Airfares: Cut Rate Gets Cutthroat

Cheap newcomers feel the wrath of the Continent's flag carriers

Deutsche BA blinked first. It began a merciless price war against giant Lufthansa last November by launching eight daily round-trip flights on the busy Frankfurt-Munich route. Ticket prices quickly tumbled as low as $110. But with some planes flying nearly empty, the upstart backed off early in February, suspending three departures a day from each city. "[Do] we want to take on this 800-pound gorilla?" asks Carl H. Michel, Deutsche BA's CEO.

As deregulation breeds cut-rate airlines, Europe's flag carriers are trying to squash the newcomers. Many get government subsidies. Most hold aces such as extensive control of takeoff and landing slots in overcrowded airports. But their tactics get rougher by the day. The established airlines gouge business travelers who have to fly their monopoly routes and use the profits to subsidize competitive ones. They're also using their own cut-rate airlines like Deutsche BA to move into big competitors' home turf.

The independents are crying foul. Italy's state-owned Alitalia is collecting $1.5 billion from the government for restructuring. But three-year-old Air One complained to the European Commission that Alitalia instead is bankrolling rock-bottom fares, such as a $60 one-way ticket anywhere in Italy.

Passengers will lose big if the majors slow the growth of no-frills travel in Europe. Within five years, upstarts will get about 14% of the traffic, figures Andrew Light, a Salomon Smith Barney analyst in London. That lags behind the U.S., where low-cost airlines scoop 27%.

LAUNCHED. Still, Europe will get a passel of new airlines, such as Britain's Debonair, this year alone. Their main advantage, as in the U.S., is lower costs. City Bird, a Brussels-based long-haul carrier launched last April, has operating costs of just 6.2 cents per mile, vs. 20.2 cents for Lufthansa.

The big airlines hope that their planned low-cost subsidiaries will go head to head with the newcomers. British Airways PLC, part owner of Deutsche BA, also plans a startup called Go. Lufthansa may get off the ground with a no-frills line that company wags have dubbed Lufthansa Lite. But the newcomers clearly face a steep climb before they reach cruising altitude.