Tag: aviation

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Should governments help the airlines? (part 2 of 2)

There’s another problem when governments rescue companies and get them back up on their feet: they may quickly forget the favours they have received. Ingratitude is a fact of commercial life, but there’s no reason for governments to set themselves up for it.   If an important airline collapses, and its assets are taken over, the successor airline may not maintain all the routes to and from the country concerned. So the rescue package may not help national competitiveness after all.

But wait, you say, surely if the route is profitable it will be maintained? No, because the new airline has a finite number of planes and other routes may be more profitable. Also, the new airline may be more interested in feeding passengers to its existing routes or hubs than in maintaining the old route.

 An important option for governments is to go out to tender for air service provision. They can invite competitive bids for a subsidy to operate the route. The lowest bid, if it meets the quality requirements, gets the contract and the subsidy. Countries typically do this to maintain connectivity between the centre and remote regions: the airline in question is paid to maintain the regional route, and this is usually called a public service obligation. In 2019, there were 12 EU countries following this option, for a total of 143 routes. Greece had the biggest number of PSOs at 28, followed by France at 27. In general PSO routes connect outlying islands or distant regions with the capital or other key cities in the country concerned.

But there’s no reason why a PSO can’t be used to maintain or increase international connectivity as well. It can be an easier way to improve national competitiveness than rescuing a whole airline. But in fact, of the above PSOs, only 8 of the 195 were for international routes. Cyprus’s single PSO route was to connect it with Brussels. All of Czechia’s 3 tenders were to connect its cities with other European cities. France had 3 PSO routes connecting Strasbourg with other European cities.

Countries might usefully consider using PSOs specifically to target missing links in their international connectivity, including intercontinental links. A small country that wants better links with another part of the world could go out to tender and see what it might cost. The price might look good in the light of the possible wider economic benefits (tourism, business links, FDI, etc.)

Full disclosure: I took one of these routes last month (In Greece: Rhodes to Karpathos). The plane actually goes on to Kasos, an additional 10 minute flight, which must be one of the shortest commercial flights in the world.

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Should governments help the airlines? (part 1 of 2)

In the early stages of the pandemic, international flight linkages were actually the main transmission channel for the virus. In fact, flight connections proved to be an even more accurate predictor of infection spread between two countries than the presence of common land borders or trade connections.

Aviation is an interesting but volatile sector. And now the economic destruction wrought by the corona virus has battered the airline industry. Passenger travel has almost disappeared.  Many large airlines have grounded their fleets altogether.  How long can the airline companies survive?  Some are already sending out SOS messages, saying that their collapse is imminent and calling for government support. In the US, the historic $2.2 trillion stimulus bill signed into law on March 27 included $61 billion in relief for the airline industry. More support is part of the current negotiations in the US Congress. Many other governments have also provided relief to their own country’s airlines. In Singapore, for example, the government-owned investment fund has extended credit of $19 billion to Singapore Airlines. In Europe, the fees that airlines pay for air traffic control have been deferred.

Should governments rescue airlines?  The idea is that these are strategic services, essential to providing international linkage not only for emergency supplies but to maintain and enhance existing trade and Investment links.  But if you think about it, there is nothing very special about an airline.  It provides more or less standardized services, using more or less standard capital goods, and more or less standard human resources. There is of course some differentiation, but nothing fundamental: an airline may have a more sophisticated planning and pricing mechanism than its competitors, or it may become well known for the quality of its food, or the kindness of its cabin crew. A few airlines have a poor safety record, but they always (understandably) have a small share of world markets. 

Airlines come and go: do you remember PanAm, TWA, BOAC, UTA, Sabena, and Swissair?   If an airline collapses, what often happens is that its assets (planes, landing slots, etc.) are taken over by some other airline. The planes are repainted. The staff get new uniforms. And flights continue. And so why should governments rescue airlines and what are the alternatives? (More to come on this)

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You want your own airline?

What’s your aviation strategy? Entry into the airline business is easier than you might expect.  You might think that you must first of all buy an airplane.  Not true: you can lease one.  And everything in the way of services that you might need can all be provided by service companies, whether for ground handling, catering, machine maintenance, and so on: everything can be outsourced.  (In American Airlines, outsourcing was 29 per cent of total non-fuel expenditures in 1995: by 2019 the share was 50 per cent). And some services, such as ticket offices, are no longer needed: you can just sell your tickets online. You don’t need crew either: you can rent those from staff agencies (or as part of the deal when you lease the plane, a so-called “wet lease”).  So what will make you distinctive?

The only way that you will succeed and make a profit is by a comprehensive aviation strategy.   This will have to cover marketing, pricing, fuel purchasing, and destinations, interconnections, and the like. These are all crucial but the necessary skills are on the market, in the form of experienced people in the aviation industry who are ready to change job.

Of course, unless you or your new planners can come up with some really original and really clever ideas for the strategy, the danger is that the existing airlines will see you come and go. Arrivals and departures in the airline industry are frequent. A total of 275 airlines started life in the years 2010 to 2019, and just under 500 airlines disappeared in the same period. Using data from the wonderful website Aviation Fanatic, the average lifespan was 16.5 years for 489 airlines over the ten-year period.

Another problem is an external shock, such as a big change in fuel prices, a war, a natural disaster, or a coronavirus pandemic. Even if you ground your planes, you will be losing money, not only because you’re paying the for the lease, but because planes cost money for storage and maintenance even when inactive. Oil prices might go through the roof, making your flights too expensive, unless you had the foresight to buy forward. Or the opposite: prices might fall and you might be stuck with a contract for expensive fuel while some competitor is not. You need more money. Maybe the government would help?

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The thing is…..

The pandemic has had many tragic impacts, and the economic effects are secondary. But they are enormous. The IMF expects global economic activity to decline on a scale not seen since the Great Depression, with 170 countries seeing income per capita decline this year. There have been striking changes in the value, volume and direction of trade. WTO expects world merchandise trade to fall by between 13 and 32 per cent in 2020, with exports from North America and Asia hit hardest. There have also been changes in the relative importance of different forms of infrastructure. Take airlines for instance. Passengers are vanishing, flights are cancelled, and this means that air freight capacity is also reduced, because much air freight has actually been carried in passenger planes. However, some airlines are now using passenger planes to carry freight. Rail is also beginning to come into its own: trains are now carrying the post from China to Europe. A 12-14day journey is a lot quicker than sending goods by sea, especially when demand is high. Another vital infrastructure, telecommunications networks, is under pressure. Voice has seen a resurgence, and network disruptions have been reported across Europe. With remote working, as well as the general population staying at home, the strain on internet services is severe. Video streaming has been reduced in technical quality in order to relieve the pressure on the systems. (As for the quality of the films themselves, this is the same as it was.) And some further pressure on the system is on hold for the moment: there is a global shortage of webcams.