Select Committee on Transport, Local Government and the Regions Minutes of Evidence


Examination of Witnesses (Questions 240 - 259)

WEDNESDAY 9 JANUARY 2002

SIR ROY MCNULTY MP, MR BOB COTTERILL, CAPTAIN MICHAEL A VIVIAN AND MR CHRIS TARRY

  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.

Chairman

  241. Do you have any arguments for that, Mr Cotterill?
  (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 collapse now.

Mr O'Brien

  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.

Chairman

  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 has accumulated.

  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.

Mr O'Brien

  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.

Mr Donohoe

  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 cycle?
  (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—

Chairman

  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.

Mr Donohoe

  254. You do not see any possibility now we have got low cost airlines in that formula that that trend will be bucked?
  (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.

Mr Stevenson

  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.


 
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