Magazine article Management Today

Distance, Demand and De-Regulation

Magazine article Management Today

Distance, Demand and De-Regulation

Article excerpt

BUSINESS TRAVEL 3 Air fares wouldn't be fair if distance were the only criteria.

What immediately springs out when you look at the world price-per-mile map is that mile for mile it is a lot more expensive travelling in Europe than it is to the rest of the world, be it to Australia, Africa or the Far East. One of the reasons for this is the so-called |taper effect'.

In simple terms, airlines incur enormous fixed costs before they have even flown a mile: station costs, ground handling costs, maintenance and of course, once the flight has been made, landing fees. Those heavy costs are there whether you fly 100 miles or 10,000 miles. So obviously unit costs decline with distance as the heavy initial fixed costs are spread over more miles.

The map is based on business class fares. By and large the regulatory authorities like Britain's Civil Aviation Authority (CAA) do not concern themselves with business class fares. The CAA's remit is the ensure that all passengers on international scheduled services have access to a |basic fare' - namely a fare for basic point-to-point travel, which offers appropriate in-flight facilities and reasonable freedom to change reservations. The fare, normally a fully-flexible economy class fire, should be closely related to the cost of providing it.

Where there is such a fare the authority will to worry about business class fares. So on the London-Paris or London-Amsterdam routes, for example, there would be no intervention.

The CAA does, however, intervene on business class fares where there is no unrestricted basic fare. So, for example, on routes like London-Madrid or London-Milan, where the cheaper economy fares have restrictions attached, the CAA does examine the business class fare. The records show that on certain of those medium-length routes (London-Milan, London-Madrid, London-Copenhagen) the authority has quite frequently intervened to disallow new fares because of divergence of price from costs.

Since November 1990 there has been a new EEC regulation which may well operate against the interest of passengers. The scheme is known as |double disapproval'. What it means, in essence, is that disapproval of a fare can only become effective if the government at the other end of the route also disapproves it. If it does not then the new fare can go ahead unimpeded. Thus is the UK disapproves a new fare that disapproval will only bite if, say, the Germans or the French or the Greek governments also turn it down. In fact since the new regulation was introduced there have been quite a number of fare increases which the CAA would like to have stamped on but has been unable to because the other countries did not disapprove. …

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