27 July 2005

The Web

Of Government hindering low-fare airlines … and other myths

Matthias A. Merzhäuser

The common market means that any EU airline may operate to and from any point within the EU, be it between two countries and also within a member state, without need for any governmental approval. Since EU membership Malta is part of this liberalised intra-EU air transport market.
Air Malta immediately took up this opportunity. It based additional aircraft and crew in Britain, successfully operating charter contracts to primarily Spain and Greece. British tour operators made use of a cost-effective product also for routes having not Malta as point of origin/destination. On the other hand core operations also offer services e.g. between Italy and Britain.
Fairly enough however, also a British airline could operate between, say Lithuania or France and Malta. Or an Estonian one between Malta and Italy. Or a Maltese one intra-UK. With 25 member states the number of theoretical combinations is enormous.
Legally nobody, also not governments, can block any EU carrier to operate between any intra-EU airports as long as one keeps to the market and operational rules. Concurrently also nobody can force a government, even for the sake of cheap tickets for everybody, to give one carrier an advantage above the other, e.g. by giving selective financial support for a product. Being in the EU means less state-intervention. And fair, non-distorting competition. And if anyone believes to indeed be hindered, they can appeal.
Currently a certain ultra-low-fare airline asks for a governmental ‘embrace’. But why does one require state intervention in a totally liberalised market?
The Maltese government’s only role, and right what they are doing, is only ensuring fair competition in a free market with no competitor more equal than others. Those suggesting that the government is hindering EU airlines to operate to or out of Malta and thus hindering incoming tourism are maybe trying to mislead. Financial support of products of selected competitors cannot be the right way. Imagine: should the government grant lower taxes to one construction firm because it builds houses cheaper for consumers, thus making consumers even happier and stimulating demand with this firm, but not grant this to other contractors? Surely not. Obviously, the same conditions must apply to all competitors.
Since the peak of tourist arrival numbers in the early 1990s, basically remaining level since, airfares eroded. Being of Maltese descent myself I always took an interest in the matter. In the early 90s an average tourist ticket used to cost ca. 600DM, translating to ca. 300EUR excluding the inflation/growth factor. At 2% over 15 years it would be ca. 400EUR. Today levels are around 200-220 EUR, with Fare4Us even near 150EUR return (all from Cologne/Bonn and Düsseldorf). Fares thus relatively came down to half. This should be the case across all markets. Theoretically this should have doubled arrivals. In practice, arrivals remained comparatively stable since peak years: further growth was generated primarily through geographical expansion or niche market development.
Maybe the problem of Malta’s tourist product is not just air fares. Some place will always be cheaper than Malta. If believing one has a cost problem, this could be multi-dimensional.
Malta’s tourism might however need to offer an improved product. A thorough overhaul by reducing the often criticised shabbiness and creating less environmental stress might help. We must have a Malta attractive for tourists to return to. Everybody knows the value of word-of-mouth advertising. It would primarily also benefit the life quality of locals. One cannot only call on the state– it is a national effort, and it will take time.
Another popular myth is that Air Malta upholds route monopolies in Europe thus hindering growth of incoming tourism.
There is a wide choice from airports were a sufficient market exists. From smaller airports tourists were always happy that there was Air Malta opening up also these risky cases at right the same fare as from the hubs. What has and is being done is collecting contingents from many different tour operators, which as such were too small to justify a dispatch of a dedicated aircraft, plus selling flight-only tickets. Air Malta’s market dominance is a result of their flexibility, competitiveness, and geographical market penetration. When operators or tourists believe(d) that others were cheaper, they could and can choose an alternative airline. A look at the airport’s annual statistical reviews reflects the diversity.
Take the Cologne/Bonn case: mid-to late 80s 1980s Air Malta, 1990 Aero Lloyd, no Air Malta, then again Air Malta until 1997, 1998 Britannia Airways GmbH and no Air Malta. And then no Air Malta but Airtours/FTI’s vertically-integrated FlyFTI (1999-2001), hailed to bring many tourists at ‘low fares’. It became a ‘touch-and-go’ for Malta, resulting in a heavily reduced Malta programme, far smaller than that of all the years before with no services in the following years. FlyFTI weakened Air Malta by several million liri only in 2000/01. In the end Air Malta cleaned up the mess and re-built the whole German market, also with FTI-Frosch’s new (old) owners, long-time partners.
Düsseldorf since the early 90s saw alternative airlines LTU, Condor, DeutscheBA, Germania Express, and maybe even others, plus connections via Lufthansa, Swissair or British Airways. Some still operate, others not. Hardly a monopolistic environment.
One wonders if all the other carriers including e.g. Air Malta, Britishjet or Lufthansa who have expanded recently ever asked for a governmental ‘embrace’.
Cologne is today the continent’s leading ‘low-fare’ airport, with airlines like FlyDBA, Germanwings, HLX, Easyjet etc., who have fares proportionally comparing to Air Malta’s, and a weekly Air Malta service. But strangely enough, in spite of negotiations, no Ryanair. Why? The management apparently could not give way to demands.
One also has to look at real fares, not just in flashy ‘starting from’ adverts. Nobody can seriously suggest that anyone runs a B737 at 1000 EUR per hour and sells all tickets for 10 EUR.
Any EU-registered carrier must be and actually is absolutely free to operate only that aid/discounts/incentives/boni etc. should not discriminate. If a certain ultra-low-fare airline were given such benefits could Air Malta, so far developing many new markets at its own risk, or others, not justly demand equality for at least any new (or even existing) service?
Alitalia, Lufthansa, Britannia and British Airways carry over 50,000 return passengers each. Were a certain ultra-low-fare carrier given a, say, LM 500,000 bonus for 50,000 arrivals (LM10 per head), or also a fraction thereof, then what about Air Malta’s 750,000 or so arrivals? Better keep subsidies to history books!
Interviewed by German national weekly Die Zeit (No.31/2004), Ryanair’s Michael O’Leary said he envisions all Ryanair passengers travelling for free in a decade’s time, fares entirely financed by airports, hotels, car rentals and airport retailers that will see more revenue through Ryanair’s passengers. Assuming this would become reality, what would this cost to the southern UK to Malta sector?
Ryanair’s average one-way fare is 40 EUR. Due to their existing ultra-low-cost structures and services little room is left for further lowering costs: one now reportedly resorts to forbidding staff to load electricity to their mobile phones at work on account of energy costs - all for lower fares for consumers. Ryanair’s core business is UK-Ireland and UK-West Continent, and there are extremely few sectors longer than 2 hours. 189 passengers represent 7500 EUR, minus 20% for Ryanair’s profit margin, 6000 EUR per flight, at two hours. At assumed 3000 EUR per hour, six hours London-Malta-London, one requires at least LM42 per head to recover costs.
Assuming overall profits on tourist spending of 20% (well, hopefully), the spending should be at least LM 210 per head to regain LM 42 free-flight input. Tourists must fill an LM110 gap above the LM100 saved on a current average fare.
Currently British tourists spend around 28 pounds sterling a day. Even with free flights, quite less than what is required it seems. Ryanair is said to bring trendy short-time trippers.
Today, an intermediate price category Air Malta flexifly (KKM), Heathrow-Malta return, is roughly LM100, starting from around LM70 return (excluding taxes). To any other market there are comparatively similar ones. One remains wondering who those tourists are who supposedly spend tons of money – yet for whom even such fares are already totally unaffordable. Has Malta ended up in a state that it can only sell itself via cheap airfares and nothing else?
During the last decade Air Malta faced multiple turbulences (fleet policy, global terrorism, oil price hike etc.). Time moves on. The management, the staff and the shareholders are bringing the carrier back to profitability. The restructuring process must continue. Recent financial announcements proved them to be on the right track.
Any EU competitor retains their already existing legal right to freely operate. What needs to be ensured is equal conditions for all competitors. Selective intervention for the simple sake of having certain popular firms operating to and from Malta is however no progress towards a fair market.

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