Flights of Fantasy?

Open Skies - Just the Ticket for Cheap Israel Flights?

The reform agreement that opens up Israel's skies in 2014 will see bargains galore for savvy consumers, but doesn't mean the Israeli tourism industry will take off.

Here’s a present to kick off the new year – 25 low-cost flight destinations to and from Israel, including Berlin, Budapest, Prague, Munich, London, Paris, Rome, Katowice, Vilnius and Cluj. And by spring, 88 low-cost flights a week will be offered by foreign airlines.

For years, the much-discussed Open Skies reform led to some heavy disputes, but the pact with the European Union is now a reality. Bulletins on the opening of new European destinations by low-cost carriers have become a matter of routine. Regular airlines haven’t been left out of the picture, either: Lufthansa recently added three flights between Israel and Munich, while Alitalia said it would be providing three more weekly flights to Rome.

Not to be left behind, El Al said it would launch its new low-cost UP brand of flights starting March 30, which will include some 50 weekly flights to five European destinations (Berlin, Budapest, Kiev, Larnaca and Prague).

How will this affect the pockets of Israeli tourists and the local tourism market? Here are seven things that will happen in 2014, thanks to Open Skies.

1. ‘Year of the low-cost’

Departures by Israelis will break the 5 million passenger barrier for the first time in history, according to tourism industry forecasts. “Assuming 2014 is reasonable with respect to security issues and free of any exceptional incidents, it could be declared the year of the low-cost,” says Yehuda Zafrani, deputy CEO at Ophir Tours. “We expect an increase in incoming and outgoing traffic at Ben-Gurion International Airport to over 14 million passengers, with some 1.5 million on low-cost flights. In 2013, there were 500,000 to 700,000 passengers on low-cost flights.”

2. Cheaper tickets

The anticipated increase in the number of passengers is obviously connected to price. “If the dollar stays low and low-cost carriers continue operating here, we can estimate that ticket prices over the next year will be about 10% lower on average,” says Zafrani. “All this is conditional on the customer knowing to book ahead of time, because to get a return airfare for Europe of $200 to $400, the consumer needs to change his habits and order three to six months before the departure date.”

However, Yossi Fattal, head of the Israel Tourist &Travel Agents Association, pours cold water on the enthusiasm over prices. “The common fantasy that anyone booking ahead can fly at a ridiculous [low] price belongs in the imaginary world,” he says. “The low prices actually cover a maximum of 20% of the seats; the rest will fly at average market prices. In other words, 80% of the noise is over 20% of the traffic. The vast majority will continue to pay average prices of $300 to $500 to Europe.”

3. Changes in traveling habits

Fattal assumes that the 20% who manage to get the lower price will be those who wouldn’t have flown otherwise, and that these are the people who will boost traffic. “These prices will bring people out of their homes during periods in which they’d never considered traveling before,” he says. “There will be a considerable change to Israelis’ consumer and traveling habits. They’ll start going away for short weekends throughout the year, and take time off from work especially, not just during peak periods like holiday seasons and the summer.”

Fattal claims the modus operandi of the low-cost carriers is to flood the market to a specific destination during the first year, pushing existing players out of the market – and then prices start rising again. “But at least we can expect an aggressive year in terms of prices, which will be good for Israeli consumers,” he argues.

4. More tourists arriving in Israel individually

It’s not only Israelis who will enjoy lower prices, but also tourists who’ll want to take advantage of the cheap flights and come for vacations in Israel. The Tourism Ministry isn’t prepared to estimate their numbers, but everyone in the industry agrees there will be a big change.

“The planes arriving within the framework of the Open Skies pact will bring in many tourists,” says Ephraim Kramer, CEO at Eshet Tours. “Not the pattern of tourists we were used to – relatives from America and organized groups – but more grass roots; young people looking for a cheaper vacation, booking their flights alone and filling small hotels – even three- or four-star hotels.”

Kramer is referring to the market segment termed “free independent travelers” (FIT), a sector the Tourism Ministry hasn’t set its sights on in its previous marketing campaigns. “If geopolitical considerations overshadowing the Middle East are factored out, we might see an increase in tourism traffic in 2014, but this depends on marketing efforts,” says Shmuel Zurel, head of the Israel Hotel Association. “Marketing needs to be adapted to individuals and not just groups, and marketing budgets that were slashed by one-third need to be increased. Otherwise, what’s the point of these [low-cost] flights?”

“When there is a larger supply of flights, we’ll launch campaigns and make marketing agreements,” promises Amir Halevy, director general of the Tourism Ministry. “We’ll market ‘city break’ packages to Tel Aviv with cheap flights and hotel lodgings at an attractive price.”

But the attractive price mentioned by Halevy refers, mainly, to the flight component. The cost of accommodations in Israel is still very high compared to Europe, and certainly when compared to neighboring countries like Turkey and Jordan – and this won’t be solved by any Open Skies agreement. The Bar Nir Committee recommendations for lowering the cost of vacationing in Israel, which were approved by the government at the end of 2012, haven’t yet been implemented. “In my opinion, the increase in incoming tourism will be small because of the cost of hospitality services,” says Fattal.

“Implementation of the government’s decision to lower vacation costs should start, but right now everything points to the opposite occurring,” says Zurel. “Local taxes are rising 3.6%, as well as water and electricity rates and food prices. Nobody is taking care of canceling the requirement for security, and we’re also suffering from the eroding value of the dollar.” Kramer believes an increase in incoming tourism will actually lead to higher hotel room prices, even for Israelis.

5. Changes in ownership structure

Ticket prices can still be expected to fall drastically, according to Israir Airlines CEO Uri Sirkis, based on what he calls a “six-stage model in implementing Open Skies” – as seen in other countries with low-cost flights to and from Israel such as Ukraine, Russia, Morocco, Greece and Hungary.

“First, airlines greatly increased their numbers of flights and new companies also began operating,” explains Sirkis. “Next, many low-cost carriers entered the picture while the number of average seats-per-flight was reduced through the use of smaller aircraft. As a result, demand soared and the traffic of Israelis to these countries increased. In the final stage, the airlines of these countries lowered their average prices considerably, and as a result the market structure and ownership of these companies changed.”

Sirkis claims the Israeli market is following the global model to a T. “The bad news for Israel’s aviation-industry captains is that the final stages of this model still loom ahead – a sharp drop in the average ticket price, and a shift in market structure and the ownership of local carriers,” he says. “Israir’s solution isn’t the aggressive sale of cheap tickets, but a dramatic reduction in production costs throughout the company, along with streamlining, reducing management, and enhancing the synergy between aviation and tourism to boost returns.”

Gadi Tepper, CEO of Arkia Israel Airlines, also believes the aviation market is headed for structural change. “For a while, there has been talk about the need for mergers in the fields of aviation and tourism,” he says, “but it seems that with Open Skies taking effect, the flexibility of company owners and Israeli regulators on this matter will also increase.”

6. Players will become a one-stop shop

“The market’s big players, including the travel agencies, are beginning to understand that, in order to survive, they need to become producers and owners of hotels, tourism companies and airlines, as in the example by the German tourism concern TUV, which constitutes a one-stop shop for tourism and aviation products,” says Tepper.

7. Change in the charter market

Fattal points out that Open Skies will affect the air-charter industry. “This field will undoubtedly change,” he says. “It was the deals segment of the industry, and it will be interesting to see if, instead of leasing planes as they did in the past, the charter companies will now buy seats on low-cost flights.”

Zwicky Abramovich