Memorandum by the Association of International
Courier and Express Services (AT 20)
THE AIR TRANSPORT INDUSTRY
AICES is the trade organisation in the United
Kingdom for companies handling international express documents
and package shipments. Our membership includes household names
such as DHL, FedEx, TNT and UPSemploys tens of thousands
of people and is responsible for over 95 per cent of the international
courier and express shipments moved through the UK every day.
The courier and express industry has expanded
rapidly over recent years. In the global economy, business and
industry requires fast and efficient transportation of goods,
components and documents in order to ensure commercial competitiveness
and success. AICES members provide the "just in time"
delivery service required by British business and industry in
order to compete effectively.
The express sector has developed in response
to a particular demand from our customers for the fast and secure
delivery of important goods and documents. Our members carry anything
from contract documents to urgent pharmaceutical and equipment
deliveries for hospitals; just in time spare parts for car and
aircraft companies; as well as machinery tools and goods ordered
through the internet, that are all needed at destination next
day or soon thereafter. The customers themselves are likewise
diverse including the FTSE Top 100 companies through to SMEsall
which make up UK PLC.
ON AICES MEMBERSHIP
SINCE 11 SEPTEMBER:
When considering the implications to the aviation
industry of the events of 11 September it is important to extend
this assessment beyond that of passenger aircraft to include our
members and the services they provide to the UK economy. The recent
DTLR sponsored study into UK Air Freight sited Boeing and Cranfield
University predictions of a growth in "Express" cargo
to 37 per cent of total air cargo by 2015, a growth rate of 18
per cent per annum from 2001. All current forecasts for the growth
in the express sector remain optimistic, even in light of the
effect of the tragic events of 11 September.
However, one of the biggest business costs to
our industry of this disaster has been in responding to the changes
in the aviation security measures as directed by the DTLR.
Background to Security Measures in place prior
to 11 September
As an association we have been involved with
the DTLR in the consultative process contributing to and helping
in the development of the legislation that covers our industry.
AICES has a seat on the National Aviation Security Committee and
also participates on many of its working groups.
Our industry has always worked with the Department
in the interests of aviation security and is committed to compliance
in this essential area.
Our members move customers' consignments in
a number of key ways:
Members own dedicated aircraft. The
integrators within our membership: DHL, Fedex, TNT and UPS are
airlines in their own right operating fleets of all cargo aircraft.
Courier traffic flown as baggage
on commercial airlines;
Uplift as cargo on commercial airlines.
Post 11 September
The events of 11 September were tragic and our
members fully appreciate the need for examination of the security
measures that were in situ. However, the enhanced measures
then put in place were more stringent than those introduced in
the US or any other European country. In addition the threat was
not seen to extend to the air cargo industry. Whilst we understand
the need for precautionary measures, we believe the procedures
already in place are sufficient. Furthermore given the current
economic climate where the aviation industry is suffering particular
hardship it is an additional cost that the businesses should not
be required to bear.
The effect of the change in security measures
has particularly impacted the integrators when operating their
own aircraft. The enhanced security measures put in place since
the 11 September are equivalent to those for passenger aircraft
and demand x-ray screening; the equipment and relating staffing
costs are significant. To date the additional costs incurred by
DHL, FedEx, TNT and UPS total £1,736,000. This figure includes
the purchase and rental of additional equipment, staffing, training
and cost of diverting aircraft in some instances.
For goods forwarded using commercial airlines
as courier baggage or cargo, the average cost that has been levied
to cover the additional security measures and airline insurance
is 9p per kilo. This figure when applied to the many thousands
of tonnes of material sent by our members' runs into millions
AICES believes that the air cargo industry should
be included in the inquiry, and that the debate surrounding the
difficulties occurring in the aviation industry should not exclude
the freight sector as we according to the UK Air Freight Study
Report the contribution of airfreight to the UK economy, measured
by gross domestic output, is for 1996 in 1998 prices £4.99
AICES members already have stringent security
measures in place to screen cargo and the additional measures
taken by the DTLR, whilst understandable as precautionary measure,
need to be re-evaluated. The costs incurred by AICES members thus
far, and on an ongoing basis, are extremely high and must contribute
to the overall costs to the aviation industry, as being examined
by this Inquiry.
AICES is happy to supply further written or
oral evidence as required.
Memorandum by the Transport
and General Workers' Union (AT 21)
THE AIR TRANSPORT INDUSTRY
The Transport and General Workers' Union (T&G)
welcomes the Transport Sub-Committee's of the Transport, Local
Government and the Regions Committee decision to undertake a short
inquiry into the immediate implications of the current situation
on the air transport industry. We represent over 46,000 members
in the industry, ranging from cabin crew, catering, ground handling,
luggage handling and security and we are the largest trade union
in the industry.
We were obviously relieved that none of our
members were killed in the tragic events of 11 September. However,
it is difficult for our membership to come to terms with the fact
that so many of their colleagues in the USA were killed while
carrying out their lawful employment. The events of 11 September
will always be a scar that the industry will have to bear.
However, we do take pride in the fact that our
members rose to the occasion to ensure that passengers were inconvenienced
as little as possible by the disruption and returned to their
families as soon as was possible.
2. THE ECONOMIC
Prior to 11 of September the industry was already facing
a serious downturn, in both passenger and freight. The tragic
events of that day increased the speed of the downturn and its
magnitude. The latest figures from the Civil Aviation Authority
for July 2001Table 1show that on a year on year
basis only terminal passengers grew between July 2000 and 2001.
However, all other measures of UK airport activity were down on
the previous year.
The economic downturn in the US since the start of the year
has seen transatlantic freight tonnes down 2.3 per cent, according
to the International Air Traffic Association (IATA). However,
trans-pacific volumes between North America and the Far East fell
the hardest, with a 10.9 per cent plunge in freight tonnes.
It might be useful at this time to explain the reason why
the crisis in the aviation industry has occurred so quickly. The
reason for this may not be obvious but it is due in part to the
fact that airlines have no real inventory, unless you count plastic
cutlery. So they have no inventory problems. But that doesn't
stop them being hurt by sudden collapses in demand. Indeed, it
is arguable that inventory-free businesses are actually more vulnerable
to cash flow crises in such circumstances because they have no
stocks to sell off at "fire-sale" prices.
Even if airlines think the downturn in demand is likely to
be short-lived, they cannot keep their capacity busy by producing
for inventory. So they are reduced to mothballing their fleets
and turning to the Government for help.
In other words, having no inventory does not insulate you
from sudden swings in demand. It just makes them more instantly
In Table 2 we show the international scheduled services of
the Association of European Airlines from January to September
2001 compared to the previous year. From this table we can see
that North Atlantic passenger traffic was down 3.6 per cent while
cargo was down 11.7 per cent.
INTERNATIONAL SCHEDULED SERVICES OF AEA AIRLINES ACCUMULATED
JANUARY TO SEPTEMBER 2001
||Freight Data ||
|Area||Load factor %
& Middle East
|EuropeSub Saharan Africa||78.2
The downturn in freight is economically possibly more significant
than the downturn in passenger numbers. In Table 3 we show the
year-on-year change for September; this shows that North Atlantic
passenger capacity was down 11.1 per cent, and freight was down
30 per cent, while geographic Europe passenger capacity was down
4.8 per cent, and freight was down 24.9 per cent.
INTERNATIONAL SCHEDULED SERVICES OF AEA AIRLINES SEPTEMBER
|Area|| Passenger data Load factor|
|Change on previous year||Freight data Mill|
|Change on previous year|
|EuropeN Africa and Middle East||62.1
|EuropeSub Saharan Africa||81.3
With this collapse in demand and having no inventory it is
not surprising that the industry was plunged into crisis, and
especially those airlines who were dependent on North Atlantic
traffic. Table 4 gives the year on year change in Revenue Passenger-Kms
between weeks 35 and 44.
RPK PER CENT GROWTH RATESYEAR ON YEAR COMPARISON
|35||27 August-2 September
|36||3 September-9 September
|37||10 September-16 September
|38||17 September-23 September
|39||24 September-30 September
|40||1 October-7 October
|41||8 October-14 October
|42||15 October-21 October
|43||22 October-28 October
|44||29 October-4 November
This shows that by week 44 the European market was starting
to return to its previous trend. The North Atlantic market was
returning to trend much more slowly. We will avoid making any
predictions as to when or if the industry will return to upward
trend rate. There are real difficulties normally in trying to
predict the future trends based on past performance; it would
be especially difficult in an industry that has been affected
by such a large economic shock.
We will now look at what has happened to employment since
11 September. According to the International Transport Workers'
Federation (ITF) on 9 November 148,949 layoffs had been announced
internationally. Due to using different sources we come up with
a slightly higher figure of 151,487 (see Appendix 2). Table 5
gives a breakdown of the layoffs by region.
The UK airlines have announced a loss of 8,800 jobs, but
this does not include airport-related jobs. It is difficult to
estimate but we believe that for every one job lost in an airline
between four and 10 other jobs will be lost inside the perimeter
of the airport and a minimum of a further three outside the perimeter;
this we believe is a conservative estimate. The ILO meeting on
the impact of September 11 events on civil aviation reported that
"one operational aircraft provides 150 to 250 direct jobs
and there is one additional indirect job for every direct airline
job". We have attempted to extrapolate the range of potential
job losses on the number of announced job losses, the results
are given in Table 6. We estimate that between 57,200 and 125,840
jobs will be lost as a result of the announced job losses.
|Employment type||4 airport related|
|10 airport related
We are working with the various employers within the industry
to ensure that the effects of the crisis are minimised and we
are taking a flexible approach to ensure our members' employment
is not terminated unnecessarily. However, we will not accept a
situation where employers might possibly try to exploit the situation
for their own gain over and above that justified by the effects
of 11 September.
3. THE POLITICAL
In this section we contrast the actions taken by the US Government
and the EU Commission to the crisis. As the full extent of the
consequences of 11 September for the airline industry emerged,
carriers on both sides of the Atlantic began to press their respective
governments for financial support. But according to The AVMARK
Aviation Economist "The responses they received were
oddly appropriate to a world newly turned upside down".
In the USA, home of sturdy free enterprise, the carriers
were bailed out to the tune of $15 billion. Conversely in the
EU, often accused of state-corporate feather-bedding, the European
Commission authorised a widow's mite to compensate the airlines
for the four days of US airspace closures and sternly warned governments
against using the crisis as a pretext for propping up inefficient
The reason the US airlines' have been so successful in protecting
their interests may have had something to do with the quality
of their representation. Putting their case in Washington was
the Air Transport Association of America (ATA). Formed in the
1930's, when the Civil Aeronautics Board had tight control over
route allocations and fare levels, ATA has developed over the
years since deregulation into a formidable lobbying body. In addition,
every airline with a presence in the US Market maintains a Washington
office or is represented by legal or public affairs consultants,
The collective power of the US airline industry's ability
to sway Congress was amply demonstrated in the immediate aftermath
of 11 September. Realising that they were likely to run out of
cash very quickly as a result of being grounded for four days,
followed by the near-certainty of a severe traffic downturn when
flights resumed, the airlines lobbied for and won a two-segment
Some $5 billion was allocated as compensation for financial
damage suffered during the closure of US airspace, which of course
also affected foreign carriers serving the USA. The allocation
among airlines was based on the available seat-mile capacity operated
by each carrier during August.
The mechanism is simple, its intent is generally agreed to
be fair, and the distribution has proceeded without arguments.
However, more controversy has surrounded the additional $10 billion
in loan guarantees which may be requested by individual carriers
through a four-member board. There are significant strings attached
(see 4 for details) and some carriers have already proved reluctant
to become involved on the grounds that participation would dilute
their shareholders' interest.
The scheme is not intended to rescue airlines that would
have run into trouble in the normal course of economic events.
A viable business plan must be submitted to the board, and the
US Government may demand warrants or other claims on the equity
of a participating carrier so that there is some potential for
The reason for this policy may be that the sheer size of
the United States4,000km from the Atlantic to the Pacific,
2,000km north to south along each coastand the absence
of an effective nation-wide passenger railway system make efficient
air transport strategically essential to the overall economy.
Conversely, in the European Union (EU) we believe that Loyola
de Palacio, the EU's transport commissioner has been seeking to
assert her authority over member states lobbying to stop national
carriers going bankrupt. She said in an interview with the Financial
Times: "We can no longer maintain in Europe 14 flags
carriers plus a lot of regional carriers, as we do now.
"In 12 countries we are going to put together our currencies.
We must overcome the logic of the national flag carrier, to think
only of European flag carriers". The Commission has long
pushed for the consolidation and greater co-ordination of the
sector and, not incidentally, for a greater role for itself. For
a decade, Brussels has insisted that the European aviation sector
is too fragmented and unable to measure up to its US counterpart.
The downturn in the sector, greatly accelerated by the terrorist
attempts, might be what finally sets off the consolidation it
has long called for.
The reason the Commission believes that consolidation is
still a priority is because of the fragmentation of the European
industry and markets. This means that European airlines and profits
do not fully benefit from the size of the internal market. Each
of the three biggest US companies transport an average of 90 million
people against 30 million-40 million for each of the biggest European
It is expected that the European carriers would probably
consolidated around the strongest players and the international
alliances of which they are members: Lufthansa, which is part
of the Star Alliance; Air France, which heads the SkyTeam group;
and British Airways, which is part of OneWorld.
The announced measures are only the latest in a series of
proposals that the Commission has made to consolidate and co-ordinate
Europe's aviation sector, notably the flagship carriers that are
often wrapped up with national identity. Up to now, many of Brussels'
initiatives have been stalled. But it now may believe that its
hour has come.
4. THE ROLE
In this section we detail the extent of support which we
are aware of that has been given by EU Commission, individual
governments in the EU, the UK Government and various governments
in the rest of the world who have given assistance to their national
4.1 The EU Commission
Brussels on the 24 September urged European Union member
states to take a unified approach in helping the airline industry
recover from the consequences of the 11 September terrorist attacks,
avoiding "distortionary" effects on the single market.
The European Commission also announced on the same day that
it was setting up a working group to study the economic measures
needed to support European airlines in the wake of the Suicide
attacks in the US. The Commission said it ruled nothing out so
far in its assessment of the state of the European airline industry,
including possible direct state support for airlines. But it was
concerned that airlines across the European Union were treated
the same. The assessment would take just over two weeks to complete
with the group due to present Brussels with its findings on 10
October so it is able to report to the 15 October meeting of transport
ministers. But Brussels has made clear that it does not want to
provide direct financial aid.
EU governments had jointly agreed to provide airlines with
third-party war risk insurance cover for a stop-gap period of
one month, although member states' approaches have diverged. The
Commission said it would need to be notified of such schemes to
ensure they did not give airlines from some countries an unfair
advantage over others. But it would not ask to be informed of
such schemes before they were put into operation.
On the 10 October, the Commission said European Union countries
would be allowed only until December to underwrite airlines' insurance
policiesa responsibility member states took on after insurers
reduced cover in the wake of the 11 September attacks. So far,
only seven of the 15 EU countries have formally sought Brussels'
approval for the emergency insurance plans they have put into
Ms de Palacio has said that a $15 billion (£11 billion)
airline bailout in the US greatly added to the difficulties of
her task of making sure the sector's consolidation was not put
back by state aid for failing carriers:
"The question is not maintaining a level playing field
within the EU. The main difficulty at this moment is guaranteeing
a level playing field with our competitors, the American airlines."
However, the commissioner has signalled that she could approve
125 million month-long loan to Sabena under special rules for
state aid for near-bankrupt companies. She also added that the
Commission was still considering the issue and would not decide
until the 17 October. Approval would be almost certain to lead
other countries to ask for aid authorisation.
The Commission believes there is a case for limiting compensation
to airlines for the effects of the 11 September attacks to four
days of revenues. "The idea of four days' compensation is
no way equivalent to the $5 billion [£3.4 billion] direct
aid the US airlines are receiving, which amounts to the revenues
from their entire network for two weeks," said the Association
of European Airlines. This has given them the financial strength
to undercut their European rivals on transatlantic routes. The
US bailout had allowed American carriers to halve fares on transatlantic
routes that competed with European airlinesalthough it
did not provide concrete examples. In a letter to Norman Mineta,
US transportation secretary, Loyola de Palacio, European transport
commissioner, said that several European airlines have complained
of sharp cuts on ticket prices by their US rivals on some transatlantic
routes following the announcement of the Bush administration's
aid package. Ms de Palacio's letter says that if the complaints
were proven right, this would be an unacceptable form of state
aid that would distort competition in the airline sector.
European airlines have criticised the Commission's measures
as insufficient at a time when many large carriers, such as British
Airways, Sabena, KLM, Aer Lingus, Alitalia and Olympic Airways,
are restructuring and cutting jobs to cope with the fall in business
caused by the attacks.
The letter, sent on the 12 October, calls for a meeting between
Mr Mineta and Ms de Palacio to discuss a US-EU code of conduct
on state aid to airlines. Despite Ms de Palacio's action, the
Commission has no powers as yet to negotiate a deal with the US
as air transport remains an issue for national governments.
But the Commission's position has become even more awkward
because of widespread expectations it will approve an emergency
125 million ($113 million) loan to Sabena, the near-bankrupt carrier.
It says it has little option but to approve the loan if it complies
with rules for rescue aid for stricken companies, but member states,
notably Ireland, argue that if Sabena gets help they will push
for authorisation to give the maximum assistance to their own
The Commission has also relaxed rules on the use of airport
take-off and landing slots during the coming winter season.
The European Commission on the 12 October left the door open
for further state assistance to Europe's struggling airline sector
when it said that governments might be allowed to help provide
airlines with insurance cover next year.
It also indicated that it could approve a
125 million (£78 million) loan for Sabena, the stricken Belgian
Most European governments are already expected to indemnify
airports against war-related risks. Another topic which was to
be discussed on the 16 October was the struggle of Europe's airport
operators, who warn that insurer's decision to restrict their
cover for acts of terrorism or war have put them "just days
away from complete shutdown".
EU ministers agreed in September that their governments would
help provide airlines and airports with insurance cover to make
up for such shortfalls. Ms de Palacio has subsequently said the
Commission would allow governments to maintain airlines' cover
until the end of the year. She excluded the airports from her
Airports' revenues have been less dramatically hit than those
of flagship carriers, since they depend less on transatlantic
flights. But the airports complain that their cover for war and
terrorism has been reduced and that they need continued government
assistance to keep operating. On the 12 October the Airports Council
International Europe, an industry group, asked Brussels to allow
member states to extend emergency insurance cover to airports,
warning that otherwise airports would have to close down.
Commission officials say they are extremely unlikely to act
against any move by a member state to ensure that airports are
fully covered. But it said that it lacked information on the sector's
problem, and added that it might not even have competence over
4.2 Individual EC Countries
Originally the Belgium Government was to provide Sabena with
a bridging loan to keep the airline afloat while it took legal
action against Swissair Group which said that it would not provide
the capital injection it has required to make. A spokeswoman for
Minister of Public Enterprise, Rik Daems, said: "We are examining
the possibility of helping Sabena. The Belgian Government is examining
the possibility of giving the money itself. We want to recoup
the money from Swissair, but in the meantime helping Sabena with
a bridging loan". Sabena had signed a deal with its 49.5
per cent shareholder Swissair that the company along with the
Belgian Government would provide Sabena with a
430 million ($391 million) capital injection. The first payment
220 million was scheduled for approval on the 3 October shareholder
meeting. Suffering under its fourth day of wildcat strike action
by pilots, the Belgian national carrier says its management has
decided to go on with operations and the airlines board of directors
will meet in the next 48 hours.
The Belgian prime minister announced on the 8 November that
the Government had found a number of investors to provide the
$179 million investment needed to expanded Delta Air Transport
(DAT), just hours after national carrier Sabena filed for bankruptcy.
The new expanded airline is to be owned 100 per cent by private
investors and the Government says it will have no shareholding
in the new airline. Sabena had said that plans are being developed
to establish a smaller, primarily short-haul operator, based on
Sabena's regional subsidiary Delta Air Transport (DAT). Meanwhile,
government ministers continue to negotiate the redundancy plan
for Sabena's thousands of employees that will not join DAT.
Belgium's Government has hammered out an agreement with unions
representing staff at bankrupt national carrier Sabena covering
the social plan for the many job losses expected following the
airline's demise. Following fresh talks, the Belgium Government
announced that an agreement with the unions on the social plan
had been reached. Attempts are continuing to establish a slimmed-down
successor airline to Sabena, a privately-owned company based on
Sabena's regional subsidiary Delta Air Transport (DAT), and it
remains to be seen how many of Sabena's 12,000 employees will
find work at the new airline.
In Paris Jean-Claude Gayssot, transport minister, said on
the 15 October that France planned to spend about FFr2 billion
(305 million, $276 million) on supporting its air transport sector,
half from the state and half raised from a special security tax
on airline tickets.
He told a news conference that the proposal would be discussed
during the French parliamentary debate on the budget on the 16
October and would need the approval of Brussels. It was not immediately
clear how much of the French moneywhich will be used to
strengthen security measures and to compensate companies for the
economic impact of the attackswould go to Air France, the
state-controlled national airline.
The German government on 21 September offered airlines our
weeks of cover against terrorist attack for up to DM40 billion
($19 billion) worth of damage. On the 7 November it announced
a three-month extension to its interim war and terrorism insurance
cover for its airlines but maintains a commercial solution must
be arranged as quickly as possible. Germany's interim arrangement,
introduced after insurance companies cut back war-risk cover after
the events of 11 September, will now be extended until the end
of January. Germany's finance Minster called for uniform regulations
across Europe covering insurance policy for airlines.
The government is considering announcing in its budget that
it will waive VAT on tickets for domestic air travel. The Commission
is unlikely to resist the move, particularly as VAT rates for
domestic air transport vary throughout the EU. Italy has one of
the highest rates in the European Union, at 10 per cent, in contrast
to the UK where no VAT is levied at all.
4.2.5 Republic of Ireland
The Irish government has said it will lobby the Commission
for the right to dispense the maximum possible aid to Aer Lingus.
After crisis talks between government officials and airline
and insurance executives, the Treasury agreed on 21 September
to insure British airlines against third-party risk for more than
$50 million per aircraft, initially for a month.
If the cover has to be extended for longer, the airlines
will have to pay premiums based on the commercial rates prevailing
before the terrorist attacks in the US.
But for the first month, the cover will be freea decision,
made a Treasury official said, "in the light of the financial
difficulties faced by the airline industry in the current climate".
The Treasury said it was not possible to calculate the value
of the month's free cover to the airlines but added that no cash
would be paid out except in the event of a crash.
Officials were confident that the deal was unlikely to fall
foul of EU restrictions on state aid as it was a response to exceptional
circumstances and was in any case likely to be emulated by other
We understand that Tony Blair has signalled that he would
not let British Airways go bankrupt.
Airports have also received the same cover from the Government
due to the "market failure" of the insurance industry.
According to a report in the Financial Times 16 October
they [the airports] will need continued Government assistance
to keep operating (see also EU section).
4.4 The Rest of the World
On 27 September, the Canadian Union of Public Employees (CUPE)
met with Transport Minister to urge help for workers. National
President Judy Darcy and Airline Division President François
Bellemare met with Transport Minister David Collenette to urge
federal aid for flight attendants who would be affected by the
devastating cuts announced by Air Transat and Air Canada. Darcy
and Bellemare attended as part of a delegation of union leaders
representing airline workers. The unions asked Collenette to earmark
at least $600 million for aid to workers out of any assistance
given to the industry. A key way to avoid further turmoil is to
avoid massive layoffs. And that means support for workers on the
front lines have to be a vital part of any stabilisation package,
said Darcy. She added that the government must act immediately
to stabilise the industry and restore the confidence of the travelling
public. This crisis in the airline industry began long before
the events of 11 September, said Darcy. This industry has been
in turmoil for years due to the government's deregulation policies
and restructuring, and it is unacceptable for workers to be made
to pay the price once again.
Canadian airlines have received a C$160 million ($101 million)
financial aid package from the Canadian government. The package
compensates only for losses between 11 September and 16 September,
during which Canadian airspace was either closed or not operating
at full strength. This is well short of the C$2 billion that the
airline had sought. About C$100 million of the package will go
to Air Canada, the country's largest carrier. David Collenette,
Canada's transport minister, said the government "would prefer
a private sector solution" to the company's problems, but
did not rule out further financial support.
Canadian carriers, led by Air Canada chairman and CEO Robert
Milton, had asked officials in Ottawa for a multi-billion dollar
aid package to compensate for general losses associated with the
terrorist attacks in the USA, including a significant fall-off
in passengers because of a heightened fear of flying. Government
representative Collenette said a restructuring of Air Canada's
ownership is likely needed, but rules out any government involvement,
such as a renationalisation of the carrier or the government buying
a large equity stake in the airline. He adds that the government
is considering changing Canadian laws that limit shareholding
stakes in airlines.
Mr Collenette said he believed there were "other investors,
who could come forward to assist Air Canada", but he declined
to name them.
India offered unlimited war-risk insurance cover to its two
state-owned airlines for the next two weeks. Air-India, the international
flag-carrier and Indian Airlines, its domestic sister, will be
guaranteed third-party cover by the government, following Indian
insurers' decision to place a cap of $50 million on any claim.
Jet Airways, the largest privately owned domestic airline
in India, has also appealed to the government to guarantee its
war-risk insurance. It has managed to raise its claim level to
$150 millionabove the $50 million capbut says this
is not enough.
A meeting between insurers and the Indian government on the
4 October examined ways of meeting insurance demand in the airline
The Japanese government will guarantee third-party war and
terrorism insurance of up to $2 billion for all Japanese airline
carriers. The decision was taken to ensure airlines would be covered
for any shortfalls after insurers reduced their coverage of third-party
payments to $50 million. Japan Airlines, All Nippon Airways, Japan
Air System and other carriers will have the third-party coverage
guaranteed for six months.
The Japanese government is still considering whether it will
assist airlines in other waysincluding covering for the
increased premium costs per passenger and extra costs for added
security measures following the terrorist attacks.
The government believes stricter security will cost the airline
industry up to Y380 million per month in additional costs. Airlines
are hoping the government will help pay part of these increased
4.4.4 New Zealand
New Zealands government was on the verge of wrapping up a
deal to take back control of troubled national carrier Air New
Zealand (ANZ). How Star Alliance member ANZ, privatised in 1989,
will revert back to state control is unclear. The Government is
prepared to use taxpayer's money but will not be buying shares
from existing investors. Government control or ownership is seen
as a short-term panacea to set a new course for the airline before
control reverts back to the private sector.
Russia has stepped in to allow its airlines to keep operating
by providing up to $1 billion in insurance guarantees for covering
war and terrorism-related risks. The Government guarantees were
valid for 30 days and will be effectively available only for those
airlines that already had cover for those risks before 11 September.
There were no more than five Russian airlines engaged in such
US airlines are once again facing the spectre of bankruptcy
that has loomed periodically over the industry since it was deregulated
in 1978. Fierce competition during the 1980s and 1990s caused
a succession of airlines to seek protection from creditors under
Chapter 11 of the US bankruptcy law.
Both Eastern Airlines and America West filed for Chapter
11 in the wake of the Gulf War, which triggered a precipitous
fall in passenger traffic that many airline analysts expect to
be repeated after the attacks on the US.
Some carriers, such as Continental Airlines, have sought
protection on more than one occasion and successfully emerged
to trade profitably, while others, such as Eastern, were ultimately
liquidated. The laws have been used to restructure companies ahead
of sale, such as that of TransWorld Airlines to American Airlines
earlier this year.
Many US carriers were already in loss before the attacks,
hit by the slowdown in the US economy, the plunge in business
travel, higher fuel prices and rising labour costs. The leading
US carriers account for four of the world's top five and six of
the top 10 ranked by passenger traffic, and the US Government
does not want to see permanent damage, to their civil aviation
capacity. The Bush administration has approved a $15 billion rescue
package for the US airline industry, a move that European carriers
feel could undermine fair competition across the Atlantic (see
Appendix 3 for details). This comprises of $5 billion of direct
aid and $10 billion of indirect support. However, Mr Bush and
his senior advisers have balked at giving too much government
help to the aviation industry, whose financial troubles clearly
predated the terrorist attacks in New York and Washington. This
is because if the government were too generous it would open the
floodgates to bailout requests from many other industries.
The final legislation requires that any airline receiving
any of the $10 billion in federal loan guarantees give the government
warrants, or options to buy, the company's common stock. That
gave the government the opportunity to profit from an upswing
in the airlines', something Paul O'Neill, the US Treasury Secretary,
seized on in justifying the government's assistance.
"I wanted the government to share in the future profitability
of the airline companieswhen that day comesand get
something in return for its investment," said Mr Corzine.
(Jon Corzine, is a former co-chairman of Goldman Sachs, the junior
senator from New Jersey, a staunch liberal Democrat.)
However, one airline analyst has cautioned that a $15 billion
US government bail-out package, approved on the 21 September,
may not avert bankruptcies in the industry.
"The aid package could be the trigger for Chapter 11
[bankruptcy] filings in situations where liquidity is questionable,"
said Jim Higgins of Credit Suisse First Boston. Some analysts
said the longer-term outlook for those airlines that survive was
very promising. As airlines have reduced capacity by grounding
about 20 per cent of their flights, an eventual recovery in the
economy could have a "breathtaking" impact on earnings,
Mr Higgins said.
According to a report published on the 12 November, the nine
major US airlines have blown through most of Washington's $5 billion
cash bailout, and their bleeding continues. The financial carnage
is so bad that the industry could be headed for a major restructuring,
with well-capitalised airlines already sizing up faltering carriers
on their gates and facilities. The Financial Times reported
on the 15 November that the US Treasury on the previous day had
provided "the country's struggling airlines with more financial
breathing space by allowing carriers to defer up to $4 billion
in tax payments until January".
Eligible carriers had previously been given a two-month deferral
of ticket taxes due after the terrorist attacks on 11 September.
Industry groups lobbied the Treasury two weeks ago to extend the
deadline from 15 November to 15 January. Wednesday's decision
could avert potentially severe cashflow problems as airlines await
the second half of a $5 billion cash bailout programme, which
they expect to receive before the end of December.
"This gives you a bridge to pay your bills until the
remainder of the government assistance comes through," said
John Heimlich, director of economic research for the Air Transport
"If you have money in your pocket you earn interest
on that money, and you can use it as backing to get private financing
or loans," he added.
Jim Higgins, a Credit Suisse First Boston analyst, said the
temporary tax relief could avert Chapter 11 bankruptcy filings
which might otherwise have happened before the end of the year.
But he added: "By the middle of January, [the industry] is
not out of the seasonal cash burn woods."
The industry's liquidity position typically declines from
the end of the third quarter, and begins to strengthen again in
The timing of the tax payments, which amount to an estimated
$1 billion per month for the industry, could have a significant
impact on some weaker carriers' prospects. America West, which
this week became the first large airline to apply for federal
loan guarantees, had expected to pay nearly $50 million in taxes
in the fourth quarteralmost as large as the $60 million
in additional bailout funds it expected from the government.
Mark Weinberger, assistant secretary for tax policy at the
Treasury, said: "[The] Treasury understands the need to allow
the airline industry, which was greatly affected by the 11 September
attacks, more time in making deposits and payments of their federal
Airline revenues are recovering more slowly than many analysts
expected from the slump seen after 11 September. The Air Transport
Association said this week that traffic in October was down 24
per cent year-on-year, which was an improvement from the 35 per
cent drop in September. But the American Airlines crash on 11
September in New York is expected to have some further impact
UBS Warburg said on Wednesday it expected an industry net
loss of $6.4 billion for 2001, above its previous $5.6 billion
Carriers' liquidity at the end of the third quarter stood
at about $15 billion, it estimated, as airlines drew down bank
facilities, deferred tax payments and received the first instalment
of the $5 billion government grant.
22.214.171.124 USA Airports
US airport operators are lobbying Congress for financial
aid, claiming that the aviation crisis could cost them $3billion
over the next year. The US bailout plan, agreed last week, concentrated
on the nation's airlines, but airports are also suffering from
Not all airports will be affected equally, Hub airports with
a very high percentage of connecting traffic, secondary hubs [and]
airports that are served by weaker carriers are the most vulnerable
to declines in traffic.
The airports are also pressing for similar insurance cover
to that offered to the airlines in last week's bailout. While
insurance companies have raised the price of war risk insurance
for airlines, they are cancelling it for airports so that it is
not available at any cost.
Creditors of Venezuelan carrier Avensa are calling for the
re-opening of dormant bankruptcy proceedings against the company
after Venezuela's president Hugo Chavez last week declined to
recapitalise the ailing airline. Avensa is currently under governmental
administration following its grounding and bankruptcy a year and
a half ago.
It can be seen that there have been various responses from
governments, but there appears to be a distinct difference between
the stance taken by the EU and the rest of the world. The most
worrying concern for us is that if the reports of support given
to US airlines are correct, and the Commission will not allow
similar support. This will not result in a level playing and this
is something we have been arguing for since the start of the crisis.
The UK civil aviation industry is as much a strategic industry
as farming and therefore should receive support from one or other
the Government or the Commission, there should be no buck passing.
We believe that the civil aviation industry is facing a very
serious crisis and in order for the UK industry to survive action
has to be taken. The following points summarise the action that
the T&G would like to see pursued:
A Compensation for the four days USA airspace
was shut down.
A level playing field in regard to state aid,
including the USA.
That airlines be allowed to keep the revenue from
the Airline Passenger Duty, to assist with their cash flow.
The Government assist the industry with the increased
cost of security.
An early positive statement on the future of Heathrow
Terminal 5, which would give a positive boost for the industry.
|Airline||Passenger data Load factor|
|Freight data (000)|
|British Airways PLC||70.8
|BMI British Midland||57.2
|KLM Royal Dutch Airlines||79.3
|Deutsche Lufthansa AG||74.4
|Malev Hungarian Airlines||61.9
|SAS Scandinavian Airlines||67.5
|Tap Air Portugal||69.4
|Tarom-Romainian Air Trans||61.2
|Airline||Capacity cuts %
|Air New Zealand||1,500
|Austrian Airlines Group||
|Delta Air Lines||20||13,000
|Mesa Air (corp.)||700
|Sun Country Airlines||
FEDERAL AID FOR US AIRLINES
Memorandum by Virgin Atlantic Airways
Limited (AT 22)
1. Virgin Atlantic Airways welcomes this opportunity
to present its views to the Transport Sub-Committee on the state
of the air transport industry following the tragic events of 11
September 2001. In particular, Virgin Atlantic has below set out
some details of:
the direct costs of the terrorist action and the
subsequent four day "ground stop";
the medium-term economic and political impact
of the attacks on the industry;
the role of international subsidies and Government
the effect of the rules of ownership and control
2. Virgin Atlantic is a full-service long-haul scheduled
airline, and the UK's second largest scheduled airline. The company
is prominent in the trans-Atlantic market, currently operating
to nine US destinations and three points in the Caribbean,
as well as operating to points in Africaand
Asia. The economic
impact of the aftermath of the 11 September attacks has been most
keenly felt in the trans-Atlantic market and Virgin Atlantic is,
therefore, well placed to provide information to the Committee
on this matter.
Direct Costs of the Ground Stop
3. The four day "ground stop" imposed on all
airlines by the US federal authorities in the immediate aftermath
of the attacks on New York and Washington naturally had a massive
effect on all carriers operating to and within the US. In Virgin
Atlantic's case the direct cost of the "ground stop"
amounted to around £20 million, a figure which includes such
items as lost revenue, refunds to passengers, increased crew costs
and hotel accommodation, aircraft parking charges etc. This figure
does not include any element of longer-term cost increases associated
with the new operating climate, or the losses of revenue from
the fall off in passenger numbers that has followed the terrorist
Medium Term Economic and Political Impact
4. It is true that the general global economic slow down
was already having a significant effect on the airline industry
as whole prior to the events of 11 September. This was reflected
in reduced passenger numbers on flights, especially in business
class. Virgin Atlantic, in common with several other carriers,
had already taken steps to react to this economic slow down and
to ensure that it remained profitable. A cost reduction programme
had been put in place and savings of £80 million identified.
5. Passenger numbers on trans-Atlantic flights have fallen
rapidly as a direct result of the 11 September attacks, and forward
bookings are at much lower levels than would normally be the case.
British Airways have already announced that their trans-Atlantic
bookings have fallen by 30 per cent. Overall, Virgin Atlantic
has seen bookings fall by around a quarter. This drop in passenger
numbers is greater than anything experienced in the Gulf War.
6. Following the attacks it was quickly evident that
there would be a crisis of confidence in air travel and as a consequence
a significant fall in passenger numbers. Virgin Atlantic reacted
quickly to this, announcing on 17 September a series of measures
to reduce capacity and further reduce costs. Virgin Atlantic has
withdrawn from three markets (Chicago, Toronto and Athens), put
on hold expansion plans for other routes (Washington, Hong Kong
and Orlando), reduced capacity on other routes and held off developing
new markets. Capacity and operations have, in fact, been reduced
by around 20 per cent. This will mean the eventual grounding of
Virgin Atlantic's entire Boeing 747-200 fleet and the loss of
around 1,200 staff.
The need to make so many staff redundant was particularly painful,
especially as Virgin Atlantic's staff have been such an important
part of the airline's success. This is the first time in the airline's
history that such cutbacks have had to be implemented.
7. Overall, we currently expect the impacts of the attacks
and the fall off in passenger numbers to continue for much of
the remainder of the financial year. Tragic events such as the
loss of the American Airlines flight on 12 November can only further
damage confidence in the industry.
8. Besides the continued loss of revenue over forecasts,
operating costs are also increasing. New and improved or heightened
security measures have added around £5 million to our cost
base and further measures may be imposed on the industry by Governments
on both sides of the Atlantic. The cost of Hull and War Risk insurance
has increased by around £3 million. Further increases in
insurance costs cannot be ruled out because the insurance market
is still in a state of flux following 11 September.
9. Of course, the impact goes much wider than direct
consequences on Virgin Atlantic, or other individual carriers.
Aviation is a huge industry in the UK. It contributes around £10
billion per annum to the UK's GDP. It directly employs 180,000
people, with a further 200,000 employed in the supply chain and
supporting roles. Inbound tourism, already badly affected by the
Foot and Mouth epidemic, has seen a sudden drop in numbers. Next
year Virgin Atlantic is to become the launch customer for the
Airbus A340-600, with an order for 10 aircraft whose wings are
made by BAe Systems and engines by Rolls-Royce. Virgin Atlantic
is also one of the launch customers for the Airbus A380, the world's
largest passenger jet, which will have significant input from
companies in the UK. It is too early to say with any certainty
whether these aircraft delivery schedules will be affected by
the events of 11 September.
10. Some airlines, which were admittedly already in financial
difficulties have been tipped over the edge by the consequences
of 11 September. Swissair and Sabena have gone bankrupt, despite
a significant cash loan from the Belgium Government in the latter
case, and Canada 3000 has also announced that it is to cease operations.
Others will follow with many commentators predicting that some
US carriers will file for Chapter 11 protection over the next
Government Assistance & Subsidies
11. The level of government assistance and direct subsidy
to the airline industry varies dramatically from country to country.
Some governments have done a great deal to assist their carriers
in terms of cash handouts, loan guarantees, and assistance with
insurance and security costs. Others have, to date, done very
little. But even where the latter is true, there is still some
doubt whether that will remain the case. Many observers expect
several European States to make moves to assist their national
flag carriers over the coming weeks and months, and some may already
have taken indirect action. The same is also true in Asia.
12. Perhaps the most striking example of state assistance
has been the US. The US Government has secured emergency legislation
which has enabled it to set aside substantial funds to compensate
US carriers for the losses which they have incurred as a direct
result of the ground stop following 11 September, and the ongoing
losses and costs which have flowed from the attacks. To date the
total value of the aid set aside by the US Government for its
carriers amounts to $18.5 billion (nearly £13 billion). This
aid is broken up as follows:
$5 billion in direct and immediate payments to
$10 billion of Federal credit instruments (loan
$3 billion to help offset the substantial new
costs related to increased security; and
$500 million for research and development of new
in-flight security systems.
13. In addition to the above, US carriers have also received
significant assistance with insurance cover, with the US Government
underwriting all war risk damage, both at home and overseas, plus
covering increased insurance premium costs for a period of 180
14. Finally, US carriers have also been granted a three
month "holiday" on tax payments to the Federal authorities.
Taxes will still be owed, but payments have been deferred in order
to assist airlines with their cash flow.
15. Attached at Annex A is a detailed list of the cash
payments made to US carriers by the US Government as of 7 November.
It is Virgin Atlantic's view that the significant payments that
have been made to carriers such as American Airlines, United,
US Airways etc have had the effect of skewing competition in international
markets. Carriers that would otherwise have been in serious financial
difficulties have been thrown a substantial lifeline.
16. In Europe, the EC has endorsed aid to airlines in
a number of areas including the underwriting of third party insurance
risk, assistance with additional security costs, and compensation
for losses due to the "ground stop". It remains to be
seen how many Member States will utilise this facility.
17. The EC proposals are very modest when compared to
the US package, but despite this, and the fact that the Secretary
of State for Transport and Local Government has said that he will
not allow the competitive position of UK airlines to be weakened
against US carriers as a result of events outside of our control,
the level of assistance from the UK Government has, to date, been
strictly limited. UK Government assistance so far has been limited
to help with insurance cover following the decision by the insurance
industry to withdraw certain aspects of cover at the end of September.
This assistance was welcome, and the UK carriers are currently
working with the Government to establish a longer-term and more
effective method of maintaining insurance cover in the absence
of a return to normality in the insurance market.
18. In line with other UK carriers and BATA, Virgin Atlantic
hopes that the UK Government will be willing to supply assistance
at least in line with recommendations of the EC, especially if
other European Governments take such measures to assist their
carriers. If the UK Government fails to at least match the assistance
that others are receiving, or are likely to receive, then the
entire UK industry will be put at a competitive disadvantage.
Ownership and Control Rules
19. The current, crisis in the aviation industry, and
the failure of several carriers, has highlighted the archaic airline
ownership and control rules that exist throughout the world, primarily
because of the system of bilateral air services agreements that
regulate international air transport. For instance, EU rules stipulate
that European airlines must be majority owned and controlled by
non-EU nationals. In the US, foreign entities cannot own more
than 25 per cent of the voting rights in a US carrier. Such bars
to foreign investment do not exist in other industry, and there
is no real reason for them to exist in the aviation industry.
20. Virgin Atlantic has long campaigned for the abolition
of these outdated ownership and control rules and for true liberalisation
in the aviation industry. Such rules are currently preventing
the much needed consolidation of the European aviation industry.
However, this is not an issue that can be dealt with unilaterally
or bilaterally. It can only be tackled at a multilateral level.
Handing a negotiating mandate to the European Commission for Trans-Atlantic
Common Aviation Area would be a first and very significant step
in that direction. The US and the EU represent the two largest
aviation markets in the world. Uniting them within a common aviation
area would spell the end for the bilateral system and result in
increased competition and consumer gains. Industry consolidation
could then take place as it does in any other industry, subject
only to normal competition law.
Virgin Atlantic Airways Limited
US DEPARTMENT OF
List of Air Carrier Payments
As of Wednesday, 7 November, payments have been transmitted
to the following air carriers in accordance with sections 101
and 103 of the Air Transportation Safety and System Stabilization
Total Payments: $2,430,538,821
Total Carriers Paid: 112
|Carrier Name||Payment Amount|
|Air Nevada Dba Pacific Wings||4,744
|Air Transport International||144,114
|Air Wisconsin Airlines||4,687,931
|Airtran Airways Corp||15,125,739
|Alaska Airlines, Inc||45,624,024
|Alaska Seaplane Services||1,688
|Aloha Airlines, Inc||4,317,060
|Aloha Island Air||83,804
|America West Airlines, Inc||60,281,956
|American Airlines, Inc||359,419,230
|American Eagle Airlines, Inc||12,844,310
|American Trans Air, Inc||32,293,436
|Arrow Air, Inc||2,050,000
|Astral Aviation Dba Skyway Airlines||738,844
|Atlantic Coast Airlines||5,722,621
|Atlantic Southeast Airlines||8,636,852
|Atlas Air, Inc||10,122,443
|Big Sky Airlines, Inc||253,253
|Capital Cargo International Airlines||454,154
|Chautauqua Airlines, Inc||2,834,737
|Continental Air Lines, Inc||191,212,249
|Continental Express Airline||12,267,855
|Daystar Airways dba Nevis Express||777
|Delta Air Lines, Inc||326,985,791
|Eagle Canyon Airlines dba Scenic Air||238,379
|Edelweiss Holdings Dba Rio Grande||5,324
|Evergreen International, Inc||7,189,975
|Express Airlines I||2,356,531
|Express One International||413,843
|F.S. Air Service||906
|Falcon Air Express, Llc||182,836
|Federal Express Corp||100,679,072
|Florida West International||819
|Flying Boat, Inc dba Chalk's Ocean Air
|Frontier Airlines, Inc||10,118,474
|Frontier Flying Service||77,505
|Gemini Air Cargo Airways||6,404,500
|Grand Canyon Helicopters||340
|Great Lakes Aviation, Ltd||982,220
|Gulfstream International Airlines||496,091
|Hawaiian Airlines, Inc||18,010,127
|Island Air Service||775
|Kalitta Air Llc||16,250
|Kenmore Air Harbor||18,045
|Kitty Hawk Aircargo||90,715
|L.A.B. Flying Service Inc||11,201
|Larry's Flying Service||6,811
|Miami Air International||1,173,661
|Midwest Express Airlines||7,530,299
|North American Airlines||1,013,794
|Northern Air Cargo, Inc||235,102
|Northwest Airlines, Inc||248,520,230
|Omni Air Express||4,345,975
|Ozark Airlines, Inc||58,085
|Pacific Island Aviation||33,954
|Pan American Airways||1,314,442
|Planet Airways Inc||180,187
|Polar Air Cargo Airways||1,277,000
|Psa Airlines, Inc||1,260,382
|Samoa Aviation, Inc||16,988
|Seaborne Aviation, Inc||13,322
|Shuttle America Corporation||291,763
|Sky West Airlines, Inc||5,656,835
|Southern Air Inc||724,673
|Southwest Airlines, Co||144,373,750
|Spirit Air Lines||10,799,992
|Sun Country Airlines||8,207,621
|Sunworld International Airlines||563,727
|Trans States Airlines||2,323,213
|Trans World Airways, LLC||78,047,235
|United Air Lines, Inc||390,671,788
|United Parcel Service||24,556,636
|Us Airways, Inc||159,746,129
|Usa Jet Airlines, Inc||110,268
|Vanguard Airlines, Inc||4,579,896
|Vieques Air Link, Inc||4,013
|Warbelow's Air Ventures||40,483
|Wings Of Alaska||15,000
|World Airways, Inc||3,218,730
The payments represent approximately 50 per cent of the estimated
compensation payments under the Act for these carriers.
Air Carrier Loan Guarantee Programme: The regulations on
the air carrier loan guarantee programme issued by the Office
of Management and Budget (OMB) on 5 October 2001, are available
by selecting the "Documents" link at the following Department
of the Treasury web page: http://www.treas.gov/atsb.
Air transport movements are landings or take-offs of aircraft
engaged on the transport of passengers, cargo or mail on commercial
terms. All scheduled movements, including those operated empty,
loaded charter and air taxi movements are included. Back
A terminal passenger is a passenger joining or leaving an aircraft
at the reporting airport. A passenger travelling between two reporting
airports is counted twice, once at each airport. A passenger who
changes from one aircraft to another, carrying the same flight
number (change of gauge) is treated as a terminal passenger, as
is an interlining passenger. Back
Freight is the weight of property carried on an aircraft including
for example, the weight of vehicles, excess baggage and diplomatic
bags, but excluding mail and passengers' and crews' permitted
baggage. Freight in transit through the airport on the same aircraft
is excluded. Back
Load factor % is calculated by dividing Traffic Mill Revenue Passenger-Kms
by Capacity mill. Available Seats-Kms. Back
Freight traffic is measured in Revenue Freight Tonne-Kms. Back
Load factor per cent is calculated by dividing Traffic Mill Revenue
Passenger-Kms by Capacity mill. Available Seats-Kms. Back
Freight traffic is measured in Revenue Freight Tonne-Kms. Back
New York-JFK, Newark, Boston, Washington, Miami, Orlando, Las
Vegas, San Francisco, Los Angeles in the US, Antigua, Barbados
and St Lucia in the Caribbean. Back
Lagos, Cape Town and Johannesburg. Back
Delhi, Tokyo, Shanghai and Hong Kong. Back
73 per cent have taken voluntary redundancy. Back