The days of open skies are dawning

Date: 20/03/1997

By Bruce Barnard

THERE will not be anything special about the planes, timetables, check-in procedures or in-flight food to alert European airline passengers travelling on 1 April that they are flying into a new era.

And yet the official launch of the EU's long-awaited 'open skies' regime could, in time, transform flying habits in Europe as much as former US President Jimmy Carter's airline deregulation in 1978 altered the face of the American industry.

Nothing much will actually change on 1 April, because there has been a long lead in to deregulation, allowing the industry to adjust to the break up of the cartels which have clouded Europe's skies since the industry was born in the 1930s.

But the simple fact that, from that date onwards, an EU-registered airline can fly anywhere within the 15-nation bloc is sure to have a catalytic impact on the industry which will eventually benefit the consumer.

The run-up to open skies has been marked by waves of desperate cost-cutting programmes among the bigger airlines and a scramble by upstart newcomers to launch scheduled services.

The bottom line is that the big carriers can no longer rig the market and that the cost structures built up during their monopoly rule are no longer tenable in the dawning era of full competition.

Moreover, while the EU has been criticised for waving through massive state subsidies to inefficient flag-carriers, it is unlikely Air France, Iberia and others will return for more hand-outs.

It is not just that the Union will block a new round of subsidies, but also that governments are no longer willing to treat airlines as a special sector.

A few years ago, European airline executives looked on in disbelief when PanAm, the most famous name in US aviation, was allowed to go bust. Now they take it for granted that the same thing could happen on this side of the Atlantic.

So is it open season for newcomers to drive the big carriers off intra-European routes? Not quite.

The established airlines are slashing their costs, dropping unprofitable services and have sufficient reserves to sit out a war of attrition. Moreover, the EU's failure to dismantle the quasi-monopoly power of the airports has severely restricted the ability of new airlines to get suitable landing and take-off slots. Slots, not planes, are an airline's most important asset.

Nevertheless, the newcomers are finding ways of taking on the old-timers. No-frills carriers operating second-hand jets flying to cheap but convenient second-tier airports are slowly making inroads into the European business and leisure markets.

While the established carriers batten down the hatches, the no-frills carriers are moving into the new era in buoyant mood.

EasyJet, a British-based airline, is offering 50,000 return tickets to Amsterdam, Nice and Barcelona for only 41 ecu. Ryanair, an Irish carrier, is charging the same for flights between Britain and Ireland to readers of the mass circulation British tabloid newspaper The Sun.

These airlines are also a hit with the business market because they do not insist on a Saturday night stay-over to qualify for their cheapest tickets. A survey for the travel agency chain Carlson Wagonlit in February showed 81&percent; of business travellers in the UK were prepared to use no-frills airlines for short-haul flights.

Lufthansa is facing tough competition on its home turf, where fares are 20&percent; above the EU average, from companies such as Eurowings and Deutsche BA, British Airways' well-financed German subsidiary.

The German public is also waking up to competition, forcing the authorities to act. In January, Lufthansa was accused by Germany's federal cartel office of overcharging passengers on the busy Frankfurt-Berlin route where it enjoys a near monopoly.

Despite the growing competition, Lufthansa commands 80&percent; of the German market and is set to slash fares to protect its share.

“We will not make any money, but no one else will either,” said Rolf-Dieter Grass, of Lufthansa's investor relations divisions.

It will be a bitter battle. Deutsche BA is buying more planes. Debonair, a no-frills British-based carrier, plans to add more. And Richard Branson's Virgin Express is reported to be on the verge of entering the market, building upon its successful fare-cutting experience on operations out of Brussels airport.

The big carriers are divided about how to respond to open skies. British Airways, a low-cost carrier by European standards, is bullish about deregulation and plans to build up a stand-alone European operation. But so far its German and French subsidiaries, Deutsche BA and TAT, have lost around 140 million ecu and industry watchers forecast a long haul to profitability.

Lufthansa, whose costs are 20&percent; higher than those of BA, is not interested in offering services inside other Union member states, not least because it is losing money on its intra-German routes.

Air France's attempt to buy into another EU market backfired when it was forced to sell its stake in Sabena to Swissair. Far from breaking into foreign markets, Air France is engaged in a fierce rearguard action to protect its home turf from domestic and foreign interlopers.

Alitalia too has been buffeted by a string of feisty rivals on money-spinning domestic routes such as Rome-Milan, and on key European services such as Rome-London. Meanwhile, Iberia is fast becoming just another carrier on the Barcelona-Madrid run - the busiest route in Europe.

In time, the smaller carriers could drive their bigger rivals off secondary routes within Europe.

The established airlines cannot adjust their bloated cost structures to make money in Europe and most are pinning their hopes on long-haul operations. This will leave gaps for new entrants to move in to, particularly as airport groundhandling monopolies begin to crumble toward the end of the decade.

The big carriers are, in fact, helping their fledgling rivals by franchising their names, a strategy pioneered by BA which has spread to continental Europe. The aim is to get low-cost airlines to feed passengers into the hubs of the established carriers, a strategy that is well developed in the US.

The pilots of the established carriers are fighting these moves, which they fear will inevitably create spin-off airlines paying lower salaries, as in the US. Lufthansa chairman Jürgen Weber angered his pilots by comparing franchise airlines to McDonalds, synonymous to German unions with low wages and flexible work contracts.

But what is bad news for highly paid pilots is good news for European travellers, because the end result will be cheaper and more flexible flights.