Tuesday, July 14th, 2015

The Heathrow decision explained in triangles

The UK Airports Commission recently released its report recommending the development of a new northwest runway at Heathrow to address airport capacity constraints in the South East.

The Commission reached its view after undertaking a cost-benefit analysis of the different options. The benefits were estimated to exceed the costs for all options, but the net benefit was estimated to be highest for the Heathrow northwest runway option.

The report’s analysis is pretty comprehensive – the main report is 342 pages long with various technical reports making up an astonishing 4,470 pages of analysis. However, the report’s findings and recommendation can essentially be explained by a triangle.

The benefits to passengers was a key factor in the Commission’s decision

The decision to recommend a new northwest runway at Heathrow was largely due to the significant benefits this option is expected to create for passengers. This includes access to additional routes and increased flight frequencies.

The Commission was able to put a value on these benefits by calculating what economists call the ‘consumer surplus’. This is the benefit passengers would receive from flights from the new runway (for example, being able to fly from a more convenient airport or shorter delays) compared to the cost of these flights (ie, their airfares).

To explain the consumer surplus in another context, suppose that on a hot day you are willing to pay $3 for a refreshing ice-cream. When you get to the shop you find that ice-creams cost only $2. The difference ($1) is your consumer surplus.

These benefits can be captured by calculating the area of a triangle

As illustrated in the figures below, the consumer surplus can be measured by calculating the area of a triangle.

Figure 1 shows the consumer surplus prior to the expansion of airport capacity. The demand curve indicates that as fares fall, more people would be willing to fly. The supply curve reflects that there is a capacity constraint at the airport currently: airlines will supply provide more flights from the airport as fares increase until the runway is at full capacity (Q1), beyond which airlines are unable to increase supply even if they wanted to. The point where demand and supply intersect denotes the price (ie, the airfare), P1.

Figure 1: The consumer surplus prior to expansion

The triangle A is the consumer surplus. It shows that some passengers (up to Q1) would be willing to pay more than P1 to fly from the airport.

Figure 2 then illustrates the impact of increasing capacity at the airport. Airlines will supply more flights at the airport as prices increase until they hit the new capacity constraint at the higher level of Q2. This increased supply leads to a lower market price (P2).

Figure 2: The consumer surplus when the new runway is built

The consumer surplus is now measured by the triangle A+B+C, which is somewhat bigger than under the previous capacity constraints. Additional passengers who weren’t willing to fly at the previous higher price are now choosing to fly (represented by the triangle C), while the net benefit of flying from the airport has increased for those passengers who were willing to fly at the previous higher price of P1 (represented by area B).

The Airports Commission undertook this exercise for all three options considered using a suite of sophisticated models to calculate the size of the triangle. It’s finding? That the size of the triangle A+B+C was estimated to be larger for the Heathrow northwest runway option than for all others. Not so much economics as geometry…

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Friday, July 3rd, 2015

US air traffic reforms lack ambition

There has been a lot of discussion in the US recently on how to reform the FAA’s Air Traffic Organization (ATO). The ATO has been criticised by many for being inefficient and for failing to modernise. Furthermore, its funding is currently subject to federal approval of the FAA’s budget – a drawn-out and unstable process that places the ATO’s activities at risk.

One popular suggestion is to transform the ATO into a not-for-profit, government-owned organisation that would operate at arms’ length and be funded by user charges. Others have touted NAV Canada’s user-cooperative as a potential model to adopt.

So far there has been little discussion of the idea of a for-profit ATO despite this model being applied elsewhere. UK NATS, Airways New Zealand and Air Services Australia are all for-profit providers of air traffic services.

When raised, the idea for a for-profit ATO has been swiftly dismissed on the grounds that it would put essential services at risk or result in profits being put ahead of safety. However, many essential services (such as electricity, water and telecommunications) are often operated by for-profit suppliers. Meanwhile, as we’ve pointed out previously, an exemplary safety record is critical to the success of any business in the aviation industry.

Having a profit motive could deliver the required changes to the ATO. It would naturally provide a strong incentive to improve efficiency, to adopt new technology and to innovate, as well as to provide a customer-focused service. Of course, there is always a risk that a profit-driven service provider with market power will abuse its position and some type of economic regulation may be required. At the same time, it cannot also be assumed that a not-for-profit operator would always necessarily act in the best interests of consumers.

The option of a for-profit ATO therefore requires serious consideration by the US Congress.

In fact, while they’re at it, why not also consider exploiting the technological potential of NextGen and introducing competition for air traffic services in the US? As we’ve been saying for a while now, the liberalisation of the air traffic management industry could deliver huge benefits to the aviation industry.

For those interested in this option further, check out this paper which suggests the Federal Aviation Act was actually designed to allow for multiple private entities to operate air traffic facilities, potentially in competition with each other.

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Wednesday, July 1st, 2015

Cabin Not OK

IATA’s communications team has been busy recently.

First there was the fanfare to announce the new Cabin OK initiative at the IATA AGM. This consists of a new guideline for the size of carry-on bags.

A few days later IATA released a clarifying press release. The size specified is not a maximum limit. This is set individually by an airline and there are no plans for an industry standard. It is merely a guideline intended to give passengers reassurance that their baggage will be able to travel with them. In fact, it seems there is no actual guarantee that a passenger would be able to take Cabin OK-approved luggage on-board. Instead, IATA was merely promising that Cabin OK-approved luggage would have priority to remain in the cabin if an aircraft is not able to accommodate a bag for every passenger and if the flight is operated by a participating airline. That’s quite a few caveats and subsequently a rather underwhelming initiative.

Less than a week later, another press release. IATA is pausing the rollout of its Cabin OK initiative. Apparently, further consultation with stakeholders is required. It seems customers get upset when you tell them that expensive suitcase they recently bought can no longer be taken on as carry-on baggage for no apparent reason. In addition, few passengers would agree with IATA’s bold belief that the reduced baggage allowance implied in the guidelines would ‘lead to an improved passenger experience’. Meanwhile, airlines are quite specific about their carry-on allowances for their own commercial reasons. For some, the carry-on allowances are designed to speed-up boarding while for others it is intended to avoid the costs associated with handling checked baggage or to entice frequent fliers and business passengers. IATA has apparently failed to consider these commercial factors when devising Cabin OK.

We can only imagine IATA thought the Cabin OK was a good idea because it would have generated revenue for the organisation. The commercial arrangements of the initiative are not publicly available but it is likely that luggage manufacturers would have paid IATA a generous licence fee for the right to fix an ‘IATA Cabin OK’ logo on their products.

The initiative may be on pause but IATA probably wishes there was a rewind button too.

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Friday, June 12th, 2015

ANSPs: A very unnatural monopoly

ANSPs would have us believe their position as monopoly providers of air traffic services is sacred. Air traffic control is a natural monopoly, so their mantra goes. Not for much longer.

A natural monopoly occurs in an industry where there are high fixed costs. Typically, these are industries which require large investments in infrastructure. This means that it would be costly for multiple firms to operate as each would be required to build its own infrastructure, leading to inefficient duplication. Commonly cited natural monopolies include utilities such as electricity lines or water pipelines.

Air traffic control has traditionally been seen as a natural monopoly due to the large sunk costs associated with radar.

However, technological changes are starting to challenge this view and, increasingly, air traffic services can no longer be defined as a natural monopoly. The satellite-based systems emerging from programmes such as NextGen and the Single European Sky can cross national borders and negate much of the need for ground-based infrastructure. Recently there has even been talk about using existing television signals to track aircraft as an alternative to radar.

Without the need for expensive radar equipment, ANSPs would be technically able to compete with each other. As we’ve previously argued, competition in air traffic management would bring a number of benefits to the aviation industry.

However, the mindset of the industry remains an obstacle. ANSPs’ current status as monopoly providers is a result of decisions made by governments in the 1950s and 60s. Technology has come a long way since then. It’s time attitudes caught up. After all, air-traffic-control-is-a-state-mandated-monopoly doesn’t trip off the tongue quite so easily.

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Friday, June 12th, 2015

The aviation industry has a right to an international workforce

Last month’s Aviation Intelligence Reporter discussed concerns in the aviation industry about the use of self-employment contracts and ‘social dumping’. Social dumping is the rather emotive term used to describe the hiring of staff from countries with lower wages and basic contracts.

The industry has been up-in-arms about Norwegian Air Shuttle’s (NAS) decision to use Asia-based crew on its routes to the US. NAS’ pilots and flights attendants are employed through an employment agency based in Singapore, and many of the pilots are based in Bangkok. Naturally, complaints have come from United, Delta and American Airlines. Meanwhile, the European Cockpit Association (ECA) hasn’t been shy about joining in and has expressed its fears that such practices undermine safety.

Concern about the impact of foreign workers on jobs and wages is nothing new. Many of the recent complaints about social dumping in the aviation industry are being voiced in the European Parliament where governments obviously have an interest in keeping unemployment rates low, ensuring their citizens pay their taxes and maintaining a high standard of living for their electorates. Recent complaints would suggest the aviation industry is also passionate about these issues.

There is of course a social aspect to this issue. It goes without saying that workers should be paid a wage that allows them to maintain a reasonable standard of living. Employees should also be protected by labour laws and have safe working practices. And of course, both employees and employers should pay their taxes.

However, we struggle to believe that these complaints about ‘asymmetric employment’ are a result of the aviation industry’s social conscious getting the better of it, or its sudden preoccupation with unemployment rates and tax evasion.

Rather, its concerns are more about the competitive threat. Lower staff costs means lower fares, and therefore a greater competition threat to other airlines. Meanwhile, airline crew fear for their jobs and union-negotiated salaries.

The ECA’s safety concerns shouldn’t be automatically dismissed. However, it seems unlikely that an airline like NAS would put safety (and therefore its business) at risk by employing staff who put commercial interests before the safety of themselves and their passengers. Again, we suspect safety concerns are not the real reason the ECA is so upset by these employment contracts.

Aviation is a global and liberalised industry. Like many other global industries, it should not be unexpected to see the airlines starting to use low-cost labour from overseas. For years firms have been happy for their goods to be manufactured in Asia, and to out-source customer services to call centres in places like India and the Philippines. Why shouldn’t the aviation industry also embrace the global labour market available to it?

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Monday, June 8th, 2015

The US carriers wield their new weapon: preclearance

It would seem that the US carriers have heeded our advice in this month’s Aviation Intelligence Reporter.

We reported that delays in Etihad’s service into the USA have allegedly been caused by the US Customs’ preclearance facilities at Abu Dhabi, which have been accused of slowing down the passenger transfer and boarding processes. We rather cheekily suggested that, if that is actually the case, the US carriers could make some competitive gains by further encouragement of preclearance facilities.

Well, American Airlines and United Airlines have both just come out in support of plans by the US Department of Homeland Security to expand preclearance to another 10 airports. This includes airports in Belgium, Sweden, Norway, the UK, Japan and the Dominican Republic. They should really have pushed for Qatar and Dubai while they were at it.

This news may also indicate presage the start of another campaign by the US airlines against a rising foreign competitor: Turkish Airlines. The list of airports where US Customs is planning to operate preclearance facilities also includes Istanbul Airport in Turkey. Currently, Delta is the only US carrier to operate any direct service between Istanbul and the USA and this is a seasonal flight to New York. In contrast, Turkish Airlines currently operates seven routes to USA from Istanbul Airport and its passenger volumes on these routes increased by 21% in the last year. The airline is also 49.12% owned by the government, which won’t sit well with the US carriers.

THY might be well advised to keep an eye on the US carriers’ antics.

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Thursday, May 28th, 2015

Lies, damned lies and statistics

Statistics can be powerful. But they can also be dangerous if used incorrectly, as illustrated recently by one member of the European Parliament Commissioner.

Commissioner MEP Gill of the UK Labour Party wanted to know what action the European Commission would take in response to a recent finding by the University of Ghent and the European Cockpit Association that ‘seven out of ten’ pilots working for low-cost airlines are self-employed.

We thought this figure was a bit high so did some digging.

In actual fact, the report found that less than two out of ten pilots working for low-cost airlines are self-employed but that 70% of pilots that are self-employed work for low-cost airlines. We presume this is where Commissioner MEP Gill got her figure from. She has clearly not understood the difference between the two statistics: a finding that low-cost airlines use a higher proportion of self-employed pilots than other types of airline does not necessarily translate into a finding that the majority of pilots working for low-cost airlines are self-employed.

An innocent mistake? It might be worth keeping in mind that the report was written for the European Cockpit Association, which does nothing to hide its contempt for these contracts.

The full report can be found here.

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Thursday, May 21st, 2015

The dangers of progressive ANSP management

The recent announcement that Richard Deakin, the CEO of UK NATS for the past five years, has decided to move on is yet another timely reminder of the difficulty in attracting and retaining strong talent into the very senior ranks of the ANSP industry.

Deakin is very well regarded for the job he has done to develop NATS. Through technical innovation and the development of its commercial activities he has driven NATS‘ operational and financial performance where today it has become arguably the best ANSP in the world. He is a loss to the industry and we wish him well.

Like so many of his ANSP peers over the years however, Deakin too has suffered at the hands of politicians and the media.

It is no way for a competent professional who has done a difficult job to be remembered but unfortunately this is all too familiar territory to watchers of this industry. In recent years equally competent leaders of ANSPs in the United States and in Australia have experienced underserved and difficult departures largely because they pursued change and were worked over by the politicians and the media.

Attracting progressive CEOs into the ANSP industry is not easy. It is dominated by governments and difficult unions, it operates a high consequence business requiring highly reliable systems, and it has inbuilt resistance to change. If this isn’t enough, a reform oriented CEO runs the risk of being subjected to ridicule by shortsighted politicians and the cheap media headline.

No wonder a job like this is hardly likely to bring a rush of candidates who are committed to long-overdue change.

The aviation industry deserves better.

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Monday, May 18th, 2015

Time to start thinking about ATM liberalisation

Would anyone like to argue that the liberalisation of European airline industry in the late 1980s and 1990s was anything other than a success? Consumers have benefitted from lower fares and increased choice. New airlines have been able to enter the market and existing airlines have been able to access new markets. Sure, we have had some consolidation but competition in the European airline industry remains healthy. Indeed; so far, so good.

But one major part of the aviation industry still remains fiercely closed to competition: 18 years after the full liberalisation of European carriers, the air traffic management (ATM) industry is largely limited by state boundaries and almost entirely run by state-owned Air Navigation Service Providers (ANSPs). There is no good reason why this situation should continue.

The liberalisation of the ATM industry would bring a number of benefits, not least to consumers. These benefits would likely include lower airspace fees (and therefore lower fares for consumers) as ANSPs would be forced to improve their efficiency in order to compete. We might also expect the ATM industry to have greater incentives to innovate and offer new products and improved choice to airlines who, for example, seek differing levels of priority when using ATM services. Fancy that: customer focus.

At the time, there were some who opposed liberalising the European airline industry. They voiced concerns that national flag carriers would find it difficult to adapt to the new market conditions and that this would place jobs and air services at risk, that competitive pressures would leave airlines to cut costs and threaten safety and security, and that it would be difficult to enforce standards. All this is a diplomatic way of saying that increased competition can be hard work.

While we have yet to see anyone from the ATM industry convincingly explain why their industry cannot be liberalised, the safety argument is never far away.

It is telling to see that the concerns associated with airline industry liberalisation have not been realised. Safety and security remain top priorities for the airline industry. After all, the existence of an aviation industry is inexorably linked with safety. Many of the legacy operators remain, and some have indeed prospered, since the liberalisation of the industry. Meanwhile, the emergence of new carriers has in fact increased the number of jobs in the aviation industry.

Liberalisation of ANSPs is unlikely to happen overnight, nor would it be seamless process. There are a substantial number of issues that would need to be addressed, such as how to continue to regulate safety, the practicalities of smoothly transitioning away from state ANSPs to cross-border operations, and the challenge of getting agreement from the large number of states involved. It would likely also require ANSPs to change the way they operate and the technology they use.

Some very small steps have already been taken towards ATM liberalisation. This includes opening up the provision of ATM services at airport towers to competitive tender. As a result, NATS are currently managing air traffic control services in a number of Spanish airports while DFS manages the Gatwick tower. However, as the situation currently stands, ANSPs will continue to operate largely free of competitive pressures.

All this doesn’t mean it’s not worth having ATM market liberalisation as a goal and the focus should be on the long-term benefits of liberalisation.

However, for this to happen, we need those who share such views to come together and form a strong and focused voice for change. The benefits of ATM market liberalisation need to be clearly communicated, and the concerns of those against market liberalisation responded to. Airlines need to be involved as well, of course. They are likely to be the big winners from this process.

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Thursday, May 14th, 2015

The Cat is out of the Bag – SESAR is nothing more than a plan to use the market to reduce costs

The game is up. The true market driven aims of SESAR have been discovered by Miguel Viegas, a Member of the European Parliament. Miguel’s National Party is the Partido Comunista Português, and he is a member of the Confederal Group of the European United Left – Nordic Green Left.
Miguel, in a written question to the running dog lackeys of the Imperial ruling class capitalists over there in the European Commission has told them straight “It has been feared from the start that [The Single European Sky initiative] may be too strongly geared to reducing costs and too closely directed towards the market, with the aim of handing a series of activities that have until now been the responsibility of national governments to private companies.”
Miguel is seeking an explanation from the Commission of how this has come to pass, and why SESER is not a “100% public joint venture”. Anything less than that is simply not acceptable. The Commissariat risks several years of re-education camp if they do not get it right. Soon.
Of particular concern to him seems to be that a (whisper this) Spanish company – Indra has joined the SESAR Joint Undertaking as a full member and is now part of this spiteful Public-Private partnership.
The alternative view, that perhaps the current system is not a perfect model of efficiency and well-being maximisation, gets no truck from our Miguel. Better to have the most expensive ATM in the world, inefficiently delivered, than the risk of customer focused, efficient innovative ATM.
The existing system delivers ATM like it is 1955 – VHF radio and radar included – but at least each controller has a chicken in every pot.
We shall watch the response of Commissioner Bul? with great interest.

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