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Aviation History
1968
1968 - 0958.PDF
916 FLIGHT International, 20 June 1968 AIR TRANSPORT... years. Such development was almost inevitable in view of the need for high utilisation with the new and expensive 747, an aircraft which would expand North Atlantic capacity, particu- larly on the New York route. "We are not convinced that the introduction of a second British carrier would necessarily increase this share." On the desirability in itself of dual designation, argued by both applicants, and its possible effect in increasing the UK share of traffic, the board says that it "listened to much argument and a modicum of evidence, but none of it carried conviction." Outside the USA, the preference was for a chosen national instrument, and evidence given on the traffic share of some European airlines showed that a single national airline could compete successfully against a two-pronged American attack. "Some evidence produced by Caledonian as to the increase in the British airlines' share of the traffic when Cunard Eagle flew in competition with BOAC and US airlines between New York and Bermuda was clearly affected by extraneous considerations, in particular the cheap night fare available to Cunard Eagle with their propeller-driven Viscount aircraft." Turning to the aspect of the applicants' competence and resources, the board said that it had judged the issue with the future in mind, and with regard to the type of equipment which would be coming into use. British Eagle had a well equipped and competent engineering establishment; Caledonian had virtually no maintenance organisation of its own and, while their arrangement with Sabena was no doubt entirely satisfactory for charter operations, it was doubtful whether it would be so for closely integrated scheduled operations. Neither applicant had established a strong financial position from which to embark on a major expansion as costly and exacting as that under consideration. British Eagle had shown profits since 1964, but the figure of £585,000 in 1966 was largely due to receipts and adjustments of a capital nature; about three-quarters of the estimated 1967 profit of £350,000 would result from a capital gain on the sale of an aircraft, and the year had in fact shown an operating loss. Caledonian had had three years of profitable operations. Profitability Estimates The board did not however rule out either applicant on these grounds, but considered the matter in conjunction with the time which they would take to reach profitability. By 1973, British Eagle expected that it would have accumulated an overall surplus of £3.5 million, with a surplus in that year of £1.19 million; for Caledonian the equivalent figures were £553,000 and £430,000. "In short, British Eagle consider that they can offer, in their first five years . . . 748,000 seats and emerge with a surplus of £3.5 million; whereas Caledonian, using similar aircraft but with fewer seats, consider it prudent to offer, in a similar period, only 407,772 seats and, even asuming a higher average fare and substantial mail revenue (British Eagle assumed they would not carry mail), expect to emerge with a net surplus of only ££ million." The load factors predicted by British Eagle were higher than those predicted by Caledonian, and were, in the board's view, prepared with less care. Looking at the British Eagle forecasts, the board found difficulty in accepting traffic forecasts based on the proposition that the offer of a given capacity would automatically attract a corresponding amount of traffic. But if such an approach had to be used, it ought to start from the average passenger load achieved; on this basis the number of passengers carried in the first year would then be 62,176, rather than the 73,643 that British Eagle estimated. Such a recalculation would be enough to turn the forecast £3.5 million Surplus on the London-New York route into a deficit. With regard to traffic-mix, the board accepted that British Eagle would be in a position to put their marketing effort mainly into the lower-rated group traffic, but doubted whether, if the traffic failed to materialise, the revenue could be main- tained with other types of traffic. A criticism which the board found to be "valid and damag- ing" was made by BOAC: neither applicant had made allow- ance for the effects of pro-rating* in estimating passenger revenue. A pro-rate absorption factor of six per cent would reduce British Eagle's revenue for the first five years by £1.5 million, and the board felt that even this was conservative. Altogether the ATLB found what it considered to be six cases of over-estimation (and one of under-estimation) in the British Eagle revenue case, and concluded: "the revenue fore- casts are so much in excess of what they would be likely to Announcing his airline's intention to appeal against the Air Transport Licensing Board's decision, Mr Harold Bamberg, chairman of British Eagle, said last week: "The board appear to have refused the licences because they take the view that our initial cumulative losses will be greater than we supposed, and because we are under-capitalised. We are quite confident about the accuracy of our costings a (id about our ability to provide any finance necessary to operate the route." Mr Adam Thomson, chairman of Caledonian, also announcing the intention to appeal, said: "This is a bad decision—a very bad decision—not just for Caledonian Airways but for the British effort in world air transportation as a whole." The board had referred to BOAC's steadily declining share of UK-USA traffic, but had proceeded to "dodge this vital national issue," and did not accept that BOAC should necessarily be expected to carry a half-share of the total traffic or even of the traffic that remained after allowing for the fifth freedom carriers. "As a British carrier, we cannot accept this defeatist viewpoint." achieve that at the end of five years their proposed London- New York operation, far from showing the expected large surplus, would in all probability still be in deficit." Looking at the Caledonian revenue forecasts, the board ruled out mail revenue; if any licence were granted it would be without mail carrying rights (except perhaps out of Bir- mingham and to Los Angeles), since an unjustified material diversion from BOAC would otherwise result. Taking this into account, and with an adjustment in the allocation of over- heads suggested by the board, the London-New York operation would become profitable in 1971, but initial losses would not be recouped until 1974. But even so, the board had doubts as to the soundness of the revenue forecasts. The application of a pro-rate factor to the Caledonian forecasts would result in a reduction of revenue in the years 1969-73 of at least £700,000, and possibly £850,000. The board considered that there had been three serious over-estimates and one under-estimate. The board's main observations on the two airlines' cost estimates were that British Eagle did not seem to have provided for financing the £400,000 import duty on each aircraft; that Caledonian had not attributed the appropriate share of genera! overheads to each route; and that Caledonian's provision for maintenance and overhaul was of doubtful adequacy (it was assessed at £100 per hour and was below the figure published by Sabena for its own operations). The under-estimation of costs for London-New York by both applicants was such that the period of deficit was likely to be further protracted, and the accumulated losses were likely to reach "very substantial figures" before the first annual profits were earned. "We have for some time been of the opinion," the board also said, "that British Eagle are seriously under-capitalised even for their present operations." The evidence of British Eagle's merchant bankers, on arrangements for assisting the airline, had been taken fully into account. In the case of Caledonian, the airline was assured of the three aircraft it would need, and did not have to raise additional finance in that respect. It also had firm promises for finance of £3 million from existing shareholders (of which £i million was needed for aircraft for other operations). There was also access to a further £2i million of additional *Pro-rating is the adjustment made when, for example, a passenger breaks a journey into two or more sectors for which he uses different carriers, but travels at the fare for the through journey. The difference between the through fare and the sum of the sector fares must be absorbed by the carriers concerned.
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