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Aviation History
1988
1988 - 1039.PDF
IGS fares —-•<?£• Northwest would use a fleet of DC-9-30s, but would actually be offering no new routes. It has a transatlantic service into West Germany. THE PAN AM/BA RESPOMSE While the US majors wait on Allied Air Attaches, Pan Am and BA are reacting to protect their markets. The route swap agreement, first signed for three years in 1975, was extended in 1978 and 1981, but was not officially renewed in 1984. So, although the route swap has since continued de facto, both carriers are now free to enter each other's markets, and started with the opening of the summer 1988 schedules. Both Pan Am's Conrad Jacoby, general manager IGS and Central Europe, and BA's Bob Austin, general manager Germany, admit that this is in response to the new applications. "We think that the existing system meets the market requirements," says Jacoby, "but if people insist on competition then we will offer it." "The route swap agreement was vital to our survival on the IGS at the time," says Austin. "We now have to accept that the demand of the West Berlin Senate and Bonn is for competition. But in that case we have to look at applying commercial criteria in terms of the profitability over each route that we operate." He points out that the loss-making lifeline route to Hannover (the closest large West German city to Berlin) grew only 5 per cent last year, compared with BA's own average of 12 per cent, and a total air traffic growth Continental's bid to reduce fares in the Berlin market brings the West German Government's subsidy into question. This amounts to approximately DM100 million a year, and is applicable to local passengers originating in West Berlin. It is not applicable to international travel. For each passenger Bonn pays the carrier approximately 14 per cent of the sector economy fare, and the passenger pays the balance. As IGS tickets are exempt from VAT, while German domestic air tickets are subject to 14 per cent VAT, it could be argued that, even after allowing for the EEC's share of VAT revenues, the IGS subsidy is largely paid by West German domestic passengers. If Continental's bid is accepted, would Bonn withdraw or reduce the subsidy? "There is a political requirement to have all forms of transport to West Berlin operating at an optimum level," says Dr Dieter Kabisch, "so if something happens to one the other can take the strain. Hence there is a form of subsidy for all means of transport to the city." He points out that Bonn is currently plan ning to spend large sums to upgrade Berlin's rail links, so some form of air subsidy is likely to remain. Although the normal subsidy is 14 per cent, in the case of Hannover it amounts to 17-7 per cent. This indicates that a possible future change would involve lowering the subsidy on the busy, profit able routes and increasing it on the thin ner lifeline routes. Thus Continental's claim that it could generate new traffic with lower fares would only hold if it reduced fares by more than the loss of subsidy. BATTLE FOR BERLIN Fares comparison Main IGS route Carrier TXL-FRA PA Main West German Domestic Route FRA-HAM LH Mileage 269 257 Sector economy fare DM192 (Bonn pays DM31, making total DM223) DM255 (LH receives DM224) Total 1987 passengers 1,329,340 969,142 Note: When considering the costs behind the above sectors, it should be borne in mind that, while Lufthansa's landing costs at Hamburg are higher than Pan Am's at Tegel, Pan Am's fuel costs are higher owing to the restricted altitude of the air corridors linking West Berlin with West Germany. of 14-7 per cent in the Berlin market. If BA's profits on the thick routes are eroded, then its ability to cross-subsidise the thinner routes is reduced. "We try to provide as broad a community service as possible," says Austin. "The new carriers do not want the costs associated with the thin routes." "You cannot look at Berlin as a purely commercial operation—there are broader responsibilities," says Jacoby. "The competitive aspect of the market has been addressed by ourselves and British Airways, so all the new carriers are talking about is a redistribution of the existing traffic." Both he and Austin forecast that the 1988 market will at best equal 1987's as the loss of the one-off visitors to the 750th anniversary celebrations is offset by natural growth. "If we can maintain 1987's carryings it will be a major success for Berlin," he says. The BFG (the Berlin airport company) agrees. Pan Am and BA still have their original licenses, so they will be in position long before the newcomers (if any) are licensed. BA is basing an additional 737-200 at Tegel to operate four flights a day on the Munich route, which was previously the preserve of Pan Am. BA wanted the Frankfurt route as well but could not get satisfactory slots. Pan Am intends to fly alongside BA to Cologne/Bonn with two 727-200s a day, and to Diisseldorf with three a day. Addi tionally, the Pan Am Express commuter operation will put two ATR42 twin- engined turboprops on the Bremen and Hannover routes, with a limited operation on BA's seasonal route to Sylt. Apart from competing with BA, Jacoby has plans for Pan Am Express to open some new international routes. "I see the Reagan initiative as calling for an opening of Berlin to new markets. Growth will come from new international routes, not from more competition on the IGS," he says. Both Jacoby and Austin emphasise Pan Am's and BA's commitment to Berlin and over 40 years of service to the market. Their appeal to the Air Attaches asks them not to risk destabilising the present system by licensing additional carriers. However, the Air Attaches are unlikely to be able to resist the pressure to bring in "new blood", or the argument that it was only the threat of outside competition that ended the route-swap monopoly. With TWA's application before them the issue was quite straightforward. When American filed the situation became more complicated, but both carriers would probably have been licensed, with the shortage of well-timed slots in West Germany scaling down American's plans. Now that Continental and Northwest are in the running, the Air Attaches are faced with a thorny problem. West Berlin's vital air access would certainly be threatened by the all-out war that would result if all the applications were granted in full. On the other hand, the deregulation movement is powerful. So Berlin waits as the applicants muster their political lobbying powers. • FLIGHT INTERNATIONAL, 23 April 1988
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