Unfriendly skies

By Karol Chlipalski

LOT Polish Airlines could fall victim to British Airways in an imminent price war, as the British flag carrier has lowered its fares to match those of low-cost airlines that are looking to enter the central European market.

As part of its fare-cutting strategy, BA intends to win over as many passengers as possible here to prepare for the possible entries of Ryanair and easyJet into the central European market. BA now competes with less expensive competitors on 62% of its connections in Europe.

The British carrier's announcement that it was following low-cost carriers in slashing airfares came unexpectedly, forcing LOT to immediately reduce prices on some of its flights with London connections by almost half. LOT's flights to London are now less expensive than BA's.

Many industry experts say that LOT may not survive this price war.

"If other airlines lower their prices following BA's example, LOT will not endure this competition," said Włodzimierz Rydzkowski of the faculty of transportation at Gdańsk University. "BA can get its profit outside Europe, which is not the case with LOT." Poland's national air carrier has not turned any operational profit since 1997.

While the financial situations of many airlines have become dire, the International Air Transport Association (IATA), an airline industry organization, has authorized them to raise their prices in light of reduced travel due to the war in Iraq and the spread of the Severe Acute Respiratory Syndrome (SARS) virus - a lethal flu-like illness which has been spreading worldwide through air travel. IATA said that this year carriers would probably have collective losses of about $10 billion.

Low-cost carriers have started slashing prices to save their businesses from these blights. For example, Ryanair's president Michael O'Leary wants to distribute tickets for L9.99, regardless of destinations, to boost air traffic.

As of April 1, BA followed suit, reducing its ticket prices by up to 48%. A passenger can now fly round-trip from Warsaw to London for $149 instead of the previous $289.

"If we hadn't introduced a new strategy, in a few years we would have disappeared from European skies," said Krzysztof Głšbiński, the newly appointed country manager of British Airways in Poland.

British Airways representatives say that they want to introduce methods of management similar to those of the low-cost carriers. The airline's first steps were to cut unprofitable connections, reduce capacity by using smaller planes, limit the number of suppliers and cancel some routes altogether, such as London to Gdańsk.

BA also wants to standardize its fleet as part of its strategy.

"For our regional hubs, a simpler fleet helps to deliver operational efficiency," Głšbiński said. The airline's fleet will now consist of only Airbus A318s and A320s and Boeing 737s.

The most revolutionary element of BA's strategy consists of simplifying its system of tariffs. To date, every passenger had to deal with mysterious acronyms such as Apex, Pex, Excn, Budget and Club, all of which affect ticket prices. Now BA will have only three tariffs that will vary depending on the flexibility of changing departure times.

LOT remains upbeat about increased competition from BA. "We will make a profit thanks to increased traffic on these connections," said Leszek Chorzewski, LOT's spokesman, adding that the carrier's prices to destinations other than the UK would remain unchanged.

He also cautioned against fare cuts.

"Low prices are often subject to numerous restrictions; we can't say that if we book the ticket, we get the fare we saw in the advertisements," he said.

Chorzewski added that LOT was not considering increasing its fares, despite the high price of oil resulting from the war in Iraq. Oil prices rose by 40% before the war, and have only now begun to fall. If nothing unexpected occurs, this trend will likely continue. Chorzewski said that LOT has protected itself against oil price fluctuations by signing hedge contracts with its suppliers, so it will not have to risk paying more in the near future.

But in the end BA and LOT may not lose too many of their passengers to low-cost carriers, should these companies enter the market. According to a report issued last year by consulting firm McKinsey, most passengers who flew on low-cost carriers did not defect from national airlines, but rather used the discount carriers for vacation travel or regular commutes to work.