Signs that Scrappage is Driving Demand
Just over one fifth of new new-car registrations in the UK are being attributed to the government-backed scrappage incentives, according to the Society for Motor Manufacturers and Traders.
Hyundai Motor Co led the way in the sales charts for July. The UK version of the car scrappage scheme offers motorists £2,000 in discount on new vehicles when they trade in vehicles that are more than 10 years old.
For the moment it is private buyers who are driving sales higher. My local Citroen dealer confirmed to me today that their sales have been boosted by the consumer discount - which is part financed by the government and by vehicle manufacturers. As our charts show new car registrations have moved higher and car production - affected greatly by winter plant shut-downs and extended holidays - is now showing signs of recovery. Sales and output for 2009 will be down as a whole - but perhaps the worst is now over?
More on the impact of the car scrappage scheme here from the BBC news site Together with an excellent background section on the challenges facing the car industry during this downturn.
Economics Snapshot - Hedging the Fuel Price
Hedging is a way of reducing uncertainty over the future path of volatile commodity prices such as the cost of fuel. One the most important decisions that an airline can take is the extent to which it uses hedging to lock in the price of a barrel of kerosene for a period of six or twelve months.
Ryanair provides a good example of how this can have a decisive effect on profitability. Late in 2008 Ryanair was hedged into paying the equivalent of $125 a barrel for kerosene just as the world price price of oil was collapsing to below $40 a barrel - the result was higher operating costs and a Euro 150 million hit on profits. For 2009 around four-fifths of Ryanair’s fuel requirements are locked in at $62 a barrel which with oil prices nudging up towards $70 a barrel will give the airline much needed breathing space as the recession affects demand for seats and forces many airlines to cut prices still further to maintain a profitable level of load-factor (the percentage of seats on each flight that are filled).
*Ryanair is now Europe’s largest airline having overtaken Lufthansa and British Airways
*In the last twelve months nearly 60 million passengers have flown with the airline
*With a market capitalisation of £4.6 billion, Ryanair is larger than the German flag carrier and easily more than twice the size of BA.
*Ryanair has a 28% stake in rival Irish airline Aer Lingus and has tried several times to take it over - so far without success!
Economics Snapshot - Losses in Global Aviation
The global aviation industry is in crisis
IATA forecasts that airlines will lose $4.7bn in 2009
International passenger traffic is falling at an annual rate of 10%
Fares for First and Business class passengers have dropped by as much as 40% this year
In the decade to the end of 2007 airlines globally generated a revenue of $3.6 trillion and made a net profit of zero
Source: Wall Street Journal
£1bn programme to electrify the Great Western Mainline
This Times article covers the announcement of a major investment in the rail network - £1bn of extra spending to electrify the Great Western Mainline. About 300 miles (480km) of line will be upgraded at a cost of £1.1billion, including tracks from Didcot to Oxford, Reading to Newbury and Liverpool to Manchester. Lord Adonis the current Transport Minister is quoted as saying that the scheme will “pay for itself over a 40 year time period”. The investment might make a good case study for cost benefit analysis: Students might generate a series of advantages / disadvantages and then discuss how they divide into private and social costs and benefits.
read more...»Scrappage scheme makes tracks
It looks like the car scrappage scheme may be starting to bring about a softening in the decline in market demand for new cars. Over 85,000 new orders have been taken under the terms of the subsidy which affects cars more than ten years old. Scrap yards are benefitting from a boost in demand for their services and the car industry (naturally) is looking for an extension to the funding given to the scheme. This BBC video looks at some of the early impact - has the car subsidy given much of a shot in the arm for the British car industry? And this article looks at the pros and cons of car subsidies.
Air passenger duty - a tax too far?
Airlines and trades unions representing those employed in the aviation industry are lobbying the British government for a rethink about the proposed increases in air passenger duty (APD).
The duty is currently £10 for short-haul flights and £40 for longer journeys, costs which airlines pass on to passengers. Under the government’s plans, the tax will rise to £85 for Australia and £60 to the US by November next year. The revised APD will be based on four bands set at intervals of 2,000 miles from London. This BBC news article provides a useful background on some of the key economic and social arguments relating to the duty and the views of different stakeholders.
read more...»East Coast Rail Line is Nationalised
The profitable East Coast rail line north of Newcastle heading into Northumberland towards Berwick upon Tweed is one of the most glorious on the entire British rail network. There are stunning views looking out to Holy Island, Bamburgh Castle and the delightful village of Alnmouth. And as trains pull out of Durham there is a fantastic panorama featuring Durham Cathedral, a view to take the breath away whatever the weather. Even the most hardened commuter is tempted away from their laptop to soak up the view. It is unlikely that senior executives at National Express will be in the mood to savour these delights since the government is taking the East Coast rail line that runs from London to Edinburgh into public ownership.
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Hidden pollution and our lung capacity
David Shukman reports on research that finds that microscopic particles of pollution from road traffic is damaging the lung capacity of people living in pollution hotspots - young people in particular are particularly vulnerable to this invisible mist pollution. A superb video to show when discussing some of the negative externalities of traffic pollution.
Cost Benefit Analysis and New Rail Lines
It is refreshing to read of a possibility of an expansion of the UK rail network. This is not simply an emotional response to the beauty of steam, but because for decades now we have underestimated the economic and social benefits from a well integrated and efficient rail network. The Association of Train Operating Companies has released a report urging new investment in the UK rail network to include opening up perhaps fourteen new lines in the years ahead.
According to ATOC, today’s rail network carries 30% more passengers than it did 45 years ago on a network considerably smaller than it was then. Using their own cost benefit analysis - which gives great weight to possible agglomeration economies of scale, they estimate that in England alone there are 14 places
where there could be a positive business case for a new line to provide access to communities each with a population of 15,000 or more but which are currently not served by rail.
Here is the link for colleagues who want to download the report and the accompanying cost benefit analysis. It could form the basis for an excellent case study.
Transport Economics - Crossrail construction under way
Construction work has begun on the biggest transport project since the Channel Tunnel - London’s £16bn Crossrail…
read more...»Grey Skies for BA as Revenues Fall and Losses Take Off
BA has announced some terrible financial figures. Having made a profit in excess of £900m last year, BA this week reported a loss before tax of £401m for the year to 31 March, after seeing its results hit by a weak pound and higher fuel costs. The airline spent more than £3bn on fuel in the last year - it has hit by being fully hedged at an oil price well above $100 a barrel. The falling pound is also a headache for BA executives as the oil it buys is priced in dollars.
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Barak sees mileage in fuel efficiency targets
Here is a good example of government intervention through regulation
“Under the proposed new standards, manufacturers must reach an average of 39 miles per gallon for passenger cars by 2016, and 30 miles per gallon for light lorries…The increase in mileage is to be introduced gradually, and is expected to add $1,300 to the cost of a vehicle by the time it is fully implemented in 2016.”
In a similar vein, the EU has progressively cut the maximum Co2 emissions per km for all passenger cars.
1. Think about how this type of regulation will affect producers both in the short and the long term.
2. How will this affect consumers? Is it (a) effective (b) does it promote efficiency? (c) Is it equitable?
3. What are some of the possible macroeconomic effects of such an intervention?
Regulation is an alternative to taxation and/or subsidy ... or should we regard it as a complement? Part of a mix of policies needed to address environmental issues and targets?
Servicing the Car Makers
Our motor vehicle industry appears to be in a fragile state, rarely a day goes by without one manufacturer or another locked in talks with the government about loan guarantee schemes or other emergency measures designed to prop up production in a sector hit by falling sales and the challenge of an industry with huge global capacity. The Society of Motor Manufacturers and Traders estimate that nigh on 800,000 people are employed in the motor vehicle industry in the UK. But how many of them have jobs on the production line itself, physically assembling the vehicles? The answer is smaller than you might think.
read more...»Not so heavy laden
Shipping has taken a major hit because of the recession and this piece to camera from Adam Mynott of the BBC taken at the port of Rotterdam is superb on the challenges facing the shipping industry and the risks of a bloodbath for some of the smaller container businesses. I used to play hockey with Adam when he played at Harrogate HC - great to see a former team mate continuing to do so well at the BBC
Global airlines nudge towards carbon emissions trading
In 2012 European airlines are scheduled to be included in the carbon emissions trading scheme for the first time. Aviation is a industry responsible for 650 million tonnes of CO2 annually - around two percent of global greenhouse gas pollution but this share is expected to rise in the years ahead and the industry has been under sustained pressure from stakeholders including the EU Commission and green pressure groups to do something to tackle carbon emissions.
The airlines have complained about being included in the EU scheme - they complain that participation will damage their competitiveness during a difficult time for airline businesses. Swiss International Airlines chief executive Christoph Franz has argued that including airlines in the EU-ETS could actually lead to more greenhouse gas emissions as airlines sought to fly around EU airspace.
But without signs of an active commitment to reducing their emissions, the industry may well find that it is subject to even tougher regulation in the years ahead and/or a specific pollution tax on aviation fuel as a means of ‘making the polluter pay’.
This week four of the world’s biggest airlines have supported a global scheme to curb carbon emissions - they are Air France/KLM, British Airways, Cathay Pacific, Virgin Atlantic together with the under-fire airport operator BAA.
The Aviation Global Deal Group is pushing for a global cap on aviation emissions to take effect in 2013 when the new climate deal to replace the Kyoto Protocol must be in place. A UN body would be charged with auctioning the C02 allowances with some of the revenue earmarked for financing lower carbon investments in developing countries and some to help fund development of sustainable second-generation biofuels for use in aviation.
Watch this airspace .... this is a really important aspect of the climate change policy domain within the European Union.
Electric cars - subsidise the consumer or producer?
We can expect a battery of articles in the days and weeks ahead on government incentives to grow the UK electric car market. Gordon Brown is reported as favouring a sizeable subsidy for consumers to purchase electric vehicles - according to the FT, buyers of electric cars will be offered discounts of more than £2,000 – paid for by the state – under plans by Gordon Brown to make Britain a leading centre for manufacturing “greener” vehicles.
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Buyers market drives new car prices below second hand
This seems to defy microeconomic logic but it is a sign of how the balance of power in the new car market has switched to the buyer rather than the seller. New car registrations remain almost a third lower than at the same time last year and car dealerships are so desperate to unload stocks and generate much needed cash flow that their deep discounts on the prices of new or nearly new cars have driven the prices of some models below that of prices for the same vehicles in the second hand market.
read more...»Q&A: What is a scrappage subsidy and will it work in the UK?
A scrappage subsidy is a “pay-to-scrap” scheme where a government offers a financial incentive to car buyers if they scrap a car that has reached a specified age and in its place they are offered a payment towards the cost of a new vehicle. Germany and France both offer scrappage subsidies to consumers and there is a growing number of voices from inside the UK business community and motor vehicle industry clamouring for one to be launched in the UK. The Retail Motor Industry Federation and the Society of Motor Manufacturers and Traders (SMMT) are at the head of the queue lobbying for a scrappage scheme to be introduced as soon as possible.
read more...»Bus oligopoly under scrutiny
The Office of Fair Trading has announced an investigation into the alleged lack of competition in local bus services. Years after the deregulation of bus services, the market has become concentrated in the hands of just a few main operators. Announcing the launch of a review, the OFT said that “This sector has become increasingly concentrated by takeovers, with nearly two-thirds of services now controlled by five large operators. The study will consider whether concentration in the market has a positive or negative impact on the prices consumers pay and the services they receive, and whether or not there is competition between operators bidding for tendered services.”
The five biggest local bus operators are Arriva, First Group, Go Ahead Group, National Express and Stagecoach. Arriva has approximately 20 per cent of the London market under contract to Transport for London. Outside of London Arriva runs more than 5,000 buses and has built up an approximate market share of 15 per cent.
Expect a report to emerge in the autumn about the extent to which the competition authorities may have to intervene to provide greater safeguards against the dimunition of competition in local bus markets where often one firm has emerged as a dominant force. Are consumers’ interests best served by unfettered competition between bus service providers on the road?
Waitrose provides a Welcome Break
What do you use a motorway service area for? A comfort break? Perhaps a chance to check emails or phone ahead to your destination? Perhaps a night’s break before continuing your journey - or maybe a chance to avoid the supermarket queues at home and pick up some groceries on the way home?
Waitrose is entering into a franchise agreement with Welcome Break to open up food stores in some of its motorway service stations. It is another sign of how food retailers are looking to extend their reach away from the superstore and also how businesses are responding to our changing needs and wants when we set off on long haul drives on our major roads.
read more...»Fasten your seatbelts - scrappage subsidy in Germany
The Times reports that new vehicle sales are soaring in Germany partly as a result of their car scrappage subsidy.
“Germany is offering €2,500 for drivers who have cars that are over nine years old to scrap them and buy new ones. The scheme is to be extended until the end of the year after fears that the programme would run out of cash by the end of this month because it has proved so popular.” More here
The odds on this being introduced in the UK budget on the 22nd April must be pretty high! If the scrappage scheme is as powerful as it seems to have been in Germany it will provide a big shot in the arm to the embattled vehicle industry.
Taxi licences and excess supply
Taxi drivers in Reading are facing an uncertain future after the council increased the number of taxi licences from 120 to 180, despite falling demand as a result of the economic downturn. A local association representing taxi drivers the Reading Taxi Drivers’ Association says that this move is highly dangerous, with cab drivers having to wait on average over an hour for a fare, resulting in more hours being worked to take home the same pay. In effect a cut in their real wage rate.
read more...»Airports for Sale - Any Bidders
The confirmation from the Competition Commission that Ferrovial will be required to sell three of their UK airports represents one of the most important competition rulings of recent years.
read more...»Q&A: Is roadbuilding an effective way of reducing unemployment?
Q&A: To what extent would a major road building project by the government be an effective way for the government to tackle unemployment?
Road to recovery or bridge to nowhere?
Road-building projects would count as capital investment spending and (if financed by borrowing) a net injection of demand into the circular flow of income and spending. The question mentions a major programme hinting at projects that together could amount to many millions of pounds.
The question also invites the student to focus on whether this is an effective way to tackle unemployment and so a good answer will go back to the main causes of people being out of work and address how a spending programme might tackle this.
read more...»Premum Flyers Go Awol
The front seats of many aircraft have been rather quiet and empty in recent months….
read more...»Giant Car Park
Following on from my blog yesterday on falling road traffic in the UK, there was also an article in The Times yesterday looking at the every expanding car park that is emerging at Southampton docks!
More than 12,000 new cars are parked in rows at the dock covering acres of land. Most of them are Hondas being stored until exports pick up. There are also Range Rovers, Land Rovers, Jaguars, Mini Coopers and BMWs stored in “multideck” car parks. The Hondas represent two weeks of output from the company’s factory in Swindon, which is on a four month shutdown.
The local economy in Southampton depends upon the three Cs- cars, containers and cruises. It is home to Britain’s second largest container terminal as well as the British fleet of P & O and Cunard. Container business was down 10% in 2008.
The big cruise ships on currently out on their round-the-world voyages and will not be returning for a month or two. Their current docking berths are occupied by cargo ships, each paying £5000 a week for mooring.
Before the credit crunch Southampton was handling 42 million tonnes of cargo a year, including one million containers at the recently renamed Dubai World Port Terminal. Nearly all imports come from the Far East. The collapse of major importers such as Woolworths has been “pretty disastrous”.
Recently arrived and sitting on the dockside is one of the 27 Olympic trains being imported from Hong Kong for London 2012. The flow of manufactued products is now nearly all one way highlighting yet further the decline of UK manufacturing.
For full article click here.
Road Traffic Falling
An article in today’s Times highlights that road traffic has fallen for the first time in 30 years after rising fuel prices and recession has prompted millions of drivers to leave their cars at home.
read more...»A Collapse in UK Vehicle Production
Car manufacturing and commercial vehicle production in the UK slumped to its lowest level for over 21 years last month as the sector suffers from the squeeze on credit and the broader economic recession.
read more...»Global downturn leave costly empty vessels
The global shipping industry is associated with huge internal economies of scale and where demand is closely tied to the fortunes of industries such as iron ore, oil and coal but also to the world economic cycle. Things are looking grim for shipping operators who have bet hundreds of millions of dollars on expanding a fleet for which there is now substantially less demand.
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Formula One and External Economies
Honda’s decision to pull their team out of Formula One for next season and their desperate bid to find a buyer for operation provides an example of the shut down point in operation. The costs of putting two cars on the grid are simply staggering - in the order of £150 million per season. And with the global economic downturn hitting marketing budgets for many of the main sponsors of international sport, it is hardly surprising that the first of the major teams has decided that there is no business rationale for staying within the sport. So Honda was the first - who will be next? Answer - keep an eye on Williams.
The Guardian/Observer carried a feature on this story at the weekend and included a nifty graphic which showed the location of the F1 team bases in the UK. McLaren are based in Woking but Renault, Honda, Williams and Red Bull are all clustered in the east Midlands. Partly this is an accident of history - namely the availability of disused airfields after the war. But the article is worth reading as an example of the external economies of scale that can be generated when a group of producers develop and expand in a relatively small geographical area. And as the extract below suggests, the negative multiplier effects that might occur if there is a wider retreat from F1 would be huge.
“Most of the teams currently racing are based in the UK, along with their R&D operations. A whole network of industries, such as component suppliers, engineering and design firms, have sprung up in Britain, mostly in central England, to serve the sport both here and abroad.”
“F1 also helps to support a far larger motorsport industry in the UK, for example rally car racing and all its associated industries. Estimates of the total number of jobs dependent on motorsport in the UK vary between 45,000 and 110,000. Geoff Goddard, professor in Motorsport Engineering Design at Oxford Brookes University, estimates that it accounts for 1 per cent of GDP, not insignificant when compared to car manufacturers, which represent about 5 per cent.”
The remainder of the article is here
