Sunday, August 03, 2008

The Cycle of Aviation

Yesterday in the Scotsman there was an article prompted by BA’s planned reduction of 500 flights out of 5,000 over the winter period in response to the crisis in the airline industry. There were the usual daft over reaction from all concerned about why was Scotland being targeted in this way blah, blah, blah. The fact is that with so many flights from London to Scotland from so many airports down south it is the obvious route grouping for some consolidation. For BA and all the other airlines it’s about reducing costs while trying to maintain revenues – a simple case of business economics.

Reading the attacks on BA in the paper’s comment column you’d think that they were a part of a Unionist alliance against Scotland. People are calling for the Scottish Government to do something – it's a case of welcome to the real world! There was even an article from Colin Borland of the Federation of Small Businesses in Scotland, who warned that it is putting Scotland at a disadvantage.

"How can we compete for contracts with companies based in, say, London, if we can't get to a meeting without leaving the night before? Not only that, given that many flights to international destinations route through London, it will take longer and cost more to do business in Europe and beyond. Reducing the frequency of flights is also bound to have a knock-on effect on the price we'll pay for those flights which do remain available. It's a lose-lose situation – fewer flights at higher cost. Perhaps it's now time for Government at all levels to safeguard Scotland's long-term transport and business links and make a commitment to a proper high speed rail link between Scotland and the rest of the UK."

Now you wonder how come this organization even gets the word ‘business’ in their title, because he clearly has only a passing knowledge of how it works. There are just not enough people neither living in Scotland nor wanting to visit Scotland from many destinations – either to do business or come on holiday - to get more routes direct from Scotland to the world. No amount of posturing by the government or anyone else is going to change that. So far this year passenger numbers from Edinburgh and Glasgow combined are down on the first six months of last year – well before the perfect aviation or global economic storm that everyone talks about. This situation has been coming for a while. And it’s also precisely because there has been a rise in flights from Glasgow and Edinburgh to international destinations that there is pressure on BA to cut the number of flights from London to Scotland.

The high-speed train link is probably a good idea – however long it may take to build - but frankly it will do nothing to address the connectivity of Scotland to the world, arguably it might even worsen that situation. Governments are powerless in this day of non-state owned and controlled airlines; it’s economics, economics, economics dear boy. Neither is it anything to do with an independent Scotland. In this day and age of open markets it’s a case of a flying free for all, a situation that has prevailed in the USA for years. Hub and spoke flying is the order of the day and nothing will radically change that. The Ryanair model is under even more threat and proposed new routes from them and others from Scotland must be under threat. Supply and demand is even more important in airline economics than most industries. Their product cannot sit on the shelf waiting for someone to come along to pick it up, it cannot be warehoused, but it can be taken from one route and moved elsewhere; alternatively an aircraft can be sat on the ground – the airline equivalent of reducing production. For the next few years there will be higher fares and reduced capacity. It’s what the airline business has always been about – a cyclical industry that sees airlines fail and then new entrant carriers start up when times get good, using aircraft with great financing deals attached to them offered by a manufacturing industry that is in desperate need to stay in business.

In real terms the cost of flying has been going down for years – at some point they have to start going up because cost savings have bottomed out.

9 comments:

Lord James Bigglesworth said...

In real terms for me, Richard, it's bloody high, thank you very much.

Richard Havers said...

But in real terms for everyone it was much bloody higher :)

r morris said...

Very lucid piece, Richard. Well done.

David Farrer said...

Richard,

See here.

Brian said...

Actually, I'm not convinced!

Don't you think the Danish would be miffed if there were no flights going in and out of Copenhagen?

There are 5 million people in Denmark.

Richard Havers said...

Brian, not convinced about what? I'm not saying there should/would/could be no flights to and from Scotland I'm just putting forward the point that there is no imperative that says there has to be particular places served from Scotland. It's a case of supply and demand. No one operates any flights out of Scotland or into Scotland unless they think it makes economic sense....ditto Copenhagen.

There's another problem....we have two airports too close to each other making it more tricky for long haul carriers to make sense out of routes from either GLA or EDI to certain cities.

Ken Dyer said...

Well said Richard. At least living in Scotland you are served by several international airports...in Wales we have Cardiff, and, err..well thats about it.

Unfortunately it has to be borne in mind that there are very few true Scottish based airlines of any size (does this tell us something?). Other than the likes of Loganair, I believe Globespan is the only one, and they have their own issues. Therefore in terms of air travel Scotland is reliant on overseas and English airlines. Sadly when the going gets tough airlines sift out the less profitable routes and these are the ones that get cut. Having said that some (such as those operated by certain low cost carriers) are sustained by subsidies of one sort of the other.

Interesting point re Copenhagen...21 million passengers in 2007...total of Glasgow, Edinburgh and Prestwick airports...20 million. And Copenhagen has the benefit of a major based carrier, ie SAS. In realty Scotland needs one airport midway between Glasgow and Edinburgh....but thats been said many times before!

Cost of air travel...the operating costs have been going up for years, but fares seem to have been pretty constant, increased slightly, or have actually come down. With the excessive increase in fuel costs, I think for most airlines, the point has been reached this year when the fares no longer cover the costs...at which point something has to give. Consequently we have seen increases in fares, mass grounding of aircraft in the US, cutbacks by many airlines in terms of routes/staff, and have seen more airlines fail in one year than ever before. As you say it is very much a cycle, and no doubt at the end of it, after the trimming has taken place, the mergers and "commercial arrangements" finalised, we will see leaner, and more stable airlines emerge. But there will be a lot more pain yet, and inevitably that will impact further on Scotland, and throughout the UK.

Richard Havers said...

Great post Ken, your up to date knowledge of the industry reinforces the arguments that there's trouble ahead! Oil coming down will help a bit....if it stays down, but consumer's disposable income is such a factor in all this. There could well be a winter of discomfort ahead for many airlines.

Ken Dyer said...

Oil appears to be coming down, however Jet Fuel is no cheaper now than it was a month ago. But if it does keep coming down then its good news for travellers on those airlines that didn't hedge their fuel in the last few months (and I know of some that did). However as you say, now the consumer has less disposable income available, holidays are one of the first expenses to be cut. Unfortunately I think the damage has been done, and it would take a major economic turnround to change that.