WRITTEN QUESTION E-2962/01

by Erik Meijer (GUE/NGL) to the Commission

(25 October 2001)

Subject: Incorporating rising insurance premiums into air fares on a self-financing basis

1. Can the Commission confirm that, by comparison with other large modern businesses, the profit margins of airlines have been conspicuously low for very many years in spite of the fact that, unlike other transport services, aviation is in a position to benefit from tax exemptions based on long-standing international agreements?

2. Is low profit margin the key reason for the failure to establish sufficient hedging reserves, one consequence of this being that, at an earlier stage than in other businesses, aviation's response to financial setbacks is to plan workforce cuts and ask governments to subsidise or underwrite operating risks which are hard or very costly to insure?

3. Is the reason for low profit margin the fact that airlines are engaged in tough competition with each other in order to increase market share, in relation both to each other and to rail, buses and ferries, and that, as a result, fares have fallen much further than is considered economically wise?

4. How much more (amount and percentage) would the average passenger have to pay per flight in order to enable the airlines themselves to fund the expected increase in premiums for insurable risks?

5. On what scale (amount and percentage) would air fares as referred to in question 4 have to rise to enable adequate cover also to be provided for risks of extreme harm to third parties which are temporarily uninsurable for the time being?

6. What obstacles are there to setting air fares on a break-even basis, including by bringing them into line with the level of increased insurance premiums expected in 2002, so that the European Union or the Member States do not have to be saddled with higher costs or underwriting possible risks?

7. How does the Commission intend to remove any obstacles to break-even price rises in aviation, so as to prevent the preservation of national carriers in the Member States from costing the taxpayer more or Member States' budgetary scope from coming under further strain?

Answer given by Mrs de Palacio on behalf of the Commission

(19 December 2001)

1. In general, the profit margins of airlines have tended to be low in comparison with many other service industries, as is their return on capital, however, this is not universal throughout the industry. The low-cost carriers now expanding in Europe as a result of liberalisation achieve much higher margins than their traditional counterparts.

2. Many airlines were already planning to reduce costs and capacity progressively before the terrorist attacks of 11 September 2001. The additional drop in demand caused by the attacks has forced airlines to enact these measures more quickly than planned and to make further reductions. The intervention of governments in the insurance of air transport is limited solely to coverage of war and terrorist risks to third parties. The commercial insurance market is currently unable to provide full coverage with respect to these risks, as a result of the massive damages in the United States. Member States' governments are providing this cover until the market resumes, subject to compliance with state aid rules.

3. There is indeed considerable competition on many routes inside the Community leading to the offer of some very low fares. However, there is little correlation between the offer of low fares and financial weakness of air carriers. Low-fare carriers are among the most profitable in the industry and some of Europe's strongest carriers operate in the most competitive markets.

4. Airlines are taking account of the immediate increases in insurance costs for risks still covered by the commercial insurance market either by placing surcharges on tickets or by higher fares or by absorbing the cost. Once the commercial insurance market is functioning more normally, premiums may change and adjustments in fares may be needed.

5. For the third party war and terrorist risks that the commercial market is currently unable to cover, guidelines agreed at Community level require Member States to charge $ 0,85 per passenger for coverage up to the level typically purchased by airlines before 11 September 2001. These premiums are in addition to whatever premium is paid to private insurers for the rest of the airline's cover.

6. and 7. There are no obstacles to prevent airlines setting fares at whatever level they wish. There are no obstacles to airlines either raising or reducing their fares. The Commission will continue to ensure that the market in air transport functions properly and that state aid rules are observed by the Member States.