When Britannia began providing intercontinental services out of Germany late last year, alarm bells began ringing at the national charter carriers.
Britannia is the first foreign charter carrier to compete in a market dominated by tour operators TUI, C&N Condor Neckermann Touristik and LTU, and their respective charter airlines Hapag-Lloyd, Condor and LTU International Airways - and is drastically undercutting its German rivals.
Despite pulling out all the stops, the German tourist industry failed to prevent Britannia, Europe's largest charter airline, from providing long-haul services to the Dominican Republic out of Berlin-Schonefeld.
Attracted by higher growth rates and the opportunity of exploiting its lower cost base, Britannia had already tried in 1996 to operate direct flights from Germany to the central American state. But the move was blocked by the German authorities because Britannia's parent, Thomson, is Canadian owned. Instead the airline had to reroute the service via Manchester.
A year later Britannia tried again, this time by setting up a German subsidiary. But once more it ran into problems because of its Canadian parentage when the German CAA argued it was not enough for Britannia to be based in the UK and that the subsidiary must ultimately be owned by EU capital.
In the end Britannia was forced to hand over majority ownership of 55 per cent in Britannia Airways Germany to European investors. Most of that is now held by a German bank with a small portion controlled by Britannia's German partner, tour operator Forsch Touristik International (FTI), with which the carrier has a five-year deal.
Local travel industry sources report that, despite advertising campaigns by the German tour operators implying German passengers were going to get poor levels of service and safety, the UK charter has filled its aircraft.
By March this year Britannia was operating a two week revolving flight schedule to the Dominican Republic with a Boeing 767-300 from Berlin, Munich, Frankfurt, Cologne, Hamburg and Stuttgart. A further two 767-300s are due to enter service and flights to Cuba, Jamaica, Majorca and Malta will be added for the European summer season.
One senior UK charter source says the carrier is in Germany to stay. Although it is undercutting local carriers by 20-30 per cent, Britannia Airways Germany is expected to be profitable in its first full year, he says.
If Britannia's low price concept catches on in Germany, the potential could be enormous. According to UK consultants ABN Amro's European Tour Operating report, 19 million Germans flew with tour operators in 1997 and long-term market prospects are good.
Charter traffic grew by 5-7 per cent last year, according to Luthansa-owned Condor Flugdienst, and with growing incomes in the east of the country and proximity to eastern Europe, the future looks bright.
However, Germany's prolonged economic crisis and rise in unemployment has made local holidaymakers more price-sensitive than in the past. 'If you work out the tour prices to, say, Malaga out of Frankfurt or Dusseldorf and compare that out of Gatwick, which is a similar distance, the price differential is fairly substantial,' says Laurie Price of consultants SH&E. 'That's why an awful lot of Germans will go elsewhere to get a better price,' he adds.
According to Bob Screen, director of operations at the UK's third largest charter carrier Air 2000, a consistent, if not very large, number of Germans and Dutch go as far as the UK to pick up to 50 per cent cheaper charter flights.
Britannia's ability to offer lower prices hinges on its higher seating densities, fleet efficiencies, higher load factors and low distribution costs. 'Britannia's standard fleet allows for cross-crewing and brings tremendous economies of scale,' says Price. Condor has similar advantages on crew commonality but LTUhas a wider range of aircraft.
German charters typically also have lower load factors than their UK competitors. Britannia is already achieving 95 per cent in Germany, at least 10 per cent higher than its German rivals. The Germans also incur higher costs from selling tickets, an exercise which requires a marketing and distribution network whereas Britannia relies mainly on tour operators. A spokesman at Condor says, like other German charters, it sells around 15 per cent of its own tickets.
Britannia will of course be hampered as much as the native charters by Germany's higher labour costs and restrictions on night flying. Fewer cycles per day mean lower profits and mean Britannia cannot hope to match the returns in the UK. However Britannia has said it will pitch profitability accordingly.
Nevertheless, the threat to local players is real enough for some charter airlines to have already begun cutting prices and reducing seat pitch, says Gus Boots, managing director of Bremen-based Air Consult.
Condor claims it has made no changes to its services. But the airline, which carried 7.1 million passengers last year, does have 'plans on file to modify prices' should Britannia's lower priced services take off in Germany. A spokesman from LTU, while recognising a growing market for low-cost air travel in Germany, says it is standing by to see how the new entrant performs before making any changes.
However, one senior industry source says late last year Condor set up a 'Lite' subsidiary operating four or five A320s out of Schonefeld airport, and putting more seats on its flights to the Dominican Republic with a view to doing this on other routes. It also provided a business class on this service, aiming at both a higher and lower price bracket than before. Senior German travel industry sources also say LTU has already introduced a lower-priced service on a trial basis on some transatlantic routes.
Meanwhile German charters are attempting to improve their cost base by taking more pages out of the UK charter industry's book.
In the UK, vertical integration has provided charter airlines with secure sales, high load factors, and low risk levels. Airtours and Thomson buy practically all the seats from their airline subsidiaries, Airtours International and Britannia, gaining cheaper prices and greater control over flights in return.
The UK concept of mutual benefits for both tour operators and subsidiary airlines appears to be catching. 'German tour groups are attempting to enhance their margin by integrating vertically and providing the flying themselves,' says Mark Brumby, a consultant at ABN Amro.
Last year saw a shakeup in the complex web of cross-shareholdings in the German travel industry. In September logistics group Preussag took over Hapag Lloyd, the tourism and shipping group which includes the third largest charter airline in Germany. This transaction gave Preussag's main shareholder, the state bank Westdeutsche LB, control of TUI, the number one German tour operator. Hapag Lloyd owns 30 per cent of TUI, while West LB directly owns another 30 per cent. Preussag is believed to want 100 per centcontrol of TUI to combine Hapag's charter airline with TUI's tour operating and retail interests.
In the same month Lufthansa's subsidiary, Condor, which claims to be the leading German charter airline with a 25 per cent market share, formed a DM7 billion (US$3.8 billion) 50:50 joint venture called C&N Condor Neckermann Touristik, with Neckermann, the country's second largest tour operator. Gus Boots, managing director of Bremen-based Air Consult believes this will allow them to obtain the kind of cost efficiencies associated with the UK model.
Whether or not local carriers reduce their costs, Britannia will still be confronted with the problems of accessing the German market. Although described by Britannia as the 'fastest growing tour operator in Germany', FTI, the fifth biggest in the country, is dwarfed by its larger rivals.
What Britannia really wants is Thomson backing it up on German ground. Thomson Travel group is to float on the stock market this May and has made it clear it is looking for a way into the German market. With UK rival Airtours, it was in talks to buy the tour operating arm of LTU, in which West LB bank is being forced to relinquish its 34 per cent stake due to the acquisition of the TUI shareholding.
It is unclear whether LTU International Airways was to have been included in a deal. However, the German cartel office has since allowed all of LTU to be put in a blind trust, at arms length from West LB, for three years. LTU International Airways says 'political' pressures on its two main shareholders, West LB bank and the Konler family, means foreign ownership has been ruled out for the time being. National elections later this year may, however, clear the air for a fresh look at ownership. Until then Britannia will have have to grow with FTI, says Boots.
But the German market is by no means the only one being targeted by the expansionist UK tour operators and their charter carriers.
Britannia's move into Germany was quickly followed, in December 1997, by Thomson's US$427 million acquisition of Swedish tour operator Fritidsresor and its charter airline Blue Scandinavia, now named Britannia AB. The airline, which flew 1.3 million passengers last year, and began operating under its new identity in February, employs 450 staff and operates five leased 757s from Orlando, Malm, Gothenburg and Oslo to Mediterranean resorts.
Britannia AB aims eventually to provide all of Fritedsresor's seats - only a third are currently supplied in-house. Denmark-based Premiair, which is in the long-haul business, currently does a sizeable amount of business with Fritedsresor and, in the medium to long term, Britannia sees considerable potential in developing the long-haul market .
The fact that Premiair is controlled by Airtours, the UK's second largest tour operator, through its ownership of Scandinavia's largest tour operator, Scandinavian Leisure group, will provide plenty of incentive. According to ABN Amro, Scandinavian Leisure carries 1.8 million passengers a year on inclusive air tours, giving Airtours a 40 per cent share of the inclusive air tour market, compared to Fritidsresor's 25 per cent.
Britannia aims to make the service on its Swedish subsidiary indistinguishable from its UK operation by the European summer, and the use of a clear corporate stamp - the Britannia livery was on the aircraft from day one of the launch in February - may already mark a clear move away from cooperation with Airtours.
But in Scandinavia the UK charter giants will have less impact on the market than in Germany. Scandiavia has a history of low-cost operations and the arrival of foreign entrants is unlikely to have a major impact on pricing in the future, believes Ralph Walldorf, senior vice president charter at Maersk Air.
Denmark-based Maersk Air, which is Thomson's largest supplier of seats in Denmark, feels its position is secure because of the UK operation's larger aircraft and continued emphasis on long-haul destinations.
What is still an unknown quantity is whether flag carrier Finnair, with a 50 per cent share of the Finnish market, will remain in the charter market.
Airtours, which is considered to have taken vertical integration more seriously than any other tour operator, is also active elsewhere in western Europe. In February it acquired Air Belgium as a result of its purchase of Sun International, and is bringing costs down by rapidly harmonising operations with its UK charter operation Airtours International, Premiair and its Canadian subsidiary Sky Service.
'There has already been a significant reduction in the company's costs,' says Air Belgium managing director Johan Vanneste. 'We had two aircraft - now we are part of a 40-plus aircraft group. This has allowed us to cut insurance and fuel bills.'
Air Belgium, 35 per cent of which is still owned by Sabena's charter airline Sobelair, has traditionally sold just 65 per cent of its seats to its tour operator parent, filling the rest of its capacity during Belgium's short summer season on an ad hoc basis or by leasing out aircraft and covering for exceptional circumstances such as strikes.
Up to 95 per cent of Air Belgium's future business - it currently flies 220,000 passengers a year - will be taken up with intra-group work, says Vanneste. Aircraft throughout the group will be positioned to archive maximum utilisation throughout the year. 'We'll be able to swap crews and aircraft in the group.' The cost advantages will allow Air Belgium to supply Airtours with better prices: 'Seat prices will come down significantly for next season,' he states.
New destinations are also on the cards. 'Sun International used to contract out seats to other charters for journeys from France and Holland. In future we are looking to start services from Lille, Rotterdam and Amsterdam,' says Vanneste.
With Airtours said to be planning a wider 'west European' division, the whole region looks certain to see stronger price competition in the future.
It may be some time before the German charters venture out of their home territory in a big way - financially troubled LTUis the only one to own a foreign charter company in the form of LTE of Spain - but ABN Amro believes there may well be four groups, - Airtours, Thomson, C&N and TUI - which will 'dominate globally' in the future.
This appears to leave little room for the outsider. 'The trend is towards consolidation and larger, vertically integrated groups. In these circumstances, small, independent charter airlines will have a hard time,' summarises Vanneste.