Price Reductions: Ryanair And Market Dominance

The national minister for development, Íñigo de la Serna, has asked airlines to reduce their prices because of the cut to airport taxes that will come into effect on 1 March and which will be repeated each year until 2021. Although, as he has said, the government has no legal power to demand that they do cut prices, it does have some authority. The airlines are likely to play ball; it's wise to keep the minister sweet.

The first airline to say that it will reduce prices was Air Europa, the Mallorca-headquartered operation that flies the flag for Spanish aviation, a flag that has been progressively lowered to the point that it's almost sharing space with airport ground crews. Other significant airlines are either foreign or foreign-owned. For Juan José Hidalgo, the boss of Globalia, of which Air Europa is a part, a positive response to De la Serna's request was to have been expected: a patriotic statement of aviation intent.

Less patriotic and purely hardnosed was Ryanair's announcement that it will pass on the tax cut. Again, it was to have been expected. Michael O'Leary has constantly called for lower airport charges; they are all part of the low-cost mix. With Ryanair, though, how can anyone be certain that the reduction is being directly or partially applied? This is to not say that it won't be, but is to say that the airline's prices are flexible, and it has demonstrated its willingness to cut prices in order to guarantee occupancy.

In the final quarter of last year, Ryanair achieved 95% seat occupancy. That was some achievement. By coincidence, it also turned in a 95 million profit for the quarter. While this was down - it was attributed to the fall in the value of the pound - it was still a healthy return, given that its prices overall were 17% lower. Taking account of a reduction in airport tax shouldn't pose Ryanair any business difficulty.

The point with Ryanair, and indeed other airlines, is that price fluctuation reflects the application of science and in particular the technology of Big Data. Prices aren't determined on a whim or purely marketing speculation; there is knowledge to back it up. And this information has been gained over years through the analysis of purchasing behaviour and demand. You don't become a highly successful airline just by taking a punt.

By contrast, there is the case of Iberia, which now also has its low-cost brand. Its president, Luis Gallego, has said this week that 2017 is going to be a difficult year. IATA, the International Air Transport Association, is forecasting a fall in profits of the order of 16% because of a slowdown in global economic activity and rising costs. Iberia has yet to say if it will accede to the minister's request, but it was perhaps no coincidence that Gallego was sounding a warning about lower profits at the same time as the request was being made. There are, so it seems, some airlines, such as Ryanair, which have little problem adjusting to altered pricing mechanisms, while there are others which do.

It is the ability of Ryanair to sell places that leaves other airlines, especially Air Europa and Vueling, gasping to keep up. It has been suggested that additional flights in winter between Palma and both Barcelona and Madrid could cause "havoc" with competitors. Moreover, there is increased service between Ibiza and Madrid and Barcelona, to say nothing of other increases to, for instance, Gran Canaria. It's a full-frontal battle with Vueling, Norwegian and others, and one that Ryanair is well-positioned to win. It can get the occupancy, while competitors struggle to fill their planes. Price reductions? Bring 'em on.

The Contradiction Of Airport Policy

Palma's Son Sant Joan airport topped 26 million passengers last year. It was a record. Roughly another million may be added this year. Another record. And when the figures are released month by month this year, which they are in laborious detail showing percentage rises for this, that and another thing, the mongers of saturation doom will assure us that the island has reached and passed the point of touristic redemption. If only the numbers arriving at the airport could be limited, they will wail, while wiping away the tears of non-sustainability.

Something curious happened on Monday. One says curious, but it wasn't so curious to hear a Balearic minister calling for a cut in airport charges. This demand has been made before. A justification of bringing about an increase in Balearic competitiveness also wasn't curious. Lower costs (in theory) for the travelling public and freight, and competitiveness is gained. But it does rather depend on which part of the public is doing the travelling and what the freight is for.

What was curious was when the minister, Marc Pons (transport), referred to boosting Balearic competitiveness as a tourist destination and to promoting additional traffic. Did we hear this right? He wishes the records to keep on being broken and thus intensify the cries of the saturation mongers?

Pons may of course had in mind the promotion of more traffic for the off-season. But if he did, then he is still firmly in saturation territory. There may be (are) certain members of the Balearic government, its president for example, who have come up with the ludicrous notion that summer visitors can somehow be shifted to the winter, but that is not about to happen. More visitors in winter mean more visitors, period. In any event, he was also calling for an increase in the off-season tariff discount from 20 to 25%.

Although one struggles to appreciate how much difference a 2.6% reduction in charges over the next five years, which is what he was calling for, would really make, he clearly believes that it would make a difference: greater competitiveness and more people. He has an ally in this regard in the form of the National Competition Commission. It has been demanding that Aena drop its charges by two per cent and it has been at loggerheads with Aena for a while. Basically, the commission thinks the airport authority overcharges, while there is also the issue of accounting for airport operations, with Aena being required to fully adopt a dual-till system by 2018.

What Pons was really driving at was the fact that Palma and the other two Balearic airports each year generate more than 1,150 million euros of airport taxes that go to Aena and which have no benefit for the Balearics. His 2.6% reduction would save the travelling public roughly 30 million euros a year; this public being both resident and tourist. But while he couched all this in terms of greater competitiveness and more employment, the bottom line - once more - is the desire for airport co-management, something that has always been remote and becomes ever more remote if the national government decreases its shareholding in Aena, which it has suggested that it will do. The consequence of this would be that the state would no longer be the majority shareholder, albeit that it would retain a significant holding (probably 40%).

But where this becomes ever more curious is in the apparent contradiction with what has been said in respect of the so-called tourism saturation. Biel Barceló is not alone in having explained that because the regional government does not co-manage the airports, it cannot adjust the number of tourists arriving. The implication is that were there to be co-management, then the government would seek to reduce flights.

Whether it would be able to is a wholly different issue. The national government and Europe would have its say, and the competition commission certainly wouldn't look upon it favourably. Even if there were to be a policy of reduction, courtesy of co-management, it would only take a change of regional government for the policy to be reversed. The Partido Popular, which has been as much in favour of co-management as the left (Jaume Matas believed he was getting somewhere on this with the Zapatero administration back in 2005), would doubtless free things up again. Apart from anything else, this would all cause great uncertainty for scheduling.

Fundamentally though, how would such a policy square with the Pons advocacy of greater competitiveness and greater traffic through a reduction in airport taxes? On the one hand there is talk of limiting arrivals; on the other there is talk of their increasing. It's baffling. Securing a better deal for passengers is an admirable aim, and the additional tourists would no doubt be grateful. Curious.

Yet More On Tourist Taxes

The regional government has asked the citizens how they would prefer the sustainable tourism tax to be spent. An online poll revealed an 80% preference for environmental protection and conservation, a result which comes as no surprise. Depending on which options the citizens are presented with, then the citizens - more often than not - will reply with an answer that might have been hoped for: among certain elements of the government at any rate.

Were the government to follow this preference, then the tax would become an eco-tax, but as we have been informed, by the finance minister, it is not an eco-tax: that was something they did thirteen years ago. This tax is different. And the government still isn't clear as to how it intends spending it.

One person who has made his views clear is the prime minister. Mariano Rajoy is not in favour of eco-taxes or other taxes directed at tourists. As pointed out previously, such a view avoids the fact that he and his government increased taxes - indirect ones - aimed at tourists: the tourist rate of IVA (VAT). This was, in a sense, a national tourist tax, but of course no one ever referred to it as such.

It isn't totally beyond the bounds of possibility that a new national government might pursue a national tax, though this would almost certainly require Podemos being at the centre of the next government's policy-making, which it may not be. Such a move would be interesting in that it could well end up being challenged in law because of regions' statutory rights over tourism policy. Hypothetical though this might be, tourist taxes are being talked up (or down) in different parts of the country. The Canaries had dismissed a tax, but the idea still keeps cropping up. The city of Seville is said to be looking at one. The Valencia region may yet introduce one.

In other tax developments, the Més lead candidate for Congress, Antoni Verger, has been speaking again about his party's wishes for air travel, a component of which would be local management of airports through which, he believes, it would be possible to reduce the airports' taxes on airlines, i.e. the charges for landing rights and handling. Rather more significant, though, is the powerful lobby of Europe's five largest airline concerns. Air France-KLM, IAG, the Lufthansa Group, Ryanair and easyJet are calling on the European Commission to act "immediately" in taking concrete measures to reduce airport taxes. They argue that, while these charges have increased by an average of two-thirds in the past ten years, the supply side (i.e. the airlines) has been lowering its charges, in other words its ticket prices.

The airlines' lobby complains about "airport monopolies on a grand scale", which is something that can be applied to Aena, and these leading airlines believe that a mandated lowering of taxes would create employment and contribute to general economic growth. One hesitates to suggest that the lobby's intervention will lead to significant cuts, as there is the Spanish example to bear in mind: the National Competition Commission has forced a reduction in taxes for next year, but it is certainly not great. But the fact that the matter has been placed on the Brussels agenda might result in something more substantial, which could only be of benefit locally in Mallorca, where Palma has the third highest (all year) charges in the country.

MALLORCA TODAY - Airport taxes to be reduced in winter

AENA, the national airports authority, has agreed to reduce taxes for the use of Balearic airports, including therefore Palma's Son Sant Joan, during the winter months from November to March. This is a move which is hoped might result in more winter flights.

See more: Ultima Hora

Harming Tourism: Government policies

Hugh Morgan, director-general of Cosmos Holidays, bemoans the fact that British reservations for holidays in Spain this summer are down by 5%. Spanish tourism, as a whole, will enter its own recession in 2012, experiencing a fall of 0.3%. In Greece, airport taxes have been scrapped for nine months. In Egypt, these taxes have been reduced, there has been "aggressive promotion" and in the first quarter of 2012 the level of arrivals increased by over 30% compared with the same quarter of 2011.

These different stories are inter-related. In the case of Spanish tourism, the reason for it experiencing negative growth in 2012 is due to a fall in demand from the domestic market, one that will not be compensated for by overseas markets. This local demand is being affected, among other things, by the rise in airport taxes in Spain. British reservations are not being helped for the same reason. Yet in Greece and Egypt ... .

There is more to the British story than just the taxes, there is also the fact that joint promotions between the Spanish tourism agency, Turespaña, and tour operators have all but ceased. Not because the tour operators have wanted them to, but because the Spanish Government has slashed the tourism promotional budget to the extent that it has. And for the Spanish Government, read also the Balearic Government. Yet in Greece and Egypt ... "aggressive promotion."

There are of course other factors affecting a fall in British tourism, but if the boss of Cosmos argues that a lack of joint promotion and a rise in taxes are major ones, then I am not about to disagree with him. It's when you put these different stories together, though, that a picture emerges that paints a scene of governmental ineptitude and one-dimensionality of economic strategy, both nationally and regionally in the Balearics.

Neither Madrid nor Palma are showing the slightest sign of doing anything to inspire growth. Both are interested solely in austerity and in measures that will do nothing to help growth. Tourism, for all that it is a double-edged sword in being a key driver of the economy and being an industry sector on which there is an over-reliance, cannot be treated, should not be treated with the apparent disregard with which it currently is. Attitudes in Madrid and Palma are perverse.

It may prove to be that, with people being killed again in Egypt, the best intentions of Egyptian tourism leaders are dashed. The beneficial effects of the Arab spring on Spanish and Mallorcan tourism had been expected to continue this year, and they may indeed now do so. But it is poor strategic thinking if a reliance is placed on external factors, such as events in Africa, to the detriment of proactivity, e.g. in promotion, or of use of the fiscal system in aiming for growth in the key Spanish tourism sector.

The perversity of attitudes towards tourism is indicative of a serious malaise within governmental circles. Current policies are being aimed mostly at symptoms of Spanish economic troubles and indeed at making these symptoms worse, e.g. by increasing IVA, rather than attacking causes. I have great sympathy for the arguments regarding a rationalisation of public administration, e.g. repatriation of certain responsibilities to central government, elimination of tiers of government or mergers of existing local authorities. I have said previously that a solution is staring the national government in its face, i.e. the system of regional government and decentralisation as it is currently practised, but as I said more recently, in connection with the tiny administration of the village of Búger, it isn't anything like as simple as one might think for this system to be changed.

Political expedience doesn't rule out a change, but would any Spanish government, including the current one, be bold enough to take remedial measures that would, almost at a stroke, have a highly positive effect on the deficits nationally and regionally? The answer is almost certainly no. So instead, the government takes the easy options to do nothing, where promotion to drive tourism and therefore growth is concerned, or to hammer everyone arbitrarily through indirect taxation and to further hammer tourism by raising airport taxes. They are economics of the madhouse, determined by a total absence of political courage in effecting a major change to a root cause of Spain's troubles.

Over in Greece, they know all about economics of the madhouse, but remarkably they also seem to know something about tourism. The Spanish Government clearly doesn't. But then what do you expect if you appoint a property expert as a tourism secretary of state?


Any comments to andrew@thealcudiaguide.com please.

MALLORCA TODAY - Government to approve lower airport taxes

Following a meeting between Isabel Borrego, the national tourism secretary-of-state, and President Bauzá, central government would appear to be moving towards a reduction in airport charges that will help in improving off-season flights. The Balearics and the Canaries are, it would also appear, to receive preferential treatment in this regard. The government prefers this method of incentive to that of subsidies, as it considers them to be discriminatory.

MALLORCA TODAY - British airlines call for lower airport taxes

Tour operators and airlines from the UK met yesterday with regional president Bauzá and tourism minister Delgado to discuss the need for lower airport taxes in order to stimulate more flights into Palma in the low season. Notwithstanding this, the airlines also pointed out that more needed to be done to ensure that establishments on Mallorca were open in winter.