Duty free loss taxes airlines’ resources

Date: 18/03/1999

By Renée Cordes

IN JUST over 100 days, multimillionaire Richard Branson's preferred form of travel in Europe might well be a hot-air balloon.

From July, low-cost airlines such as Branson's seven-year-old Virgin Express could face higher landing fees at EU airports, as the latter seek to make up for lost revenues following the abolition of duty-free shopping within the Union.

The airline itself will also have to forego its cut of the average €2 spent by each passenger on tax-free liquor, cigarettes and perfumes bought during airborne shopping sprees.

Virgin Express, which reduces the risk of flying empty planes by having partnership agreements with Swiss/Belgian airline Sabena, will most likely have to recoup lost revenues by raising fares. The size of the increase would depend on the readiness of passengers on specific routes to pay more.

But even if the 6.7-billion-euro-a-year EU duty free industry gets a 30-month reprieve - an increasingly unlikely scenario following this week's meeting of finance ministers - the businesses which are most vulnerable will have no choice but to make up the shortfall somehow.

Airports claim that they will be forced to raise landing charges for planes. This has prompted predictions that airlines will seek to pass on the increase to passengers by raising ticket prices by an average €18 per seat for commercial flights and €30 for charters. Ferry companies claim that they would lose 94% of their retail sales revenue.

" Landing charges at airports have been kept low over the years thanks to duty free," says John Gallagher, a spokesman for Aer Rianta, the state-owned Irish company which runs Dublin, Shannon and Cork airports. "Obviously that is going to disappear. Something will have to give."

The British Airports Authority has already been authorised to raise landing fees by 15% from July.

Low-cost, no-frills airlines such as Ryanair, which operates out of Dublin and secondary airports close to Paris and Brussels, could suffer the greatest casualties.

The entire strategy of these airlines is founded on offering low fares on the basis of deals with airports (often subsidiary destinations close to major cities) which charge lower landing fees. Airports currently make up the difference with income from duty-free sales. One study estimates that the end of duty-free shopping will require an average increase in airport charges of €860 for a typical charter service and €370 for scheduled intra-EU flights.

Contingency plans vary. Ryanair insists that it will be able to remain competitive by cutting costs, while Spanish independent carrier Spanair says it would resist raising fares for its Scandinavian flights but increase prices on all other routes to spread the burden around.

Aer Rianta expects to lose €29 million a year, a hefty chunk of its €165-million annual revenues. It is now scrambling - seven years after the original decision to abolish duty free was taken - to assemble a €170-million war-chest to expand terminals at Dublin, Shannon and Cork, to attract more passengers.

" We are putting an optimistic face on it by saying we are expanding," says Gallagher. "But there is no way we are under any illusion that we are going to be able to recoup the losses."

The company has widened its activities to reduce its dependence on duty free by, for example, buying a 41% stake in Birmingham airport and 50% in Düsseldorf. Its stores will aim to sell more clothing and cosmetics to make up for reduced tobacco and liquor purchases, relying on the fact that passengers with time to kill before their flights take off are a captive market which can still produce lucrative profits in the post duty free era.

Even larger airports such as London's Heathrow and Frankfurt International, where much of the duty free revenue comes from passengers travelling to and from destinations outside the EU, will probably be forced to borrow more heavily to finance investment plans unless the income lost on intra-Union sales is replaced from another source.

" If an airport has not developed its duty free operations or has a non-EU international market, it will not be significantly affected," says Romano Pagliari, an aviation economist at Cranfield University, who has conducted an impact study into the loss of duty free. "On the other hand, some large and regional airports, particularly in the UK, will be badly affected."

Some duty free operators such as Belgium's Sky Shops, which operates stores at Brussels Zaventem Airport, say they plan to focus more on products such as confectionery and clothing.

A year ago, the company opened a shop at Zaventem selling toys based on cartoon characters. It also plans to run promotions such as last year's exhibition of French wines, to boost the airport's image.

However, Sky Shops' commercial manager Marc Leemans concedes that it will take several years before the company is able to reach a break-even point and another couple of years before it returns to profit. "We want to maintain our competitive position versus other airports, but we cannot recoup this loss of 30% within a year," he says.

Duty-free shops' suppliers are also having to think creatively. "As soon as the talks started over abolishing duty free, we began turning toward the eastern European countries," says Raul Spanger, a business manager for Gebrüder Heinemann, a Hamburg-based supplier and shop operator at Germany's major airports.

He adds that the company, which is currently active in Hungary and the former Soviet Union, is constantly on the lookout for new businesses in the East. "One has tried to become less dependent on duty free in the EU," he explains.