1996 Summer ACTE Quarterly: President's Message | The New Era of Distribution | European Airline Liberalization

So far, open skies in Europe, a process that began nearly 10 years ago, has been frustratingly slow. Even with the so-called "third package," which abolished the restriction on foreign carriers operating domestic services in other EC countries (Air France could fly to Madrid to Barcelona or Milan to Rome without having to take off or land first in France, for example) there hasn't actually been much of a dent on prices, route development, or on the encouragement of startup airlines. Fares in Europe "continue to be significantly higher than--about double, actually--those in the US on a cost-per-mile basis," according to Kyle Davis, Director of the European Airfare Management Unit for American Express. "Nor has there been much improvement in the choice of airlines on major routes. Among major carriers there seems to be a fortress mentality, an unwillingness to encroach on each other's traditional territory."

"Except in the UK, consumers haven't seen dramatic changes in benefits from liberalization," said Dan Brewin, Head of Sales, UK & Ireland, for British Airways.

As for startups, there actually have been a few success stories, such as Air Jet in France and Easy Jet in the UK, and a promising start for Virgin Express based in Brussels, but nothing that even approaches the number of applications the USDOT receives per month for new carrier-wannabes in the already-competitive US market.

Why the snail's pace for liberalization in Europe? According to Philip Lowe, Chef du Cabinet for Neil Kinnock, European Commissioner for Transport, state subsidies put a damper on a level competitive environment. A sluggish economy and slow economic growth forced airline managers to focus more on seat and yield management than on expansion. The difficulty in getting slots at choice airports has made larger carriers reluctant to move away from the airports where they can at least exercise dominance over their home markets. There's tough competition from excellent--and expanding--rail and road links in short-haul markets, precisely those most likely to attract smaller carriers. And the broad bureaucratic arm of the EU deliberately slowed the action down to avoid the chaos that followed US deregulation, when 180 new carriers started up and virtually all failed outright or were absorbed by other airlines.

Still, once total liberalization takes effect next year, most airline industry executives and transport experts expect a quicker pace of change. Their predictions, based on a survey commissioned by consultants SH&E; and Harrell Associates for American Express and presented at a business travel symposium in Brussels in May, include five major trends:

1. Increased consolidation and market dominance by the major carriers. Respondents predicted that two to five "mega" carriers will emerge, perhaps as soon as within the next five years. This mirrors the US experience, where the market share of the Big Three (American, Delta and United) accounted for about 33% of the US market in 1978 and 60% in 1990, largely through mergers and acquisitions.

2. New airline entrants will emerge to fill the gaps left by the major carriers. The main airports will be dominated by large carriers operating primarily long-haul routes, and the upstarts will offer regional services from second-tier airports. The EU is acting carefully to ensure that half of all slots that become available are allocated to smaller airlines.

3. Blurring of the distinction between scheduled and charter services.Unlike the US model, in Europe nearly half of all flying is done on charters. Although this had little direct bearing on the corporate market, strong ties with profitable charter companies may make weaker commercial airlines more competitive.

4. The development of a European hub and spoke system. Although respondents agreed that the exact type of hub-and-spoke system prevalent in the US is unlikely to be duplicated in Europe, they did predict some hubs will grow stronger, Likely candidates will be Amsterdam, Brussels, Frankfurt, London and Zurich, all of which are anticipated to connect long-haul with short-haul destinations rather than connecting short-haul destinations.

5. Increasing competition around schedules, costs and quality of service. In this increasingly volatile environment, there is widespread agreement that competition will bring down fares. How far and how fast prices will drop is too hard to predict, but the process of broad price cuts on domestic fares has already begun, now that Lufthansa has introduced a new fare category (domestic economy coach). This quickly caused domestic fares to plummet by 35% while economy and business fares in other European markets have risen 3-5%.

Many agency executives believe liberalization will result in more complex fare structures, including more unpublished corporate fares, said Toby Joseph, Director of Development and Marketing for Carlson Wagonlit. "Travel managers will find more volatile pricing on the one hand, and significant savings opportunities on the other," he said. "So they'll need control systems like a firm travel policy and consolidated purchasing," since travel suppliers will increasingly require proof that a company can influence its travelers behavior.

"Travel managers will also need sophisticated management information systems to back up their claims," Joseph pointed out.

The New Era of the Deal
In this new environment travel managers may also find airlines more open than ever to discount deals on a Europe-wide or global basis. That's good news. The bad news is for travelers, who may, after being spoiled a bit in European-style business class, find low- cost or cut-frills service disappointing.

"That may mean that on some routes, employees will have to spend more time waiting for connections in airports that aren't well equipped for the increasing numbers of passengers awaiting connections," Eric Brannen, Senior Vice President, Travel Operations Europe for American Express said. Onboard they'll find "fewer amenities and possibly tighter quarters." Still, Brannen expects the frill quotient to be "superior to that of US domestic airlines."

Added to the traveler's aggravation: more options but less choice, as companies take decision-making away from them. Assuaging their egos, on the other hand, are more convenient schedules on well-established routes, and greatly expanded frequent flyer programs, to win the hearts, minds and seats of European travelers.

Words to the Wise
What's a travel manager to do while anticipating post-liberalization volatility? "Prepare before the turmoil begins," Brannen said sensibly. "Stay current on the major and minor developments in the airline industry; begin collecting data for negotiations as quickly as possible; and negotiate broad airline contracts. You should also explore pricing opportunities with alternative carriers that want to grow their market share on those routes. And periodically review your travel policy and look for ways to tighten control over the booking process."

Open skies will unlock a wealth of opportunity and professional benefits, assuming we keep our hands firmly on the controls, and our perspective down to earth," Brannen said. AQ

1996 Summer ACTE Quarterly: President's Message | The New Era of Distribution | European Airline Liberalization