WORLD AIRLINES AIR TRAFFIC IS HEALTHY: AIRLINES PROFITS ARE NOT

Press, Volume CXI, Issue 32521, 3 February 1971, Page 12

WORLD AIRLINES AIR TRAFFIC IS HEALTHY: AIRLINES PROFITS ARE NOT

(By

MICHAEL DONNE,

in the “Financial Times". London)

(Reprinted by arrangement)

World airlines have just finished, one of their worst years ever financially, and are not expecting much improvement in the year ahead. Dstafied figures for 1970 are not yet available, but it is widely believed that the industry s financial situation will be shown to have deteriorated further from that of 1969, during which the global operating profit of the airlines of all the 116 member States of the International Civil Aviation Organisation (1.C.A.0) amounted to only 3.9 per cent of operating revenues—the lowest figure since 1962, when it stood at 1.5 per cent.

If it is also borne in mind that the operating profit is subject to big deductions for such items as taxation and interest on loans, before net profits or losses can be determined, it seems likely that in 1969, for the second year in succession, the revenues of the airlines of 1.C.A.0. States scarcely covered their costs, that in fact many airlines made substantial losses.

For 1970, the pattern seems to have been repeated. Many of the biggest airlines in the world Pan American and Trans World Airlines of the United States for example have recently announced big losses. British Overseas Airways Corporation while reporting substantial operating profits for the financial year ended last March, and reduced profits for the first half of 1970-71, has warned of more difficult times ahead. British European Airways, while still expecting to end 1970-71 with a profit, does not expect it to be a big one—indeed, even that position may have been jeopardised by the events of recent weeks, such as the continued go-slow of airport workers, and the recent fog. Profitless growth

; For the industry as a • whole, the outlook for 1971 ■ has been summarised by Mr 1 Knut Hammarskjold, direc-tor-general of the Intema- • tional Air Transport Association (1.A.T.A.), as being a continuation of "profitless growth.” The statistics for world air traffic, both passengers and freight, continue to rise. For 1971, the I.A.T.A. airlines expect to carry some 265 m passengers, or about 10 per cent more than 1970, while flight traffic is likely to grow by about 15 per cent. 1.C.A.0., whose statistics cover a wider sample of airlines, forecasts a bigger total of passengers, but about the same rate of growth. But, as Mr Hammarskjold has pointed out, statistics showing growth in passengers and freight can be misleading if used to gauge the industry’s financial health. For rising costs in all directions, coupled with a much more widespread use of cutprice and off-peak promotional fares, have served to offset for an increasing number of airlines the financial advantages that would normally be expected from increased traffic.

1 The scheduled airlines' i dilemma is that, while ■ recognising that fares reducl tiqns ue the one way to t stimulate traffic growth, they ■ have been obliged to seek i increases in many fares, i ranging between 5 and 10 f per cent from the coming i spring, in order to try to , make ends meet. This does ; not mean they have abandoned the idea of fares i reductions. Indeed, while put- . ting up scheduled fares, they > have also sought to make ■ many of their off-peak and ■ promotional fares more * attractive, especially to tour r operators. i At the same time—and for ■ the first time in the history ■ of scheduled air transport—- > airlines in Europe are now to tbe permitted by LA.TA. i (through which the airlines , themselves determine their t fares and rates) to sell off . seats on scheduled day and I night services to tour operators at rates subt stantially below normal . scheduled fares. This will i help fill seats on scheduled I services, thus hopefully, int creasing revenue yields. It . will also—again hopefully t —help the airlines in their . struggle against the inroads being made by the charter operators. ‘ Rigid timetables - The airlines are strapped ‘ into their timetables, with all . the heavy overheads these . involve, especially when they [ have to fly with aeroplanes . that may be only half full. . The non-scheduled airlines—- . a more accurate description ,of "charter” or “supple- ' mental” airlines can ar : range their flight loads by : chartering aeroplanes to ' clubs and groups in a way ; that is more likely to yield . them profits. The battle between the : scheduled and the non- . scheduled airlines has become, behind the scenes, one ■ of the most critical aspects of the whole current world air transport situation. The ; scheduled airlines have made ' considerable efforts in recent years, either to get fares down, or to peg them in the face of steadily rising costs. It must be admitted that, when compared with the substantial rises in the costs of many other consumer items, scheduled air fares have risen by much less than many people might imagine. But there have been increases and more are now on the way. There is no doubt whatever that the travelling public, looking askance at the comparatively high cost of scheduled fares, is turning increasingly to charter flights. This growing interest is evident in short haul flights (as shown bv the growth in recent years of cheap European package holidays), and equally in long hauls; it is now estimated that several million people annually take charter flights between North America and Europe, compared with the 6m or so on scheduled flights.

What holds back the growth of non-scheduled operations are the rules made by Governments to protect the scheduled carriers (often Government - owned and financed). There is now mounting consumer pressure to amend or even to abolish those rules, so as to give almost unlimited freedom to the non-scheduled carriers. Clubs and groups Outside the cheap packaged hol’day business, where different considerations apply, the rules include such requirements as that clubs and groups chartering aeroplanes shall not have been formed expressly for the purpose of obtaining cheap travel, and that the passengers shall have been members for not less than six months, attending meetings of their organisations regularly. Inevitably, some bending of these rules has taken place, although the Department of Trade >:nd Industry and the airlines themselves are strict in policing them, for any violations that are detected could cost the airlines their licences or “charter authority” granted by governments, and have already resulted in some charter flights being cancelled at the last moment.

But the point is simply that if the public interest in these non-scheduled flights continues to grow at the same rate as in recent years, the pressures for relaxations in the rules will become so great that governments will find it hard to resist. Those pressures will also make life increasingly difficult for the scheduled airlines.

Accordingly, there are many in the world air transport industry who feel that the time is now long overdue for a complete reexamination of the whole air transport system, scheduled and non-scheduled, to try to achieve a compromise that will < - able both sides to live in harmony and earn profits. In Britain some relaxations of the rules governing charter flights may not now be far away. Attack on costs In the meantime, however, the scheduled airlines’ own attack on costs continues in

a variety of ways cutting down staffs, tighter budgetary controls and deferment of expensive re-equipment programmes. The latter has been taken to such extremes that the world’s aircraft manufacturers are now faced with production lines drying up for lack of orders and there have been heavy labour lay-offs in the United States aero-space industry especially at Boeing, in Seattle, the biggest transport aircraft manufacturing centre in the world.

Some lay-offs are also beginning to occur in Britain (British Aircraft Corporation has made several hundreds of workers redundant at its Weybridge and Hum factories because of the abandonment of the Three-Eleven programme). Such airline orders as are being placed are coming in ones and twos. While many airlines, especially in Europe, are known to have large requirements for airliners for the longterm, such as short-haul “airbuses” and B.E.A. is an example they are holding off from placing orders until their financial situations improve, or until they have digested purchases already made.

Whether other techniques of improving the airlines' over-all economic situation have been adequately explored is debatable. They could increase pooling arrangements, reduce frequencies on Mme routes (where too many services can sometimes result in too low a load factor), concentrate upon improved marketing techniques, and “slicken up” more determinedly the whole image of scheduled air transport.

Almost every regular air traveller has views of his own as to what the scheduled airlines can, or should, do to improve their images. Sooner or later, the pressures on those airlines must lead to all of these things being considered and, perhaps, implemented. Security problems In the meantime, what particularly worries the industry is the increasing incidence of problems outside the airlines’ direct control. One of these, of course, has been hijacking —it has done the industry immense damage and has set it back many years. Whereas a year or so ago, the emphasis throughout air transport was on streamlining facilities and procedures even to the point of talk of abolishing visas in some countries and perhaps eventually of also abolishing passports—now, the talk is of tighter and still tighter security, involving delays to passengers and aircraft. This world-wide mood will take a long time to pass, and it could well be years before tht industry regains its former confidence.

Another problem is the steady increase in charges for such things as air traffic control, air navigation and landing fees. The British and Canadian Governments for example are planning to recover the full cost of their share of providing air navigation facilities over the North Atlantic, a move that is being closely watched by other countries, who may decide to follow suit If this move is successful—it is being resisted by the airlines—it will almost certainly result in further increases in air fares.

Many outside the industry will argue that it is only fair that services provided for the airlines should be paid for by the airlines and their passengers. The air transport industry, on the other hand, argues that air transport is now not just a luxury for a few, but an economic necessity for any nation, making a substantial contribution to its over-all balance of payments. It argues that such facilities as air navigation and air traffic control ought to be borne by national, rather than airline, budgets. There will probably be no end to that kind of argument, but in the meantime it does look as though the airlines will have to pay up. Long-term prospects In all, the immediate outlook for the airlines is bleak. The steady rises in costs continue, and the prospects of profits in the year ahead for many airlines are not rosy. The industry is going through the trough of one of its periodic cycles, and it may b< some time before its economic fortunes turn upwards again. These will depend upon an improvement in world-wide business conditions, of which traditionally, civil air transport is a barometer.

But that an improvement will eventually emerge does not seem to be doubted by any in the industry. The original forecasts of expansion through the 1970 s to new peak levels of passenger and freight traffic do not seem to have been revised much, despite the economic difficulties of the past year or two. The view generally prevailing is that if the industry can survive 1971 without major financial disasters, it will have put the worst behind it, and 1972 should see a return to better times.