Open skies bring hope of lower fares

Date: 31/10/1996

By Michael Mann

BY APRIL next year, the radical transformation of Europe's skies which began a decade ago will - in theory at least - be complete.

While still a far cry from the 'big bang' sparked in the US by President Jimmy Carter in 1978, the number of new operators in the EU market today is testimony to the effectiveness of the changes introduced so far.

But there will be no overnight revolution when Europe's airlines win the right to invade each other's domestic markets in April, and shortcomings in the liberalisation of ground-based services will continue to hold up progress.

Aware of the challenges they will face in six months' time, most governments have kick-started reforms of their own markets to improve competitiveness, opening up routes which were formerly the sole preserve of national flag-carriers to domestic newcomers.

In France, competition is mounting between AOM, Air France Europe and TAT. In Italy, Alitalia is fighting off Air One on its Rome-Milan route. Similar developments are under way in Spain, Portugal and Greece.

Given the costs of setting up a new business from scratch, however, airlines will need strong incentives to launch new operations on foreign soil.

British Airways took the plunge in 1984 by setting up a new German domestic airline, Deutsche BA, together with a group of German banks; and took a minority stake in French carrier TAT. Two years on, both are yet to post a profit.

There is no doubt that air fares have come down over the last five years as airlines have slashed prices to fill seats in a sluggish market.

The Association of European Airlines (AEA) predicts that airlines will continue to reduce the real cost of flying in the coming years, pointing to proposed job cuts in several leading companies.

Perhaps surprisingly, traditional players in the airline industry appear to welcome attempts by small airlines to enter niche markets, believing this will actually encourage more people to use airlines than ever before, with gains all round.

But while the drop in air fares has undoubtedly been good news for holidaymakers and business executives travelling around the EU's single market, further price reductions still seem unlikely to bring fares anywhere near US levels for the foreseeable future.

European airlines point to higher air traffic control and airport charges and shorter flights as part of the explanation. Despite concerted efforts to reduce overheads, they face several costs which are entirely outside their control.

Even if aeroplanes are less restricted while they are in the air, progress towards liberalisation on the ground is a far cry from many people's hopes and expectations.

The recently finalised deal to liberalise groundhandling was the result of months of intense lobbying and heavy political pressure. Although its foresees the phasing out of airports' monopolies on baggage handling, catering and refuelling operations, the changes will be gradual, include significant exemptions and will not necessarily bring a large number of new companies into the arena.

Germany and France fought particularly hard to win concessions on the cut-off date for ending control of airport services by monopolies and duopolies.

France was concerned about changing the system at Orly airport, where two operators share the work, while Germany was worried about Frankfurt, where the airport authority runs all services.

Despite the deal's short-comings, officials representing Transport Commissioner Neil Kinnock are satisfied with what has been achieved. “It took ten years to liberalise Europe's airspace and it will only take seven to free up groundhandling, so we are happy with the progress made,” said one.

The Commission faces similar headaches deciding how to improve the system for allocating landing and take-off slots to new entrants. Plans being drawn up by officials would leave the current twice-yearly share-out intact, while legalising the 'grey' secondary market for airlines wishing to sell the slots they already have.