Airlines Are Fastening Their Seat Belts

As European deregulation nears, the fighting gets nastier

In a darkened cockpit above the North Sea, pilot Robin Russell talks frankly about his job at British startup Debonair Airways Ltd. The pay--an average of $75,000 for a captain--isn't tops, says the Royal Air Force veteran and former executive-jet flier. And new airlines come and go all the time. But Russell, 50, likes the "tremendous buzz" at the fledgling company, which has given him his first airline job. "This is a big opportunity for me," says Russell, as he follows a trail of navigational beacons from London to Copenhagen.

Although it has been around only since June, Debonair is doing its bit to shake up the once cozy world of European aviation. With barriers dropping away, startups such as Debonair are slashing fares, challenging traditional carriers on short-haul routes, and spurring a scramble for passengers (table). At the same time, Europe's major carriers are planning drastic moves to preserve market share. One watershed date is April, 1997, when the European Union will end restrictions that keep airlines from flying domestic routes outside their home countries.

PREDATORY. The fight for markets is already getting vicious. By keeping costs low, Debonair can charge from $80 to $146 for London-Copenhagen fares each way before tax, compared with $287 to $683 round-trip coach at British Airways PLC and $254 to $683 on SAS. Another Britain-based newcomer, Easyjet, launched a price war last April against KLM on the London-Amsterdam route, offering $58 one-way tickets. When KLM dropped its lowest fare to match these rates, Easyjet filed a suit in London and a complaint with the EU charging KLM with predatory pricing. KLM says it was being competitive. Still, the battle shows that "the low-cost carriers are starting to hit the bottom lines of some of the flag carriers," says Nick Cunningham, aviation analyst at BZW Ltd. in London.

That seems to be true, even though the majority of startups fail. According to a recent EU report, only 20 of the 80 airlines launched since 1993 remain in business. Still, some analysts think the newcomers may eventually drive the big carriers out of the short-haul market. Already, BA is turning over some routes on a franchise basis to lower-cost smaller airlines, which offer business travelers access to BA's connecting flights. Low-cost operators such as Debonair, which will soon put electronic slot machines on its seatbacks, will probably appeal mainly to its nonbusiness passengers.

The key to the startups' competitiveness is outsourcing. Debonair, for example, leases its fleet of five 96-seat British Aerospace 146 planes from USAir Inc. and most of its engines from their manufacturer, AlliedSignal Inc. It also outsources operations such as aircraft maintenance and ticket accounting. "We want to avoid having millions of dollars in spare parts sitting on our shelves," says Franco Mancassola, Debonair's CEO. European behemoths such as BA and KLM are also aiming for a stripped-down cost structure. Both BA and KLM have announced restructuring plans.

JOCKEYING. Larger operators are also positioning themselves for runs at neighboring air space when restrictions fall. Lufthansa plans to add a Bordeaux leg to its existing Munich-Marseilles flights in January. On Nov. 6, a French court awarded control of the insolvent domestic carrier Air Liberte to Air France's archrival, BA. Although it faces an uphill battle, BA will try to combine Air Liberte's operations with those of its other French unit, TAT, giving it about 20% of the French market.

Despite all the jockeying, Europe's air-transport market has a long way to go before it matches the cutthroat environment of the U.S. Although prices are coming down where there is competition, only 6% of EU routes had three or more carriers flying as of Jan. 1, 1996. But where competition is limited, sky-high prices prevail. For instance, a round-trip London-Cologne ticket on BA or Lufthansa still costs almost $521 if you don't stay over Saturday night.

But on new airlines such as Debonair, passengers are pleased. Says Hans Jorgen Herskind, 59, a Danish textile executive returning home from London: "For so many years, London-Copenhagen has been monopolized so that it was too expensive to visit friends." As competition picks up, air travelers from Athens to Dublin will look forward to better deals, too.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE