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Aviation History
1959
1959 - 1069.PDF
PLIGHT Conrair 880: 78 on order, at a cost of about f 720m with spases, by seven airlines FINANCING THE JETS between 1949 and 1955—largely as a result of higher load-factorsand high utilization rates during the Korean mobilization period— and during these years they achieved an average return on invest-ment of some 11 per cent. Since 1956 their earnings have been declining, although some slight recovery was evident in the pastfew months. Substantial profits effected on the sale of surplus equipment by U.S. carriers reduced the extent of the profit declineduring 1956 and held the average investment return for the lead- ing airlines to a level approaching that earned during the precedingsix years. But in 1957 their investment return was reduced to an average of only 5 per cent, and in 1958 the industry only justmanaged to break even. Outside the United States, the airlines' financial record hasbeen even more unstable. Although some European carriers such as K.L.M., S.A.S. and Swissair have progressed towards profit-ability, their margins have seldom been more than nominal, and in no year between 1950 and 1957 did the European industry asa whole achieve a net profit before subsidy. Indeed, in 1953— and probably in 1957—it incurred a net loss even after subsidy!It seems certain that the 1958 accounts will also show a loss for European carriers. African, Asian and Australasian airlines as a group have achieveda better record than the European industry, but in many respects this has resulted from a difference in the form of capitalizationapplied to State-owned carriers in these areas as compared with State-owned airlines in Europe. Many of the latter, B.E.A. andB.O.A.C. for instance, are capitalized either with fixed-interest- bearing stocks or with substantial long-term loans. In Asia andAustralasia, however, there is increasing evidence of adopting the practice of financing State-owned airlines on an issued sharecapital basis similar to that employed by privately owned joint- stock companies, dividends being paid only when profits aresufficient. Fix<*l interest is a charge prior to the ascertainment of profits; as such it acts in reduction of profit margins. For this rea-son, the airlines' increasing dependence on fixed interest-bearing loan capital will unavoidably damage the industry's financialrecord in the years immediately ahead. The investment attraction of airlines is based on the samefactors that determine the attraction of any other form of industrial or commercial enterprise. Privately owned airlines will succeedin attracting large amounts of fresh capital only if they can present financial records and potential investment returns comparablewith those of other industries seeking new capital. In this respect it must be .remembered that funding prospects were much morefavourable when the first orders for turbine equipment were placed in the last quarter of 1955 than they are at the present time. Theattitude of American investors to the U.S. international and domestic trunk airlines remained favourable through 1956 andinto early 1957. Some carriers such as Delta and Northeast exer- cised the opportunity to issue stock at that time and the Dutchgovernment snatched that moment to dispose of some K.L.M. shares on the New York and Amsterdam stock exchanges. Since the end of 1955 orders have been placed for over 300 newturbine-powered transports. But instead of the expected steady expansion of traffic at an annual rate of some 15 per cent therehas been a gradual decline in the rate of traffic growth. This was most marked during the height of the business recession in theUnited States; from the last quarter of 1957 until the summer of 1958 U.S. international and domestic trunkline traffic failed toshow an increase. Only now is traffic returning to the mid-1957 level. The effects of this deterioration have been twofold; first, thenet income of most carriers was considerably reduced at a crucial moment during financial negotiations; second, the declinereduced investors' confidence in the ability of the industry to develop traffic at a rate sufficient to ensure adequate utilization ofthe capacity that it had ordered. This loss of confidence was aggravated by the airlines' emphatic declaration to the C.A.B. thata fare increase was vitally necessary to bolster up their ailing finances. On the international front, air traffic expanded rapidlyonly on the North Atlantic—although in this instance over- enthusiastic scheduling led to a fall in load factors and a consequentdeterioration in profit margins. Europe experienced a slight rise in regional traffic, but services in South America, Africa, Asia andAustralasia suffered general reductions in traffic primarily as a result of the fall in international commodity prices. In comparison with this pause in the rate of traffic-growth,aircraft operating costs—particularly salaries and wages—have tended to rise. The U.S. trunk carriers, which had reduced theiraverage costs per c.t.m. from 30 cents in 1948 to 26 cents in 1955, experienced an increase to 26i cents in 1956 and 27 cents in 1957and 1958. The Big Four (Eastern, United, American and T.W.A.) were largely responsible for this trend, their unit costs hayingincreased every year between 1950 and 1957. Their smaller rivals have as a group managed to reduce unit costs (usually by obtainingaccess to more economical long-haul routes) although their average level is still above that for the Big Four. The U.S. overseascarriers reduced their average costs each year during the period
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