UK: Distance, demand and de-regulation - airline fares.

UK: Distance, demand and de-regulation - airline fares. - What immediately springs out when you look at the world price-per mile map is that mile for mile it is a lot more expensive travelling in Europe than it is to the rest of the world, be it to Austr

by Malcolm Brown.
Last Updated: 31 Aug 2010

What immediately springs out when you look at the world price-per mile map is that mile for mile it is a lot more expensive travelling in Europe than it is to the rest of the world, be it to Australia, Africa or the Far East. One of the reasons for this is the so-called "taper effect."

In simple terms, airlines incur enormous fixed costs before they have even flown a mile: station costs, ground handling costs, maintenance costs and of course, once the flight has been made, landing fees. Those heavy costs are there whether you fly 100 miles or 10,000 miles. So obviously unit costs decline with distance as the heavy initial fixed costs are spread over more miles.

The map is based on business class fares. By and large the regulatory authorities like Britain's Civil Aviation Authority (CAA) do not concern themselves with business class fares. The CAA's remit is to ensure that all passengers on international scheduled services have access to a "basic fare" - namely a fare for basic point-to-point travel, which offers appropriate in-flight facilities and reasonable freedom to change reservations. The fare, normally a fully-flexible economy class fare, should be closely related to the cost of providing it.

Where there is such a fare the authority will not worry about business class fares. So on the London-Paris or London-Amsterdam routes, for example, there would be no intervention.

The CAA does, however, intervene on business class fares where there is no unrestricted basic fare. So, for example, on routes like London-Madrid or London-Milan, where the cheaper economy fares have restrictions attached, the CAA does examine the business class fare. The records show that on certain of those medium-length routes (London-Milan, London-Madrid, London-Copenhagen) the authority has quite frequently intervened to disallow new fares because of divergence of price from costs.

Since November 1990 there has been a new EEC regulation which may well operate against the interest of passengers. The scheme is known as "double disapproval". What it means, in essence, is that disapproval of a fare can only become effective if the government at the other end of the route also disapproves it. If it does not then the new fare can go ahead unimpeded. Thus if the UK disapproves a new fare that disapproval will only bite if, say, the Germans or the French or the Greek governments also turn it down. In fact since the new regulation was introduced there have been quite a number of fare increases which the CAA would like to have stamped on but has been unable to because the other countries did not disapprove. This has happened, for instance, on routes like London-Athens, London-Madrid, London-Copenhagen.

Competition can keep fares very low. The classic example is London-Sydney. The reason fares are so low there is the large number of airlines flying the route. On many routes there are often only two carriers, the flag-carriers from the countries where the flight starts and ends. But on runs like London-Sydney there are many so-called "sixth freedom" carriers. The phrase "sixth freedom" refers to passengers carried between two countries by an airline of a third country, via its home base. So in addition to the two flag-carriers on the London-Sydney run, BA and Qantas, there are more than a dozen other airlines, like, for example, Malaysia Airlines, flying the route. The intense competition keeps fares down.

One route which might puzzle the business class-traveller is London-New York. The newspapers are full of stories about cut price fares to New York, but the price of a business class ticket over the Atlantic never seems to move (except upwards) even when, as happened last year, the recession really bites. The explanation is that there are two types of passenger on transatlantic flights. The economy class passengers at the back tend to be discretionary fliers. They will fly if the price is right, but stay at home or go elsewhere if it is not. So price-cutting encourages many more of them to fly. Business travellers fly because their business dictates that they should. They are an inelastic market. Their flight is not a function of the ticket price - on if the price is lower, off if it is higher - and they appear quite willing to pay premium rates to ensure the much greater comfort and higher service at the front of the plane. Dropping fares doesn't bring in new passengers. If airline A dropped its business class fare, competing airline B would do the same. Since there is no increase in the size of overall demand, the only result would be lower revenues all round.

One question which intrigues travellers is what would happen if European airline travel was de-regulated as it has been in America. The experts suggest a disappointing answer. The present, oligopolistic situation would probably just become more entrenched. The existing carriers would fight like mad to keep the newcomers out and, if they got in, to eliminate them. Once they were eliminated, the old airlines would still be there but with no one to regulate them would probably raise fares even higher.

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