2009 - a desperately difficult year for airlines
This BBC news article highlights some of the key economic challenges facing the global airline industry as we move further in 2010. IATA reports that world airline passenger traffic dropped by 3.5% from a year earlier, while freight traffic fell 10.1% as the downturn hit demand. Losses have mounted and the industry continues to have to weather many uncertainties such as the likely strength of a rebound in global tourism, freight and business travel and the volatility of aviation fuel costs. This in the week when Japanese Airlines filed for bankruptcy. IATA has forecast that airlines will lose $5.6 billion (£3.5 billion) on a net basis this year after losing $11 billion in 2009.
Airlines scramble to find new revenue streams
The days of the all in one ticket price - a simple means of flying from A to B are looking like a distant memory. The global aviation industry is set to lose up to $30bn this year and with average ticket prices continuing to decline and capacity utilization falling, the airlines are falling over themselves to find extra ways of getting passengers to part with their cash.
New wheezes include asking passengers to pay for the right to choose a seat, together with the growth of charges for baggage check-in and meals on board. If you are willing to pay in advance, travel light, book online and check-in online in a seat of the airline’s choice, you can still find very cheap flights. But the extras amount to a premium on choice and flexibility - I guess this is an example of the hurdle model of price discrimination - BA has launched a second-bag check-in fee on some of its flights and a reservation fee for passengers wanting to book particular seats more than 24 hours in advance of flight time. Day by day it is starting to resemble a budget airline in tactic as well as consumer goodwill. I booked a return flight to Hong Kong today with Cathay Pacific - no tedious optional extras - what a refreshing change!
This BBC video is good on the new a la carter revenue policies of airlines.
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
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.
CAPEX under pressure as spare capacity grows
The recession is creating a growing amount of spare productive capacity across many different markets and industries. From container ships to hotels and from steel plants to airlines, the fall in demand has lowered capacity utilisation and put a big squeeze on profits. That pressure on profit margins comes not just from weaker revenues. Keep in mind that many businesses have a large fixed cost component such as the overhead costs of operating a network. Thus when output is contracting, the average fixed costs of production increase.
Declining demand and rising productive slack inevitably cause a fall in planned investment spending - economists term this a negative accelerator effect. BBC news reports that British Airways is cutting capital spending in response to the slump in demand and mounting losses. “The airline said it had cut spending by 20% to £580m ($952m) from £725m, and had lengthened its schedule of orders for 12 Airbus A380 aircraft.”
Further evidence for the reverse accelerator affect comes from Japan where Japanese firms cut their capital spending by a record level in the first quarter of 2009. In contrast Stagecoach is increasing investment in a fleet of greener buses.
BoE Health Check on the UK Economy
The Bank of England has released its latest health check on the stability (or otherwise) of the UK financial system.
Without a recovery in financial sector balance sheets and a return of an appetite to lend and unfreeze the supply of credit, any recovery will be delayed and weak.
Banks continue to de-leverage aggressively and I have met several owners of profitable and well managed smaller businesses in recent weeks who have complained that their banks are getting in touch directly to change the conditions of their credit facilities. In some cases the banks are adding 1 or 2 per cent to the rates charged for overdrafts and loans - which themselves are already a high multiple of the policy interest rate. It is the banking equivalent of the rip-off extra charges for people flying with the lower-cost airlines.
read more...»EU single market creaks under the pressure of the recession
Wolfgang Munchau has an important comment article on the fragility of the EU single market in todays Financial Times.
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.
read more...»Wiki Revision: A to Z on Monopoly
Here is an idea that worked quite well today. Take a broad topic - in this case the economics of monopoly - and get students to enter items for an A to Z on that topic. The VLE worked well here and students could email in contributions or go direct into a wiki and edit the entries themselves. One of the benefits of Moodle is that it auto-links words from the internal glossary, so the A-Z is created instantly and automatically links back to the course glossary so that students can check their understanding of the concepts.
Here is our current A-Z, I am sure we have missed out lots of ideas, can you add some in? If so please leave a comment!
read more...»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.
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