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Aviation History
1968
1968 - 0045.PDF
FLIGHT International, II January 1968 47 Points from the IATA Symposium DURING THE IATA annual general meeting in Manila onDecember 4-8, a symposium was held on the themeI AT A in the 1970s. Following the summary report on this symposium in Flight for December 21, page 1023, we now give a more detailed account of three of the papers given: on the financial aspects of the theme, by MR D. H. GLOVER, financial director of BOAC; on the cargo traffic aspects, by MR. HAROLD L. GRAHAM, vice-president of cargo sales, Pan American; and on the technical aspects, by MR H. BALTENSWEILER, executive vice-president, Swissair. All were speaking in a private capacity and not as spokesmen for their airlines. Financial Aspects Mr Glover, introducing his paper, said that there seemed to him to be a tendency to regard financial men as brakes on progress, and this was not really a fair view. "I would say that airline financial men would class themselves as a group of executives who would like to see the orderly and prosperous development of companies." Already one could see problems in the way of this orderly and prosperous development in the 1970s. He picked out, from the many financial problems confront- ing IATA members, three which seemed to transcend all others: the problem of operating economics, that of the possible over- commitment of capital, and that of finance availability. A year or so ago, not all managements seemed to have realised the impact that would be made by the new tariff structures, which were being adopted at the time when the possibilities for further cost reduction with existing subsonic equipment were nearly exhausted. It seeemed to have been only in the past year or so that there had been widespread awareness that the level of profitability maintained until early 1967 would be very difficult to maintain in future. It was not always appreciated that there could be two very different reasons for reductions of fares. One was to increase net revenue after allowing for the extra costs incurred in carry- ing the extra traffic; the other was as a result of passing on to the customer the benefits of improved efficiency and profit- ability. The North Atlantic fare structure dating from 1964 had been designed to improve profitability by increasing traffic in off-peak periods, and it had resulted in better load factors. But special fares were in some cases as much as 50 per cent below the normal, and, as well as bringing in new business, these could also attract some of the passengers who would travel anyway. Such traffic had to be prevented from growing into a major part of the airlines' business at existing load factors; it was vital to ensure that promotional fares brought higher load factors—"otherwise we shall be digging our own graves." As to the second reason for fare reductions, Mr Glover said that it was important to note that, under present IATA procedures, it was impossible for an airline to achieve an acceptable rate of return overall, if it had to reduce fares on the more profitable routes and was thereby prevented from using that extra profitability to offset inadequate returns from other routes. With the present fall in revenue yields caused by pro- motional fares, and the rising trend of seat-mile costs, the possibility of being able to afford fare reductions was becoming remote, at least with present fleet equipment. The optimum of cost reduction achievable with the present generation of sub- sonic jets had been reached or passed. Expansion of operations brought a small improvement in efficiency, but this was being offset by the worldwide tendency towards inflation. The only chance of improving the situation lay with the use of improved aircraft types. Here it should be noted that there would be no special low fare for the 747 when it was operated side-by-side with existing jets. The IATA cost com- mittee had already determined that on the two routes most likely to be affected by the initial introduction of the 747—• the North Atlantic and the North Pacific—the representative cost level in 1970-71 would be very similar to that determined for 1968-69. This was because the effects of inflation would offset the influence of the 747. It was heartening to see that the chairman of the Civil Aeronautics Board had given recog- nition to the fact that the potentially lower direct operating cost of the 747 should not affect passenger fare levels until sufficient of the type were in use to reduce the overall unit costs of long-haul operations for both 747 and existing fleets combined. Unless the situation for airlines was faced squarely and immediately, a continuing squeeze on profit margins was inevitable. This was a squeeze that had been induced by the industry itself—"borne out of the low-load-factor/over-capacity situation of the early 1960s, and matured by the challenge of charter and supplementary operators. "In this situation," added Mr Glover, "I must say that it is a cause of some bewilderment to the economically minded members of the IATA financial fraternity that airlines should be considering the acquisition of new equipment over which there is substantial uncertainty as regards its potential capa- bility—even in the long run—of improving current or prospec- tive profitability. I refer of course to the SST." This led Mr Glover to the problem of the possible over- commitment of capital, and the danger of over-capacity in the early 1970s. There were indications that the overall expansion of capacity anticipated by the cost committee for the intro- ductory period of the 747 was higher than the rate of traffic growth over the past three years. Furthermore the current aircraft types displaced by the 747 were going to be put to use somewhere—"maybe as a very sharp and deep thorn in our flesh." It was distressing that in the past the industry had far too often taken a short-term view in making major policy decisions. "We seem to find it difficult to resist the temptation to secure a short-term advantage without looking to see what the long-term effects are likely to be." The third main problem, said Mr Glover, was availability of finance. Connected with this was the fact that most of the finance would have to be in dollars. The American capital market was already under severe pressure, and US interest rates had risen very steeply over the past two or three years. The USA had its own balance-of-payments difficulties, and had placed limitations on both foreign investment and banking assistance. Few countries had such a healthy economy that airlines could obtain dollars freely, and most had therefore to raise loans in the USA, to be repaid during the working life of the aircraft. At the moment, it seemed, American bankers were reluctant to lend for periods of more than seven years, which was unreasonably brief, and it was doubtful whether the Ex-Im Bank would alone be able to meet the demands of the next decade. The technical problems of choosing aircraft for the 1970s were now diminishing; the financing problems remained really serious. What were the answers to these three problems? One possible line of attack on the first—operating economics and the squeeze on profits—would be to limit, on an industry basis, expenditures of a certain character that are capable of being monitored. "As one single example, would the total carriage of IATA members really be lessened in the 1970s if advertising expenses were held to an agreed percentage of revenue, say half to two-thirds of present levels? . . . Then, again, why do airlines have to keep the smiles on the faces of landlords in city central areas? It seems that Airline Row always has to be in the very heart of the most expensive district." At least routine clerical processes could be moved to cheaper locations. These were just two of many areas of expense which could usefully be investigated. But the root cause of the problem was not high unit-cost levels. A major cause was that past traffic conferences had not called for cost forecasts that covered a long enough span of years. This was compounded by inadequate evaluation before acceptance of tariff policies adopted on the basis of those forecasts. There was also a need to improve the forecasting machinery of the cost committee and to allow full rein to the recently-established financial economic studies sub-committee of the financial committee. On problem number two, the over commitment of capital,
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