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Aviation History
1973
1973 - 0013.PDF
FLIGHT International, 4 January 1973 and £4-37 in the case of BCAL in 1971. Airlines are fortunate in that the aircraft fleet, which absorbed 55 per cent of BCAL's capital employed, can be leased or otherwise financed by loans. In the case of BCAL, the Boeing 707 fleet was financed as follows: Owned 3 Principal outstanding, 30 June 1972, £2 • 65 million Leased 6 Airlease International 2 CCT (aircraft leasing) 1 Pakistan International 2 American Airlines The principal outstanding on the ex-BUA aircraft at 30 September 1971 was £7,234,000. Three BAC One-Eleven- 200s were sold during the year, but two were leased back. A further bonus for an airline financial director, com pared with his opposite numbers in other industries, is that his debtors are relatively low. And many passengers pay in advance, improving his supply of cash. Also, he seems to be able to secure generous credit terms from his suppliers. In the case of BCAL, £4-3 million had been secured from advance sales. Debtors were £12-5 million; and creditors £11-3 million. Usually in other industries debtors are much higher than creditors. If outside purchases were about 55 per cent of all expenditure, suppliers were giving about five months' credit. Nevertheless, BCAL.. employed over £27 million of capital, which was provided as follows: 11 Share capital Share premiums and reserve Loan capital (10>2 per cent convertible secured 1990-95 loan stock) Loans (aircraft—see above) un- Taxation equalisation provisions etc. Total £ (million) 4-3 2-9 7-2 4-0 120 4-2 27-4 This funded a fleet valued at £15-3 million, and other fixed assets of £14-3 million. In a year of reorganisation, when other airlines were losing money, the operating profit of the airline was £1 • 722 million, from which must be deducted interest of £363,000 on the convertible loan capital. Unfortunately, the group profit was much reduced by a number of factors: Loss on exchange rates, due to devaluation of Argentine Peso £458,000 Loss suffered by Blue Cars tour subsidiary* £580,00 Loss on hotel operations £69,000 Total £1,107,000 There were two changes in accounting practice which affected the result. Caledonian's pre-merger method of equalising financing charges has been altered, leading to an additional charge for the year of £73,000 less tax: reserves were reduced by £242,000 to account for earlier years. Future years will benefit, however. The second change affecting previous BUA practice has been to spread initial crew training costs over a period of six years, which improved the profit by about £250,000. Though this is common practice among airlines, including Caledonian before the merger, some may feel that the expenditure has taken place: the cash has flowed out, and that there is an argument for writing it off. Those who want to see the second-force policy succeed await the figures for the year ended 30 September 1972 anxiously. Hopefully, the vigorous action promised to stop the tour operating and hotel losses will have succeeded, and the inevitable teething problems arising from the takeover of the West African and other routes, will have been solved quickly enough to secure a contribution to profits. For the future, British Caledonian, with its low overhead costs per passenger carried (£5 in 1969-70) should be well placed to make profits out of ABC and Apex, or part charter, at fares which the high-overhead carriers (Qantas [1969-70] £66 per passenger; BOAC [1971-72] £46—of which marketing was £20—; Pan Am [1970] £23) may have difficulty in meeting. Indeed, the ABC concept and its consequences seem likely to alter transatlantic scheduled operations profoundly, and British Caledonian may find the new environment much more comfortable than the old. The original Atlantic budget for the year to March 31, 1974, given to the CAB in August 1972, was for a loss of £920,000—of which £790,000 arose from the new scheduled services. The advertising and promotion budget alone was £1-55 million (over £10 per passenger). Some may feel that it would have been an act of exceptional boldness to implement the original plan. * "Diminution in value of investments" in a subsidiary of £1-087 million was provided for in 1971. Reply from Mr M. A. Guinane, managing director of British Caledonian The accounts dissected in the article are now one year and three months old and it is nonsense to attempt to deduce BCAL's current or forward position from such outdated figures. In any event the accounts were for the first opera tional period of the "second force" after the difficulties of merging two vastly different airlines. After the Caledonian take-over of BUA it was inevitable at this early stage that much remained to be resolved in a rapidly changing environ ment in respect of forward corporate (including financial) planning. It is, however, a fact that during a period of great difficulty for civil aviation generally and after a substantial BUA loss in the previous year, BCAL made a profit on airline opera tions in its very first year—this in an atmosphere of industrial peace within BCAL. Not only was a profit achieved, but it was a better profit than that achieved by the other major estab lished British airlines. We achieved scale economy benefits—and we brought for ward to day one our undertaking to give our staff members comparability of pay with those in the Corporations—an achievement never before matched in independent aviation. The main point of the article questions BCAL's ability to obtain development money at the 1971 level of profitability. The need to ask that question is superfluous. In fact, it was answered by the former Air Transport Licensing Board earlier this year. In giving its reasons for its decision to grant North Atlantic licences to BCAL, the board clearly indicated its satisfaction with our financial status and plans. This came after private hearings, including the examination of evidence from shareholders. The remarks made by the board are a matter of public record. In any event, you will be glad to know that funds for expansion and re-equipment are available from a number of sources. On the matter of associate companies, I would like to point out that since the 1970-71 financial period, the tour operating and hotel companies have ceased to be subsidiaries of the airline, although they remain within the group. And as forecast, both elements are currently moving into profit ability. Flight states that the airlines are fortunate in being able to obtain equipment by leasing or through loan finance. Surely this is true of much of industry in general. A number of similar points are made to show that airlines are different. They areN different in some ways; but in my opinion the principal difference is that airlines tend to utilise their assets more efficiently than many other industries—and what can be wrong with that! As for spreading the'- initial crew training costs, this is clearly accepted as regular iridustry practice—as the accounts of airlines such as American, United, Eastern, Northwest, Pan American, Continental, Braniff and TWA will show. A number of British airlines follow the practice, too. In fact, I hear that the amortisation of pre-operating expenditures, including initial crew training, is a CAB account ing requirement. Flight is entitled to its opinion, but we made our own management decision in line with accepted industry practice. With regard to the transferred routes, I should point out
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