FlightGlobal.com
Home
Premium
Archive
Video
Images
Forum
Atlas
Blogs
Jobs
Shop
RSS
Email Newsletters
You are in:
Home
Aviation History
1963
1963 - 0802.PDF
FLIGHT International, 30 May 1963 771 Airline Competition in the United States IN a recent article "BEA and Britain" Flight International, May 9) reference is made to some of the conclusions presented in Airline Competition by F. W. Gill and G. L. Bates. This study was published in 1949, but even at that time its authors reached far more tentative conclusions about the advantages of competition than your article's selected quotations would lead us to believe. Let me add the following quotation to those given:— "Competition has, however, often been a double-edged sword. In some cases it has resulted in improved service to the traveller, lower prices, and the development of traffic to such an extent that profitable operations were attainable in furtherance of the industry's goal of self-sufficiency. On the other hand, competition has, in some cases, not only not had such beneficial results, but has been instrumental in bringing about less desirable service, higher fares, and such a diversion of traffic and revenues as to retard or even reverse certain carriers' progress towards self-sufficiency. As a matter of principle, therefore, the authors find no support for the •presumption doctrine' as applied by the Civil Aeronautics Board in many cases." The intention of this article is not, however, to discuss the balance and validity of the conclusions presented by Gill and Bates in 1949. My purpose is to question whether the US domestic evidence of the past ten years can reasonably allow any student of the industry to arrive at the sweeping conclusions about the merits of competition presented in "BEA and Britain." It is a widely held view in the US airline industry that the current financial problems of the major airlines spring from the author ization of an excessive degree of competition in the past ten years. The statistical evidence in support of this thesis is remarkably impressive and has been summarized in the chart which accom panies this article. It seems quite clear that as competition has increased, load factors have fallen, and in consequence there has been a decline in airline profitability. The top part of the chart shows the considerable increase in the degree of airline competition over the past ten years. The measure of competition used in the chart is the percentage of the leading 100 domestic markets served by three or more airlines. This index of The fall in return on capital investment and passenger load factor during ten years of increasing competition among US domestic trunk airlines 40 p 30 •2 j 10 70 11 s Q60 o 50 15 10 INDEX OF COMPETITION (Percentage of top 100 routes with three or more competing airlines) PASSENGER LOAD FACTOR BY STEPHEN WHEATCROFT Economic adviser to BEA competition has risen from 11 per cent in 1952 to 38 per cent in 1962. (In the same period the percentage of these top 100 routes served by two or more airlines has risen from 63 per cent to 90 per cent.) The average passenger load factor of the US domestic airlines has shown a steady downward trend from 67 per cent in 1952 to 55 per cent in 1962, as illustrated in the middle section of the chart. There is strong support here for the view that current low load factors are not solely due to excess capacity created by the jet revolution but are a reflection of a much longer-term malaise of the industry. The lower section of the chart shows the declining profitability of the airlines, as measured by their average rate of return on invest ment. The rate of return has fallen from 15 per cent in 1952 to less than 4 per cent in 1962. In each of the past three years return on capital has been inadequate to cover the amount paid out by the airlines as interest. It is interesting to note that the rate of return has increased only in those years when there has been a rise in fares. US domestic fares were increased in 1958 (twice), in 1959, in 1960 and in 1962. As a result of these fare increases the average fare level (passenger revenue per passenger-mile) rose by 15 per cent from 1957 to 1962, despite the increasing proportion of passenger traffic carried at coach class rates. It is also worth noting that, in the same period, 1957-58 to 1962-63, the average fare level on BEA domestic ser vices (without benefit of competition from other airlines) has been reduced by 3 per cent. As suggested in your article, compe tition may be "an all-important factor in determining the fares charged airline passengers," but it could well be that the influence of this factor is not the one which your article infers. One final point on the US evidence of the past ten years. The thesis that an excessive degree of competition has been responsible for low load factors and low profits is further supported by an ex amination of the relative results of the individual airlines. By and large, the degree of competition enjoyed by the "big four" airlines is greater than that faced by the seven smaller carriers and "big four" profitability is correspondingly lower. In 1961, the "big four" airlines earned 74 per cent of their passenger revenues in competitive markets and achieved an average rate of return of only 1 per cent on their invested capital. The smaller seven airlines earned 64 per cent of their passenger revenues in competitive mar kets and achieved an average rate of return 2.9 per cent. One of the smaller airlines had a much higher degree of competition than the others; it was, in fact, the highest in the industry. That airline, Northeast, also had the largest percentage loss of the whole industry. I am very well aware that statistical evidence of correlation does not prove a causal relationship. But there are lots of people today smoking their ways to death saying that "cum hoc ergo propter hoc''' is a basic fallacy. The statistical evidence of a high degree of cor relation between the worsening financial position of the US dom estic airlines in the past ten years and the increase in the degree of competition to which they have been subjected during the same period seems to me to be sufficiently impressive to make it foolish to go on quoting as divine truth the selected conclusions of a study made 15 years ago. As John Kenneth Galbraith said in The Affluent Society: "The shortcomings of economics are not original error but uncorrected obsolescence. The obsolescence has occurred because what is convenient has become sacrosanct." Your contributor has failed to keep up with the conventional wisdom, to use another of Galbraith's expressions. Professor Louis Jaffe of the Harvard Law School, reviewing a recent book The Federal Administrative Agencies by Henry Friendly, wrote as follows:— "But because the airlines are relatively few in number they do not compete intensively on rates; like other oligopolistic industries they are more likely to compete by differentiating their products, RETURN ON CAPITAL INVESTED 1952 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62
Sign up to
Flight Digital Magazine
Flight Print Magazine
Airline Business Magazine
E-newsletters
RSS
Events
