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Aviation History
1957
1957 - 1334.PDF
422 FLIGHT, 6 September 1957 CIVIL AVIATION . . . POSTSCRIPT TO B.E.A.'s REPORTT HE airline business, reduced to the simplest economic terms,seems to be a matter of putting a vast amount of money to work and being thankful, if not actually satisfied, if it yieldsa one per cent profit. Every year is spent flying dose to the break- even line, chased by fast-rising costs and in pursuit of not-so-fast-rising revenues. The margin between profit and loss is slender— too slender to withstand extraneous political and economic com-motions, and too small to permit the build-up of capital for the renewal of plant which depreciates faster than in any other industry.Yet it is an industry for which the demand is doubling every five years, and a closer scrutiny of B.E.A.'s annual report and accountsfor 1956-1957, summarized in Flight last week, yields some of the reasons why one particular airline cannot exploit increasing trafficincreasingly profitably. Seldom is there to be found a company report so comprehensive,and so attractively produced: certainly no other airline can com- pete with B.E.A. in this respect. Its pages convey, in frank and fulldetail, the complete account of the year's trading to which B.E.A.'s public owners are entitled. As recorded, this year's edition shows that the year 1956-57was one in which net profit (£216,770) fell to only a little more than a third of that for the previous year. The reasons for the declinewere (1) the familiar bogy of rising costs; (2) the lowest ever traffic revenue-rate, and (3) advance commitments made in antici-pation of a 20 per cent increase in traffic, which because of the political disturbances in the Middle East (Cyprus and Suez) andthe Government's credit-tightening measures at home, increased by only 14 per cent. It is illuminating to examine these points in detail. Costs wentup by 13 per cent, to a figure of £23,731,004, an increase which, it seems, might not have been so great had it been tied directly to. the cost of increased operations. But other costs rose out of pro- portion: the payroll, for example, accounted for 41.3 per cent oftotal expenditure compared with 38.5 per cent in the previous year. Landing fees and maintenance costs were also a higher proportionof total expenditure. As a result, the cost of each capacity ton- mile, an item which B.E.A. have steadily reduced in the past,actually went up by 1.2 per cent. Nevertheless, output per employee —a measure of efficiency—went up 2.5 per cent (to 13,244 C.T.M.sper employee). The reason for the "lowest ever" traffic revenue rate—i.e.,B.E.A.'s prices to the public—was the increasing proportion of lower-rate excursion-fare traffic on international services, (whichcontribute more than three-quarters of B.E.A.'s revenue). This was achieved in spite of the five per cent increase of most EuropeanI.A.T.A. tourist fares which became effective in November 1956. The actual revenue rate fell from 6.39 pence in the previous year to6.24 pence—a reduction of two per cent. The report does not, of course, cite the reduced revenue rate asa reason for the reduced profit; rather does it take pride in the fact that a profit was achieved while a lower price was offered to thepublic. This is the right outlook; but it is a little disappointing not to see in the report the firm promise of lower and lower faresin the future. "B.E.A. is seeking the agreement of other European operators," it is stated, "to a policy which will take advantage ofthe economies which may be achieved [by increased seating and simpler cabin service] and will pass them on to the travelling publicin the form of cheaper fares." But, the report goes on, the fare reduction which might be possible "would not, however, be large." The Corporation does not believe that the introduction of third-class, thrift-fare service in Europe is "commercially desirable." First-class service, B.E.A. believe, is likely to be in increasingdemand, and this, together with tourist service, may be offered "not necessarily at the same standards" as at present. But a newthird-class service is not foreseen, except as continued very-low- fare tourist services at off-peak times. It would have been good to read that B.E.A., with Europe's largest and most efficient short-haul fleet in service and on order,were intending to take the initiative in pressing for very low fares on international tourist services. The introduction of a thirdfare-level may (as will perhaps be proved on the Atlantic) make standard tourist services redundant, attracting all their traffic aswell as creating a new demand for air transport; and though three tiers of service in Europe might be surplus to requirements, thereis a strong case to be made for a policy aimed at steadily reducing existing tourist rates to the so-called third-class level. By all meansbuild up first-class business: but low-fare tourist travel will be the airlines' big market of the future, and B.E.A. of all airlines willhave the tools to make it pay. It is disappointing, too, to hear of the prospect of increasedfares on B.E.A.'s domestic services, even on the "potentially profit- able" routes to the Channel Islands and to Scotland and NorthernIreland. B.E.A. estimate that in 1956-57 the deficit on domestic services was £1,371,000, after arbitrary allocation of total over-head costs. This is a staggering deficit; but can it really be wiped out by increasing prices in a market which is being more and morekeenly contested by surface transport? If a route is potentially profitable, it does not seem logical to hint first at increased faresand in the same breath to say that general policy is aimed towards "the promotion of greater traffic volume." Greater traffic volume,which will permit the economies of high-intensity operations, must derive from lower fares. The "feeder services," such as those from Manchester andBirmingham to London, continue to run at a loss (as do the feeder services of many other intra-European operators). The report saysthat "the value of these services justifies a small deficit," but adds "that an increase in fares on these routes is, however, necessary."B.E.A.'s social services, such as those in the Highlands and the Islands of Scotland, and other routes like those to the Isle of Man,seem likely always to be unprofitable; but radier than allow them to be a drag on the total effort, there seems to be a strong case forsuch services to be separately accounted for and subsidized accord- ingly. (Apparently, certain routes have been offered to the inde-pendents, but were not accepted.) The third item which accounts for B.E.A.'s reduced profit—theGovernment's domestic policy to combat inflation and the political dis- turbances in the Middle East—needs no comment. Both were unexpected,and though B.E.A. planned for a 20 per cent traffic increase, the fact that 14 per cent was achieved—a figure which is just about the world average—was highly creditable in the circumstances. A study of the Report's revenue breakdown shows that B.E.A. is stillnot making a profit on the main business of flying operations: total revenues from operations amounted to £23,080,678, the balance towardsprofit coming from "commissions" and "incidental revenue." Commis- sions, mainly on the interline sale of tickets, amounted to £639,706 (theequivalent commitment to other airlines, on the other hand, was £1,569,734). The item "incidental revenue" amounted to £227,390.This figure is actually greater than B.E.A.'s net profit for the year, so that the revenue is obviously not as "incidental" as it appears. It wasmade up, among other items, of "no-show" charges. The Viscount 700s were again the only aircraft in the fleet to make aprofit (£620,599). The losses incurred by the other types were as follows: Viscount 800 (which had been in operation only two monthsat the close of the financial year), —£100,929; Elizabethan, —£50,296; DC-3 Pionair/Leopard, -£1,045,995; Heron, -£76,151; D.H.89Dragon Rapide, —£12,229. In presenting the Report and Accounts at a conference last week,Lord Douglas made certain points which are summarized as follows: — (1) Results so far during the current financial year are promising;profit at the moment is about £ 1 million, but "what happens in the rest of the year is in the lap of the gods." (2) The possibility that B.E.A.might order "a small number" of Comet 4Bs can not be ruled out. (The background to B.EA.'s impending order for jet transports isreferred to on an earlier page.) (3) The Corporation is "nearer" to services to Moscow, and there have been recent indications of Russianwillingness to re-start negotiations. No doubt, said Lord Douglas, B.O.A.C. would be interested in routeing their Far East services throughMoscow if British traffic rights were obtained there. BREVITIES VC O-OPERATION between Bristol and C.P.A.L. has resulted inthe manufacturers adopting much of the airline's card-index maintenance system for the Britannia. El Al have adopted similarmethods in Tel Aviv and Northeast are also interested. * * * Lockheed's CL-329 executive jet, which was expected to makeits first flight on September 4, has been named "Jetstar." * * * South African Airways had an operating surplus of more than £1 million in 1955-56. They carried 246,356 passengers and flew 6.5 million miles. B.W.I.A. and B.O.A.C. are to provide between them 800 seatsa week on services from the U.S.A. to Jamaica during the winter tourist season. * * * ••.vw-.:^ G/C. J. A. McDonald, C.B.E., A.F.C., has joined IndependentAir Transport as liaison executive. He was previously deputy commandant at London Airport. _ . ....... ; Transair, Ltd., announce the appointment of Mr. KennethJ. Anderson to the newly-created position of general services manager. He will take up his appointment on September 1at Croydon and will later transfer with the company to Gatwick.
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