Amex Projects Rise In Business-Class Euro Fares

Don't be fooled by the apparent stability of European airfares in recent months--it is merely the calm before the storm, warns American Express.

Average first-class, business-class and full economy fares remained unchanged in the last quarter of 1996, the first time this has happened in two years, according to the latest edition of the Amex European Airfare Index. This plateau has been reached after average rises of 1 to 1.5 percent per quarter, spurred by booming load factors and costly first- and business-class relaunches.

But that is just a breathing space before even more dramatic rises in Europe, according to Amex European Airfare Management Unit head Kyle Davis. "We expect the first quarter of 1997 to show increases of anywhere between 3 and 5 percent, with some markets up as much as 10 percent,'' Davis said.

The prime culprit this time around is the steep hike in jet fuel costs imposed in the second half of 1996, which has not yet been reflected in fares. "Historically, there is a lag between fuel and fare increases, and the fuel rises started at the end of Q3,'' Davis said.

The growing strength of the dollar against most European currencies also will push up fares. "The strong dollar is likely to affect fares in two ways,'' Davis said. "Firstly, as jet fuel is traded in U.S. dollars, the price increases will be further compounded for European carriers. Secondly, fares from Western Europe to the U.S. are bound to increase in order to close the growing gap between U.S. and European-originating fares. What's more, we will soon be entering the busy spring business travel period, which traditionally puts upward pressure on fares.''

Ironically, the anticipated increases follow the first stable period since Europe started to emerge from recession in the mid-1990s. According to Davis, fares hit a plateau in the fourth quarter because the market could not bear any further increases.

How the market will react to the new jump in fares remains to be seen, particularly in the United Kingdom. Although fares went up 3 percent in business class across Europe in 1996, in the United Kingdom the year-on-year hike was 7 percent. The biggest leaps were to the Far East and North and South America, with demand heavy and supply restricted to all these destinations.

Hong Kong was most frightening of all, with business fares from the U.K. shooting up by 16 percent. Demand also is tight as travelers book seats for the June event that will mark the transfer of power to China.

Tokyo is the other Far East destination for which it is tough to find a seat, and Davis warned that capacity also is starting to tighten for Eastern European destinations, particularly Prague, Budapest and Warsaw.

With fuel price rises again triggering the latent supply and demand inequality into big fare increases, the situation looks bleak for corporate clients, but Davis advised them not to panic. "Travel managers should try to make existing deals work by communicating preferred supplier relationships to the travelers," he said. "Often, travelers don't even know that these relationships exist, yet getting compliance is the key to making airline deals succeed.''

Paradoxically, while the market braces for further premium fare increases, discount economy and excursion fares have been plummeting in Europe. In the last quarter of 1996 alone, excursion fares dropped no less than 26 percent in Belgium, while discount economy fares fell 9 percent in Austria and the Netherlands.

The Belgian story mirrors similarly dramatic falls in domestic excursion fares in Germany, Sweden and Italy over the past 18 months. The reason is simple: increased competition from low-cost carriers. In the case of Belgium, the catalyst was the purchase of EuroBelgian Airlines by Virgin Atlantic and its rebranding as Virgin Express. For the others, the domestic market has faced more competition in the approach to the third and final step of European airline deregulation, which takes effect April 1.

The only country where domestic excursion fares have not fallen in the last seven quarters is the United Kingdom, which went through unilateral deregulation and its attendant fare wars several years ago.

The good news outside the United Kingdom is that Amex expects a domino effect from the excursion sector to push down domestic business fares later this year. But shrewd travel managers already have discovered they can make use of the discounted excursion fares. In some cases, return fares are so low that it is cheaper to buy one and throw away the return portion rather than buy a one-way full-fare economy ticket. The smartest buyers of all have been purchasing back-to-back returns, circumventing Saturday-night stay restrictions by flying out with a return portion and coming back on an outbound portion.

All that is likely to change. European airlines have realized they are in danger of cannibalizing their yields and are likely to adjust discount excursion fares, Davis said.