Examination of Witnesses (Questions 240
WEDNESDAY 9 JANUARY 2002
MP, MR BOB
MICHAEL A VIVIAN
240. What is the percentage since 11 September?
(Mr Tarry) What we have seen now is a reduction by
the airlines and we have seen capacity reductions in the order
of 15 to 20 per cent depending on each market. What we are now
seeing is a structural change. We are moving into a different
price environment where the airlines are stimulating traffic.
We can see this most clearly with British Airways' traffic figures
last Friday where they saw economy travel down by nine per cent
which was about the running rate for the first quarter, yet Business
Class traffic was falling at 18 per cent which is much more a
function of the economy. So what we have is on the one hand price
stimulation coming in and on the other hand what we see is the
impact of the economic background feeding through on to business
traffic, plus a structural change where certainly on short haul
I think we are going to see business travellers or business passengers
move first of all to the back of the aeroplane and, secondly,
as there are a greater number of routes offered by carriers such
as GO and easyJet out of the main business catchment areas to
the south and west of London, we will see a migration to those
carriers as well.
241. Do you have any arguments for that, Mr
(Mr Cotterill) As to the detailed figures, I think
Mr Tarry has probably done more detailed work than us. The one
point I would add is that the over-capacity does vary quite substantially
between different airlines and for some of those who clearly were
in the worst position we are seeing the results of it in their
242. Can I put a question to Sir Roy. In your
evidence from the Civil Aviation Authority you comment on the
Government interventions and the £40 million compensation
package but you do suggest that this is an unhelpful intervention
because of the fact that you say it will only delay the distortion.
Can you give further comment on that, Sir Roy?
(Sir Roy McNulty) I think the philosophical position
that we are expressing there is that the solution to the problems
the industry is facing do not lie in subsidies in general. I do
not think we would disagree strongly with the £40 million,
that puts us on parity with the rest of Europe, but some commentators
have argued that the Europeans should be helped to the same extent
as the Americans and we do not think that is a particularly helpful
strategy to follow.
243. In your evidence you also suggest that
the support measures should come from the industry itself in a
levy on holiday makers or holiday takers.
(Sir Roy McNulty) There we are addressing a different
and very specialised issue which is the Air Travel Trust which
lies behind the ATOL scheme which in effect guarantees the holidays
of people who go with tour operators. That fund is in deficit
today. The deficit, the overdraft, is guaranteed by the Government.
We are saying that at some point in the not too distant future
a levy on holidays, and we are talking about less than one pound
per holiday with an average holiday price of about £450,
so it is quite a small levy, is necessary to get that fund back
in the black.
244. What about the commercial travellers, how
will it apply to them?
(Sir Roy McNulty) It is really a specialised scheme
which applies to people who buy package holidays in this country.
245. We had members of the aviation industry
before us before the Christmas recess and they were critical over
the current situation where they are talking of a levy on passengers
to help meet the cover for insurance against terrorism and war.
How would you address that point, that is should the levy be on
the passenger or on the service?
(Sir Roy McNulty) I can only say again that the only
aspect that I think we have addressed in our evidence is the ATOL
fund. The tour operators and the travel industry agree with us
that that can be effectively addressed by a levy on each person
buying a holiday package, and it is quite a small levy.
246. Sir Roy, that was the whole basis of the
scheme, was it not, it was brought in by a Labour Government precisely
on that basis?
(Sir Roy McNulty) Absolutely.
247. And it is expected to break even. If there
is any difference between the two sets of figures then there is
an automatic increase.
(Sir Roy McNulty) Correct. Over a long period it should
break even. In the early 1990s it got into deficit and that deficit
248. So they are totally different things?
(Sir Roy McNulty) Quite different things. The question
of levies for insurance costs, security costs, anything else,
we have not addressed that and certainly it is not intended to
be addressed in our evidence.
249. And you have no comment on that?
(Sir Roy McNulty) We have not looked at that subject.
250. Mr Tarry, have you any comment?
(Mr Tarry) I do not have anything to add, no.
251. Would it be possible to let us have your
observations on that in writing?
(Sir Roy McNulty) Certainly. We will let you have
that as soon as possible.
252. In terms of when you do your analysis,
Mr Tarry, do you take into account the fact that the industry
is cyclical, and that is one of the bugbears of the industry itself,
as to what growth there would be in any event lost in that cyclical
(Mr Tarry) We have done a lot of work looking at what
we would call fundamental demand. Another issue as regards cyclicality
is maturing markets and what we also noticed, particularly in
the US domestic market because it was a closed market and we wanted
to look at the history of ten years ago and isolate then the Gulf
War effect, was the breakdown of the relationship with GDP and
we also saw in the US that traffic was beginning to grow at a
fraction of the rate of GDP rather than a multiple of the rate
of GDP. We also saw
253. From the recovery from the Gulf War?
(Mr Tarry) No. I will have to review my figures, I
do apologise for not having them to hand. Certainly over the last
four years, post the recovery phase from the Gulf War, it began
to grow as a fraction of GDP rather than a multiple of GDP. What
we also saw, perhaps it is to be expected, was if you used business
confidence indicators or consumer confidence indicators they gave
a better predictor of turning points. You are right, the bugbear
of the industry has been the cyclical nature of it and also that
the industry tends to push capacity in and with the lags and the
leads in the system of delivery of capacity you tend to have overcapacity
just at the wrong time. In an industry where for any six month
period effectively 100 per cent of the costs are fixed and once
you get to break even 80 to 85 per cent of additional revenue
is profit, the consequences of the reverse are very clearly evident.
254. You do not see any possibility now we have
got low cost airlines in that formula that that trend will be
(Mr Tarry) I think what we saw after the Gulf War
in the recovery phase was a very modest approach to new aircraft
ordering. We saw almost a very rational approach to it and it
was a reasonably good period economically for the airlines. With
the low cost carriers I think this is part of a structural change.
I think with any airline we might talk about high cost, we might
talk about low cost, but the reality and the simplicity of it
is that you need an appropriate cost base for the traffic stream
that you want to address. If we look at the example of British
Airways when they introduced their strategy three years ago, one
element of that which I saw very clearly was that BA was breaking
the circle of dependence upon ever more traffic and our analysis
showed that by taking transfer traffic out of Europe and feeding
it through London and on to the United States for some of the
very low fare traffic it was perhaps getting three pence per passenger
kilometre on the short haul sector but it was costing an average
cost of 13 pence to carry it, so they were losing money the minute
they sold that ticket. To take that forward, it is possible to
look at an industry where slower and lower growth may be more
beneficial from the point of view of financial returns. At the
end of the day unless the industry makes adequate financial returns
then capital and finance is not going to be forthcoming.
255. On the analysis that you made of the likely
duration of all this, specifically on the effects of 11 September,
could one argue that if people are travelling on low cost airlines
and they are growing at the rate that they are it has got absolutely
nothing to do with the events of 11 September, it has everything
to do with the economy that was there in any event?
(Mr Tarry) I think there are elements of all. You
are right, we do see opportunities now for the lower cost airlines
to grow and we watch with interest as easyJet first, and maybe
GO secondly, move into Gatwick because it gets a wider catchment
area. I think it is probably true to say to a greater rather than
a lesser extent the catchment areas around Stansted and Luton
for the traffic that they want to attract may well be exhausted
but you can see a different set of relationships. It was mentioned
earlier in terms of the lower cost segment, it is capacity led
growth. We are seeing capacity coming to the market, they have
the cost structures and the pricing structures which enable them
to fill that traffic comfortably.
256. What analysis have you done? Low cost is
mainly point to point as it stands.
(Mr Tarry) It is.
257. What happens if they develop to the stage
like we had with Laker and start going across the Atlantic?
(Mr Tarry) I think the risk for any of these airlines,
and Ryanair are on the record as saying it, is if they give up
the business model which they have set up. I think they have to
stay in their segment and we are seeing a market which is far
more broadly segmented than perhaps the airline industry has wanted
to recognise. It is not just a simple segmentation between business
travellers and leisure travellers, we can segment in different
ways. For example, we can look at a leisure traveller who will
travel a much greater distance to the airport, so the geographic
catchment area for leisure travel is much greater than for business
travel and figures from the CAA show that very clearly.
258. As part of that there is also the charter
airlines. Could you just give us your impression as to where you
see the development between these two groups?
(Mr Tarry) I think right in this room, looking at
the evidence before, the point has been made that the charter
sector is actually a large part of the lower cost sector within
the United Kingdom which is largely absent in the United States.
If we look forward it is almost impossible to predict when traffic
will return to normal. I certainly would not want to venture a
date on whenever that may be. I think we can now see the turn.
I think there is opportunity in terms of structural change for
the low cost carriers to take more market which will remove them
from the cyclical effects but the issue for them, and the extent
to which they can benefit, is governed really by airport access.
259. Could I ask you about the structure of
the industry. Do you think that the rules on ownership as they
stand are of value or a problem for the industry?
(Sir Roy McNulty) I think they are a part of the problem.