Clouds darken EU’s open skies

Date: 26/09/1996

By Chris Johnstone

LUFTHANSA blazed a trail for European airline liberalisation with a New Year present to passengers in January 1994 - a string of cut-price fares between major European cities during the traditionally slack mid-winter season.

Lufthansa's initiative took rivals by surprise, but they soon hit back with their own price cuts, taking advantage of the new-found freedom to set their own fares in Europe without heavy-handed government interference.

The European Commission could not have been happier that liberalisation had started with such a consumer-friendly bang.

But almost three years later, as the EU approaches the April 1997 deadline for the last liberalisation measures to come into force, Union officials and the airline industry are already warning that it will end with a whimper.

Their downbeat message is that travellers should not expect an overnight revolution when Europe's airlines acquire the right to invade each other's domestic markets next April.

Hitherto, even those airlines which have taken up the little-used opportunity provided by existing liberalisation measures to fly within other national markets have only been able to offer half their seats to local passengers.

Few industry experts expect foreign airlines to rush into new markets from 1 April next year. Part of the problem - or success - of the Commission's step-by-step approach to liberalisation is that national governments have already anticipated the last wave of European airline liberalisation by kick-starting reforms of their own domestic markets.

Former monopoly routes for national flag-carriers, such as Paris-Nice or Rome-Milan, have been opened up to domestic newcomers in the last three years in a bid by governments to ensure they have competitive national carriers by 1997.

In France, AOM, Air France Europe (formerly Air Inter) and TAT are involved in cut-throat competition on the busiest domestic routes between Paris and Nice, Toulouse, and Marseilles. Alitalia is now fighting off brash newcomer Air One on its most crowded route between Rome and Milan, and this pattern has been repeated in Spain, Greece, and Portugal.

“It is difficult to think of any domestic market in Europe that has not been opened up to competition in the last few years,” says David Henderson of the Association of European Airlines (AEA).

The new competition has cut fares and profits on what used to be some of the monopolists' main money-spinning routes.

Blame for Air France Europe's slip into the red, becoming a case for total restructuring, has been pinned on the loss of leadership in its key domestic routes.

The result across Europe is that national markets and routes no longer have the same appeal to outsiders.

“Madrid-Barcelona would have been very attractive to non-Spanish carriers before it opened up. That is not the case any more,” says Henderson.

Airlines need strong incentives to start new operations from scratch on foreign soil. There are cultural problems; recruiting local staff and making a market impact where local airlines are already entrenched is not easy; the cost burden of setting up an offshoot operation is heavy; and the question of how new airlines can

win landing and take-off slots at congested airports remains largely unanswered.

British Airways' experience on mainland Europe is illuminating.

BA helped create a new German domestic airline, Deutsche BA, together with a group of German banks, and bought a minority stake in French carrier TAT after taking advantage of the first wave of EU airline liberalisation.

Two years later, neither of BA's units has yet posted a profit. TAT has been forced to draw back from what was arguably an over-rapid expansion of routes, while Deutsche BA is showing considerable caution about opening fresh routes.

But although taking advantage of full liberalisation might not be as easy as it may appear on paper, travellers can look forward to an era of lower air fares, according to the AEA.

Ticket prices have undoubtedly fallen in the last five years as firms have slashed prices to fill seats in a sluggish market and, although the bad days appear to be behind them, the AEA predicts airlines will continue to cut the real cost of flying in the next few years.

In its latest research survey, the association estimates that European airline yields, effectively the profits they make per passenger seat, will fall by 2.3&percent; a year over the next five years. Real yield fell 2.7&percent; per year in the five years to 1995, with yields 30&percent; lower in 1995 than in 1985.

Away from the bottom line, the AEA is vaguer about putting figures on how much less European travellers are paying in the maze of business, economy, APEX, weekend, and package fares.

The European market is still fragmented, says Henderson, and a new offer could push prices down for a few weeks, only for them to rebound afterwards.

A survey by American Express in July this year also showed that different price trends were emerging across Europe. It found year-on-year price increases of between 5&percent; and 10&percent; across market segments in Greece and Spain, but falls of between 8&percent; and 11&percent; in excursion class fares in France and Switzerland.

American Express, which manages travel budgets for large companies, concluded that the Greeks and Spanish were hiking up fares in a bid to return to profit, while France was affected by increased domestic competition and Switzerland by tougher European competition.

The AEA points to talk of fresh job cuts by BA and similar plans already announced by Lufthansa - an indication that two of Europe's most aggressive companies are not standing still - to support its prediction that ticket prices will continue to fall.

“Cuts will eventually find their way to ticket prices,” says Henderson.

Europe's less efficient, laggard carriers will clearly have to follow the leaders.

But how much room remains for further reductions is less clear.

Europe's air fares still appear inflated compared with those in the US. A 500-mile economy trip within the US averages out at 234 ecu, while its European equivalent costs 334 ecu, according to American Express.

European airlines point to higher air traffic control and airport charges and the shorter length of most flights as part of the explanation for the difference.

The AEA says airlines cut their overheads in the dark years before 1995 and now face a higher proportion of costs that are outside their control.

Nevertheless, airlines are already switching to direct marketing using networks such as the Internet in a move which could slash their heavy marketing and ticketing costs.

Direct selling is part of Richard Branson's cut-price formula for his growing no-frills airline Virgin Express and scheduled carriers such as British Midland and Lufthansa are also increasing their direct sale of tickets to cut out the travel agent's commission.