Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

Memorandum by Christopher N G Tarry (AT 35)



  I am an investment analyst and head the transport sector equity research team at Commerzbank Securities. I have been a follower of the airline industry since late 1986 at which time British Airways was being prepared for privatisation. I am a Fellow of the Royal Aeronautical Society and a Member of the Chartered Institute of Logistics and Transport. I welcome this opportunity to present my perspective to the Committee on a number of the key issues that confront the airline industry at the present time both in the UK and elsewhere.


  I will address the following in this submission:

    —  The pre and post 11 September operating environment for the airline industry.

    —  Market segmentation.

    —  The nature and consequences of the fundamental changes in the UK market place.

    —  The nature and consequences of the fundamental changes in the international market place.

    —  Issues of consolidation.

    —  Airline productivity.

    —  Financial returns.

    —  Open skies and slots.

    —  Constraints to the efficient functioning of the air transport system.


3.1  The pre 11 September operating environment

  3.1.1  In the period up and until the events of 11 September 2001, the operating environment for the airline industry was already showing very clear signs of a marked and accelerating deterioration. The onset or at least the perception of an economic slowdown was increasingly evident in underlying demand and in particular in respect of business travellers in a number of markets. Research that we had undertaken earlier in the year indicated a breakdown in the traditionally accepted relationship between GDP and airline traffic. There appeared to be for example a stronger relationship between business and related confidence indicators and traffic. This is in reality unsurprising but meant that the slowdown in air travel occurred earlier than might have been reasonably expected on the basis of traditional economic models. Indeed the US market in particular was displaying the key characteristics of a mature market and, even before the breakdown in the traditional GDP based relationship that we identified, was growing at a fraction rather than a multiple of GDP.

  3.1.2  It is important to differentiate between the cyclical effects that were in evidence and which had begun earlier and appeared to have a greater intensity, and the ongoing structural issues that have confronted the industry for some considerable time.

3.2  The post 11 September operating environment

  3.2.1  The immediate and near-term consequences and reactions to the attacks on the US on 11 September have been well documented. Whilst some commentators have sought to draw a parallel with the period of the Gulf War, perhaps the only similarity is that a major external event resulted in the emergence of the perception of a threat to travellers. The attacks on the US in terms of the impact on air travel were orders of magnitude greater. Whilst airline traffic has begun to recover from the lowest points, this is largely a reflection of the significant marketing campaigns that the airlines in the most affected regions, North America and Europe, have pursued and the resulting price stimulation of the market. The immediate need for the airline industry was one of liquidity and the extent of support provided is also well documented. Operationally the requirement was (and still is) to generate traffic to produce cash.

  3.2.2  The capacity reductions that have been announced and implemented have been rapid and these to varying degrees have been accompanied by workforce reductions, although the pace of implementation has been dependent upon local labour legislation and the nature of the method of reduction.

  3.2.3  Over the next few months attention will turn to the Summer booking period (generally February/March) and final decisions over Summer capacity to be implemented in the timetable from the final Sunday in March. Whilst a recovery in business traffic is dependent on the emergence of a more positive perspective for the world's principal economies, recent experience has shown that at least some of the traffic can be recovered by price stimulation. One significant unknown is the extent to which this will result in a further re-calibration of consumers' expectations regarding air fares, which will place even greater pressure on costs. There remains a fundamental need for the industry to control capacity and cut cost.

  3.2.4  Over the medium term there is an opportunity for the industry to emerge from this period of turmoil fundamentally stronger and more profitable. A reluctance or inability to take the necessary steps and follow these through will almost inevitably result in large parts of the airline industry continuing to fail to realise their potential. In large part future success will be dependent on the ability to emerge with a more appropriate cost base, an issue which was very clear even before the events in September.


4.1  Changing market segmentation

  The traditional segmentation of the marketplace into the business traveller and the leisure traveller is far too narrow. Whilst airlines will tend to report their traffic figures on the basis of those travelling in economy or coach class and those that travel in premium (First or Business Class), the reality is that the segmentation in the market place is more complex. It is also clear that there is not a "one size fits all" template that is appropriate. Whilst there is much focus on the so-called low-cost segment—the reality for all airlines is that they must have an appropriate cost base for the revenue stream that they seek to pursue. The issue is not just one of traffic but rather whether their cost base allows the traffic to be profitable.

4.2  An important difference between the customer and the traveller

  At the same time there is an important and significant difference that has increasingly emerged in the business market between the traveller and the customer. It is the customer that pays the cost of travel and it is also clear that corporate travel policies are more rigorously enforced than in the past both in respect of volume and class of travel. Minimising cost even in more normal times is a principal focus area for the corporate travel office. For the financial control department, travel is an easy area to cut. This was borne out by the rapid fall in business travel in the early part of 2001, particularly in the US as companies became concerned about their own prospects and cut back on travel budgets. This will also clearly impact the recovery in traffic in the current environment.

4.3  Changes in the UK industry structure

  4.3.1  The UK airline industry comprises three major types of passenger carrier. The mainline airlines which accounted for 59 per cent of the passengers carried by the UK industry; the charter or scheduled leisure carriers which accounted for 31 per cent; and the low-cost/no frills airlines which accounted for 10 per cent of the industry's passengers in 2000. These shares exclude the effect of Ryanair, which is a major participant in the low-cost segment but is Irish registered. The business models of the low-cost airlines are not the same, with a significant difference in the approach of Ryanair when contrasted with both Go and easyJet.

  4.3.2  For the "new entrants" the opportunities embrace both the development of new markets and the potential of providing alternative/substitute services to the established carriers. The ability of these airlines to perform the second function depends largely on gaining access to the "appropriate" catchment area. In this respect data from the CAA illustrates quite clearly that business travellers will select an airport closer to their home or place of work whereas leisure travellers are prepared to travel a greater distance to an airport to take their chosen flight. This is clearly a reflection of the difference to each traveller of time and price.

  4.3.3  In this respect the increased focus on Gatwick by the low-cost carriers/no frills that is now evident was to be expected. Firstly from the perspective of these airlines getting closer to the main origin of higher yielding business traffic compared with their traditional operating bases to the North of London. Secondly the apparently high break even load factors of Go and easyJet even in normal times suggest that there is a need to enrich their traffic mix.

4.4  Changing International competition and consolidation

  4.4.1  The most significant developments in respect of changing international competition relate to the formation of alliances and other partnership arrangements. Alliances are not new neither is the perspective that the industry will centre around three major groupings currently; Star, Skyteam and oneWorld.

  4.4.2  There is also little doubt that the greater the degree of integration, the greater the potential realisable benefit. However in the current regulatory environment it has clearly been shown that the commercial agreement between the partners is significantly more important than any shareholding. A number of commentators have suggested that the events of 11 September will almost inevitably result in further consolidation. This is however by no means certain and it is unlikely to be manifest by "airline A acquiring airline B". Market exit, whether partial or total, will also show through as market consolidation.

  4.4.3  What is clear however is that international competition is now to an increasing extent between the networks of one airline group and its partners and the others, particularly where there is no direct service between particular city pairs. The US DOT in October 2000[27] highlighted the rapid growth in the so-called "behind and beyond traffic" where passengers from one partner's network are fed across the Atlantic and out through another partners network in the other continent. The mainland European and US partners in Skyteam and Star are able to benefit in this way.

  4.4.4  In this respect it is reasonable to conclude that the relevant reference market for assessing future alliance developments should be Europe rather than a particular individual market. However, it is also reasonable to be cautious regarding the timing of the conclusion of a multilateral agreement between the EC and the US, when the expected changes in jurisdiction occur, given the potential for disagreement in a number of areas.

  4.4.5  Whilst airline alliances offer the potential for significant cost cutting much of this may remain unrealised given the degree of integration and the ceding of control that is needed to realise the benefit, even before consideration is given to a merger/acquisition, which in itself will introduce nationality issues. As a consequence the greater potential for alliances is through extending the reach and feed of an airline. The potential in this regard is well illustrated with the alliance between Air France and Alitalia where the extensive network of Air France is connected with the under-served Italian market. The link between SAS and Lufthansa gives rise to similar opportunities in the Scandinavian market.

4.5  Underlying of fundamental demand

  4.5.1  Despite an almost universal view in the airline industry that it is traffic alone that matters, it is evident that in more normal times not all traffic is either good or profitable. It is however clear that traffic that might not be profitable for one airline can be profitable for another. It is important to recognise the variation in market maturity, which in some markets may be absolute, whereas in others they are only mature at the prevailing price structure.

  4.5.2  Analysis that we have undertaken at an aggregate level in the past has focused on determining and forecasting what is best described as fundamental demand for in effect a given pricing environment. Our analysis recognises the difference between reported passenger traffic and what we would describe as fundamental demand, which is a reflection of underlying activity and expectations over the economic outlook.

  4.5.3  Reported passenger traffic reflects the combination of this underlying element and the degree of excess capacity that exists in the market place. The degree of excess capacity that exists will in effect determine the pricing behaviour in the short term given the inability of most airlines in normal circumstances to adjust capacity rapidly. Excess capacity in the industry is also cumulative in effect and it is possible that over the period since 1980, globally, aggregate excess capacity exceeds fundamental demand by some 30 per cent with the consequent depressing effect on average revenues. The general underlying assumption within the industry is one of an inexorable decline in real yields and this is not misplaced. There is a need for a structural reduction in both capacity and the industry's cost base. Without it, the necessary returns for the wider industry are likely to remain out of reach, with the consequences for funding and financing.

4.6  Financial returns

  4.6.1  For the traditional airlines, once beyond break-even some 80 to 85 per cent of any additional revenue would flow through to profit. The margin performance of the traditional airline segment suggests however that there has been a breakdown between the pricing strategies and the cost of operation. The airline industry provides clear evidence of supply side economics at work and is also an industry that has suffered from the consequences of considerable excess supply. The ability of an airline to stimulate traffic in a market has never been in doubt if it is prepared to reduce its fare levels to the market clearing price. The problem has often been an incompatibility of the pricing strategy with the cost of operations. This shows through in an average operating margin since the start of the jet age of little over three per cent and rates of return for the majority of the industry which only exceed the cost of capital for short periods of time in the upswing phase of the cycles.


ROCE (adjusted for operating leases)
Year to March 199619971998 19992000 2001
Air France2.1 per cent 2.8 per cent6.5 per cent4.8 per cent 5.9 per cent5.5 per cent

British Airways
11.7 per cent 11.2 per cent6.9 per cent 5.7 per cent2.7 per cent 5.2 per cent

7.5 per cent 4.3 per cent8.0 per cent 4.2 per cent2.0 per cent4.1 per cent

7.0 per cent 5.6 per cent10.1 per cent 12.2 per cent5.1 per cent 11.0 per cent

n/a 53.1 per cent39.3 per cent 25.6 per cent15.7 per cent 12.1 per cent
* Results to preceding December.


Year to March1996
Air France6.57.8 8.1
British Airways12.311.6 8.1
KLM10.19.2 6.6
Lufthansa*9.99.9 7.7
Ryanair15.614.6 12.611.111.4 11.8
Source: *Company Reports/Commerzbank Securities.

  4.6.2  Generalisations are inevitably dangerous and the experience of the "low-cost" segment in the UK shows how with an appropriate cost base they are generally able to stimulate and create a market by adding significant capacity, but profitably.

  4.6.3  In particular these airlines have tended in the first instance to enter markets offering service between particular city pairs which have been unserved or under-served and which by definition are not mature and furthermore which are profitable at the average price levels offered.

  4.6.4  It is important to note that transparency on pricing is not absolute in the low-cost segment.

  4.6.5  The reported returns from the airline industry, where the traditional carriers only cover their cost of capital in the good times and then make insufficient in this period to offset the downswing, are increasingly unsustainable. The reality of this is that unless these airlines are able to improve their returns then investors will be unwilling to invest for anything other than the short term.

4.7  Cost issues

  4.7.1  There are significant differences in the cost structures of the participants in the various segments of the airline industry, not only between long haul and short haul but also as might be expected between the established airlines and the new entrants. In the latter case these reflect differences in the method of operation as well as in the scope and scale of operations.

  4.7.2  In the latter part of 2000 and the early part of 2001 labour costs, in the wake of a number of significant settlements in the US, became an issue of concern in Europe and this was not aided by the settlement reached with the pilots at Lufthansa, after arbitration.

  4.7.3  For any airline not only are a large percentage of costs determined externally but in any scheduling period they are also almost 100 per cent fixed. Indeed as the actions post 11 September have shown it is necessary not only to take capacity out of the market by grounding aircraft but it is also necessary to remove the associated costs of operating that capacity.

  4.7.4  For the new entrant airlines it is possible to establish the business model from first principles. For the established airlines the issues are of managing transition to be able to avail themselves of the opportunities offered in a number of areas.

  4.7.5  The use of the internet and other direct routes to the market for advertising, sales and distribution has been used perhaps close to its maximum by the new entrant airlines. The benefits in financial terms are clearly evident through the low levels of commission costs in particular.


Year endBritish
KLM uk
Passenger services (a) Fixed11.83 1.030.500.00 1.750.000.00 0.00
(b) Variable0.004.32 0.940.154.73 0.534.0913.83
Passenger embarkation fees2.58 2.847.553.94 0.433.660.39 0.00
Passenger insurance0.75 0.400.000.01 0.00
Sales3.241.24 1.511.951.41 1.041.320.00
Reservations0.003.06 0.340.002.15
Advertising and promotion11.20 2.790.374.35 1.399.102.40 7.09
Commission23.197.21 0.370.0017.54
Total per passenger52.79 22.8917.3410.57 21.2214.7411.39 41.34
Source: CAA Airline Data Statistics 2000.


  4.8.1  The traditional measures adopted by the industry are misleading. The use of ATKs per employee as a key indicator of productivity, where in effect capacity is divided by the number of employees, reveals little about the fundamental performance of the industry. In particular it gives little or no indication of how changes in this figure translate into an improved operating result. This particular statistic can of course be affected by changes in size and route length. All other things equal, a structural change in an airline's fleet over time will distort productivity reported and measured in the traditional way.

  4.8.2  Revenue and actual cost based measures of productivity are more appropriate. In this respect measures that reflect for example the cost per flying hour set against the revenue gained per flying hour will provide a better basis for analysis and evaluation.


  4.9.1  There was a certain inevitability that one of the key issues once again in the regulatory deliberations concerning the proposed alliance between British Airways and American Airlines would be Heathrow slots. It would appear reasonable however, that since the focal point for the relevant market is Europe to the US, and that as competition in this market is between the airline groupings, attention should focus on the scope for the existing Heathrow operators to cede slots to their partners to gain access.


Summer 2001
Winter 2001
Of which BA36.4 36.8
Total of these88.389.0
Source: Commerzbank Securities from ACL data August 2001.

  4.9.2  Of course it is easy to point to the share that OneWorld grouping has, but in relative terms this is a smaller share of slots than any of the European partners of the competing alliances hold at their respective home bases. Indeed, BA's share of slots at Heathrow is markedly lower than its European competitors at their principal bases. (BA's slot share differs between these tables as it reflects a different data source and the period used.)


AirportShare of slots
per cent
Air FranceCharles de Gaulle 54.6
AlitaliaMilan Malpensa 58.3
British AirwaysHeathrow 37.9
KLMAmsterdam Schiphol 53.9*

  Source: Commerzbank Securities/Airline Business.

  *Includes KLMuk.

4.10  Constraints on the efficient operation of the air transport system in the UK

  4.10.1  For any airline operating a high intensity operation at a congested airport there are significant cost penalties that are incurred. Whilst there are valid concerns regarding putting too much store by the use of hours and minutes flown as a meaningful measure of productivity, the data can provide a useful indication of the differences in utilisation.

  4.10.2  In 2000 British Airways and bmi British Midland, both operating a substantial part of their system out of Heathrow, reported utilisation of between 6.5 and 7.7 hours and 7.5 and 9.4 hours a day respectively for their short-haul fleets. This compared with 9.1 hours for Go and 11.1 hours for easyJet. The data for Q2 2001 is presented as Appendix 1 on a wider basis showing actual utilisation as a percentage of the aircraft hours theoretically available.

  4.10.3  Congestion and delay is a very real impediment to the efficient operation of the airline industry in the UK and indeed elsewhere. It is unlikely to be relieved either by Terminal 5 or the provision of incentives by the CAA for BAA to increase slots at Heathrow to 480,000 a year which will require additional delays to be borne by airlines and passengers. Indeed the CAA itself recognises that the binding constraint at Heathrow is the runway or in effect the absence of an additional runway capacity and that it is unlikely to be relieved in the period to 2007.[28] As traffic recovers there is an inevitability that airlines and passengers will have to endure additional delays both foreseen and incorporated in the schedule and unforeseen in this regard.

  4.10.4.  British Airways also suggested that delays caused by BAA at Heathrow cost them some £60-£70 million in the previous calendar year before some £25 million of cost to passengers.[29]

  4.10.5  At an aggregate level for 2000 the data collected by Eurocontrol's Central Office for Delay Analysis (CODA) showed significant delays at the key UK airports. These delays are however not wholly unexpected and insofar as they are foreseen are included as a buffer in the timetable. For many airlines, arriving close to time ensures that the integrity of the network is maintained. This is clearly much more of a pressing issue for the operator of a high intensity short-haul network.


Minutes of delay % of flights delayedAverage delay
per delayed
flight (minutes)
London Heathrow936,978 19.820.3
London Gatwick668,743 22.522.7
London Stansted402,599 22.921.3
London Luton177,626 19.223.3
Edinburgh135,62612.4 22.4
Glasgow127,97911.6 22.7
Source: Eurocontrol: CODA


Minutes of Delay % of Flights DelayedAverage delay per delayed flight
London Heahrow1,094,165 20.423.0
London Gatwick618,989 20.623.0
London Stansted413,796 25.119.3
London Luton144,655 16.921.6
Edinburghn/an/a n/a
Glasgown/an/a n/a
Source: Eurocontrol: CODA

  4.10.6  An analysis of an airline schedule over time will give an indication of the extent to which the provison for delays has increased over time. In this case analysing the British Airways schedule shows increases of[30]:

12 per cent on the Heathrow—Glasgow route between Summer 1989 and Summer 2001

14 per cent on the Heathrow—Paris CDG route between Summer 1979 and Summer 2001

18 per cent on the Heathrow—Frankfurt route between Summer 1979 and Summer 2001

33 per cent on the Gatwick—Frankfurt route between Summer 1979 and Summer 2001

  4.10.7  Most recently, and again as might be reasonably expected, the CODA data for November 2001 shows a marked reduction in delays. In particular in November 2000 some 19 per cent of Heathrow departing flights were delayed for an average of 19.1 minutes. Similarly 18 per cent of the flights arriving at Heathrow were delayed for an average of 23.8 minutes. The corresponding data for November 2001 does not include Heathrow in the departure delay table and only 5 per cent of arriving flights were delayed (but for an average of 28 minutes). Reduced delays however are likely to prove to be a temporary phenomenon and the underlying issue that remains to be resolved when traffic recovers to previous levels is one of terminal area delays.

C N G Tarry

January 2002


Aircraft type and airline Sector length
Passenger flights
available used
BOEING 737-300
easyJet79110,396 49.07
KLM UK1,163949 43.86
GB Airways1,4861,467 42.78
Go Fly1,0508,132 42.16
BMI British Midland674 2,95836.33
British Airways (Euro Ops Gatwick) 759 3,90225.76
BOEING 737-400
GB Airways1,4811,055 40.87
BMI British Midland664 1,04537.47
British Airways8153,592 36.76
British Airways (Euro Ops Gatwick) 1,012 9,61836.16
JMC Airlines2,3335,356 57.72
Airtours International Airways Limited 2,3112,07253.58
Britannia Airways2,075 5,47851.94
Air 20002,2895,258 50.76
Monarch Airlines2,195 1,99041.85
British Airways79916,908 29.23
AIRBUS A320 100/200
JMC Airlines2,1212,928 61.42
Airtours International Airways2,135 4,10460.51
Air 20002,0311,504 52.79
Monarch Airlines1,970 1,54251.29
Virgin Atlantic2,429 91951.25
British Mediterranean2,437 1,05545.34
GB Airways1,614350 42.17
BMI british midland655 4,26136.22
British Airways7693,409 25.55
Source: CAA.

Memorandum by the British Airline Pilots Association (AT 36)



  In responding to the Select Committee invitation BALPA wishes to bring the committee's attention to the effect of the recent terrorist atrocities and their aftermath to the UK airline industry. As the Trade Union and professional association representing around 8000 commercial pilots we are represented in most carriers in every sector of the industry. We also have a unique perspective on security issues as our members are directly in the front line. We concentrate here on the economic and employment aspects of the crisis, but we also look forward to measures, which can help the UK sustain and improve its leadership in European commercial air transport.

  The effect of September 11 has done more than exacerbate a downward trend it has effected a catastrophic short term reduction traffic, including the temporary closure of US airspace, and led to a medium term depression in the airline industry. Even the most optimistic forecasts do not foresee a full recovery before the third quarter of next year and many see recovery being delayed until the first quarter of 2003. In many ways the impact of the current industry crisis has been worse than the Gulf war aftermath the only comparable event. One respected airline economic consultancy estimates the impact to be twice as bad as the Gulf War, with long-term uncertainty for business travel as the most significant future trend.

  If there was any doubt about the overall economic contribution of the air transport sector they have surely been dispelled by the events of September 11. According to a recent report by Oxford Economic Forecasting air transport contributed £10.2 billion to UK GDP (1.4 per cent of the total). [31]Previous rapid growth and projected growth meant aviation was growing four times more quickly than the rest of the UK economy, and would contribute two per cent to GNP by 2015. Moreover the growing sectors of the UK economy such as information technology, biosciences, telecommunications and tourism depend heavily on air transport. The sector sustained directly 180,000 jobs or 0.8 per cent of total jobs in the UK.

  In addition aviation demonstrates considerable "multiplier effects", sustaining up to three times the number of direct jobs through the supply chain induced effects and jobs directly relating to the tourism which air transport facilitates. In terms of macroeconomic impact aviation was responsible for £6.6 billion of services, 11 per cent of UK service exports and three per cent of total UK exports. The industry helped Britain's export effort by transporting £35 billion of exports, amounting to one fifth of all exports. The contribution to the exchequer of this vital industry is conservatively estimated at £2.5 billion although the real contribution is thought to be far higher. Aviation also provided about three per cent of UK business investment in 1998.

  As the lynchpin of the UK's rapidly growing tourism industry, the sector sustains an estimated 200,000 jobs.

  Given the economic, and social importance of the air transport industry to Britain, we are deeply concerned about the industry future in the light of current events. In our submission we wish to make several key points.

    1.  To outline the extent of the crisis and its effects on BALPA members and the airline within which they are employed.

    2.  To place the crisis in its correct context as a major "discontinuity" in the industry's development.

    3.  To discuss the issue of government assistance both here and abroad

    4.  To suggest some initiatives which might help alleviate the current situation and facilitate long term restructuring.

    5.  To suggest some measures which might help the UK to emerge from the current crisis in the best possible position.


  3.  Since September 11 the UK airline industry has undergone a well-documented period of severe financial and economic discomfort, extending across all sectors. The entire industry has been affected, from the largest intercontinental flag carrier to the smallest training school, affected by the glut of commercial pilots.


  5.  It is important when assessing the impact of September 11 and its aftermath that we recognise the diversity of the airline industry, addressing issues within particular sectors, rather than viewing the industry as one entity. Throughout this difficult time BALPA has worked constructively with the airlines concerned to find a productive solution to the short-term problem. Whilst ensuring that the resources for future growth were in place.


  7.  Before September 11. In truth the industry was on the cusp of recession but was taking steps to manage that downturn. Carriers had already taken reduced capacity, rightsizing their workforces accordingly, and were exploring further changes. The unions across the UK industry understood and supported this. Having laid the foundations for recovery, the industry suffered the catastrophe of September 11, which must be seen as a major shock and discontinuity to the industry. There may well have been a recession but effectively September 11 has not only exacerbated the situation it has worsened the situation markedly. We would argue that whilst carriers may have had plans to rationalise their operations, September 11 by putting the industry into what is effectively a demand side depression has made it necessary that many take action. Transatlantic yields, which provide most of the revenue are down 60 per cent, the number of passengers flying has fallen as uncertainty grips the US and elsewhere. The difficulties in air transport have repercussions for the rest of the economy.

  8.  The worst affected areas of the industry are those with a direct exposure to the transatlantic market, where both revenues and yields have plummeted. This has led to major problems for the main scheduled carriers British Airways, Virgin Atlantic and BMI British Midland. These carriers have varying degrees of exposure to the transatlantic market, which is the most lucrative premium market in the global airline industry.

  9.  BA has suffered from both the US shutdown and a prolonged fall of in revenues. Their premium business class product, revamped to great acclaim and attracting business from other carriers was heavily dependent upon strong transatlantic traffic. Whilst yields had started to fall of pre September 11 as the industry faced a predicted downturn (see below), the terrorist actions have placed revenues from this source to a degree greater than any cyclical economic effect. Business travel has fallen off as companies curtail travel for security and cost reasons. In total BA's latest yield figures show that current yields are down 25 per cent on November last year.

  10.  In effect these transatlantic revenues have cross-subsidised other aspects of the BA operation, maintaining BA's position as the UK network carrier in the European and global airline industry. These issues have prompted both major redundancies as BA strips out capacity, and adapts to a lower yield environment, and have also led to the early withdrawal of older 747 fleets signalling the demise of the flight engineer, and have also required staff pay sacrifices in respect of a deferred pay claim and Christmas bonus payment. The airline has also been forced to re-appraise the future "size and shape" although detailed proposals have yet to be advanced.

  11.  Virgin Atlantic also suffered from the loss in transatlantic revenues where the effects were arguably more concentrated given the carrier's exposure to long haul traffic, and to a US/Caribbean focused leisure business. Virgin was also harmed by the fact that its traffic mix is exclusively international save for some abandoned feeder routes and as such has been affected in every international market. As the UK's second Transatlantic carrier with a large exposure in terms of both services and revenues Virgin was forced to take immediate action. This meant that retirement of all remaining older 747 classic aircraft which in addition to BA withdrawals has effectively ended the requirement for flight engineers certainly in the UK. These withdrawals also affected a large number of pilots, many of whom were made redundant. The carrier also terminated its A320 operation servicing the UK from Athens causing further job losses. BALPA negotiated a restructuring package with the company to facilitate fair redundancy but we were still left with 152 job losses. In addition to job losses the redundancy process has brought reductions in pay through demotion for those losing command positions. This is usually the case where compulsory redundancies are sought.

  12.  bmi British Midland was also affected by transatlantic exposure, primarily because such services were the basis of planned expansion. The carrier also suffered falling revenues and yields. Overall the company put forward a business plan, which envisaged a reduction in capacity of 16 per cent. The most immediate impact was a withdrawal of aircraft used primarily to operate inclusive tour routes for holiday companies; they were also affected by the general downturn. Bmi has also curtailed its European route network, as overall air transport has fallen in the short term. 109 confirmed job losses with further demotions have resulted, although the company council and BALPA have negotiated ground-breaking part time working deals. Some pilots have opted for 50 per cent working.

  13.  Other carriers have been less badly affected by the direct problem of transatlantic losses. But these carriers and others have suffered in any case from the general anxiety in consumer confidence, and the general downturn in the economy, which though evident before September 11, was being dealt with by carriers.

  14.  These are all worrying developments however we believe that the overall demand for air travel remains strong, and that with the reductions in capacity which have taken place, the industry has taken steps to ensure that it can recover quickly. There is encouraging news from festive forward bookings, which suggest that the urge to fly again has returned. Leisure passengers are also hugely important to the industry, and it is to this sector we now turn.


  16.  The UK leisure carriers continued to fly throughout September 11 primarily because bookings are committed in advance and fearful flyers would have lost their deposits. However other concerns particularly about domestic job losses could affect consumer decisions.

  17.  Nevertheless there has been a reduction in capacity across the industry, and a wave of redundancies. Pay restructuring has also been in evidence, as have been the suspension of working agreements. In our view the sales outlook in the charter sector is not as pessimistic as some operators originally claimed. Indeed a recent survey commissioned for ABTA points to a 5 per cent reduction in holiday bookings generally. Some two million fewer holidays are being sold this time. Leading to a more sustainable market. We expect that consumers will continue to travel, and that many are waiting until the last minute to secure discounts. Many industry analysts believe that the withdrawal of capacity is an opportunity for carriers to firm up prices, before the January booking season. In our view the airlines have by cutting capacity so precipitately, exposed themselves to the problem of possible undercapacity when the market recovers. We find it worrying that many carriers are actively seeking to operate a "winter crewing" business model, whereby they procure extra capacity from outwith the UK/EU. We have written to DTLR and made clear our opposition to such a strategy and discuss this further below.


  19.  The low cost operators seem to be proving that there is a market for air transport, although many enjoy significant cost advantages. Both Ryanair and easyjet have discounted fares to grow the market and have been maintaining and improving their market share, often at the expenses of major airlines. However there has also been sustained discounting, and whilst this guarantees cash flows it does reduce margins. Yet low cost airlines generally with access to low cost airports, less congested airports can achieve the required utilisation to profit from this business model. Other low cost operators such as GO and Buzz the KLM subsidiary have also expanded. The expansion of low cost carriers is something we welcome, and their existence has absorbed at least some of the surplus pilots ejected from the UK industry.


  21.  The regional operators have also been affected to varying degrees, Gill Air a regional carrier operating from Newcastle on a network servicing Air France and operating its own point-to-point services was, we feel, hastily liquidated in the immediate aftermath of the attacks. Financial market nervousness is a factor in the industry's problem, and those carriers with little or no access to additional borrowing possessing saleable assets, are most at risk. 93 pilots and additional other staff lost their jobs at Gill Air, which may have had a viable financing as a result. We have just learned that another UK operator British World which strictly falls within the "supplementary/ad hoc" category has also filed for bankruptcy. The carrier had earlier withdrawn fleets, and demanded a 15 per cent pay cut from some staff, and has clearly been affected by the tendency in recessions for carriers to minimise wet leasing and chartering.

  22.  Other regional operators have been largely unaffected although those who provide a feeder role to major carriers such as BMI commuter, where there have been job losses and BA Citiexpress where restructuring is underway have been affected. Other regional operators have seen increased traffic as more people choose to avoid the congestion of large hubs.


  24.  How can the industry be assisted to overcome the effects of September 11? We outline briefly our views below. But we wish to look forward and to look positively at the opportunities, which will present themselves when the industry recovers. Many of these issues will be short term but the best assistance government can give is to recognise the industry as a pivotal sector of the economy which needs clear policy and direction. We outline the issues we wish to see addressed below:


  26.  Whilst being hobbled by the crisis the industry has also faced a continued drain on its resources. The requirement to increase security has been a major cost burden for airlines, as have increased insurance costs. Though we very much welcome the government's support to the industry in the form of underwriting guarantees, these costs are but one aspect of the increased industry cost burden. US carriers have asked for and received substantial state support in the form of compensation for losses, help with security measures and structural aid. These amounted to $18 bn in total. In Europe the Commission has re-iterated its view that state aid should not be used to bail out stricken carriers, although state bank guarantees and other actions cannot be so readily detected. The commission in its report of October 2001 gave permission for national governments to compensate carriers, and we wish to see the UK government use this authority more widely.

  27.  Government has come forward with compensation for estimated revenue losses on the shutdown days, however this support whilst in our view welcome, goes only part of the way. Government needs to do two things. Firstly it needs to recognise that UK carriers are under medium and long-term threat from US carriers, who have benefited from large-scale subsidy, and from a number of government interventions, which are in our view akin to state aid. It also needs to recognise that the industry is a strategic one with wider impacts on the economy. Because of that impact it is important the government works with the airlines, the tourism and hospitality industry and other affected sectors to build the necessary confidence and ensure that people have both the confidence and the opportunity to fly on UK airlines.


29.   Demand Side Measures

  30.  Government can provide the necessary framework by facilitating general drives for tourism and commerce and by encouraging people to fly in greater numbers and more frequently. This applies as much to business as to leisure passengers. Whilst a tourism tax credit of the type introduced within the US might be more complex to administer in the UK, we still feel this is worthy of consideration. We would still suggest that some immediate relief could be given to the UK industry, which would ease the airlines cash flow position. We re-iterate here our plea for an easing of the costs burden through the withdrawal of Air Passenger Duty as stimulus to the industry, and/or its hypothecation to the industry. The removal of APD would act to stimulate the industry and make fares more attractive.

  31.  Recent precedent for helping stricken industries includes Government's £1.2 billion compensation to farmers so far this year. Aviation worth 1.5 times farming industry in GDP terms has at least the same right to crisis aid.

  32.  Government can afford to help the aviation industry with at least eight billion in unallocated reserves and underspend on this year's budget.

  33.  We would also suggest that government provide comprehensive assistance with security costs, although in this submission we do not wish to make specific recommendations on security per se.

  34.  However we need to invest in new aviation security measures. This would be very easy to justify in political terms, given the timbre of public opinion. Good security is quite costly—El Al spends two per cent of its revenues on security, compared to a US/EU average of 0.25 per cent.

35.   Supply Side Measures

  36.  There are a number of issues which we believe need to be addressed in the context of the industry crisis, both to guard against a temporary complacency which the current temporary downturn may encourage, and to promote a longer term approach to policy on air transport if these decisions are taken then the industry which be able to benefit from the growth which is predicted.

  37.  The main point to make is that the industry globally will recover. It may well recover on a different basis, and on a more modest growth path than previously believed, however it will recover. Longer term planning for growth needs to take place now given the long lead times in the construction of airport infrastructure. Even the mid range forecasts from ICAO suggests that air passenger traffic could grow six fold between 1990 and 2050. The bulk of this growth will come in the first three decades. The UK authorities predict a doubling of air traffic on the mid range forecasts between 2003 and 2015. The events of September 11 may have a lasting impact in changing the nature of air transport, but they will not threaten its growth, as the growth of air transport is a constant in a globalising economy with an increasing proportion of tradeable services. When the industry does rebound, we need to ensure that UK carriers are not put in a position where they are disadvantaged either in the short or long term.

  38.  Firstly, whilst security is a specialist and sensitive subject, and one, which we will not address specifically, government needs to take account of the very real impact September 11 has had on UK carriers in this regard. The government guarantee of insurance cover is most welcome. However the UK with its high level of aviation security has borne these costs without government support for many years, whilst carriers in other nations and particularly the US have had these subsidised by government. Aviation security is an issue in which we would like to see government take an increasing responsibility. Allowing our operators to preserve and extend the high levels of security currently available in the UK.

  39.  Secondly in the short to medium term, we need to ensure that current re-negotiations on Air Service Agreements do not disadvantage UK carriers in relation to those in the US. There is every sign that starved of growth in the US; many US carriers will target Europe and particularly Heathrow as the major transatlantic business hub. Existing market distortions particularly the continued protectionism within the US market suggest to us that we should not surrender the bilateral treaty Bermuda II at this critical time. We are particularly concerned that such negotiations are being linked to the granting of anti-trust immunity for certain alliances. We re-iterate our concerns as voiced in the Aviation Forum's evidence to the select committee on Air Service agreements (HOC 2000). We agree with a re-negotiation on the basis of managed regulation, but we feel regulation continues to be necessary.

  40.  Thirdly the UK government needs to take positive action as it reviews aviation policy to address the problem of infrastructure. The UK's major hubs and increasingly the secondary hubs are operating up to and over capacity. Poor terminal facilities and inadequate runway capacity, as well as a disproportionate attention to environmental objections, and a cumbersome planning process have delayed and frustrated growth in the UK. Whilst the granting of permission to build Heathrow's fifth terminal has been a ray of light in the planning process it was well overdue and will now not be ready for many years. By the time T5 is ready greater capacity will be needed if our airports are to compete. The government needs to consider two issues.

  41.  Firstly we need to ensure that existing terminal and runway capacity can be utilised effectively, within the constraints of reasonable environmental objections. This means a more balanced approach between the objections of those who have lobbied on for example night flights from UK airports, or on changes in runway use, and those who benefit in both jobs and access to air services.

  42.  Secondly we need to encourage long-term sustainable growth in the industry, to allow the UK to compete as an aviation hub with the rest of Europe. That means additional infrastructure and airport development. The balance must be struck between the economic and social benefits of continued aviation growth and reasonable measures to protect the environment and communities. However those communities, which stand to benefit, from jobs gained and sustained in air transport must be listened to. The events of September 11 have shown in graphic detail the employment multiplier effects of our air transport industry. The cancellation of flights has affected not just the airlines and the tourism and hospitality sector but also a myriad of suppliers, providing everything from food and drink to specialist computer equipment, training, transport and a host of other services. All of these are dependent upon air transport. Air transport is a key industry and needs to be seen in that way.

  For air transport to grow and recover it needs to have the resource base to benefit. One worrying issue of current pilot lay offs is that they may encourage airlines to believe that pilot shortages are over for now. Indeed it is important that we use the breathing space afforded to examine the whole issue of pilot training.

43.   Pilot Availability:

  44.  The dynamics of the industry suggest that when traffic recovers everyone will want to expand at the same time. Recovery may be on the basis of lower yields as carriers discount, to build cash flow, but in a network industry everybody is tempted to expand at the same time and everyone searches for the same inputs. As yields recover and profits grow then expansion will continue. In that sense the issue of training and recruitment is more crucial than ever because one issue, which will affect the airlines, is their ability to recruit and retain skilled staff, including pilots. These shortages could be the main constraint on expansion and could severely limit the UK's ability to preserve its comparative advantage on air transport. The continued growth of job opportunities for pilots in the future means that we need a sustainable and dynamic training effort; at the moment our training is ad hoc and inconsistent. The route to airline pilot training is expensive and unlike that in other countries does not benefit from favourable tax treatment. VAT for example is levied on this vital element of vocational training. This disadvantages the UK training industry, which is a vital part of our air transport industry and creates a distorted market favouring European competitors.

45.   Assistance with training

  46.  Government can also assist by taking action to ease the training of skilled staff into available jobs. Government could for example offer through the DFW subsidised low interests training loans, or could even underwrite the training cost under EU restructuring criteria. This would help both cash strapped airlines and unemployed qualified pilots. For example there are many qualified A320/A340 pilots at both Captain but mainly FO level. The transition training for these pilots to get them into positions with the low cost carriers, where there are vacancies on the 737 fleets would be minor but welcome to those involved. Government could also assist the flight engineer community with retraining costs, and help facilitate their absorption in alternative careers.

47.   Restrictions on Work Permit issues and wet leasing

  48.  One issue, which still threatens the employment of UK pilots, is the continued use of work permits for non-EU nationals and the one issue of wet leasing of capacity whereby aircraft and crews are hired on a temporary basis to cover capacity shortfalls.

  49.  On the specific issue of work permits and the recruitment of non-EEA pilots. We have written to the DTLR and the Overseas Labour Service outlining our view that there should be no new issue of permits, and no extension of existing ones whilst the current crisis prevails. We have around 700-1000 redundant commercial pilots, many of whom we expect will be unemployed for at least a year. Those pilots in training who have contributed hugely to their own training costs are also disadvantaged as work permits are usually sought to employee fully "type rated" pilots. This allows some carriers to minimise training, and should we believe be discouraged if the UK is to develop a sustainable supply of pilots.

  50.  We have also asked DTLR to refuse applications for wet leasing when the UK currently has excess capacity. In our view the rationale for either measure no longer applies when the industry is suffering from excess capacity. The relevant legislation (EU Regulation 2407/92)— specifically states that such leasing should be carried out only under exceptional circumstances. A number of operators are actively committed to a business model which uses wet leasing to develop new routes and services, and who aim to maintain these arrangements long-term.

  51.  We are especially concerned that operators, who have reduced capacity before any evidence of a sustained downturn, are not encouraged to supplement that reduced capacity with wet leasing. Wet leasing is appropriate where carriers come up against immediate capacity restraints, and short-term emergencies. However where it becomes a structured and planned business strategy; it can only undermine UK carriers and UK pilots and crews. The UK has a quality air transport industry with most of Europe's leading leisure airlines. By allowing some sections of the industry to source capacity on a wet lease basis we threaten that quality. It is vital that we preserve the UK reputation as the leader in quality and safety. We leasing especially at a time of unemployment and overcapacity destabilises that quality, and we believe through fragmentation and the use of varying operational standards can also potentially threaten safety.


  53.  The UK industry has been and will continue to be severely affected by the events of September 11. Our members have suffered with other workers from the crisis, and continue to suffer from the uncertainty, which has affected the industry. We have suggested measures, which can alleviate the current situation, but we have also suggested measures, which are more long term. In our view, the industry still has a vibrant future and we need to lift our sights beyond the current crisis and take positive action to ensure that our air transport industry can benefit from that growth albeit with the increased security and re-assurance which passengers and flight crew alike demand.

Dr John McGurk,

Head of Research and Communication

Roger Kline,

Principal Negotiator

December 2001



CompanyJob losses DemotionsPay cuts/deferrals Comments
Air 200017-72Up to 30 Deferral
British Airways380 Deferral
British European40 proposed 20May re-assess given more favourable environment
British World Airways100 Closure of carrier
BMI British Midland109 55Deferral and suspension of long haul pay
BMI Regional40+15—20
AirtoursNone Proposed deferralNegotiations on alleviation to scheduling agreement
BrittaniaNonePay increase grantedCould suffer from loss of Hadj charters
BARNone15 surplus
Flightline50 9 per cent pay cutLoss of Swissair contracts
Gill Air92 Closure of carrier
GoNone Pay freeze to cope with revenue and profits loss
JMCUnder negotiation Proposed pay cuts of 15 per cent Possible job losses
KLM UK3510-15 May be mitigated by route expansion
Maersk20 Mainly through natural wastage
MonarchNone proposed Company will review operations post Christmas to assess impact
Virgin Atlantic15260
Total confirmed975

Supplementary memorandum by the Civil Aviation Authority (AT 07A)


Q1.  In the CAA's written evidence it states that "new entrants put considerable pressure on any airline with poor products and/or high cost structures". Given that that is the case, to what extent is the current slot situation at Heathrow and Gatwick "protecting" inefficient high cost carriers?

  The administrative slot allocation system and the principle of historic precedence that lies at its heart has allowed airlines to retain slots at congested airports from one year to the next provided they do not fall foul of the use-it-or-lose-it rules. This has certainly constrained the ability of new entrants to acquire slots at Heathrow and Gatwick. Consequently, the competitive pressure that incumbents have faced from new entrants has often been more muted than it might otherwise have been.

  However, we are not able to quantify the extent to which incumbent carriers are being protected, particularly given the existence of a "grey" market in slots. Establishing a properly functioning secondary market in slots should significantly improve the position, in terms of both the competitive pressure exerted through new entry and the efficient allocation of scarce airport capacity. It would also confront the existing users of slots with their true value, which should make it less likely that slots are used inefficiently.

  It should be added that the current slot situation is not the only constraint which serves to protect incumbent carriers. The artificial constraints imposed by the inter-governmental system of bilateral air services agreements, with its restrictions on numbers of airlines, routes, frequency and capacity and fares and, most fundamentally, the nationality of the ownership and control of airlines, have had a much greater effect.

Q2.  To what extent is the continuing lack of slots at the major London airports influencing what would otherwise be the natural development of the UK airline market?

  There is no doubt that the scarcity of slots at Heathrow and Gatwick has had a profound influence on the development of the UK airline market. If capacity at Heathrow had expanded to meet the demand for slots, for example, it is likely that the UK airline market would have developed rather differently from the way it has. Precisely how it would have differed is, however, difficult to say.

  Having said that, scarcity is by no means unique to airport slots. Many industries and markets develop in an environment in which one or more factors of production are scarce. In order to achieve an economically efficient outcome, the normal approach would be to ration scarce resources by means of price. In the CAA's view, the same principle should be applied to scarce airport capacity through the establishment of a properly functioning market in slots.

  Again, as noted above, the artificial constraints imposed by the inter-governmental system of bilateral air services agreements will also have influenced significantly the development of the UK airline market.

Q3.  Evidence from ACL indicates that the largest increase in slot requests is at Gatwick, and that there has been a decline in requests at Stansted. That evidence appears to be at odds with the CAA evidence, which suggests that Gatwick is likely to be more affected by the events of 11 September than Stansted. Does the CAA accept ACL's analysis and what is the CAA's view of the potential impact of those trends on the industry?

  The CAA has no reason to dispute the evidence provided by ACL. As the body responsible for the allocation of slots at Gatwick and Stansted, ACL will have detailed first-hand knowledge of slot requests and usage. The CAA's evidence on this point was based in large part on BA's announcement that it would be reducing some services at Gatwick and transferring others to Heathrow. There were also reports of cut-backs by other Gatwick operators since 11 September, including the main charter carriers. On the other hand there still appeared to be growth at Stansted with the latest data then available, provisional statistics for October, showing a 5 per cent increase in passengers there as compared with a 13 per cent decline at Gatwick. At that time it was unclear whether any airlines would be looking to introduce new or expand existing services at Gatwick. In the event, however, it appears that a number of airlines, notably easyJet, have obtained slots at Gatwick in order to operate new services. To the extent that the expansion of low-cost carriers' services at Gatwick is likely to intensify the competition faced by services operated on parallel routes from Heathrow, this is to be welcomed.

Q4.  Do you consider that now is the right time to be advocating a change to the charging regime at regulated airports that will inevitably increase airports' charges to airlines?

  The CAA is required by the Airports Act to set price caps on airport charges for the five years to March 2008, with these not coming into force until April 2003. While some airlines are currently suffering financial losses in the wake of the 11 September attacks, the position may look very different in 15 months time when the new price caps come into effect.

  The Airports Act gives the CAA a number of statutory objectives, including that of encouraging investment in new facilities at airports in time to satisfy anticipated demands by users. The CAA's priority in terms of the future economic regulation of BAA is one of investment. Heathrow in particular continues to exhibit substantial excess demand. In these circumstances the CAA believes that price increases need to be permitted to secure greater investment in capacity and service quality and to improve the efficient use of existing capacity.


Insurance and security costs

  The CAA sees no case for the Government to compensate UK airlines for increased costs associated with insurance and security. To the extent that costs have increased, these might either be absorbed by the airlines or passed on to consumers in the form of higher fares. How much they can be passed on to consumers will in practice depend on the level of competition in any given market. In fact, many UK airlines have implemented fares surcharges to cover the increased costs associated with security and insurance. These surcharges have generally been set at £2.50 per one-way sector. The CAA saw no reason to intervene to prevent these surcharges, but has approved them only until the end of March 2002 in order that the position can be kept under review.

North Atlantic fares

  Since 11 September there have been a number of pricing initiatives by US and UK airlines, as one would expect in any event at this time of the year. Under the terms of the bilateral agreement, US airlines file their fares with the CAA for approval and our normal practice is to act on these filings upon receipt. However, since 1 November and at the DTLR's request, where US airlines' file fares which undercut UK airlines we have been delaying our approval for 48 hours in order to give UK airlines an opportunity to complain if they believe that particular fare levels are unjustified. We have received no such complaints from UK airlines. Indeed, there is no clear evidence that the US Government's assistance has in fact affected fare levels in the marketplace.

British Airways slots at Gatwick

  Responsibility for the allocation of slots at Gatwick rests with ACL. We have confirmed with ACL that British Airways relinquished 180 slots per week at Gatwick for the current Winter season (2001-02) that it no longer required for this season or for the future. These slots were returned to the pool and reallocated by ACL to other airlines with outstanding requests under the EC Regulation on slot allocation (Council Regulation (EEC) No 95/93).

  In addition approximately 200 British Airways slots are being cancelled monthly (up to the end of February so far) as BA re-evaluates the shape and size of its future Gatwick operations. We understand from ACL that the airline intends to re-claim some of these slots for Winter 2002-03 under the provision of the Regulation which deals with "unforeseeable and irresistible cases outside the air carrier's control". In practice, therefore, these slots are available only for ad hoc flights.

  In neither case is there any question of British Airways being able to exert any influence over which airlines were allocated the slots it had relinquished.

Transatlantic Deregulation; The Alliance Network Effect. US DOT October 2000. Back

28   Heathrow, Gatwick, Stansted and Manchester Airports' Price Caps 2003-2008, CAA Preliminary Proposals-Consultation Paper-November 2001 paragraph 2.19 Back

29   Performance Reports of BAA London Airports and Manchester Airport: August 2001 paragraph 7.31 Back

30   Source: BACK Aviation from OAG data Back

31   Oxford Economic Forecasting 2000 Back

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