Europe is allowing more competition, but 'dogfights' continue.
Dressed in a pilot's uniform, Richard Branson waves from the steps of the leased Boeing 747 he has named 'Maiden Voyager'. The date is June 22nd 1984 and celebrities, journalists and a handful of bemused fare-paying passengers pile on board for the inaugural flight from Gatwick airport, south of London, to Newark, which most knew was somewhere near New York City.
But how to get from Newark to Manhattan?
Some 1,000 bottles of champagne later, no one cared. At the time, the launch of Virgin Atlantic was widely seen as a foolhardy venture by the young owner of a record label. The North Atlantic, although the busiest air route in the world, was guarded by pterodactyls: the big, established carriers which had made it a graveyard for the earliest budget airlines, including Laker Airways and later PEOPLExpress. But Virgin Atlantic survived.
It fought predatory fare cuts and other tactics its competitors used to undermine it. It also innovated with new levels of service, including 'Upper Class', a first-class section at business-class prices, and sophisticated in-flight entertainment, even in the economy section, which Sir Richard, as he became, was persuaded not to call “riff-raff”. Gatwick and Newark have since turned into well-known international airports, but Virgin also went on to launch services from its rivals' citadels of power, London's Heathrow and New York's JFK airports. Virgin now has a young fleet of 37 aircraft and from later this year will be flying to some 30 destinations around the world. In 1999 Sir Richard sold 49% of his creation to Singapore Airlines.
Carriers use minority shareholdings, alliances and 'code-sharing' (where two airlines use the same flight, each badging it as their own) to get round the national restrictions preventing mergers and acquisitions. Truly global airlines are getting closer, but it is taking a painfully long time because of the industry's natural instincts towards protectionism and the reluctance of some governments to treat airlines like any other business. Even Virgin Atlantic seemed more like an establishment carrier when it joined British Airways earlier this year in objecting to an 'open skies' accord between the US and the European Union. Under the existing treaty between America and Britain, only these two British carriers and two American counterparts, American Airlines and United, are allowed to fly between Heathrow and American cities. Heathrow is the busiest airport in the world and many of its almost 70 million passengers a year are in transit, which means that carriers operating North Atlantic services from there can pick up large amounts of additional traffic. British Airways earns more than half its operating profits from flights crossing the Atlantic.
The deal between America and the EU is supposed to open up Europe's airports to greater competition in March 2008 by allowing airlines from both sides to fly to and from any destination in Europe or America. But the Heathrow-based carriers fret that America seems in no hurry to go along with the EU's additional goal of having no restrictions on airline ownership or control. Some European airlines would like their own American operations. Sir Richard, for one, won permission in May to launch Virgin America, a San Francisco-based domestic carrier, after an 18-month struggle during which levels of foreign investment had to be reduced. Further talks on the thorny issue of ownership are due to be held later. Yet the prospect of change is already starting to shake up Europe's airline industry.
Many European carriers are considering setting up operations in cities other than their home base. Interest in mergers has grown too: Texas Pacific Group, a giant private-equity firm, has launched a bid for Spain's Iberia, in partnership with British Airways. Alitalia has attracted several bids, including one from Russia's Aeroflot. Private-equity groups do not seem to be put off by the industry's already high levels of debt and its cyclical nature. More countries have come to realize that they do not need to own airlines to encourage air services. However, there will have to be many more privatizations before the air-travel industry flies completely free.
With the emergence of long-haul low-cost carriers and a new breed of business-class-only services, competition on the North Atlantic routes is also getting hotter. The idea of equipping a jet with luxurious seats and providing extra services for business people is not new. The original concept of what eventually became Virgin Atlantic was very similar. In 1987 Kirk Kerkorian, an entrepreneur, set up a premium service flying between Los Angeles and New York, but it did not get enough passengers and was eventually sold. Various business-class-only operators have recently entered the market. Germany's Lufthansa offers a transatlantic service called Business Jet. L'Avion, a French start-up, launched a service between Paris and New York in January. Several operators have begun flying between London airports and America, including Maxjet, Silverjet and Eos Airlines. Some operate from special terminals or executive-jet centers to make the experience more pleasant for the 50 or so passengers they carry on each flight. Some also provide limousine and helicopter transfers. Both British Airways and Virgin are now planning their own business-class-only services.
How will they fare?
The business case for such services has been strengthened by increasingly congested airports, more security checks and more flight delays. On multi-class airlines, business travelers find that although they can escape to executive lounges and bypass some of the queues, their flights can still be delayed because other passengers remain stuck in queues or linger in the duty-free shops. The idea of business-class-only services is to „take away the painful part of travel”, says Jack Williams, CEO of New York-based Eos Airlines, which lays claim to being the most punctual airline flying between New York and London last year. Being on time helps, but many business travelers also want frequent services in case their schedules change. In April Eos increased its service to three flights a day during peak periods.
One of the biggest problems any airline faces in launching a new service is obtaining landing and take-off slots, especially at the most popular airports. The traditional method of allocating slots involves a scheduling committee made up of airport and airline officials. At Europe's busiest airports runway slots are administered by an independent slot co-ordinator. In America some trading of slots is allowed. The new open-skies agreement between America and the EU is supposed to let more carriers into more airports, but that is not how it works on the ground. The slot co-ordinator for Heathrow, for instance, says demand already far outstrips supply. Incumbent operators claim „grandfather rights” over 97% of all slots, and most of those left are at times unsuitable for transatlantic services. Even when Heathrow's long-awaited new Terminal 5 opens next year, runway capacity will remain restricted. But it is possible to exchange slots among airlines. That has created a grey market at Heathrow in which swaps are usually accompanied by undisclosed payments.
London Heathrow and Gatwick, Paris Orly, Frankfurt, Dusseldorf and Milan Linate are already desperately short of capacity. By 2010 another 15 or so European airports will have joined them. Britain's Civil Aviation Authority, among others, thinks slots should be auctioned to airlines and then traded in a transparent secondary market to encourage better utilization of a scarce resource. For now, given enough patience—and the wherewithal to stump up £10 million ($19.7 million) or so—an airline might be able to obtain a pair of reasonable take-off and landing slots at Heathrow under the existing system. But it would have to repeat the trick on the other side of the Atlantic.
„Demand right now is overwhelming,” says William DeCota, aviation director of the Port Authority of New York and New Jersey. With three big airports, JFK, La Guardia and Newark, all within 25 miles of the Statue of Liberty, this is one of the busiest airport systems in the world. Those three airports already handle just over 100 million passengers a year, a total forecast to rise to 125 million or even 150 million by 2015. But the amount of airspace is fixed and there is little room to expand on the ground—even if local neighborhoods were willing, which almost invariably they are not. Yet, says DeCota, „we are convinced we can make much more efficient use of the ground and air.” This includes the use of bigger aircraft. Even though many flights are full, the average number of passengers on each aircraft using LaGuardia, the airport closest to downtown Manhattan, is only 68. The aircraft are too small, and there is little incentive for airlines to bring in bigger, more modern ones, says DeCota, because „I can't price the airfield to encourage efficiency.” What he would like is a combination of market mechanisms and efficiency rules, such as that, carriers must use their departure gates at least once every hour—or make them available to another carrier. But it is not just the commercial airlines that need to be accommodated. America alone has some 500,000 private pilots. And a growing number of well-heeled business people and celebrities like to go exactly where they want, when they want, in their executive jets. (economist.com)