Select Committee on Transport, Local Government and the Regions Eleventh Report


The Transport, Local Government and the Regions Committee has agreed to the following Report:


I. Introduction

1.     Global demand for air travel collapsed immediately after the catastrophic events of 11 September 2001. In the month after the terrorist attacks, air traffic on routes between the United States and Europe fell by 35 per cent, and within Europe by 10 per cent.[1] In the United Kingdom, British Airways traffic in October fell by 24.7 per cent overall on the previous year, with a 36.2 per cent fall in premium traffic, and load factors fell by 8.1 per centage points to 63.1 per cent.[2] Premium traffic was hardest hit, partly as a result of the decline in economic confidence and partly due to companies imposing travel bans, with trans-Atlantic and Japanese routes worst affected.[3] In response, many airlines withdrew routes, cut back services and shed staff. For example, shortly after 11 September, British Airways announced an additional 5,200 job losses, and bmi British Midland announced 600 job losses.[4] Several airlines with pre-existing financial difficulties were forced into part or full closure.[5] In December 2001 and January 2002, we held two evidence sessions into the responses of the air transport industry and of governments to the attacks in the United States and the longer-term prospects for aviation in this country. We received more than thirty written memoranda. We are grateful to all those who submitted written and oral evidence and to our specialist advisor, Mr Laurie Price.

2.   Since concluding evidence for this Inquiry, we have undertaken a separate short inquiry into the finances of National Air Traffic Services. We shall consider some of the wider issues relating to air transport in our forthcoming inquiry into the Government's Aviation White Paper, which the Minister, Mr David Jamieson confirmed to us in evidence in January would be published in the autumn.[6] We expect to see firm proposals for the future of aviation in the forthcoming Aviation White Paper, which is due to be published in the autumn of 2002. We are concerned that the timetable for the White Paper has already slipped.

The United Kingdom air transport industry before 11 September

3.   In 1998, the United Kingdom's air transport industry contributed, in 1998, an estimated £10.2 billion to gross domestic product, and directly supported 180,000 jobs.[7] In addition to its direct economic effects, the air transport industry is vital to many businesses, providing cargo services, supporting tourism and attracting international foreign investment through the quality and quantity of international air connections.[8] The United Kingdom supports a large number of airlines that operate scheduled, charter, no-frills and cargo services.[9] The industry also provides vital social and economic links for the United Kingdom's remoter regions.[10]

4.   Despite the size and scale of the industry, airlines have traditionally survived on slim profit margins. Moreover, the industry displays cycles of growth and contraction. Capacity follows demand, which creates periods of overcapacity when demand falls.[11] Industry analysts had forecasted another cyclical downturn was due at the start of 2001.[12] The Civil Aviation Authority (CAA) described the industry as having been "on the cusp of recession" before the attacks on 11 September. The attacks in the United States accentuated and accelerated the industry's difficulties of overcapacity, high costs, a changing demand structure and intense competition.[13]

5.   The industry's financial resilience depended on an "appropriate cost base for the traffic stream".[14] Before 11 September, there was pressure on both costs and traffic levels. Labour and aviation fuel costs had increased, and excess capacity had built up over a period of time.[15] Mr Chris Tarry, an aviation investment analyst, considered the overcapacity in the industry before the terrorist attacks to be as much as 30 per cent, which led to severe financial pressures for airlines that had failed to adjust to the "incompatibility of the pricing strategy with the cost of operations".[16]

6.   Scheduled airlines have had to respond to changes in traveller behaviour and the dramatic increase in competition from no-frills airlines on short-haul routes. Increasing numbers of business travellers have moved from business to economy class, or switched to low-cost carriers in order to achieve best value for money, adding to the pressure on those airlines that make the majority of their profit from premium class passengers.[17] The CAA noted that new entrants to the market, which are mainly in the no-frills sector, put considerable pressure on airlines with poor products or high cost structures.[18] The industry had responded to the less favourable operating environment by seeking opportunities to consolidate and reducing costs and the number of unprofitable routes.[19]

7.   In addition to pressures within the industry, aviation has been susceptible to the general global economic slowdown.[20] The onset, or at least the perception, of an economic slowdown was evident in underlying demand, particularly in the business traveller and trans-Atlantic leisure sectors.[21] Before the attacks on 11 September, the International Air Transport Association forecast a $2 billion to $3 billion loss on international services due to the drop in demand for business traffic and excess capacity. In the United Kingdom, the foot and mouth outbreak and the relative strength of sterling also had an impact on the number of air travellers.

8.The air transport industry is cyclical and susceptible to downturns in the economy. Since 2000, there have been signs of a general slowdown in the global economy that led to fewer passengers and less money for investment in the industry. Many sectors of the United Kingdom's air transport industry were, therefore, already experiencing a significant reduction in business even before the terrorist attacks in the United States. There has been a marked contrast in reaction by the various industry sectors in responding to that reduction in business. The low-cost sector appears to have been the most successful in generating traffic and improving profitability by exploiting new markets and, in some cases, use of secondary airports while restraining costs.

1  AEA data for the period 10 September to 28 October; Ev. pp 54, 120. The CAA cite forecasts for full-year 2001 on 2000 from IATA of -7% to - 13% for US domestic passenger traffic, up to -13% for trans-Atlantic traffic under its optimistic scenario, -1% to -5% for intra-European passenger traffic, and up to -6% for total international passenger traffic.  Back

2  Ev. p 139. Back

3  QQ 56, 57. Back

4  Ev. pp 136-137; Q 285. Back

5  Ev. pp 121, 147-148. Back

6  QQ 373-374. In a written answer on 8 May 2002, Mr Jamieson stated that the Government hoped to publish the Aviation White Paper "before the end of the year", HC Deb, 8 May 2002, col 219W. Back

7  The Future of Aviation, The Government's consultation document on air transport policy, Department of Environment, Transport and the Regions, December 2000, pp 32-33 (hereinafter The Future of Aviation). Back

8  Ev. pp 47, 96, 163; The Future of Aviation, pp 32-33; see also Economic benefits of aviation, Issue Brief, BAA, September 2001, and Airport Statistics, Issue Brief, BAA, September 2001. Back

9  Ev. p 157; The main scheduled carriers (British Airways, bmi British Midland and Virgin) carry 59 per cent of passengers, the charter and leisure carriers 31 per cent, and the low-cost or no-frills airlines 10 per cent (this figure excludes Ryanair which is a major participant in the low-cost segment but is registered in the Republic of Ireland).  Back

10  The Future of Aviation, p 34; see HC (1997-98) 589-I. Back

11  QQ 252-253; Ev. pp 48, 156-159; see also Managing the cycle, Airline Business, December 2000. Back

12  Managing the cycle, Airline Business, December 2000; The unpalatable truth, The Economist, 24 November, 2001. Back

13  Ev. pp 142-144, 164. For example British Airways traffic in early 2001 on North Atlantic routes was down 17 per cent for passengers and 21 per cent for freight.  Back

14  Q 254. Back

15  QQ 229-230. Back

16  Ev. pp 158-159; QQ 237-239, 241, 253. Back

17  QQ 229-230, 240; Ev. pp 156-157. Back

18  Ev. p 54. Back

19  Ev. pp 136-142; QQ 3, 9, 283, 285. Back

20  Ev. p 54. Back

21  Ev. pp 96-97; QQ 9, 229. Back

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