Fares rise would follow closure of shops

Dramatic rises in air and sea fares are on the cards if duty-free sales within the EU are abolished as planned in 18 months time, according to studies commissioned by the transport industry.

But there is reason to suspect that while industry representatives are currently "talking up" the price rise threat as part of their campaign to have dutyfree retained, the impact may not be as severe as predicted.

Scrapping duty-free would hit airlines and ferry companies in various ways. For airlines, increased landing charges are likely if Aer Rianta, the management authority at Dublin, Cork and Shannon airports, is forced to seek alternative revenues to replace millions of pounds of lost duty-free profits.

An Irish study, by Tansey Webster & Associates, suggests that the loss of intra-EU duty-free sales last year would have cost Aer Rianta £25 million in foregone profits.

Ferry companies, who make up to 30 per cent of their revenues and an even higher proportion of their profits from on-board duty-free sales, would be even more directly affected. The same applies to low-cost airlines, who rely more heavily than large competitors on in-flight sales.

On top of that, even a slight increase in fares would have a bigger impact on low-cost airlines whose passengers are more sensitive to increases in fares.

By all the established criteria, Ryanair is more likely than most to be forced into increasing prices to recoup the losses caused by the abolition of duty-free.

An additional factor for Ryanair is the fact that, as the company stated in its Pathfinder Prospectus earlier this year, one-third of its flight attendants' pay comes from commission earned in the sale of in-flight beverages and dutyfree goods. Abolition of duty-free could have a dramatic impact on the airline's wage bill.

Yet Ryanair remains confident that it can avoid increasing fares, even without such a valuable source of revenue. Mr Charlie Clifton, director of ground and in-flight operations, said the company was in the process of introducing a number of alternative money-raising innovations.

These include in-flight advertising and the introduction of new items for sale, including telephone cards which will be available on the airline's flights from next April. He called for a similar imaginative approach from Aer Rianta to keep airport charges down.

Any attempt by Aer Rianta to recoup duty-free losses through higher charges to airlines would be strongly resisted, he added. "We would be jumping up and down if that was their approach; we feel very strongly about this issue."

Nevertheless research carried out for the transport industry by independent consultants suggests some price increases will be inevitable.

A report this year by a British consultancy firm, Symmonds, Travers & Morgan, estimated that some low-cost airlines would have to increase fares by 22 per cent. The Tansey Webster & Associates study says higher fares for Aer Lingus passengers "cannot be avoided".

But how much higher? Aer Rianta says that to recoup fully, reduced profits from the loss of intra-EU duty-free would require an increase in airport charges of 50 per cent. But Mr Frank O'Connell, group operations manager of the company, says he cannot predict what the increase will be until the full impact of abolition is clear.

Price is only one factor which encourages people to buy in duty-free shops; it remains to be seen what level of trade can be maintained in airport passenger areas if the duty-free incentive is removed.

The European Commission also argues that there is too much emphasis on the contribution duty-free sales have made to lower fares, particularly air fares. It says deregulation has been the main reason for low fares and will continue to have the same effect in the future.

It is also suggested that Aer Rianta, which has steadily expanded its worldwide operations, should be able to comfortably cope with the loss which was signposted eight years in advance.