Amex Reports Dive In German Economy Air Fares

<H1>Amex Reports Dive In German Economy Air Fares</H1><H3>By Amon Cohen</H3>Germany has become the first European country in two years to see a major change in air fares-and the change is a welcome one.

According to American Express' most recent quarterly European Airfare Index, German domestic discount economy tariffs plunged in the first quarter of 1996 to show a drop of 21 percent over the same period last year.

Full-fare economy tickets for domestic flights dropped significantly less, by 5 percent, while the country's international economy and business-class fares crept up by 3 percent.

The Germany decreases are in contrast to Europe overall. Domestic fares across Western Europe rose by 5 percent in business class and full economy, and by 4 percent in discount economy.

So much is fact. What is hotly disputed is the reason for the drop in Germany's fares and whether the American Express figures are relevant to the business travel market at all.

The interpretation of Kyle Davis, head of the Amex Airfare Management Unit, is that this is a protective move by flag-carrier Lufthansa ahead of the deregulation of the European aviation market next year, when all European carriers will have the opportunity to fly within one another's domestic markets.

Indeed, the fares fell after Lufthansa introduced a new category of discount economy fares into the domestic market.

According to Davis, Lufthansa was moving to warn off any other airlines that were considering entering the German domestic market. Germany has the largest domestic aviation market in Europe, not only because it has the second largest population (after Russia) but also because it has a decentralized economy with numerous businesses scattered across the country.

"This is the first major shock wave to go through the European air-fare arena in two years of our collating data for the Index," Davis said. "It looks to be the first sign of an airline flexing its pricing muscles in the buildup to European airline deregulation in 1997. This move probably has more to do with Lufthansa strengthening its market position than just stimulating traffic."

If Davis' theory is correct, this is more good news for European corporations looking to trim travel spend. Competition from established carriers outside their own markets would help bring down short-haul fares, which already are under pressure from a new wave of low-cost carriers based on U.S. models such as Southwest Airlines.

However, this theory is challenged by Deutsche BA, an airline that is 49 percent owned by British Airways. The carrier has been competing with Lufthansa on five of its domestic routes since 1992. Since Deutsche BA started undercutting Lufthansa on five routes in September 1994, the airline has achieved 30 to 35 percent market share and believes it was responsible for persuading Lufthansa to cut its fares.

"Lufthansa has lower fares on these routes than on any others because of the competition," said Deutsche BA spokeswoman Sandra Trautmann. Thus, Lufthansa has responded to actual competition, not the threat of it happening in a deregulated market, she said.

"You can never say never, but we don't fear deregulation because both Deutsche BA and Lufthansa are so established in the market," said Trautmann. "We do not think there is room for a third carrier."

Davis, meanwhile, only half-accepts Trautmann's conclusions. "I don't disagree that Deutsche BA may well have caused fares to fall," he said. "Where that argument falls down is that Lufthansa also lowered fares where Deutsche BA does not operate."

No one from Lufthansa was available for comment.

Taking issue with Davis from a different point of view is Michael Kirnberger, chairman of the German Association of Business Travel Management and the travel buyer for Merck. Kirnberger is not convinced that the discount economy fares are that relevant to business travelers, who usually require fully flexible tickets. Full-fare economy tickets fell by 5 percent over the same period, according to American Express figures.

"We cannot use discount tickets," said Kirnberger. "The business traveler has to be flexible at all times."

In addition, like Deutsche BA, Kirnberger does not foresee any more carriers entering the German domestic market. Increased competition is far more likely to come from the country's new high-speed train services, which are not only fast but relatively cheap and environmentally preferable, he said.

Davis, however, contended that Lufthansa's discount economy tickets are nonetheless highly flexible. The trips do not require Saturday-night stays, and changing to a last-minute departure involves paying a premium of only DM50, which is less than the difference in price between a discount and full-fare economy ticket. "A business traveler would be pretty silly not to use them," Davis said.

But whatever lies in the background of Lufthansa's strategy, it amounts to good news for the corporate client as far as Davis is concerned.

"The fare cuts are probably not going to stimulate a lot of demand, but for corporate customers it is a windfall straight to the bottom line," Davis said.

Unfortunately, every silver lining has a cloud.

As of April 15, Lufthansa passes on to the passenger an airport infrastructure tax that it pays on every ticket it sells. The tax, which was previously absorbed into the ticket price, costs passengers between DM7.50 and DM12, according to which German airport they use.

Nevertheless, Lufthansa is refusing to lower the fare to keep prices the same. In effect, therefore, ticket prices have actually risen by an average of slightly less than 3 percent.

And spare a thought for the travel agent. Lufthansa will pay commission only on the pretax fare, yet still expects agents to collect and handle the tax.