Budget airlines eye up business travellers as fares go sky-high

FREQUENT flyers who thought the deregulation of European air routes completed last year would bring down fares have received a nasty surprise: even as low-cost carriers proliferate, the cost of full-fare business tickets is still rising.

Prodded by start-ups such as London-based easyJet, the price of leisure tickets in Western Europe has dropped 5 per cent over the past two years, according to American Express Corporate Services. But full-fare tickets have jumped 5 per cent and are 40 per cent more costly mile-for-mile than in the US.

"Business class fares in Europe are still outrageous," says David Steyn, who flies frequently as chief executive of Quaestor Investment Management, a fund management company. "It's beyond annoyance. I still think that the market is essentially a cartel."

It also worries regulators in Brussels, who plan a campaign to force the airlines to change course. The European Commission recently hired Cap Gemini, Europe's biggest computer services company, to build computer models to see whether carriers are charging "unjust" prices on certain routes.

The commission says it will use the results of the study, due to be announced in October, to prod airlines to cut fares. Such heavy-handed intervention may run counter to the ideal of a truly deregulated market but Brussels wants to use a successful airline policy to win popular support for plans to free up other industries such as telecommunications.

There's ample evidence that prices are rising. On the London to Paris route, the most heavily travelled in Europe, business fares have risen 6 per cent in the past 12 months despite competition from Eurostar. On London-Amsterdam the price of a business class ticket is up 8 per cent, while London-Frankfurt prices are up 6 per cent.

The regulators have their work cut out for them, according to analysts and industry executives. Few companies are more opaque in their pricing practices than airlines, which typically offer a welter of special discounts.

"Fares are in a constant state of flux," says David Henderson, of the Association of European Airlines, an industry lobbying group.

Frederik Sorensen, the commission's air transport policy chief, acknowledged that he holds little formal power to order the airlines to bring down fares. But he said the commission holds considerable power of persuasion. He pointed to a row between easyJet and KLM Royal Dutch Airlines over prices on the London-Amsterdam market.

Faced with easyJet's complaint of price-dumping and a surprise "dawn raid" by commission officials who confiscated KLM documents, the Dutch carrier raised its fares. Once the commission makes "sufficient noise", Mr Sorensen said, "airlines find that there are certain things they cannot do".

But industry experts say that talk alone won't be enough to bring down fares. The key, they say, is opening up competition at Europe's congested airports to give its growing ranks of small start-up carriers a chance to add more frequent services.

What matters for the business flyer is "schedule, schedule, schedule", said Kyle Davis, vice-president of the American Express purchasing management group in Europe. Business travellers need carriers with several flights a day, in particular at peak morning and evening hours, so they can grab any flight and change it at a moment's notice. So far, the likes of easyJet and Ireland's Ryanair Holdings do not carry that clout with business people - and their rivals know it.

Henri Hourcade, the head of a medium-haul division at Air France, said he responded with lower leisure fares once Ryanair began offering a few weekly flights from Dublin to France's Beauvais Airport outside Paris. But he didn't bother with business tickets - "they weren't in competition."It is a two-tier system the industry seems eager to protect. Big airlines say they need to charge business travellers higher fares to balance out the bargains offered to leisure flyers, who account for 75 per cent of all traffic.

"The business traveller has to pay for all those special prices offered on the leisure market," said Monika Goebel, a spokeswoman for Lufthansa. "We airlines earn our money on the business sector," she added. "Like other carriers Lufthansa, too, tries to get what it can get" from the business traveller.

The low-fare airlines say they are not content with that state of affairs. But to have a chance, they say, regulators need to do more than just talk - they need to take firm action to loosen the big carriers' stranglehold on busy airports such as Heathrow and Gatwick.

That means streamlining Europe's fragmented air traffic control system to lift the number of permitted flights and rationalising a tangled system of awarding take-off and landing slots at the airports, now largely controlled by large airlines such as British Airways and Lufthansa. Regulators "need to open up barriers to entry", said Mr Davis, the American Express travel planner.

It is a problem that confronts regulators on both sides of the Atlantic. In the US business fares have jumped 41 per cent over the past two years, according to American Express, and the larger airlines are muscling out start-ups that sprang up in the overnight deregulation in 1978.

The Department of Transportation is weighing measures to decrease the dominance of the bigger airlines at their hub airports, but it has been resisted by the airlines. In Europe regulators have not yet delivered promised measures to reform the award of airport take-off and landing slots.

Low-fare rivals say they expect to win business flyers; it will just take time. Stelios Haji-Ioannou, the chairman and founder of four-year- old easyJet, said: "Ninety per cent of the plane are wearing suits," on his London-Glasgow route now that the number of flights is four a day.

He expects more suits on services to Edinburgh, Amsterdam and Madrid, where he is also boosting flights. If they do not come immediately, they may once an economic downturn forces companies to become more cost-conscious.

Most of easyJet's business flyers, he said, "are people working for themselves, small companies or departments of large companies where they're responsible for their own travel budgets".

Copyright: IOS & Bloomberg