The United Kingdom air transport
industry before 11 September
3. In 1998, the United Kingdom's air transport
industry contributed, in 1998, an estimated £10.2 billion
to gross domestic product, and directly supported 180,000 jobs.
In addition to its direct economic effects, the air transport
industry is vital to many businesses, providing cargo services,
supporting tourism and attracting international foreign investment
through the quality and quantity of international air connections.
The United Kingdom supports a large number of airlines that operate
scheduled, charter, no-frills and cargo services.
The industry also provides vital social and economic links for
the United Kingdom's remoter regions.
4. Despite the size and scale of the industry,
airlines have traditionally survived on slim profit margins. Moreover,
the industry displays cycles of growth and contraction. Capacity
follows demand, which creates periods of overcapacity when demand
falls. Industry analysts
had forecasted another cyclical downturn was due at the start
of 2001. The Civil
Aviation Authority (CAA) described the industry as having been
"on the cusp of recession" before the attacks on 11
September. The attacks in the United States accentuated and accelerated
the industry's difficulties of overcapacity, high costs, a changing
demand structure and intense competition.
5. The industry's financial resilience depended
on an "appropriate cost base for the traffic stream".
Before 11 September, there was pressure on both costs and traffic
levels. Labour and aviation fuel costs had increased, and excess
capacity had built up over a period of time.
Mr Chris Tarry, an aviation investment analyst, considered the
overcapacity in the industry before the terrorist attacks to be
as much as 30 per cent, which led to severe financial pressures
for airlines that had failed to adjust to the "incompatibility
of the pricing strategy with the cost of operations".
6. Scheduled airlines have had to respond to
changes in traveller behaviour and the dramatic increase in competition
from no-frills airlines on short-haul routes. Increasing numbers
of business travellers have moved from business to economy class,
or switched to low-cost carriers in order to achieve best value
for money, adding to the pressure on those airlines that make
the majority of their profit from premium class passengers.
The CAA noted that new entrants to the market, which are mainly
in the no-frills sector, put considerable pressure on airlines
with poor products or high cost structures.
The industry had responded to the less favourable operating environment
by seeking opportunities to consolidate and reducing costs and
the number of unprofitable routes.
7. In addition to pressures within the industry,
aviation has been susceptible to the general global economic slowdown.
The onset, or at least the perception, of an economic slowdown
was evident in underlying demand, particularly in the business
traveller and trans-Atlantic leisure sectors.
Before the attacks on 11 September, the International Air Transport
Association forecast a $2 billion to $3 billion loss on international
services due to the drop in demand for business traffic and excess
capacity. In the United Kingdom, the foot and mouth outbreak and
the relative strength of sterling also had an impact on the number
of air travellers.
8.The air transport industry is cyclical and susceptible
to downturns in the economy. Since 2000, there have been signs
of a general slowdown in the global economy that led to fewer
passengers and less money for investment in the industry. Many
sectors of the United Kingdom's air transport industry were, therefore,
already experiencing a significant reduction in business even
before the terrorist attacks in the United States. There has been
a marked contrast in reaction by the various industry sectors
in responding to that reduction in business. The low-cost sector
appears to have been the most successful in generating traffic
and improving profitability by exploiting new markets and, in
some cases, use of secondary airports while restraining costs.