Subsidies And Winter Flights To Mallorca

The wailing and gnashing of teeth regarding flights between the UK and Mallorca in winter is understandable, as are also understandable the beliefs and thoughts that demand exists to make more flights viable. However, believing and thinking do not make a business case.

One aspect of the airline industry that has flown under the radar in all this discussion is not unimportant. A few days ago, the Spanish National Competition Commission (NCC) issued a report in which it complained that there was a "competitive distortion" in respect of airports in Spain. What it was specifically referring to was the varying levels of subsidies granted by regional governments to airlines.

In the past five years, the Balearics have issued subsidies to the tune of just under six million euros. This may sound a lot, but it isn't when you consider that Castille-León gave 84 million or that Aragón stumped up 34 million. Of the Balearics' six million, just slightly more than two million was allocated to routes into and out of Palma's Son Sant Joan airport.

Finding out what subsidies go to which airlines from which regions or which airports would be almost impossible, but where subsidies have been used, they have favoured the low-cost airlines. Ryanair, for example, has been known to extract enormous reductions on landing charges, paying way less every year than competitors.

Ryanair sparked off a row with Thomas Cook last year over what the tour and charter operator claimed were unfair subsidies for the airline to fly to the Canaries. These were subsidies, lobbied for by the Canaries Government, approved by national government and channelled through AENA, the airports authority. The scheme - discounts on airport charges - has helped off-peak travel, with the island of Fuerteventura having returned to the Ryanair winter schedule.

Thomas Cook may have had a point in being miffed by the scheme, but Ryanair comes in for all manner of criticism, and, subsidies or no subsidies, there are plenty of airports and plenty of passengers who would suffer without them, including those to Palma. If subsidies there are, then so be it.

The problem lies, as the NCC emphasises, with their unevenness and potential to distort competition. The point is that where subsidies are that significant, they can divert capacity from other routes, even ones which may have greater demand but which, because of the lack of subsidy and/or high landing fees etc., can prove to be less profitable.

Given the amount spent by the Balearics on subsidies, by comparison with some other parts of Spain (and in other countries), one would have to conclude that this may just have some bearing on off-peak flight scheduling.

The growth of traffic into Palma over the past few years has been hugely reliant on low-cost airlines, with UK passengers being arguably the greatest beneficiaries, but this low-cost market has itself created a distortion; it is one based on an expectation of cheap flights, the sustainability of which is now open to question. Douglas McWilliams at the ABTA convention argued that the day of the super cheap flight is all but over; even Michael O'Leary has questioned the future of low cost, though with O'Leary you can never be quite sure.

To maintain low cost requires all the right constituents to be in place, and one of them can be the subsidy. Offer a carrier alternative routes which may turn out to be more profitable even if they have lower demand, then it will take them.

Competitor airlines have been critical of subsidies, especially those that Ryanair receives. Spanair is one, and it has closed its Palma base. Air Berlin is another. Yet the Air Berlin case is significant. Though it is reducing capacity this winter, it was flying daily from several German airports last winter, and its flights were generally well booked, if not full. But the cost of an Air Berlin flight is typically substantially higher than that which you would expect of a UK carrier.

Should we conclude, therefore, that price has caused its own market distortion? It has created an expectation as to what it should cost to fly to and from Mallorca, certainly amongst the British. A carrier such as BA can't compete with such an expectation. Though it would be wrong to suggest that subsidies are all that counts, they are not unimportant, especially for low-cost airlines.

Just under six million euros. Here may be part of the answer, because, and I quote from the "AirObserver Blog", "subsidies are such a lucrative business ... (that they are) the sole reason routes exist".


Any comments to andrew@thealcudiaguide.com please.