Visions of a €10 ticket to fly across the Atlantic
by Nicola Clark
Friday, April 13, 2007
PARIS: Ryanair, one of many low-cost carriers that have transformed European lives with discount air fares, has conjured up visions of a €10 ticket to cross the Atlantic.
But the less enticing likelihood is that good deals on fares between Europe and the United States are still far off, despite a landmark agreement to open more trans-Atlantic routes.
The United States and the European Union have hailed the accord as a watershed for long-suffering air travelers fed up with the steep fares that airlines charge for travel across the Atlantic. But despite claims that ultra-low fares are just around the corner, the initial impact on ticket prices is likely to be far more limited, according to industry analysts.
"There is no genuine reason I can see for a dramatic drop in fares on most routes," said Dan Solon, an aviation industry consultant in Barcelona. "Despite popular perception, the North Atlantic is already highly competitive," he said, especially for leisure travelers.
Under the terms of the "open skies" deal, which will be signed on April 30 in Washington, European and U.S. airlines will be allowed to fly any route between any city in the EU and any city in the United States, eliminating current restrictions that prohibit, for example, the German carrier Lufthansa from operating flights to the United States from Amsterdam or Rome.
Access to London Heathrow Airport, Europe's busiest air hub, will be opened to full competition, ending a lucrative oligopoly on trans-Atlantic service granted 30 years ago to British Airways, Virgin Atlantic Airways, United Airlines and American Airlines.
U.S. carriers will also be given new rights to fly between European cities, and EU airlines will be able to operate direct service between the United States and non-EU countries like Switzerland.
Some airlines are already preparing their battle plans for when the agreement goes into effect in March 2008.
On Thursday, Ryanair, the largest low-cost airline in Europe, confirmed plans to start a new airline that would fly long-haul routes between Europe and the United States.
In an interview published Thursday by Flight International magazine, Michael O'Leary, chief executive of Ryanair, said the airline would start service around 2010, serving five or six U.S. cities, including Baltimore and Providence, Rhode Island.
The new carrier would sell economy-class seats for as little as €10 while offering more expensive "premium class" seats in the front of the plane aimed at business-class travelers who are currently the mainstay of such full-service carriers as Virgin and British Airways, O'Leary said.
Virgin Atlantic said last month that it was prepared to invest up to £100 million, or $135 million, over the next two years to add daily flights to New York from several major European cities, including Paris, Frankfurt, Milan, Amsterdam and Zurich.
The Irish flag carrier Aer Lingus plans new direct services to Orlando, Florida; Washington; and San Francisco later this year, and Continental Airlines has said it will offer direct service between Heathrow and Houston before the summer of 2008.
These changes should result in new routes and more frequent service between Europe and the United States, giving passengers more choices in where and when they travel, analysts said.
But analysts cautioned that airlines would still face significant constraints that might limit the number of low-cost seats available.
"It's very hard to say how things will turn out for the consumer because the various forces on the supply and the demand side are shifting in different directions," said Peter Morris, chief economist with Ascend, an aviation industry consultancy in London.
This is particularly so at Heathrow, where barriers for new entrants will remain high even after open skies, reflecting a chronic shortage of runway capacity and strict government limits on the number of flights allowed per day.
Heathrow's two runways handle around 475,000 aircraft takeoffs and landings each year, just shy of a ceiling of 480,000 set by the British government in 2000 in response to pressure from neighboring communities and environmental groups concerned about noise and air pollution linked to the construction of the airport's Terminal 5, which opens next year.
Incumbent airlines control no less than 97 percent of these runway slots, and the open skies deal contains no provisions forcing the "Heathrow Four" to sell any of these rights to trans-Atlantic newcomers.
"Any new slots have to be dislodged from somebody else," Morris of Ascend said. Heathrow runway slots rarely change hands, he said, but when they do they can cost more than $20 million each. "That adds considerably to the money you need to get back to cover your costs."
That said, fares to the United States from Heathrow are considerably higher than they are from other European airports - thanks to limited competition - so that the profit margins remain attractive. A business-class ticket on British Airways from Heathrow to Kennedy Airport in New York, for example, costs 40 percent more than a flight from Frankfurt to New York on Lufthansa, according to Airline Tariff Publishing.
"Carriers will see the high yields that BA and others are getting and think that they can still make a pretty good profit out of it," Morris said.
Still, it is not certain that this new competition will do much to bring down fares. A study by Britain's Civil Aviation Authority predicted that passengers flying to the United States for either business or leisure purposes could expect price reductions of only up to 10 percent over the next five years.
Off-season economy fares as low as £199, or $394, round-trip between Heathrow and New York are not uncommon these days - a byproduct of fierce competition for time-sensitive business travelers.
In order to secure their premium-class market share, the airlines flying direct between London and the United States need to offer a high frequency of service. But for every 85 premium-class seats on, say, a Boeing 747, there are perhaps an additional 300 economy-class seats needing to be filled, creating relative bargains in the back of the plane.
Travelers willing to fly from continental Europe to the United States via Heathrow also benefit from the lower prices this extra seat capacity brings.
Business-class passengers could wind up the biggest early beneficiaries from open skies, analysts said. Just as Virgin Atlantic is eyeing opportunities in continental Europe, carriers like Lufthansa - which flies 50-seat all-business-class Airbus A319s to Newark, New Jersey, and Chicago from Düsseldorf and Munich - could expand to other cities, giving incumbent flag carriers a run for their money.
Ryanair, too, with its plans to offer trans-Atlantic business-class service, would add to the options available.
"The premium-class cabin is going to be the real battle ground," said Chris Tarry, an analyst at CTAIRA, a British aviation consultancy. "In the open-skies environment, that's what every airline is going to focus on."
Still, some warn that the trans-Atlantic travel market remains lackluster - a factor that could blunt the impact of the open skies accord. Increased concerns about terrorism since 2001 and new security and visa procedures for visiting the United States have made it a less-attractive destination for Europeans, while a weaker dollar has discouraged Americans from vacationing across the Atlantic.
Meanwhile, the financial troubles of the major U.S. airlines have led them to cut back their schedules.
"It is a situation of weak demand and weak supply," said Morris of Ascend. "As American carriers get more bullish and put capacity back on, you might start to see fares come down."
iht.com
