UK: BUSINESS TRAVEL - FLIGHTS, FERRIES AND THE FAIRER SEX. - The official deregulation of the European skies is proving hard to put into practice. In the first of four articles, competitive pricing, landing slots and new routes are analysed by Malcolm Br

Last Updated: 31 Aug 2010

The official deregulation of the European skies is proving hard to put into practice. In the first of four articles, competitive pricing, landing slots and new routes are analysed by Malcolm Brown.

The good news is that the skies over Europe were deregulated on 1 January and some fares are coming down. The bad news is: not many. European business class fares are mile-for-mile still among the highest in the world and most are likely to remain so for some time yet.

British Midland Airways (BM), which has been campaigning for years for more competition in European air transport, is doing its best to shake the system up. On 28 March it introduced separate business class cabins on all its European services at a range of fares the highest of which was no more than the normal economy class fare charged by its competitors. That may eventually have an impact on competitors' fare structures on the routes concerned (Heathrow to Paris, Dublin, Frankfurt, Amsterdam and Brussels), but elsewhere little is likely to change.

'Where companies like British Midland are actually able to find slots at major airports and get up and running on the routes, fares will come down as will the fares of those with whom we're competing,' says Sir Michael Bishop, chairman of BM, 'but there is no great motivation to actually follow our lead and bring their own fares down unless they get direct competition.' European business fares have always been high - they subsidise the low cost tourist fares at the back of the aircraft - and the way air routes have been organised has tended to reinforce rather than challenge that situation. Of the 15 busiest cross-border air routes, 9 are still served by just two national airlines, the respective flag carriers of each country, and most of those airlines are wholly or partly owned by the state. British Airways is the only one that is 100% privately owned (see How State Aid Boosts the Flagging Airlines, p38).

In what has been, in effect, a series of classic duopolies there has been no internal motive for altering anything, least of all fares. Change, when and if it comes, will almost certainly have to involve the introduction of third parties such as BM on duopolistic routes. The key to change should be the European Community's so-called 'Third Package' of air traffic regulation which came into effect on 1 January. This contains three main elements.

First, all intra-European routes have been opened up to competition. Any European airline will be able to fly on any cross-border route. Second, so-called partial or consecutive 'cabotage' is now allowed. Cabotage is the right of an airline of one country to fly domestic routes within another country. Full cabotage has been delayed until 1997, but permission for consecutive cabotage means that any airline serving a foreign destination can now pick up traffic there and carry it to a second destination in the same country. That means, for example, that a British Airways flight from Heathrow to Paris can continue on to, say, Marseilles, subject to a limit of passenger numbers.

Third, airlines can choose their own fares without interference from governments. There are only two main constraints: the European Commission has the power to limit what it considers to be excessive price rises and it will also be able to set a price floor through which carriers cannot go. This is to stop predatory pricing where one airline sets unrealistically low rates in the hope of driving out a less resilient competitor.

So the main deregulatory steps are there on paper. The problem is implementing them. The big sticking point is the allocation of take-off and landing slots. It is all very well to have the right to fly a particular route, but if you cannot get space on the runway because of congestion then it remains just that - a right.

'There is no block legally,' says Sir Michael. 'There is a practical block. On many of the best routes the airports are full and it is difficult to get landing and take-off slots. The answer to that is to build more runways, expand the airports. The way to stop a shortage is to create a surplus and not to regulate.' Where new airways can squeeze in, fare cuts should follow. Heathrow to Brussels, for instance, had always been one of the highest fares in Europe, but British Midland's entry into the route has brought fares down quickly. 'Now that we are on that route, already our competitors are bringing down their fares,' says Sir Michael. 'It has been happening over the last six months, but since 1 January, when the new rules came into effect, Sabena has matched some of our fares and British Airways has matched some of Sabena's, so there has been a domino effect.' How far could fares fall? British Midland calculated last year that business travellers were spending £600 million a year too much on the 15 busiest European routes. About 70% of business travellers complete their journeys within three days. If all British Midland passengers who were entitled to, had taken advantage of fares like British Midland's three-day executive return they would, in aggregate, have saved a total of £235 million. Introduce comparable tickets on non-BM routes and the total would soon be ratcheted up by another £370 million.

Air fare experts like Alex McWhirter, technical editor of the authoritative Business Traveller magazine, are not holding their breath in anticipation of a radically different structure.

'It all depends on the actual market,' says McWhirter. 'Certainly, from the UK, there are signs that where there is competition the actual business fares are falling, but within mainland Europe it is different because there isn't the competition. Nearly all major routes within this territory are in the hands of just two airlines. You need another carrier to act as a catalyst. But the airlines are losing so much money at the moment - British Airways is the only major carrier that is making any money in Europe - that this doesn't look very hopeful.'

BA and BM do not agree about much, but they do concur on one thing: that the infrastructure at Europe's airports is inadequate. There is an acute shortage of slots at airports such as Heathrow and Frankfurt, says BA's latest policy report, Agenda for Europe. 'Instead of trying to increase the number of slots for all carriers, regulators have turned too easily to rationing slots as a solution. Rationing is not an acceptable alternative to supply.' Air traffic control is another problem they agree about. BA calculates that the present regime in Europe involves 51 different air traffic control centres, 22 different operational systems and 33 different computer languages. 'Airspace is not planned or mapped out properly so that planes are forced to make costly detours in what could be shorter, more direct flights within Europe.' Inefficiency drains money. BA says that airport and air traffic control costs in Europe are nearly two-and-a-half times higher than in the US due to lack of investment.

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