French Government bans national internal flights with minimal financial impact

DRBS Morningstar has published it's report on the recent ban on internal national flights where the equivalent journey can be achieved by train in less than 2.5 hours.

Read the report below:

Limited Financial Impact on Group ADP, Air France, and SNCF SA Expected in the Wake of France’s Ban on Three Domestic Flights

On May 23, 2023, the ban on short-haul direct flights between Paris-Orly airport and the cities of Nantes, Bordeaux, and Lyon was signed into law by the French government after it had been approved by the European Commission in December 2022. The new law prohibits these direct flights because they can be replaced by a train journey of less than 2.5 hours, there is sufficient rail capacity to accommodate the additional passengers, and there is an adequate frequency of trains during early mornings and late evenings. However, the new law does not ban any connecting flights.

In the short term, we believe it is unlikely the new law will have a meaningful financial impact on
Groupe ADP, which manages and operates more than 20 airports globally, including the Paris-Orly
airport, given that the mainland France segment represented less than 15% of total passenger traffic in 2022. We also note that the slots that have become available with the ban on these flights will potentially be taken up by other airlines (including Air France) for other destinations that are not affected by the new law, given that Paris-Orly is one of two international airports in Paris and is a hub for Air France. Furthermore, in 2020, it was reported that Air France stopped offering short-haul direct flights between Paris-Orly airport and the cities of Nantes, Bordeaux, and Lyon as one of the conditions in exchange for receiving EUR 7 billion of liquidity support from the government during the pandemic. Therefore, the new law isn't expected to have a material impact on Air France.

As European policymakers race against time to introduce policies to reduce greenhouse gas (GHG)
emissions by 55% from 1990 levels by 2030, further changes will be required. We note that new policies may have the potential to change the fundamental outlook of a specific transportation industry, such as the airline sector, that has traditionally benefitted from the favourable economics of the fossil fuel market. Therefore, in the wake of climate change, these industries will need to adapt to the evolving regulatory landscape or risk losing their competitiveness to alternative means of travel that are considered more climate friendly.

Is High Speed Rail a Viable Alternative to Short-Haul Domestic Flights?
France has a large and well established network of high-speed rail lines that connect cities across the country and with other cities in Europe. If the new law is progressively extended to other flight routes, then this could benefit the state-owned passenger and freight logistics group, Société Nationale SNCF SA (SNCF SA), in the medium to long term. At this stage, however, we believe the ban on the three flight routes is likely to have only a limited financial impact on SNCF SA’s turnover. France’s intercity highspeed rail service is primarily operated by SNCF Voyageurs SA, the train operating company of SNCF SA.

In February 2023, the French government announced that, by 2040, it will invest EUR 100 billion to expand and upgrade the rail network in France. The massive investment will also require funding from the EU, SNCF SA, and sub-sovereign governments. According to public information, the French government will spend EUR 1.5 billion annually for the next five years to renovate and modernize the existing lines in order to increase capacity, achieve shorter journey times, and improve reliability. The government is also planning to launch express commuter rail networks, similar to the rapid regional express (RER) system in Paris, in major metropolitan areas; a draft law is currently under discussion at the French National Assembly.

Despite the plans to modernize the existing railway network in the next five years, we believe it is unlikely that train journey times can be reduced significantly enough to compete with flight journey times without further technological advancements in the rolling stock and its related infrastructure.

Nevertheless, we believe certain flight routes may be more at risk of being replaced by high-speed rail. There are a number of studies on the competition between air and rail travel with diverse views of the substitutability of the two forms of transportation. Travel time saving, journey distance, and cost of travel will all clearly play a critical part in a traveller’s decision-making process when choosing between an airplane and a train. Convenience and reliability are other important factors to be considered as well, alongside potentially growing environmental considerations from customers.

At this time, we believe that short-haul, direct flights are likely to face stiff competition from existing high-speed train journeys that can provide similar benefits to travellers (assuming there is sufficient rail capacity to take on more passengers). Therefore, it is likely that flight routes between major cities could be negatively affected by future policy changes.

However, short-haul connecting flights (feeding to or from global destinations) may be more challenging for high-speed rail to replace at this time, in the absence of a seamless intermodal integration, which could cause considerable inconvenience to international air travellers who have to switch transportation modes in order to arrive at their final destinations.

Furthermore, the challenges associated with high-speed rail infrastructure cannot be overlooked and the duration to project completion may be decades. By that time, the widespread adoption of sustainable aviation fuel and other technological advancements, such as hydrogen combustion technology and electric airplanes, may already be making a positive impact in reducing GHG emissions.

Will Other Countries Follow Suit?
We believe countries that have committed to reduce their GHG emissions are considering a number of policies to achieve their GHG emission targets. These may include, but are not limited to, introducing additional taxes on air fares on certain flight routes, capping the number of aircraft movements at airports, banning certain flight routes, etc. Ultimately, the goal is to disincentivize or discourage air travel and reduce the sector's carbon footprint. However, we believe there are also legal hurdles that countries may need to navigate and the complexity of such may vary considerably globally. For example, members of the EU must comply with the EU's competition law and freedom of movement and other relevant EU laws and processes. Otherwise, any decisions to restrict air travel may result in a legal battle (e.g., in April 2023, the court ruled against the Dutch government's attempt to cap the number of flights at Amsterdam's Schiphol airport) that may result in no change at all.