International -- European Business: EUROPE
AIRLINES ARE FASTENING THEIR SEAT BELTS (int'l edition)
As deregulation nears in Europe, the fighting is getting 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--averaging $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 protective barriers dropping away, startups such as Debonair are slashing fares, challenging established carriers on short-haul routes, and spurring a scramble for passengers, especially in France and well-traveled routes to London (table). At the same time, traditional carriers are planning to cut costs to preserve market share. One watershed everyone has in mind is April, 1997, when the European Union will end restrictions that keep airlines from flying domestic routes outside their home countries.
PRICE WARS. The fight for market share 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 with 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 just being competitive. Still, the pricing 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 European Commission report, only 20 of the 80 airlines launched since 1993 remain in business. Still, some analysts think newcomers may eventually drive the big carriers out of the short-haul market. Already, BA is turning over some of these routes on a franchise basis to smaller airlines with lower costs. Such arrangements offer business travelers access to the big airlines' connecting flights. Low-cost operators such as Easyjet and Debonair, which will soon put electronic slot machines on its seatbacks, will probably appeal mainly to 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 hires others to do much of what other airlines do themselves, including maintenance, ramp service, and ticket accounting. "We want to avoid having millions of dollars in spare parts sitting on our shelves and mechanics sitting on their behinds," says Franco Mancassola, Debonair's CEO.
ELUSIVE. European behemoths such as BA and KLM are also aiming for a more stripped-down cost structure. BA unveiled a restructuring plan in September. On Nov. 5, KLM CEO Pieter Bouw announced plans for job cuts and more use of contractors, although KLM had cut costs in recent years. KLM reported a 45% fall in operating profits, to $107 million, for the second quarter. Bouw is not alone in finding profits elusive. "Every time you think you have reached the bar, it gets raised," says Rene Lepautre, former CEO of France's UTA, which Air France bought in 1990.
Meanwhile, 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. France attracts attention because it is Europe's largest market for air travel and because Air France has been slow to respond to change. On Nov. 6, a French court awarded control of the insolvent domestic carrier Air Liberte to Air France's archrival, BA.
BA faces an uphill battle. It will try to combine Air Liberte's operations with those of its other French unit, TAT, giving it about 20% of the French market. BA also hopes that having a French partner, Banque Rivaud, will help overcome resistance to its expansion.
While the battle for France rages, airline executives are eyeing domestic markets to the south. There, inefficient state carriers such as Alitalia, Iberia, and Olympic may become easy targets as their generous state subsidies decline. Chris Partridge, senior analyst at London aviation consultant Avmark International, thinks the major airlines will attack these markets through franchising deals with small airlines or equity stakes in big ones.
JOCKEYING. On a global basis, BA is ahead in this game. It has nine franchise arrangements that range from local British operators to deals that feed BA flights from South Africa. But even BA is feeling heat from the low-cost operators. Its most nettlesome rival, entrepreneur Richard Branson, recently scored a coup by persuading money-losing Sabena to lease its Brussels-London routes to Virgin Express, his low-cost Belgian operation. Branson can now funnel passengers from Heathrow through Brussels to Virgin Express' seven other European destinations.
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 airlines such as Debonair, passengers are pleased. Says Hans Jorgen Herskind, 59, a Danish textile executive flying home from London: "For so many years, London-Copenhagen has been monopolized, so it was too expensive to visit friends." As competition picks up, travelers from Athens to Dublin may find better deals, too.By Stanley Reed, with Heidi Dawley in London, William Echikson in Brussels, and David Woodruff in BonnReturn to top