The accepted view of a smooth and steady annual fall in passenger yields needs to be revisited, especially in the light of the step change now taking place in fare structures, writes Chris Tarry at CTAIRA
For any economist, it is always tempting to follow the long-term trend line rather than attempt to make sense of the roller-coaster of short-term peaks and troughs. But long-term trends hold their pitfalls too.
This column has often challenged the accepted wisdom of a smooth relationship between traffic and economic growth, with traffic rising at twice the rate of GDP. The same is true of the rule of thumb that real yields fall by about 1% a year. As with the GDP relationship, the long-term trend line shows a smooth downward curve. In reality, decline has tended to come in a series of dramatic step changes rather than as a gentle descent.
The current structural change in fare levels, is a case in point. In the USA domestic market fares are still 15% below levels of two years ago. At the same time, economy fares on routes between the UK and western Europe fell by 30% during 2002, according to the most recent data from the regular fares survey produced by American Express.
US lesson
It is worthwhile taking a look at the history of the US domestic market. The data from the US Air Transport Association suggests that real domestic yields fell by an average of 2.3% a year in the three decades to 2001. Of more interest is the fact that in 10 of those years real yields actually rose - climbing 13% in 1980 alone - and that in another 10 yields fell by more than 5%. The only period of relative stability was during 1995-2000 when the fall in yields averaged a modest 0.65% and when capacity was, for at least part of the time, relatively constrained - showing that the trusty laws of supply and demand are alive and well in setting price. For the record, real domestic yields in the USA fell by 10.6% in 2001.
Within western Europe the evidence of structural change has been, if anything, more marked. In particular, the American Express survey shows a decline of 30% in average economy fares in the UK. This is clearly a dramatic development and the causal chain is relatively obvious: mainline incumbents have begun to fight back against the new low-fare start-ups. Intra-European economy fares from the UK, both leisure and full economy, are now 75% of the European average when calculated on a per kilometre basis. By comparison, the figures show full fare economy fares around 40% above the average in both France and Germany and 48% above in Switzerland - despite the fact that economy fares fell by 15% there in 2002. Note also that this data excludes the "low-cost" airlines.
Given that it is reasonable to conclude there has been a structural downward shift in fares in the UK market which is unlikely to reverse to any great degree, the question is who and where next is going to feel the effects and why? The catalyst for change in the UK market has clearly been the new entrants and arguably easyJet more than Ryanair, given that it is competing more directly with the majors.
However, the catalyst for change in the mainland European markets may well be British Airways and bmi british midland as they compete for traffic at the non-UK end of the route. The new start-ups are often hampered outside their home markets by limited access to major airports and to best flight timings. And their success against the incumbents must rest on the extent to which they can provide a close - or close enough - substitute to the services currently on offer.
The laws of gravity suggest that the higher you are the further you have to fall, and the same is true of fare levels. Given the recent developments at Swiss this principle is unlikely to be disproved. Germany has already been targeted by the new entrant airlines, although easyJet felt unable to proceed with its interest in Deutsche BA. However, given the fundamental change in BA's fare structure, and its extensive European coverage, its presence in its "non-home" markets, offering cheap fares on a competitive number of appropriately timed flights, at least in the near term, may have a far greater effect on European fares in key markets than that of the new entrants.
The end result may be the same - lower fares across Europe - but the causal chain may be quite different. Reaction in the UK to the direct and close competition that easyJet provided for BA and bmi is now being exported. As there is only one way fares are likely to go - it is easy to see that costs must fall too. In this new era, the game is to survive, compete and prosper. While some carriers may be able to tick off the first two, a questionmark still hangs over the third.
Source: Airline Business
