Thursday, September 3rd, 2015

How to become a millionaire in the airline industry

Start as a billionaire and buy an airline.

It’s an old joke that continues to be relevant, even as the industry posts record profits for 2015. It also captures the great anomaly of the airline industry: why do airlines continue to operate despite apparently never making a decent profit?

Economists often talk about the Weighted Average Cost of Capital (WACC) as a benchmark for whether a firm’s profits are reasonable. The WACC is a calculation that attempts to capture the risk associated with an investment by estimating how much return potential investors would need to earn on their investment to be willing to invest in that firm, rather than in another firm.

Profits below the WACC are typically seen as evidence that a firm is making insufficient profits. Theory dictates that should this continue, the firm would eventually go out of business.

Yet, according to a 2013 report by IATA, between 2004 and 2011 the airline industry persistently made profits below its WACC. This suggests that either the estimated WACC is wrong, or that investors in airlines are irrational. Read the rest of this entry »

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Friday, August 14th, 2015

Few surprises in reactions to the Heathrow decision

The decision as to whether to build an additional runway at Heathrow is increasingly likely to a political – rather than an economic – decision. Therefore, the various affected parties have all been busy publically voicing their opinions on the recommendations set out in the Davies Report. And it is all very predictable. Read the rest of this entry »

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Tuesday, August 11th, 2015

Is Eurocontrol at risk of creating a new monopoly?

As we discussed in this month’s Aviation Intelligence Reporter, the European Commission is struggling to find an alternative supplier to Eurocontrol to support the Performance Review Board in its activities. Ironically, Eurocontrol may soon be facing the same type of problem itself. Read the rest of this entry »

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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.
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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.
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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.
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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. Read the rest of this entry »

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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. Read the rest of this entry »

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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. Read the rest of this entry »

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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. Read the rest of this entry »

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