Cheap Air Fares Reach Europe, Spread in US
ON Feb. 29, WestJet started service, offering to fly Canadians from its Calgary base to Edmonton for $42 one way. Before WestJet started the service, the one-way fare on this 200-mile flight within Alberta was $112. After WestJet's first three flights sold out, competitors quickly matched its air fares.
''We've already made a big impact,'' says company spokeswoman Siobhan Vinish.
The Canadians are not alone. Discount airlines are unfolding their wings in Europe, too, from Brussels to Paris. In the United States, which started the discount trend in the wake of its 1978 airline deregulation, even established airlines such as Delta are getting into the act.
Millions of people now can afford to fly more often. Each day, hundreds of thousands who used to drive or take trains or buses board scheduled flights offering cheap seats and no frills.
As the discounters have thrived, fares have plunged in many markets. Wherever Dallas-based Southwest Airlines has operated, prices have fallen - sometimes by 50 percent. The US Department of Transportation calls it ''the Southwest effect.''
In France, Air Liberte and Air Outre Mer (AOM) have cut fares in half on the heavily travelled Paris-Nice run. And EBA Express offers $195 round-trips between its base in Brussels and Rome - a flight that can cost as much as $1,600 on Alitalia or Sabena.
The pioneer that failed
Baby boomers may remember People Express, which offered cut-rate fares to flyers willing to put up with delays. ''People Express was a social experiment, not a business,'' says Morten Beyer, an airline consultant in McLean, Va. The airline sometimes featured pilots loading luggage and flight attendants selling tickets.
Although People Express ultimately failed when it expanded too quickly, the airline gave Americans a taste for discount travel. Now, that appetite is growing as new carriers, such as ValuJet of Atlanta, start to enter new markets.
''There has been a completely new wave of upstart carriers since the early 1990s,'' says Bob Harrell, an air-fare consultant to American Express in New York.
European discounters have not been quite as aggressive, he observes. It has been harder to start new airlines because of airport-capacity constraints and protectionism. But Europe is changing. On Jan. 1, after France liberalized airline policy, Air Liberte cut its prices.
Early in March, Virgin Atlantic Airways purchased 80 percent of EBA. The British airline's goal is to start a discount carrier called Virgin European Airlines. EBA currently offers flights from Brussels to Rome, Vienna, Barcelona, and Madrid for about $100 each way. ''The idea is to expand,'' says Alain Skowronek, EBA's marketing manager.
The Virgin move may presage a surge in European competition. In 1997, the European Union will implement a third liberalization package that will permit any airline to fly anywhere in the EU, including domestic routes outside its home country. ''This means a French airline could pick up a citizen in Rome and carry them to Milan if they wanted to. This has been a long protected privilege,'' Mr. Harrell says.
In Britain, discount operations have been slow in starting up, largely because of the difficulty of getting slots at Heathrow and Gatwick airports on the outskirts of London. ''You may only be able to get a slot at 3 a.m. and then there are curfews,'' Mr. Beyer says.
Instead, price-sensitive travelers in Britain are heading off on new charter airlines such as Britannia Air, First Choice, or Air 2000. Alexis Coles, a spokeswoman for Thomas Cook, a travel agent, says the travel market has become ''aggressive and discount driven.'' For example, this January, tour operators were offering 15 to 20 percent off their packages. ''It's been good and bad,'' Ms. Coles says, ''since it stimulates demand but makes margins very tight.''
Lower pay and 'hush kits'
One of the important reasons for the surge in new airlines - many of them discounters - is the availability of old jets and experienced pilots, says Steven Morrison, a professor of economics at Northeastern University in Boston. In the US, Delta sold used DC-9-30s to ValuJet for $1.5 million to $2 million apiece. It cost another $2.7 million to modify them and add ''hush kits'' so the planes meet federal noise standards. By comparison, a new 737-300, a short-haul 100-seat aircraft, costs $38 million to $44 million.
At the same time, pilot salaries on the new airlines have shrunk. Mr. Morrison says pilots flying for discounters may have base salaries as low as $50,000, compared with $100,000 to $150,000 a year for pilots at established airlines.
The older airplanes do not mean discount airlines are less safe to use. Bill White, deputy director of flight standards service at the Federal Aviation Administration (FAA), says his agency is tougher on start-ups. ''When it goes into service, there is more important consideration or observation of that carrier,'' he says, to make sure that the carrier follows its operations manual.
Older airplanes, Mr. White says, are not a greater risk. ''I do see additional maintenance and more frequent inspections on an older aircraft,'' he says. He calls the DC-9s that many discounters are flying ''dependable.'' As the planes get older, he says, the FAA adds a supplemental program that requires more inspections.
Still, there are flyers who prefer to fly established carriers. In Paris, one elegant client at an Air France ticket office never considered flying a discount airline. ''I know Air France, and I trust it,'' she says. ''I know the other fares are lower, but I feel more comfortable with Air France.''
But an increasing number of French are opting for the discount fares. Since its creation in 1987, Air Liberte has attracted about 6.8 million passengers from state-run competition. This year, the airline, opening up 23 new domestic routes, expects to fly 4 million people.
Flamboyant Air Liberte founder Lotfi Belhassine expects to take his company onto the French stock exchange in 1997, and says he welcomes his company's renegade image.
''Air Liberte is rattling the establishment because we have the style of a 'voyou' [street-wise delinquent] and we're viewed as revolutionaries because we lower prices and we respect our passengers,'' Mr. Belhassine told Agence Air France magazine in an interview last month.
In the US, flyers have a more pedestrian view of why they travel on discounters. At Logan Airport, Trace O'Connor, an Atlanta administrative assistant returning from a pleasure trip to Boston, says she chose ValuJet because of the ''low fares. Period.'' Barry Risk, a manufacturer's representative from Wickford, R.I. says he travels on a discount airline - preferably Southwest - because of the prices.
The fares are so low in part because discounters have learned to pare expenses on point-to-point runs. At ValuJet passengers are not issued tickets, only confirmation numbers. Lewis Jordan, president of ValuJet estimates that this saves $2 to $5 per passenger.
Mr. Jordan also offers his captains bonuses and stock options if they save money. It is not unusual for ValuJet captains to taxi to the runway on one engine to save fuel. Jordan says all the cost-saving measures add up. ValuJet only needs to fill 42 to 43 percent of its 113 seats to break even. ''If 50 people show up, we're making money,'' Jordan says. By contrast, a full-fare airline may need to fill 60 percent of its seats to break even.
A plane and a profit plan
The success of such discounters is stimulating still more airline entrepreneurs. On Jan. 25, JetTrain, based in Pittsburgh, started a Pittsburgh-Newark-Orlando service. With its $79 fares to Orlando, its single DC-9-30 is flying with two-thirds of its seats filled. ''We are really trying to attract the leisure and friends and relatives market,'' says Cy Cardillo, the vice president of marketing and planning.
Like other discounters, JetTrain is trying to pick markets that are ''overpriced and underserved.'' Pittsburgh did not have a discount airline, and JetTrain founders noticed that cost-conscious passengers were driving to Cleveland to get cheaper flights. ''We just want to be a low cost alternative to USAir,'' Mr. Cardillo says. He adds: ''We don't want USAir to get mad at us.''
The discounters generally try to downplay the idea they are stealing customers from another airline. ''If Delta were to choose to come into every ValuJet market and match our fares, they have the financial muscle to hurt us dramatically,'' Jordan says.
In fact, Delta hopes to do just that. It is starting up its own low-fare service this spring when it is expected to focus on Florida flights. Delta has already negotiated a lower pay scale for pilots flying on the low-cost airline.
The discipline of cutting expenses is not limited to US flights. Air Inter Europe, now a subsidiary of Air France, is struggling to cut costs and improve service to meet the competition from discounters as well as France's new rapid trains, which are also cutting into domestic airline markets. Industry analysts expect that Air Inter Europe will declare losses of $100 million for 1995 when it reports earnings on March 31.
''We're not cutting our base fares yet, but we are multiplying the number of promotions,'' says an Air Inter Europe spokesman. ''We're determined to regain our markets.''
Air Inter Europe also expects to begin dropping unprofitable routes to remote French cities and towns that once were the basis for its ''public service'' monopoly.
The airline also hopes to combat a price war with increased services. A new Air France agency on the Champs-Elysees is a first step. The high-tech center, which opened Feb. 12, features regional desks to help travelers buy tickets and arrange hotels, car rentals, insurance, visas. The agency also includes a library, financial services center, and a boutique with 600 travel-related items.
Not a global trend yet
The trend to discount airlines is not global. Discount airlines don't exist in Japan, for example, where the domestic carriers only recently won the right to set their own fares. The country's three major airlines, which control 90 percent of the domestic market, are introducing new pricing systems this June, but nobody is predicting a US-style fare war.
Last month, All Nippon Airways Company, which dominates Japan's domestic market, announced a new pricing system that features three different seasonal fares, plus discount rates ranging from 15 to 40 percent off normal fares. The company says the new price structure, thanks to deregulation by the Ministry of Transport, will bring Japan into ''the age of price competition.''
The ministry used to insist on carriers charging the same fare for the same route. Airline industry analysts see only marginal differences arising among the fares offered by the big carriers. ANA used to charge 23,000 yen ($219) for the one-way, 450-mile flight from Tokyo to the northern city of Sapporo. Travelers could fly cheaper, but only by buying package tours arranged by travel agents. Starting this summer the full-fare, high-season price will be 25,000 yen, but new advance-purchase fares will bring the price down to 18,000 yen or lower.
ANA spokeswoman Reiko Tanaka says Japanese domestic air fares reflect high airport user fees and the lack of ceilings on the amount of compensation for airline-mishap victims.
Meanwhile, back across the Pacific, WestJet is growing. In the future, Ms. Vinish says, the airline may offer discount flights between Calgary and the US. Who knows, this may be the start of a new round of air-fare rivalry among international discounters.