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Aviation History
1958
1958 - 0502.PDF
518 FLIGHT, 18 April 1958 THE EUROPEAN OUTLOOK . . . States have been taken because of certain basic similarities betweenthis airline's operations and those of European air carriers. Capital is a very short-haul airline and, moreover, is of particular interestin this comparison because a large proportion of its routes are now flown by British-made Viscounts. It is these differences in productivity which primarily accountfor the considerable differences which still persist in the level of operating costs between Europe and the United States. Thesecost differences are set out in Table VII which, like Table VI, compares B.E.A. and Capital Airlines results. TABLE VII: EUROPE AND U.S. OPERATING COSTS, 1956-1957 Maintenance and overhaul ... Flying operations Passenger and cargo services Station costs Sales and publicity ... H.O. administration ... Aircraft standing charges ... Totals ... ... Expenditure per ct.m. (pence) Europe* (B.E.A. 1954-7) 7.8 9.9 2.0 8.7 3.8 3.2 3.7 39.1 U.S.f (Capital 1956-7) 4.3 7.0 2.1 4.7 2.9 0.8 2.7 24.5 European Difference to,' \\ Sol +81+28 C +83+ 31 + 300+ 37 +60 • B.E.A. results for the 12 months to March 31,1957. t Capital results for the 12 months to June 30,1957. The results shown in Table VII cannot be taken to indicate thatthe European airlines are less efficient than those of the United States. Differences in productivity and differences in efficiencyare quite separate matters. It can be, of course, that low produc- tivity is indicative of low efficiency but this is not likely to be truein this particular case. Low productivity in airline operations in Europe arises for the most part from conditions which are externalto the airlines and over which managements have no control. The U.S. figures do, however, show the extent of the cost-reducing possibilities which are still open in Europe if steps are taken to enable the productivity level to be raised. The Americanfigures can be regarded as encouraging for Europe's future rather than as an indictment of our current failures. Despite the very great advantage which the U.S. carriers haveover European in the level of operating costs, airline operations in the United States are not without their financial difficulties at thepresent time. The problems of Capital Airlines are more spec- tacular than most of the other trunk airlines and have led them toa considerable deficit and the need for a Federal subsidy. But all the major carriers appear to be facing considerable difficulties infinancing their future equipment programmes and have used this as an argument for asking die Civil Aeronautics Board to approvesubstantial fare increases. Their line of argument is not that the new equipment can or ought to be financed out of earnings butthat the present level of profits is inadequate to attract new capital on the scale required by the industry. It has been estimated thatthe U.S. airlines will need to raise about $375 million in the capita! market in the next few years; an amount almost equal to thepresent market value of the whole industry's common stocks. The difficulties of the raising of new airline capital in the UnitedStates arise from two important aspects of the economic state of the industry. The first is the critical relationship between returnon capital and the operating ratio. The air transport industry is characterized by a relatively high rate of capital turnover. Despitethe very high cost of modern aircraft the ratio of annual revenue to capital employed is much higher in the airline business thanmany other industries, particularly other forms of transport. In circumstances in which government economic regulation of theindustry, directly or indirectly, has the effect of keeping the return on capital at a fairly low rate it is inevitable that the operatingratio in the industry (the ratio of revenue to expenditure) will always be critical and will allow only a small margin of revenueover expenditure. This, combined with the somewhat uncertain nature of the business, means that the airlines always work ona small and very insecure profit margin. It is this aspect which makes them a rather unattractive investment for private capital. The U.S. airlines are arguing that they must be allowed muchhigher profit-margins to attract new investment and to this end they have asked for fare increases of up to 20 per cent. The dilemma here is that the demand for air travel may proveto be as elastic in response to these fare increases as it has proved to be in the past in relation to fare reductions. And even if themarket does not actually contract it is difficult to believe that it will expand as rapidly at the new fare level as it has done in thepast few years. This rate of expansion may be a critical factor, for the re-equipment programmes of the airlines are all based upona continuation of past trends of traffic development. Could it be that in order to raise the money for their new equipment the airlines are obliged to take steps which will result in their notwanting the new equipment or at least not so much as they now have on order? The second aspect of the current economic situation is thequestion of whether the industry can really afford the present rate at which it is planning to undertake a complete technologicalrevolution. Too much current thinking seems to be along the lines of arecent American report which says that the only alternative to the jet revolution "is to admit that America, with the world's richesteconomy, can afford but a second-rate air transport system." The alternative may be to recognize that occasions do arise in thecourse of economic history in which technological development is so rapid that it can make all investment unprofitable and, byparadox, lead to stagnation rather than rapid progress. Such situations surely call for some measure of investmentplanning within the industry concerned. The future progress of the European air transport industry would be better assured ifthe airlines were now engaged in a joint study of their future equipment programmes and were seeking to avoid the seriouseconomic consequences which might easily arise if jet competition, almost overnight, renders obsolete all other types of aircraft. The public should not be denied the advances in speed andcomfort which technological development is making possible. But, on the other hand, they will not really gain from an uncontrolleddevelopment which plunges the whole industry into insolvency. The foregoing may be summed up as follows: — (1) Some degree of joint investment planning is a primaryrequirement for the financial stability of the industry. This could be undertaken through the Air Research Bureau under the direc-tion of its Council of Presidents. (2) There is still room for a substantial reduction in the cost ofoperating European air services. This may be achieved by: (a) greater co-operation between the airlines—in fields of activitylike ground traffic handling—which need not materially affect their competitive relationships; (b) a continuation of the trend towardsan intensification of the route system and more positive joint action on the part of Government to secure this through someform of multilateral route planning. The Political Framework. The lower average density of Euro-pean air transport accounts for the large difference in operating costs in this continent compared with the United States. More-over, the lack of any form of co-ordinated government planning has been a major reason for the extensive rather than intensiveway in which the European route structure has developed. Although differences in income levels and differences in the degreeof economic and political affiliation are the most important reasons for the variation in rates of development of air transport in Europeand the United States, this does not detract from the conclusion that the most urgent problem in Europe is to find some way ofintroducing a multilateral system of route planning. It seems certain that a new spirit walks in Europe and that afundamental presumption of various plans for economic and political integration is that economic nationalism should be aban-doned. There is, as yet, little sign that such nationalism has lost any of its influence in shaping air transport policies. The dis-cussions at the European Civil Aviation Conference both at Stras- bourg in 1955 and at Madrid in 1957 disclosed that many of themember-States are, as yet, unwilling to give up the idea that they should be allowed to protect, by restrictive practices, the com-mercial interests of their own national airlines. No progress can be made towards a more satisfactory economicfuture for European air transport by arguing that we should have "freedom of the air" comparable to the freedom of the sea. Noris it useful to talk about the benefits of competition in the nine- teenth century laissez-faire sense of the term. A liberalization ofattitudes and a more competitive spirit may both be highly desir- able in the regulation of European air transport, but it appears tome that there might be many ways in which freedom of the air could have very adverse effects upon air transport progress. The operation of scheduled air services is by its very naturea duopolistic or oligopolistic business and some form of economic regulation is essential if there is to be any stability. This is thefundamental justfication for the sort of economic regulation which has been adopted in the United States and is the raison d'etre ofthe Civil Aeronautics Board. What is needed in Europe is a system of regulation which,within the restrictions of national sovereignties, will reproduce to the greatest possible extent the economic planning function whichthe C.A.B. exercises in the United States. In an article in Interavia about a year ago M. Max Hymans, the chairman of Air France, proposed that Europe should in fact set up an Air Transport authority which, he explained, would bear a strong resemblance to the U.S. Civil Aeronautics Board. But a supra-national solution to the air transport problem is not vet a practicable step. Europe should, at this stage, set up an Air Transport Commission with mainly advisory functions. In The Economics of European Air Transport I described how this Com-
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