Flying Cheap In Europe

Full deregulation of air travel looks like a bonanza for passengers

Karl-Heinz Jork is not a popular guy. As in-house travel manager for German electronics giant Siemens, he has decreed that everyone but top brass must fly economy class in Europe. With hundreds of employees in the air on any given day, he also drives hard bargains with airlines. Jork has sliced his annual budget of $1.2 billion by 10%, even though the number of trips taken is up. Colleagues grumble, but "I'm not sending people on kamikaze airlines," retorts Jork.

His job may soon get easier. On Apr.1, Europe will take the final step in its 10-year journey to total air deregulation. After that, European airlines will be able to fly between any two cities in the European Union--even on domestic flights inside another country. Since 1993, they've been able to operate between any two EU cities across a national border. But this last phase will throw open to full competition domestic routes long dominated by national flag carriers that have used their monopolies to keep prices high.

Europe's transition to open skies has been far gentler than in the U.S., where air deregulation in 1978 led to the demise of such hallowed institutions as the original Pan American Airways Inc. Yet a shakeout looms in Europe, too, as low-cost upstarts challenge national airlines on their home turf. To cushion the blow and save jobs, governments continue to prop up such flag carriers as Air France, Alitalia, and Iberia at taxpayers' expense. But things will get nasty soon. "It's going to be much more of a dogfight than most people envisioned five years ago," says Frederick W. Reid, the 46-year-old American who will take the controls at Lufthansa on Apr. 1.

Just like U.S. upstarts such as Southwest Airlines Co., Europe's new entrants offer simpler fare structures, electronic ticketing, no meals, and low, low prices. They are exploiting a growing demand for low-frills flying by cost-conscious companies and recession-battered consumers. Brussels-based Virgin Express, Germany's Eurowings, and Britain's easyJet are targeting cheaper, secondary airports, such as London's City Airport and Berlin's Tempelhof.

Discount flights on heavily traveled routes are causing headaches for Air France and Lufthansa. And with monopolies still controlling two-thirds of all routes in Europe, new targets abound. "It's like the birth of democracy in a dictatorial state," says Franco Mancassola, chairman of Britain's nine-month-old Debonair Airways.

Of course, it will be European-style democracy. Industry-watchers don't expect the Big Bang that air deregulation brought in the U.S.--largely because a European government is unlikely to let its flag carrier go out of business. In addition, at Europe's major slot-controlled airports, governments can limit the number of slots to keep competition out. And in contrast to the U.S., airlines can't buy and sell slots without approval. So new entrants must use secondary airports or focus on less-traveled routes.

Nevertheless, some upstarts are already driving down fares on formerly monopolized routes. Ryanair has snatched 40% of Dublin-London traffic from Aer Lingus. The result: a price drop to $94 round trip, down some 44% from Aer Lingus' fares of 10 years ago. When Norway's Braathens SAFE started flying the Stockholm-Oslo route last fall, it offered a $263 round trip with no restrictions. Scandinavia Airlines System (SAS), which was charging $500, bounced back with new passenger benefits and a matching fare. And when Italy's Air One introduced its Rome-Milan flights a year ago, it forced Alitalia to cut its off-peak prices by 42%.

Stung, national carriers are scrambling to decide which routes it makes sense to defend. Since they often lose money on short hauls, many of those will be subcontracted. Belgium's Sabena World Airlines has given its flights between Brussels and London, Barcelona, and Rome to Virgin Express.

SIBLINGS. Another tack the giants are taking is to franchise shorter routes to startup carriers that operate 30% to 40% more cheaply yet still carry the national brand name. British Airways PLC has eight franchisees, mostly under the umbrella name BA Express, flying throughout Britain and into Scandinavia, South Africa, and the Mideast. Lufthansa so far has three German franchisees flying domestic flights as Team Lufthansa, where operating costs are as much as $40 per hour lower.

A riskier way to crack new markets is through subsidiaries. BA has tried to steal some German and French routes via subsidiaries Deutsche BA and Paris-based TAT European airlines, with mixed success. In France, it has also bought troubled Air Liberte, largely for access to its slots at Orly. Although it's a costly way to gain ground, Carl Michel, who heads business development for BA and will take over Deutsche BA on Apr. 1, is forging ahead with the strategy. "The good times are coming to an end for Lufthansa," he predicts.

To survive, the flag carriers are likely to rush into new alliances. Industry experts see three to five global groupings emerging over the next decade. In Europe, the most likely powerhouses will be BA, KLM Royal Dutch Airlines, and Lufthansa, which all have a powerful American partner. Will more U.S. airlines move in on Old World turf? Industry insiders say the big American carriers aren't interested in regional routes within Europe. But those with partnerships that feed transatlantic traffic into their domestic flights expect deregulation to boost business as the strong European airlines get stronger.

For example, United Airlines Inc. has code-sharing agreements with Lufthansa and British Midland Airways Ltd., Britain's second-largest noncharter carrier. Cyril Murphy, United's vice-president for international affairs, says UAL will capitalize on British Midland's new freedom to expand its feeder operations. And he expects Lufthansa to be a winner under deregulation, adding: "Every transatlantic passenger Lufthansa carries means more revenue for United."

Among the Europeans, the coming months will bring a scramble of deals. On Apr. 1, Air France and Alitalia will begin a code-sharing pact. KLM, already in an acrimonious but profitable partnership with Northwest Airlines Inc., is looking to add a southern European partner. KLM has approached Iberia, but, says a U.S.-based industry source, Northwest thinks Alitalia would be a smarter move. "The dance cards are filling up rapidly," he adds.

POLISHED BRASS. The giants are also putting tough managers into their top ranks. Swissair has hired Jeffrey Katz, most recently managing director of passenger sales for the western U.S. at American Airlines Inc., as its new president. BA's Robert Ayling, who took the reins in January, 1996, is maintaining an aggressive focus on the bottom line. In promoting Reid to president, Lufthansa has created a new unit that gives him freedom to manage the passenger business separately from the rest of the group. Before joining Lufthansa in '91, Reid ran European sales for American.

Still, some national carriers seem fated to disappear. Most vulnerable are those that have been sheltered by protected markets and government handouts. These include Alitalia, Iberia, Air Portugal (TAP), and Greece's Olympic Airways. Politicians are still trying to carry these dinosaurs. Since 1991, European governments have spent $5 million per day keeping their planes in the air.

Yet even the most nationalistic governments will have a hard time coming up with subsidies as the rivalry heats up. And the fare wars will only escalate. Jan Krieger, a 43-year-old architect in Berlin, flies to Stuttgart once a week on business. He takes Lufthansa only when he can't get a seat on Deutsche BA--and not just because the upstart is slightly cheaper. "Deutsche BA is friendly and more relaxed," he says. Just one more thing to make the big carriers tense.

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