8 August 1998

Michael Harrison

BA begins to feel the summer heat

As summer sales go, the decision by British Airways to sell off 2 million tickets at bargain basement prices this weekend takes some beating. To put the offer into perspective, that is equal to 6 per cent of its annual passenger traffic. It is, of course, not an act of complete philanthropy towards the travelling public. Many of the seats on offer would otherwise have remained empty, others are on routes where business traffic has dried up for the summer. The promotion will also act as a loss-leader, tempting some passengers into travel agents and ticket shops where they will end up paying the full-fare. Then there is the sheer public relations value of the exercise, which is considerable.

This is also much more than just a summer clearance sale sparked, BA would have us believe, by the football factor. The World Cup may have kept lots of us glued to the television when we could otherwise have been booking holidays. But it cannot explain why BA suddenly has two million seats to sell.

A better explanation is that BA is beginning to feel the heat. For all its protestations about how competitive the airline market has become, the fact remains that BA enjoys an extraordinarily dominant position, if not a monopoly. It accounts for nearly 40 per cent of all the take-off and landing slots at Heathrow, the world's busiest international airport, a position built up over years of public ownership and bequeathed to shareholders on privatisation.

Like all monopolists, BA instinctively feasts on its customers whenever and wherever it can. Where it cannot because it faces competition, the instinct is to crush the opposition with low-priced fares, particularly if their pockets are not as deep as BA's.

We are witnessing something of that this weekend. Virtually all the cut-price deals are on domestic and European routes, where BA faces competition from the low cost operators such as Debonair, easyJet and Ryanair. Ask for two-thirds off the standard Heathrow-New York air fare this weekend and you will be politely shown the door. Ask for a 79 return fare to Nice (including airport taxes) and the sky's the limit. It just so happens that BA competes with three low-cost operators on that route. It is a similar story on routes to Scandinavia. Once the most expensive air corridors in the world, they have been brought within reach of most pockets by the likes of Ryanair. Thanks to BA you will be able to fly to any of the four capital cities for 89 between now and Christmas.

But that's enough free advertising for one day. BA holds over 3,000 weekly slots at Heathrow and thousands more at Gatwick and regional hubs like Manchester and Birmingham. It is perfectly entitled to use them however it sees fit.

But the argument raging right now between the competition authorities in Brussels and London is whether it should also be allowed to sell them. The European Competition Commissioner, Karel Van Miert, says no. The Director General of Fair Trading, John Bridgeman, says yes. The stand-off could cause yet further delay to the BA-American Airlines alliance since approval for the deal relies on the two airlines relinquishing 267 weekly slots. The difference between whether they are surrendered for free or sold could be as much as 500m.

There is already a grey market in slots at Heathrow and other capacity constrained airports. American Airlines and United Airlines recognised as much when they bought TWA and Pan Am's Heathrow routes in the late 1980s.

The question of who owns airport slots is a murky one. Under the system of grandfather rights, airlines have the right to the use of slots allocated to them over the years. But does that also mean they own them? Or do they belong to the airport or the Civil Aviation Authority, which regulates airlines. Do they, in fact, belong to anyone?

Mr Van Miert thinks not, which is why he believes BA should surrender them to new entrants without compensation. Mr Bridgeman thinks possession is nine-tenths of the law and that the alliance should be able to realise the value of those slots when they are sold, just as companies do when they are required to dispose of assets in return for approval to merge. The OFT's argument goes further, claiming that the sale of slots is the most competitive way of allocating them since they would go the airline that would make the best use of them.

What this argument tends to obscure is that BA never really paid for the slots in the first place, unlike other assets such as aircraft or engineering workshops. Second, there is a huge economic benefit to BA and American of being allowed to merge their transatlantic services. The two airlines have been careful never to quantify what that is in public. But when Lufthansa and United Airlines got together in a similar alliance, they said it was worth the equivalent of one extra jumbo jet load of passengers a day.

BA and American have been waiting for approval of their merger for more than two years now and probably calculate they have little to lose by exploring any avenue open to them. If they think the OFT's view has a chance of prevailing over that of Brussels, then why not wait a little longer?

But the whole bureaucratic process of regulatory approval is threatening to result in ossification. BA is delaying an announcement about whether a 2bn jet order will go to Airbus or Boeing in the hope that it can lever a better deal out of Brussels. In the meantime, rival alliances go from strength to strength while BA's strategy remains fuzzy and its share price becalmed. At some point, BA's chief executive, Bob Ayling, has to decide where his bottom line lies.