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The Travel Adviser: The year of the bad call
By MARK FELDMAN
12/29/2012
The open sky agreement would have you believe would have opened the Israeli aviation industry to greater competition.
 
In the words of humor columnist Joel Stein, “There was a word for people who approached decision making rationally: losers.” In the case of the open sky agreement between Israel and the European Union, this applies not only to those who decided, after years of negotiations with the European Union and its member airlines, to delay the agreement, but to the rest of us as well.

The open sky agreement, while not the panacea the Israeli Hotel Association would have you believe, would have opened the Israeli aviation industry to greater competition. It’s true that in principle such a step could have eventually led to lower prices (keep in mind that once the agreement was signed it would have only gradually come into effect over five years), but in practice, things aren’t so simple.

Here, in short, are the four basic laws of supply and demand:

1. If demand increases (tens of thousands of European tourists insisting on coming to Israel) and supply remains unchanged, a shortage occurs, leading to higher prices.

2. If demand decreases (threat of war, boycotts, higher hotel rates) and supply remains unchanged, a surplus occurs, leading to lower prices.

3. If demand remains unchanged and supply increases (European airlines treble their flights to Israel), a surplus occurs, leading to lower prices.

4. If demand remains unchanged and supply decreases, (European airlines focus on other markets like the Far East) a shortage occurs, leading to higher prices.

In a competitive market, such as exists today, the unit price of an airline seat will vary until it settles at an equilibrium set by consumer demand and the quantity of flights supplied by the airlines. Let’s be very clear: tripling the number of airplane seats available on flights to Israel will not result in lower prices. This is because airlines use sophisticated computer models to analyze the market before opening up new routes; when a new route is added, it because there has been an increase in demand. This means that the supply/demand equilibrium doesn’t change, and thus prices don’t change.

So don’t be lulled into believing that the open sky agreement would change the economic model. Listening to Avi Federmann, president of the Israel Hotel Association, besmirch and bemoan the government’s decision to delay the implementation, one would assume the sky was falling. Avi, I have a tip for you to increase your members’ occupancy rate – lower your rates. Israeli hotels remain in the top tier of room rates worldwide.

More often than not, when quoting a fare for a tourist, I start off by apologizing for the high rate I’m about to quote. My excuses run the gamut from holiday surcharges, to high costs to distribute food to hotels in the Dead Sea and Eilat, the high wages that we pay for hotel workers and other insipid reasons.

One short-term solution would be to build more hotels. (Of course this is Israel and nothing is built in the short term; witness how long it will take to complete the highway expansion between Tel Aviv and Jerusalem. So we will file this under long-term solution). Build more hotels and the average room rate will drop dramatically.

Then you can start marketing even more aggressively to the European tourist market.

Political pundits have pontificated that the reason for the delay was to curry favor with the Histadrut, whose workers have been drinking the same lemonade. They too have been lamenting the agreement, their flames fanned by false rumors of massive layoffs.

No doubt the Labor Party, led by Shelly Yacimovich, is quaking in its boots at the prospect of workers deserting in large numbers and voting for the Likud in the upcoming election. Our prime minister and his cronies, however, must step back from the political situation to review what has transpired in the airline industry in Israel.

Easy Jet has successfully entered the market, claiming huge chunks of the British market with her flights from London and Manchester. She’s picked up thousands of loyal Swiss passengers flying from Geneva. SAS returned to the Israeli skies last summer with flights to Copenhagen and will be adding Stockholm to her flight routes next summer.

Dozens of other European airlines have initiated routes to Israel in the past two years, primarily due to demand. The marketplace does work; the open sky agreement will be a boon in promoting Israel.

It won’t fill the hotels, nor will it cause the demise of El Al.

El Al, along with the other Israeli airlines, Arkia and Israir, are plagued by poor management and incapable of finding new markets. That Arkia and Israir elected to not compete on the Tel Aviv-London route, allowing Easy Jet to carve out this market niche for itself, speaks volumes about their inability to make correct business decisions.

So stop your procrastination, prime minister. Sign the agreement. The majority of the players in the tourism industry welcome it. As in most instances, the reality may not be all that we imagined, but most definitely it’s a risk worth taking.

Mark Feldman is the CEO of Ziontours Jerusalem. For questions & comments, e-mail him at mark.feldman@ziontours.co.il
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