Austria made waves in the European aviation market when it announced last month it would be implementing a price floor on all flights out of the country. The €40 minimum price instantly prevents low-cost airlines from running services at their usual cost. The government claimed it was an environmental move; opponents say its protectionism for the national flag carrier. Is it right, and will it stand up to scrutiny?
What happened in Austria?
In light of the coronavirus pandemic, airlines around Europe have been seeking financial assistance. Austrian Airlines was one such carrier. The Austrian state, in partnership with parent company Lufthansa, has injected €600m in rescue funding, in a mix of loans and capital.
The rescue package came with strings attached. Most of these were environmental, including short-haul flights moving to railways, CO2 emission cuts, and jet fuel efficiency improvements.
Simultaneously, Austria decided to hike taxes on short- and medium-haul services. The current €3.50 short-haul, €7.50 medium-haul, and €17.50 long-haul taxes are to be replaced with a flat rate of €12 for almost all flights. However, on flights shorter than 350km, this is to be hiked to €30.
This means that the higher tax rate will be applied to all flights from Vienna (VIE) to almost all destinations in Slovakia, Hungary, Slovenia, Czechia, and Croatia as well as parts of northern Italy and southern Germany.
Even on flights to other parts of Europe, African, India, and the Middle East, the increase in tax represents a 60% hike over the previous level. Conversely, long-haul flights, of which Austrian Airlines is the main provider out of Vienna, will enjoy taxation that has decreased by more than 30%.
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Why this is a problem for low-cost carriers
Low-cost airlines are the main competitor to Austrian Airlines at Vienna. Specifically, the Ryanair Group’s Lauda and Hungarian airline Wizz Air have led the charge of low-cost takeover from the Austrian hub.
Since 2015, the low-cost carrier share of passengers has increased from 5% to 24%, excluding Eurowings which, like Austrian, is a Lufthansa Group airline. Conversely, Austrian Airlines’ share of passengers dropped from 45.6% in 2015 to 43.2% in 2019.
The increase in tax on shorter routes hits these low-cost airlines hardest. All base their networks on point to point, short- to medium-haul services, and operate on the slimmest of margins, relying on ancillary revenue to make their ultra-cheap airfares work.
Taxation, in itself, is not a new problem. Several other nations have hiked airline taxes, under the guise of environmental concerns. Not least, the UK’s cripplingly high APD (air passenger duty) is something all Europe LCCs have to deal with. And deal with it they have.
Often, there are seats from UK airports to points in Europe that are selling at less than the £13 payable under the APD, or at just a few pounds above it. LCCs operating these flights rely on ancillary revenue (checked bags, priority boarding, etc.) to make up the difference.
This is where Austria really put the sting in the tail.
What is the price floor?
More controversial than the tax hike announced by Austria was the proposed implementation of a fare floor. In line with the new taxes, no seats will be allowed to be sold from Austria for less than €40.
This includes taxes and charges, so for some flights, it will be simply representative of what that airline would pay to Austria to operate the flight. However, it leaves no flexibility for airlines to set their own prices, or to ‘underprice’ certain services, as they do elsewhere in Europe, simply to stimulate demand.
The proposed price floor is a massive issue for LCCs. Across the Ryanair network, its average fare per passenger in 2019 was €37. For Wizz, it was €38. Of course, the average revenue per passenger was much higher than this, thanks to those juicy ancillaries, but that’s not the point.
Both Ryanair and Wizz are known to price dump on routes to stimulate demand. This means they would sell some seats at far below their average price, encouraging passengers to fill up their planes. Now, the least they could charge with the price floor in place would already exceed their average fare, leaving no room for maneuver at all.
What’s happening now?
Austria maintains it is implementing the tax and the price floor to prevent airlines selling tickets at less than the real cost of operating the flight. It says this is to discourage people from taking short flights when other modes of transport are available.
While an ecological motivation will gain the support of the left-leaning public, is that really all that’s going on here? Austrian Airlines is the only carrier to benefit from this new policy, as long-haul flights, which it specializes in, will be taxed 30% less. Already, as a condition of its bailout, Austrian has had to agree to drop some short-haul routes, so would remain unaffected by the price floor and tax hike.
It begins to sound like protectionism at best, distortion of competition at worst. And, as you can imagine, low-cost carriers are not happy. When Ryanair released its flight schedule from Vienna last month, CEO Michael O’Leary said,
“Our Vienna base will serve 64 routes, with air fares starting from just €9.99 one way before some crazy Austrian Minister tries to force Austrian consumers and visitors to pay higher €40 air fares!!! Ryanair will provide non-State Subsidised competition and choice to the high fare Austrian Airlines (which is a subsidiary of the German subsidy junkie Lufthansa Group).”
Indeed, Austria could well be on the radar for Ryanair’s court action, along with parent Lufthansa which recently gained approval for a massive €9 billion bailout. But is he right? Is the price floor wrong?
The argument for the Austrian price floor
At a recent AviaDev Europe webinar, a colorful discussion was held regarding the legitimacy of the actions of Austria. While it’s natural for a nation to want to protect its flag carrier, this type of price-fixing sets an uncomfortable precedent, and one which hasn’t been seen in quite this way before. You can enjoy the debate for yourself here:
Of course, the sustainability argument plays out quite well. During the webinar, founder of Low Season Traveler, Ged Brown, demonstrated that, even now, Ryanair flights were operating at ridiculously low prices. He challenged this, noting that other modes of transport were significantly higher priced.
One fare level he pulled out was for a trip of roughly 2,000 km from the UK. By air, the cheapest tickets were £20 for a round trip. By coach, it was £180 and by train, £252. Considering air travel is far quicker than other methods, shouldn’t we pay more for it. Ged said,
“Should we expect to fly 2,000 km for less than the price of a pizza? Does this feel right to you?”
Environmentally, no, it certainly doesn’t. Over the past few decades, the cost of flying has got lower and lower, as airlines compete themselves to death to be the cheapest option. Now, even the mainline carriers have ‘basic’ fares, where passengers are expected to pay for every little thing that used to come for free.
This has come at a cost to the environment, and one which we’re yet to really get a hold of. If higher tickets on short-haul flights make us rethink our plans, that has to be a good thing, right?
The argument against
The issue against this price floor is complex. For one, Austria has made no commitment to doing anything environmental with the extra money it collects from short-haul passengers. If this were being plowed into sustainable aviation fuel development, R&D for aircraft of the future, heck, even into better rail connections, it would be valid. However, it’s not, and likely won’t be.
The other issue is that it is a locally applied policy for Austria only. If Europe put its collective heads together and came up with a price floor/tax level for the whole continent, it would make sense. But by applying it unilaterally to Austrian departures only, it’s risking forcing passengers to drive across the border and catch cheaper flights from one of Austria’s neighboring countries.
What it is doing is forcing Ryanair and Wizz (and other LCCs) to either raise prices or to operate at a loss. Simultaneously, it’s protecting its own flag carrier, Austrian Airlines, from any additional costs. CAPA described it as “barely disguised protectionism,” and we have to agree.
The legal standing
Of course, the price floor likely won’t pass without some serious scrutiny. It could be that Ryanair or perhaps another airline group could look to take legal action to block this proposed policy. But is it legal? Would they have a case?
It was interesting to hear from Jeremy Robinson, a partner at Watson Farley & Williams and a specialist in EU and Competition Law, during the webinar. He noted just how difficult it is to predict which way a legal challenge to Austria’s policy would go. It’s unprecedented, and as with all unprecedented things, this case will undoubtedly serve as a learning platform for aviation going forwards.
At this point, Jeremy says, Austria is not breaking competition law. Under EU rules of competition, competing businesses would have to be involved in setting the price floor, thereby distorting competition. Providing Austria doesn’t hand the issue to a group of airlines to decide the level of the price floor, they are acting legally. However, there could be another rule that the state is breaking. Jeremy explained,
“Austria’s announced price floor could face legal challenge, not necessarily in competition law, where the state could devise a measure that avoids creating a situation where it encourages or endorses competing airlines to fix prices to get to the price-floor, but instead under Regulation 1008/2008 provisions on pricing freedom.”
The regulation mentioned by Jeremy is contained within Article 22 of the Regulation 1008/2008. In it, it is stated,
- Without prejudice to Article 16(1), Community air carriers and, on the basis of reciprocity, air carriers of third countries shall freely set air fares and air rates for intra-Community air services.
Clearly, the proposal by Austria is in breach of this regulation, at least to some extent. Whether that is enough to prevent it going ahead remains to be seen.
Will the price floor go ahead?
Right now, there is no guarantee that the price floor will be implemented as planned, or that it will be scrapped. Jeremy Robinson noted that perhaps there was a middle ground that Austria was yet to explore. He said,
“The policy question is whether Austria needs to go down this path to achieve its desired environmental benefit, or could a less distortionary approach be devised?”
There is no playing down the environmental issue. It needs to be dealt with. However, there may be a less heavy-handed approach that would work just as well, without crippling the low-cost market.
What do you think about Austria’s price floor? Is it what we need to fix the environmental problem, or is it indeed protectionism gone wrong? Let us know your thoughts, as always, in the comments.