Air fares return to earth

Consumers hold the whip hand as Europe's airlines learn the meaning of competition. John Eisenhammer reports

Great for consumers, excruciating for the airlines. That is the message blaring from the advertisements crowding hoardings and newspaper pages, offering cheap flights and special deals.

Europe has traditionally been one of the most expensive regions of the world in which to fly. Suddenly, dramatically, things have begun to improve, as European Union deregulation has forced open the tight fists of the old national monopoly carriers on the Continent.

While, internationally, airlines are quietly celebrating the return to better days following the misery of the recession, as passenger levels soar and fares stabilise, the skies above Europe resound to the clamour of war. Ticket prices are tumbling in the battle for control of the airways into the 21st century.

The latest reports from the front came late last week from France, where Air Inter, the domestic unit of the beleaguered state-owned carrier Air France, announced it was almost halving fares in special deals on two of its most lucrative routes, the Paris-Toulouse and Paris-Marseille runs, in response to new competition.

This was no act of generosity, just desperation, which Air Inter, hardly a paragon of lean-machine efficiency, cannot afford.

The French government opened the Paris-Toulouse and Paris-Marseille routes from 1 January after pressure from the European Commission to liberalise its air routes.

France had earlier yielded to pressure to open up Orly airport, south of Paris, to foreign carriers, one of the conditions for EU approval for a Fr20bn (£2.46bn) state subsidy for Air France.

Air Inter's agony is being repeated on countless routes in other European countries as once-protected sources of income have been broken open to interlopers by EU directives.

"Some airlines are really hurting under the pressure, but they have no option but to adopt actions many cannot afford," says Karl-Heinz Neumeister, director of the Association of European Airlines in Brussels. "Fares are on a downward path and will stay that way."

The immediate challengers to Air Inter are two local airlines, Air Liberte and AOM. Hovering in the wings is TAT, British Airways' flying Trojan horse for the assault on France's domestic routes. It has been given permission to fly certain of the key routes, but appears to be biding its time during the slow season of the winter months, before entering the fray in earnest.

Having led the way in the Eighties with its cost-cutting and efficiency improvements, British Airways is at the forefront of the skirmishes in Europe.

It alone, so far, has had the financial clout to pursue the ambitious strategy of taking the fight directly into France and Germany, Europe's two other main airline markets besides Britain.

Like TAT, in which BA has a 49.9 per cent stake, it also set up Deutsche BA in Germany, with a 49 per cent stake, the rest held by German banks that are, in effect, sleeping partners. The advent of Deutsche BA transformed flying in Germany, forcing Lufthansa, which was already in the midst of a radical restructuring programme, to become even more aggressively competitive in service and pricing on key home routes.

This strategy is hugely expensive for BA, which explains why other European airlines have yet to imitate its aggressive tactics. Analysts estimate Deutsche BA and TAT together are costing BA £40-£60m a year.

Sooner or later, others are expected to follow this course of setting up local units in other countries, or at least of cementing alliances with carriers in other EU member states. The thinking behind the strategy is similar to that which has driven European carriers in recent years to seek out US partners.

The domestic markets of most European airlines are simply too restricted to support their vast intercontinental networks, so they have to extend their catchment areas.

One way of doing this is by tapping into the massive potential of the American market, bringing passengers to the trans-Atlantic flights to Europe.

Another is by covering as many countries as possible in Europe itself, which can then feed into the airline's profitable long-haul runs.

The more successful of the European airlines have also sought to lower fares by cutting costs through forming "cheap" versions of their airlines.

Lufthansa Express, which pays the crews lower rates and offers no fringe services, has costs about 25-30 per cent below those of the international operations.

The problem for the European airlines, as they struggle for each other's home share, is that the heat of battle is likely to remain most intense in a relatively small area, which covers the biggest travel markets: Britain, France, Germany and the Benelux. "This is the catchment area everyone is interested in, and will be piling into from the periphery. But it will be hard for all to make a go of it," says Mr Neumeister.

In 1997, all the intermediate restrictions will be lifted, and any EU airline will be able to operate any domestic route within any member state.

The current battles are all part of the frantic efforts by airlines to position themselves before that deadline. For the flying public, it holds out the prospect of more years of special deals and low fares. As Jurgen Weber, chief executive of Lufthansa,said recently: "The public is doing well out of this suffering."