Airlines need to get to grips with the pricing and IT issues that are posed by the planned arrival of Europe's single currency on 1 January, 1999. Report by Gemini's Keith Turner. A year ago it was debatable whether Economic and Monetary Union (EMU) would ever happen. Since then there have been ups and downs, including elections, gold revaluations (or not), arguments over whether 3.2 per cent was really 3 per cent, and a lot of careful national budgeting.

But there is now little doubt that the euro will be introduced within the proposed timescale (see box). The establishment of bilateral rates and the choice of participating, or eurozone, states is due in May. The process will end in July 2002 when the euro becomes the sole legal tender within the participating states.

At presstime various national changeover plans were due for release and a number of Iata and industry decisions were pending on matters like tariffs, ticketing, revenue accounting and bank settlement plans (BSPs), necessitating a constant reevaluation of the specifics relating to EMU.

In mid January, Iata - which is nudging its members to respond to EMU through its EMUtask force - announced a consensus among its members to adopt the euro for sales and ticketing alongside national currencies from its introduction on 1 January, 1999. Iata is working closely with computer reservations systems to find the most cost effective way of doing this.

EMU will affect almost every area of an airline. Much of the impact will essentially take the form of operational changes with regard to short-term costs and, in some cases, longer term savings. But probably the greatest business issue facing the airlines is that of pricing during the changeover period.

Pricing minefield

One of the biggest challenges associated with EMU and pricing is that of price transparency. For instance, which is the higher price for a Lisbon-Helsinki-Lisbon ticket - 150,000 Portuguese escudos or 5,500 Finnish markka? Now consider the same prices after the introduction of the euro. Which is the higher price for a Lisbon-Helsinki-Lisbon ticket - 742 euros or 919 euros?

Currency fluctuations and their associated risks are always cited as a major factor in country-dependent price differences. With the introduction of the euro, there will be no currency fluctuation within the eurozone. The euro will be the only currency, with fixed relationships to the old national currencies. This will increase the pressure on airlines to charge the same price for a particular ticket wherever it is sold.

Price transparency will call into question another pricing practice, possibly with even more impact. Once all prices are in euros it will be clear that the price of a return ticket depends on the origin. But why should Lisbon-Helsinki-Lisbon be a different price to Helsinki-Lisbon-Helsinki?

The real reason is almost entirely due to the difference in what the Finnish and Portuguese markets will bear, and airlines have often hidden behind currency issues which will disappear within the eurozone from 1 January, 1999. The pressure for 'symmetric pricing', particularly in the business market as corporate business adopts centralised travel management policies, will increase dramatically over the next few years.

Another important factor is 'price pointing'. Everybody knows the psychological value of the DM199 fare, but for a short period between January and July 2002 there will be a legal requirement for some sort of dual pricing (the display of prices in national currency and euros) in every country in the eurozone. The final deadline for national currency no longer being legal tender is July 2002, but the actual date will depend upon the country. In some countries consumer legislation will require dual pricing to start sooner.

So, how should an airline respond over time to the issue of price pointing combined with dual display, which inevitably means that only one of the two numbers on display will be psychologically attractive?

At present prices and price points are in national currencies. At some stage - many have already come out in favour of 1 January, 1999 - an airline can decide to take payment in euros, probably by applying the fixed conversion rate to the national currency price. Once in the dual pricing period, an airline must decide whether to price-point in national currency and convert to euros, or price-point in euros and convert to national currency. There will be a lot of consumer confusion throughout this period and the timing of the swap to euro price-points will be critical for airlines. Low cost operations that emphasise price pointing will be particularly vulnerable during this period.

The changeover to the euro will further complicate the already intricate issue of pricing and airlines that make the right response will have some real opportunities.

Industry changes

In the airline industry customer/supplier interactions are often not just bilateral - many mechanisms or bodies support multiple customers in standard ways. These include BSPs, Cargo Accounts Settlement Systems, CRSs, Iata, Eurocontrol and airports. There are many interfaces to be considered and handled by everybody in the industry.

These areas are changing rapidly but a few examples serve to illustrate the sort of effects that are likely:

1 Eurocontrol mainly operates in ECUs. On 1 January, 1999 the ECU ceases to exist and the euro replaces it at a conversion rate of 1:1.

2 Airbus has recently announced that it will offer euro prices as well as dollar prices for its aircraft.

3 German airports are planning to move to the euro on 1 January, 2000.

4 Eurozone airlines will need to file fares in euros.

5 In the medium term, settlement for Iata BSPs will move to euros rather than national currencies. In the longer term, some are asking if there is a need for multiple BSPs within the eurozone.

In addition to these considerations, many other customer/supplier relationships will be affected. The introduction of a new European monetary environment is potentially cause for invoking force majeure clauses in contracts and could be used by some as an excuse to terminate unfavourable contracts. EU-wide legislation is planned to stop this, but contracts in the law of non-EU countries won't be covered automatically, except in very few places where specific legislation is passed. The October 1997 Iata EMU task force bulletin includes a draft from the Iata legal advisory group designed to ensure 'contract continuity'.

From 1 January, 1999 airline customers can ask both to have prices in euros, and to pay in euros. At present there is no legal obligation to respond until 2002, but what if an airline's competitors offer euro pricing? Customer communications will need to be considered very carefully in order to convey the right degree of euro-friendliness and customer-friendliness.

Huge range of issues

A huge range of issues will affect every airline support function. Many will be driven by the various national changeover plans being produced, and it is important that airlines track these plans in each of those countries in which they have operations. For example, there will eventually be significant simplifications within the treasury functions: as up to 11 currencies eventually become one, hedging will disappear and pan-European cash management will be possible.

In accounting, the systems will at some point need to change to the euro as the base currency. A degree of dual reporting should be done earlier, to help staff to start thinking in euros. During the changeover period, the issues to be addressed will include how to handle rounding errors, tax treatment of foreign exchange losses/gains, the conversion of forms and other paperwork, and how to contain error and fraud. National accounting bodies are expected to give significant guidance in such areas, based on the advice already issued by the European Commission's DG XV.

In human resources, staff training (particularly for customer-facing staff) will be a big issue, as will staff education. The introduction of the euro affects everybody and airlines must decide how much they will help staff through this confusing time. At some point payroll will need to convert to euros, as will pension funds.

Clashes with the Year 2000

Every IT system supporting an airline needs to be reviewed to see how EMU will affect it. The Year 2000 systems inventory, which most organisations now have, provides an excellent starting point. There might, however, be clashes with the Year 2000 programme in some instances when it comes to actually making the changes.

Most of the issues raised have some system implications. Typical examples include changing screens or reports to dual display during the changeover, converting current and historic data to euros, and modifying interfaces between systems. All of these have to be pulled together and handled in a programme potentially as complex as the Year 2000. An additional complication is that the changes must be business-driven and are not functionally neutral like the Year 2000 changes.

There are other IT twists too. For example, there are systems in which the currency of purchase determines the country of purchase: if the purchase is in pesetas the country of purchase must be Spain. But what is the country of purchase if the currency is the euro?

The use of spreadsheets is another problem area. Although some areas of an airline - such as revenue accounting and treasury - are always careful to specify currency, most staff use spreadsheets in one currency which is often not even stipulated in the spreadsheet. During the changeover there is scope for plenty of confusion as undocumented spreadsheets move around an airline with no indication of currency denomination.

Handling the euro

Most people have heard of the single currency and are generally aware that it is being introduced. However, there is still much uncertainty in most people's minds about the exact timings and implications. A key first step would therefore be a 'mobilisation' stage throughout an airline. This would involve informing staff about the facts and remaining uncertainties of EMU and encouraging them to think through the implications for their part of the business. This will provide a much more solid base for establishing an EMU programme to handle the changes needed to processes and systems.

The EMU programme for an airline has two unusual characteristics:

1 It has to cover almost every aspect of an airline.

2 It has to take account of external - mainly political and industry - decisions, many of which are still unclear.

These two characteristics make EMU programmes very complex and recognising the need to manage this complexity is a key step. An airline must have a strong central EMU team, which tracks external EMU events, assesses the implications, and then coordinates and supports the activities of the various subprojects.

Even airlines that are not headquartered within the eurozone will be affected by EMU. Any airline operating to and from the eurozone will of course see the euro as a foreign currency. But the pricing issues and other implications of the single currency are complicated, as is the need to handle the euro in the eurozone states.

Costs and opportunities

Some organisations are taking a defensive attitude to the euro by asking: 'What am I legally obliged to do and when do I have to do it?' More enlightened ones are approaching the event with an open mind: the introduction of the euro, more than any other single step to date in Economic and Monetary Union, reinforces the trend towards Europe as a single domestic market, and over time can be expected to herald unprecedented change across Europe. Any market change on this scale will inevitably produce winners and losers. In short, the euro brings opportunities as well as costs, but airlines won't find the opportunities unless they look for them.

A year ago it seemed that EMU might never happen. Next January the euro will take its place as one of the world's top three currencies alongside the US dollar and the yen, as 10 or 11 other currencies begin to disappear. Airlines that do not prepare for this upheaval will just have to hope that they can weather the resulting storm. Those that embrace it will have the best chance of success.

The timetable for the introduction of the euro (which will break down into 100 cents) is as follows:

1-3 May, 1998

The EU countries joining the first wave will be agreed. The most likely 'first wave' countries in the eurozone are: Belgium, Austria, France, Finland, Luxembourg, Ireland, Netherlands and Germany (known as the 'Baffling' scenario) with Portugal, Spain and Italy probably joining them. Denmark, the UK, Sweden and Greece are expected to sit it out for now. The 'bilateral rates' - the fixed rates to be used between all the eurozone countries once the euro is introduced - will also be announced, for instance the exchange rate will be fixed between the French franc and the deutschmark or the Dutch guilder and the Belgian franc.

1 January, 1999

The euro will be created with a conversion rate between the ECU and the euro of 1:1. The conversion rates from all the eurozone currencies will be announced and will be consistent with the bilateral rates announced in May 1998. At this point the eurozone national currencies will be expressions of the euro (known as 'non-decimal denominations' of the euro).

From 1 January the major world currencies will be the US dollar, the yen and the euro. The eurozone national currencies will no longer be traded on world markets.

It will be possible to make non-cash payments, such as credit cards, cheques or bank transfers, in either euros or national currencies from this date. The notes and coins of the national currencies will, however, continue to be the only physical currency until euro notes and coins are introduced on 1 January, 2002.

January, 1999 is the start of a three year 'no compulsion/no prohibition' period, during which there is no legal pressure to use the euro, and no legal pressure not to use it. However, many large corporate businesses are now saying that they expect their suppliers to use the euro from 1 January, 1999. During this period airlines cannot legally be forced to use the euro, but commercially they may have to.

1 January, 2002

Euro notes and coins will be introduced across the eurozone from this day. For an initial period euros and local currencies will both be legal tender. There will be various legal requirements to show prices in both euros and the relevant local currency (dual pricing). Currently the length of the changeover period will be defined by each country, but it must be completed, that is local currencies must be fully withdrawn, by 1 July, 2002.

1 July, 2002

The euro will be the only electronic or physical currency within the eurozone, which might by then include countries that weren't in the first wave. With this key step Economic and Monetary Union will be complete.

Source: Airline Business