01 Feb 2011

(by Andreas Stephan) This month, the European Commission the proposed merger between Greece’s two main airlines, Olympic Air and Aegean Airlines. What seemed like an insignificant concentration between two minor players in international passenger air transport would have destroyed competition in the market for domestic flights in Greece. Olympic and Aegean make up around of flights out of Athens International Airport. While the decision is beneficial to European air passengers travelling within Greece in the near future, can two Greek airlines survive the economic downturn?

The European Commission only very rarely blocks a proposed merger. However, the concentration in the present case would have controlled around 90% of the Greek domestic air transport market and eliminated competition for around 4 million passengers flying internally from Athens each year on nine short haul routes. Air transport is particularly important in a country with some 227 inhabited islands, most of which rely very heavily on tourism. Olympic has more flights than Aegean, but would have been the junior partner in terms of international routes. Aegean joined the Star Alliance last year, connecting its international flights with services operated by airlines including Lufthansa and BMI. The present case has some similarities with the prohibition of the Aer Lingus and Ryanair merger in 2007. In both, a shared home airport and the unlikely prospect of new entry appears to have played a major role in the Commission’s decision.

The attempted merger followed a turbulent and complicated history of distortions to competition in the Greek passenger air transport market. It was only in 2008 that the European Commission forced Olympic Airways (Olympic Air’s publically owned predecessor) to repay the Greek government before it was privatised. This followed some 15 years of litigation between the Commission and various Greek governments over their generous treatment of the national carrier. Even beyond this, Greece had historically sought, secured and been the beneficiary of multiple derogations. The defiance which characterised this period (retaining chronic overstaffing and pumping endless public money into the loss making airline) typifies the public love affair with national carriers. Olympic Airways was a particular source of national pride, originally founded by the son of the shipping tycoon, Aristotle Onassis. Olympic Air was created in 2009 as a slimmed down private entity stripped of Olympic Airways’ debt (most of which will never be repaid).

The problem is that Olympic and Aegean are struggling to make money and are not large enough to effectively compete with the likes of KLM-Air France or Lufthansa. This was one of the behind the merger. They are also both subject to public service obligations, running routes which are not economically viable (the profitable routes are to larger islands such as Crete, Rhodes, Corfu and to Thessaloniki). As the Commission discovered, it is very unlikely that a new provider will enter the market for domestic flights. Most low cost airlines (notably easyJet) focus on transporting passengers directly to the islands from foreign airports (there are some nine routes from London Gatwick), while the likes of Ryanair have stayed away altogether because the Greek government has refused to open rival airports at the most popular Greek destinations. The difficulties arising from the geography of Greece also represent a considerable challenge to profitable operation, and are reflected in comparatively steep airport taxes and cost of refuelling. It can also be quite difficult for foreign firms to enter Greece without political backing or in partnership with a Greek firm. The owners of Olympic and Aegean (Marfin Investment Group and Vassilakis Group respectively) are exceptionally well connected politically.

Questions over the airlines’ long term viability, coupled with significant barriers to entering the domestic market, mean that competition may only endure if Olympic and Aegean are acquired by rival airline groups. If the public service obligations deter such acquisitions, we may yet see the two airlines merge on the basis of failing firm, or – worse still – we may return to the days of wasteful state aid.