carriers will now co-ordinate their schedules to maximise connections, a process expected to be completed at the end of September.

2.3 Airports

Traffic Europe’s ACI member airports increased passenger throughput by 6.1% in the first four months of 2007, compared with the same period in 2006. This was above the worldwide ACI growth of 5.2%. Relatively low increases in passenger traffic were recorded at the organisation’s North American airports, up just 2.0%. Cargo traffic growth worldwide was less strong, with the ACI airports worldwide recording 2.0% annual growth for the four months to end April. Europe was ahead of the world average, which was held back by relatively weak performance from Asian airports (the largest market in absolute terms).

Year to April growth (2007/2006) at ACI airports worldwide

6.8% 6.1%

5.2%

2.3% 2.0% 2.0% 1.6%

0.9%

Passengers Freight

Asia Pacific Europe North America Total ACI

Source: ACI International

The top twenty European airports increased passenger traffic in the first four months of 2007 by an average of 5.7%, compared to the same period in 2006. At two of the UK airports in the group, traffic at London Heathrow and fell, but increased at all other airports. The turn-down in traffic may reflect passengers’ defensive action to BA’s labour problems.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 11 A number of the other airports recorded growth in double-digit percentages, with Madrid achieving over 14% year-on-year growth as its new capacity came on stream.

Passenger traffic and growth, January-April 2007 at the top European airports

20,000,000

16,000,000

12,000,000

8,000,000

4,000,000

0 Oslo OSLOslo Paris ORY Paris Paris CDG Paris Milan MXP Vienna VIE Vienna Rome FCO Rome ZRH Zurich Dublin DUB Madrid MAD Madrid Munich MUC Munich London LHR London STN London LGW Brussels BRU Brussels Frankfurt FRA Frankfurt Barcelona BCN Barcelona Stockholm ARN Amsterdam AMS Manchester MAN Manchester CPH

16%

12%

8%

4%

0% growth over Jan-Apr, 2006

-4% VIE VIE LHR LHR STN STN OSL FRA FRA ZRH ZRH BCN BCN FCO DUB CPH ARN BRU MXP MXP ORY ORY AMS AMS MAN MAN CDG CDG MAD MUC MUC LGW LGW

Source: ACI Europe

Airport news The UK government announced a new set of rules designed to speed-up the process for approving large scale infrastructure developments. The aim is to streamline a lengthy and complicated process. Ireland’s Commission for Aviation Regulation provisionally decided to leave charges levied at unchanged for the period up to 2009. The airport’s improved financial position was the main reason behind the regulator’s determination.

Delays AEA released statistics covering airport delays in Q1 2007 reported by the organisation’s member airlines. The table below summarises departure and arrival delays (>15 minutes) at the ten best performing, and ten worst performing, airports. Vienna, Milan Linate and Brussels managed only half the delay rate experienced at the worst performing airport, London Heathrow, where almost one in three departures were delayed. All the best performing airports recorded lower rates of delay compared to the previous year, but of the ten airports at the bottom of the table, only Geneva managed to improve its performance.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 12 Major European airports with the best, and worst, record for departure delays (AEA airlines) Q1 2007

compared to average delay average delay Airport departures % arrivals % Q1 2006 (minutes) (minutes) Vienna 14.1 ▼ 32.5 14.8 36.1 Milan Linate 15.0 ▼ 36.0 22.7 36.3 Brussels 15.1 ▼ 42.4 17.1 37.9 Dusseldorf 15.9 ▼ 38.9 18.7 37.9 Paris Orly 16.6 ▼ 42.8 25.3 37.3 Istanbul 17.3 ▼ 40.0 26.9 42.4 Athens 18.5 ▼ 40.4 21.3 39.3 Barcelona 19.3 ▼ 39.6 18.9 39.3 Milan Malpensa 20.0 ▼ 41.7 25.3 37.1 Munich 20.4 ▼ 41.2 16.3 44.7

London Heathrow 30.1 ▲ 32.9 29.6 36.6 Madrid 25.3 ▲ 39.6 31.2 38.3 Copenhagen 24.6 ▲ 41.7 25.7 43.9 Stockholm 24.5 ▲ 38.2 24.8 39.7 London Gatwick 24.1 ▲ 28.1 24.9 33.2 Frankfurt 23.6 = 37.2 26.3 40.9 Geneva 23.4 ▼ 39.0 24.5 34.9 Helsinki 23.4 ▲ 37.1 21.5 40.4 Paris CDG 22.4 = 36.4 18.4 36.1 Rome 22.1 ▲ 44.5 23.0 44.3 Source: AEA

Ownership and airport developments • Macquarie Airports announced it will sell its stake in Aeroporti di Roma, the operator of Rome’s Fiumicino and Ciampino airports to the investment company Geminia, which already owns 51% of shares in Aeroporti di Roma, in a transaction is worth €1.2 billion and subject to Italian competition authority approval. • A consortium led by Hochtief Airport completed the acquisition of BAA’s shares in Budapest Airport. The transaction was worth €1.8 billion and comes just eighteen months after the Hungarian Government sold shares in the airport to BAA in a keenly contested privatisation tender. • Kobenhavns Lufthaven, the operator of Copenhagen Airport, sold its 20% equity stake in China’s Hainan Meilan International airport for approximately €42 million. The company is also in the process of gradually divesting itself of its Mexican airport interests (ASUR). These moves are part of a new strategy adopted by the company to focus on core operations at Copenhagen where the proceeds of these sales will be used to reduce long-term debt and fund capital expenditure. • Ireland’s Aer Rianta and Macquarie have agreed to sell their 48% stake in airport. The Canadian-based Airport Group Investments Ltd is the preferred bidder and both parties have agreed a price of approximately €630 million. However, the transaction is subject to the approval of the seven West Midlands District Councils who collectively own 52% of the company.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 13 • The operator of Leeds- Bradford, one of the few remaining UK regional airports, remaining under local authority control, has been sold to an equity fund, Bridgepoint Capital, in a deal worth €280 million. • Flugafen Wien, the operator of Vienna airport, completed its purchase of a 25% equity stake in Friedrichshafen airport. • Fraport announced that it had secured three overseas airport interests in Q2. In association with a Turkish partner, it had won the concession to operate airport. The 17-year contract was secured with a bid price of €2.4 billion. Fraport also announced that it had secured a 24.5% equity stake in Xian Airport located in Central China. Fraport also, as part of a winning consortium, secured the tender to operate Dakar Airport in Senegal for a 25-year year period. • BAA received planning permission to build a new terminal which will replace the existing Terminals 1 and 2. The new development will be known as Heathrow East and it is expected to be completed by 2012.

2.4 Safety and security According to analysis by Flight International, airline fatal accidents were at a historical low in the first half of 2007. There were only eleven fatal accidents in the period, taking into account all categories of commercial airline operations, including cargo. Indonesia is bottom of the world league table in terms of safety for the year so far, having suffered two fatal accidents involving Adam Air and Garuda. The EU added all Indonesian carriers to its safety blacklist, while easing restrictions on Pakistan International Airlines, to allow the carrier to operate more of its fleet on services to the European Union. The revised European list includes a total ban on TAAG Angola Airlines. Analysis of incidents in UK airspace involving business jets suggests business aviation may not have a safety record to match that of the airlines. According to NATS, the UK air navigation service provider, business jets record a level of safety- related transgressions significantly disproportionate to their share of airspace movements. For example, while only between three and four percent of movements in NATS airspace relate to business jets, these account for one-third of all failures to follow standard instrument departures, and one in ten of incidents involving a failure to carry out changes in flight level after acknowledging the instruction from air traffic controllers. The rate for fatal accidents involving business-aviation per million flying hours in UK is eight and a half times that for large public transport aircraft, according to CAA statistics.

2.5 ATM No final deal for the Galileo satellite navigation system's public private partnership is expected before September, after the May deadline passed for the constellation's manager, Galileo Operating Company (GOC), to sign the concession contract. The lack of any agreed contract between the legal Galileo owner, the European GNSS Supervisory Authority (GSA), and GOC has required revision to the funding mechanism.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 14 Aircraft flying in European airspace last year poured thousands of tonnes of global- warming carbon dioxide into the sky unnecessarily because of ATM inefficiency, according to the Eurocontrol Performance Review Commission. The report for calendar year 2006 shows that ATC delays have been increasing for three years in a row. An excess of emissions results from inefficiencies in the continent's ATM systems, which means that every flight travels nearly 50km farther through the air than it needs to in order to reach its destination. The fuel wasted is the equivalent needed to power 5,500 flights around the earth and the unnecessary extra distance covered by each aircraft represents 5.9% of the average European trip distance. Germany’s government is expected to make a decision on the proposed partial privatisation of the country’s air navigation service DFS by this summer, following last October’s ruling by head of state to block the sale on constitutional grounds.

2.6 Manufacturers

2.6.1 Aircraft manufacturers Airbus eclipsed Boeing by a factor of nearly 6:1 in terms of orders and commitments announced during the Paris Air Show in June, with a total of 725 compared to 125. Airbus’ total of 425 firm orders included thirteen additional A380 aircraft for Air France, and and 141 orders for the A350XWB. Boeing’s tally included orders from the big two leasing companies with ILFC ordering fifty 787s and 10 737s and GECAS six 777 Freighters. Despite the positive news for Airbus there were still issues to be resolved around the restructuring of the company and the incoming French president was keen to discuss the breakdown of the job cuts with his counterparts in Germany and the UK. Bombardier announced a major investment in the Chinese regional aircraft industry at the end of June. A total of USD100 million is to be invested in AVIC to assist in the development of the stretched ARJ21-900 and to co-operate in the market for 90 to 149 seat aircraft. The impact of production, and hence delivery, problems at Embraer continued to hamper the company’s financial performance with reduced profits announced for the first quarter of the year. However the company was aiming to increase deliveries in the second quarter with a total of 40 aircraft planned to be delivered, 60% up on the last quarter. Embraer rolled out its first Phenom 100 (Very Light Jet) on 16 June, when it had over 400 orders for the 100 and 300 variants of their 4 to 7 seat aircraft. By the end of June ATR had announced 63 orders for its turboprop aircraft, matching the total for the whole of 2006.

2.6.2 Engine manufacturers The lack of progress on offering a GE engine on the A350XWB is holding up the conversion of a commitment by GECAS for 10 of the original A350s into a firm order for the new variant. To date the A350XWB is only offered with the Rolls-Royce Trent XWB.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 15 GE Aviation is working with Airways and Boeing on a biofuel demonstration on a 747-400 which is scheduled for 2008. In June Rolls-Royce completed the certification trials for the Trent 1000 which is offered on the B787 and shipped the first set of engines to Boeing in Seattle ready for the first aircraft, due to be rolled out on 8 July. Pratt and Whitney announced that they are working on a geared turbofan (GTF) demonstrator which they are developing for regional and narrow body aircraft – they predict it should offer 12% lower fuel burn than current engines and 55% reduction in Noise and NoX emissions, with maintenance cost reductions of some 40%.

2.7 The environment The Chief Executive of IATA outlined his organisation’s environmental goals at its 2007 AGM. First, the elimination of the 12% inefficiency in air traffic management, cutting this in half to 35 million tonnes of CO2 annually. Second, a global emissions trading scheme that is ‘fair, voluntary and effective’. Third, a call on aerospace manufacturing countries to build a zero emissions aircraft in the next 50 years, and to have 10% of the industry’s fuel from alternative sources in 10 years’ time. In June a new partnership was established between the US FAA and the European Commission aimed at reducing carbon dioxide emissions on transatlantic flights through co-operation on air traffic management measures. The Atlantic Interoperability Initiative to Reduce Emissions (AIRE) would focus on interaction between the USA’s Next Generation Air Transportation System and the EU’s Single European Sky initiative. Part of the agreement will centre on continuous descent approaches (CDA) on transatlantic flights. Partners signed up to AIRE include the civil aviation authorities of Ireland, Sweden and Portugal, as well as Airbus and Boeing, and Air France-KLM, Delta, FedEx, SAS Group, UPS and Virgin Atlantic. EasyJet proposed in April that European governments remove almost 700 of the oldest, dirtiest aircraft from Europe’s skies by banning any aircraft built before 1990 from operating within the EU after 1st January 2012. It estimates that replacing aircraft aged 22 years and more with the latest technology would result in a fuel and emissions saving of 4-5%. EasyJet outlined its requirements for the next generation of short/medium haul aircraft to be available by 2015: the ‘easyJet ecojet’ needs to deliver 50% improvements in fuel efficiency and reduced carbon dioxide emissions, a 75% reduction in NOx, and 25% less noise than today’s newest B737/A320 and similar aircraft. Its fuel efficiency requirement for 2015 is identical to the ACARE target for 2020. The Committee for Environmentally Friendly Aviation (CEFA), a group of European airline trade associations, released the findings of the impact analysis they commissioned of the EC proposal to include aviation in the Emissions Trading Scheme. The report disagreed with the EC’s impact assessment on the degree to which operators would be able to pass on their ETS costs to consumers, concluding that demand would be more affected by the increase in fares (assuming the costs were passed on) and that there would be no 'windfall' profits from free allowances. The estimated cost impacts were stated in terms of the total monetary impact on the industry rather than on a per passenger or cargo tonne basis; and were totalled over the twelve year period (2011-2022) but without giving the context of total revenues earned or other costs incurred over this period.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 16 3 Public Service Obligations

In order to enable governments to maintain essential air services, Article 4 of Regulation (EEC) No 2408/92 defines a system of public service obligations (PSO) which can be imposed on a carrier operating on designated routes. In essence, the legislation allows Member States to impose such obligations on any route involving an airport in a peripheral or development region, or on a thin regional route considered vital for economic development of the region. If no airline is prepared to provide a service under the conditions imposed, the government may restrict access to the route to a single carrier and award financial compensation to the carrier in return for compliance with the PSO. These are known as restricted access routes, while the others, which may attract a number of carriers, are open routes. A PSO can be imposed by a Member State for a route between its territory and that of another Member State, although all but a very small proportion of PSOs have been in respect of domestic services. In Finland, Greece, Ireland, Portugal and Sweden, national government departments administer air service PSOs, while in France, Germany, Italy and Spain, administration is in the hands of regional authorities. In the UK, where all but one PSO are in , the Scottish Executive is responsible for administering the routes operated from and the respective regional authority for services provided in , and Western Isles.

3.1 Use of the PSO Ten Member States (Finland, France, Germany, Greece, Ireland, Italy, Portugal, Spain, Sweden and the UK) currently impose a total of 226 PSOs. Although PSOs are also imposed by EEA members Iceland and Norway, only EU services are included in this analysis. A list of current PSOs is provided by DG TREN1. As illustrated by the following charts, France has the largest number of restricted access PSO routes, followed by Italy, Portugal2, the UK and Greece with between twenty-five and thirty each. Of the 226 PSOs imposed, 139 are of restricted access, while the rest are open access. As of May 2007, 81% of all nominated PSOs are in operation.

1 http://ec.europa.eu/transport/air_portal/internal_market/doc/pso_web_120507.pdf 2 Portugal announced recently its intentions to abolish the PSOs on the routes between Madeira and the continent. This analysis is based on data still taking account of these PSOs.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 17 EU PSO routes by designating country (May 2007)

Open Access Restricted Access

80 75 70 65 60 55 50 45 40 35 30 Number of Routes of Number 25 20 15 10 5 0 France Italy Portugal UK Greece Spain Sweden Ireland Germany Finland

Source: DG TREN.

EU PSO routes operated & not operated (May 2007)

Operated Not Operated

80

75

70

65

60

55

50

45

40

35

Number of Routes of Number 30

25

20

15

10

5

0 France Italy Portugal Greece UK Spain Sweden Ireland Germany Finland

Source: DG TREN

In terms of the types of routes that have been designated as PSOs, there are 75 inter island routes and 68 that link islands to their adjoining mainland. Of the remaining

Cranfield University: Quarterly Report Q2 2007 for DG TREN 18 routes, 63 connect domestic mainland locations, sixteen are international and four are domestic long haul linking France to its overseas territories.

EU PSO routes by type (May 2007)

80

70 Domestic Long haul Mainland 60 Mainland - Island Inter island International 50

40

Number of Routes Number 30

20

10

0 France Italy Portugal United Greece Spain Sweden Ireland Germany Finland Kingdom

Source: DG TREN.

The significance of PSO capacity as a share of domestic capacity varies greatly among EU countries as can be seen from the following tables and charts. Portugal heads the table of countries with the highest proportion of PSO flights and seats, explained by the requirement to provide air services between the mainland and the two groups of Atlantic islands, Madeira and the Azores, and within and between those two island groups. PSO capacity as % domestic capacity seats flights Portugal 71.5% 73.5% Ireland 18.1% 34.3% Greece 9.4% 19.0% France 13.0% 17.1% Spain 10.4% 16.7% Italy 13.7% 14.9% Sweden 1.9% 4.6% UK 0.4% 2.3% Finland 0.7% 1.6% Germany 0.5% 1.3% Source: OAG

Cranfield University: Quarterly Report Q2 2007 for DG TREN 19 In most cases, the proportion represented by PSO seat capacity is very much higher than the proportion of PSO flights to total domestic flights. This reflects the small size of aircraft employed on many PSO services.

Weekly domestic flights within those EU states operating PSO routes, June 2007

10,000 non-PSO PSO 8,000

6,000

4,000

flights per week, June 2007 June week, per flights 2,000

0 ES GB DE IT FR SE GR FI PT IE

Source: OAG

3.2 Conditions imposed All restricted access PSOs require the operating carrier to adhere to fixed levels of service for the duration of the contract. In the majority of cases, the airline is required to provide a minimum daily service frequency and/or number of seats. It is the responsibility of the administering authority to determine what this should be. There are often specific timetabling requirements to which the operator must comply. Many of these are there to enable passengers to undertake day return trips and to make convenient onward connections. In addition, there have been an increasing number of conditions set relating to the type of aircraft that must be employed. In some cases the administering authority has required the flight crew to include personnel with specific language skills.

3.3 Fares charged on PSO routes Most PSOs stipulate the maximum fares that may be charged. Wide variations exist in these levels for routes of similar distance and traffic volumes, with certain countries being much more generous to travellers in terms of setting lower maximum fares and paying higher levels of subvention. The following chart compares the highest return fares currently charged on a representative selection of PSO routes operated in France, Greece, Ireland, Italy, Portugal, Spain, Sweden and the UK.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 20 Comparison of highest return fares on selected PSO routes

Greece France Ireland Italy Portugal Spain Sweden

440 €

400 €

360 €

320 €

280 €

240 €

200 €

160 €

120 €

80 €

40 €

0 € 0 40 80 120 160 200 240 280 320 360 400 kilometres 3.4 PSO tendering process It is clear that established carriers and especially those with previous experience of operating routes in peripheral regions have an undoubted advantage over new entrants. The following chart shows that most PSOs are operated by locally based carriers. Tenders cover only three years of operation, although the Commission is proposing that this be increased to four years. In spite of the relatively short duration, several carriers have pulled out of their contracts early. Most have done so as a result of under-estimating the costs of operating the service they have been contracted to provide. In a few instances the tender winning carrier has entered into bankruptcy during the course of the contract: in 2002 this fate befell Euroceltic, which had operated two PSO routes in Ireland. Partly as a result of these experiences with the tendering process, the operation of PSO routes rests mainly in the hands of tried and tested carriers.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 21 PSO routes by origin of operator (May 2007)

Local Carrier Foreign Carrier

30

28

26

24

22

20

18

16

14

12 Number of Routes of Number 10

8

6

4

2

0 France Greece UK Portugal Italy Sweden Ireland Germany Finland

Source: DG TREN.

By way of example of the relatively low rate of change in operator, the table below shows the results of the 2002-2005 and 2005-2008 tendering rounds in Ireland. The comparatively short time allowed between notification that a carrier’s tender has been selected and when it must commence operation has been cited by some prospective airlines as a deterrent to submitting a bid. This is particularly the case when a carrier based in one Member State is contemplating a PSO bid on a route in another country. The leasing of aircraft, the setting up of an operating base and the arranging of crewing, ground handling, maintenance, etc., all take time and may represent a significant outlay to a small carrier. Local bureaucratic procedures have also been cited by prospective carriers as an impediment to their tendering for a route. In the event of not winning the tender round, airlines may be faced with significant sunk costs. It is perhaps not surprising therefore that most PSO routes continue to be operated by locally based airlines.

Dublin routes in the Irish PSO tendering rounds 2002-2005 and 2005-2008

Tendering round 2002-2005 Tendering round 2005-2008

Previous operator Successful tender Operator Successful tender Current operator Loganair Loganair Loganair Loganair Loganair Donegal Aer Arann Euroceltic* Aer Arann Aer Arann Aer Arann Galway Aer Arann Aer Arann Aer Arann Aer Arann Aer Arann Kerry Aer Arann Aer Arann Aer Arann Aer Arann Aer Arann Knock Aer Arann Aer Arann Aer Arann Aer Arann Aer Arann Aer Arann Euroceltic* Aer Arann Aer Arann Aer Arann Sligo Source: Department of Transport (2003). (*Euroceltic ceased trading in winter 2002.)

Cranfield University: Quarterly Report Q2 2007 for DG TREN 22 The following charts show the number of PSO routes operated by each carrier. The first chart focuses on restricted access routes, where (22 routes) leads the field of 28 carriers.

Restricted access PSO routes by designated operator (May 2007)

22

20

18

16

s 14

12

10

Number of Route of Number 8

6

4

2

0 Alitalia Brit Air Brit Nextjet Hex'Air Airlinair Air OneAir Airlinair Twin Jet Twin Finist'Air Loganair Regional Åland Air Skyways Aer Arann Aer Aerocondor Sky Europe Sky Air Nordkalottflyg Cirrus Airlines Cirrus Nordic Regional Olympic Airlines Sata International Augsburg Airways

Air France/CCMAir Airlines 3.5 Types of aircraft used on EU PSOs There are large differences in the seating capacity of aircraft used on these routes. A large proportion of routes in France, Italy, Portugal and Spain operated by jet aircraft seating over 60 passengers, whilst in the UK most PSO services use turbo-prop or piston equipment with fewer than 20 seats. This in part reflects the volumes of traffic carried and the distances flown. Aside from the routes connecting France with its overseas territories, the longest PSO sectors link mainland Portugal with the Azores. Services are operated by SATA and TAP using a combination of Airbus 310 and Airbus 320 aircraft. The large hold capacity of the wide-bodied A310 is of particular importance for these services. The distances flown are over 1,400 kms with a flight time of two hours. Airbus 320 aircraft seating over 150 passengers are also normally used between Paris Orly and Ajaccio by Air France, but during summer traffic peaks the carrier regularly uses Boeing 747-400 equipment with over 400 seats available.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 23 Size of aircraft used on EU PSO routes

50 more than 60 seats

45 40<60 seats

40 20<40 seats 10<20 seats 35 < 10 seats

s 30

25

20 Number of Route of Number

15

10

5

0 France Italy Portugal Greece Spain Sweden UK Ireland Germany Finland

At the other end of the scale, the inter-island service linking Westray and in Orkney involves a distance of only two kms and a flight time of just two minutes. The route is flown by Loganair using twin-engined BN Islander aircraft equipped with nine seats.

EU PSO Routes by average length in kilometres (May 2007)

800

750

700

650

600

550

500

450

400

350

300

250

200

150

100

50

0 France Portugal Sweden Italy Germany Greece Finland Spain Ireland UK

Cranfield University: Quarterly Report Q2 2007 for DG TREN 24 3.6 Levels of subvention Where information is available, it is clear that subvention levels on PSO services have been on the rise, in some instances dramatically so. Ireland, for example, has seen annual subsidy levels on four of the country’s PSO routes between Dublin and Donegal, Galway, Kerry and Sligo rise from EUR4.2 million in 2000 to EUR14.4 million 2003. In the current tender round (2005-2008) the annual subvention level for all six Irish PSOs is set at EUR15.3 million. While the introduction of larger capacity, pressurised aircraft has contributed to an improvement in the level of service provided, it is not realistic to attribute the hugely increased amount of subvention solely to this. The amount of subsidy required per one-way journey varies widely between routes, in the case of these four Irish PSOs in 2003 from EUR53 on Dublin- Galway to EUR290 on Dublin-Knock. Some more recent data from Sweden also reflects the wide variation between PSO routes in the amount of subsidy provided for a one-way journey. In 2006, the subsidy per one-way trip between Stockholm and Gällivare amounted to EUR30, whilst between Pajala and Lulea the equivalent amount was EUR280 reflecting the much lower traffic volume on this route. Social assistance in some cases is handled by offering residents of peripheral regions assistance in the form of direct discounts on ticket prices, rather than directly subsidising airline operations. A scheme of this nature is in force for transport between the Madeira archipelago and mainland Portugal, and the Scottish Executive received approval in 2006 for the operation of a similar scheme in the Scottish Highlands and Islands.

3.7 Enforcement of PSO rules On 1 August 20063 the Commission initiated a formal investigation into the PSOs imposed by Italy on several routes between the mainland and Sardinia. The Commission has decided not to call into question the principle of PSOs on the routes examined, but it is authorising their application only if several conditions imposed by the decrees governing them are revoked or amended. In particular, the Commission has drawn attention to the following points: • the first stage of the PSOs must remain open to any operator which complies with them; • the period chosen to ensure continuity of services must be reasonable and should not exceed one year; • the authorities must not prevent air carriers from providing services on the routes concerned which go beyond minimum requirements; • the authorities cannot make air carriers' right to provide services on one route between two cities conditional upon the obligation to operate on another route between two cities; • the need to maintain PSOs on each route, and the extent of those obligations, should be reassessed at least once a year and each time a new carrier starts operating or notifies its intention to operate on that route.

3 http://ec.europa.eu/transport/air_portal/internal_market/pso_en.htm

Cranfield University: Quarterly Report Q2 2007 for DG TREN 25 The Commission decision applies directly to Italy, which must notify the measures taken in order to implement the decision by 1 August 2007 at the latest.

3.8 The Commission's proposal to revise the third aviation package In July 2006, the European Commission made a proposal for modernising and simplifying the legal framework for the internal air transport market. It consolidates the three existing regulations (2407/92, 2408/92 and 2409/92) of the "third package" into one and aims to ensure an even more effective aviation market in the future. The third package also covers PSO rules. The proposal recognizes the continuing need to impose PSO on routes which would not be adequately served if left to the market. The right to impose PSOs is preserved and the basic mechanism is left unchanged. But the proposal clarifies the rules with regard to PSOs: 1. The proposal reduces red tape (simplified publication). 2. The proposal improves the information of the Commission to monitor the correct application of the rules and to avoid abuses that would unnecessarily restrict access to certain markets. Member States must inform the Commission on the process and on the outcome of the call for tender procedure. Also in the context of an investigation, the Commission may ask an economic report justifying the PSO. 3. It emphasizes that PSOs must remain proportional to the economic development needs of the region concerned. Account must be taken of alternative transport modes, in particular rail services. 4. The present two-stage system is maintained: 1st stage: imposition of the PSO 2nd stage: if no carrier serves the route, it may be restricted to one single carrier selected by call for tender (compensated or not). The proposal increases the concession period from three to four years (five years for ultra-peripheral regions). 5. The proposal contains an emergency procedure: in case of sudden interruption of the services on a PSO route, another air carrier can quickly be selected for a maximum period of six months and respecting certain conditions of transparency and non-discrimination. The proposal is currently being discussed in the European Parliament and the Council.

Cranfield University: Quarterly Report Q2 2007 for DG TREN 26

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