FlyBe Nonsense

This sounds like utter guff to me

https://www.bbc.co.uk/news/business-51093934

The number of passengers it carries pales by comparison with better-known budget carriers such as easyJet or Ryanair.

As a company, it is only a tenth as big as collapsed holiday firm Thomas Cook, so there is little prospect of a government bailout.

But those who habitually choose Flybe see it as a vital service, because it reaches the places that other airlines fail to touch.

"Mainland UK doesn't understand how vital Flybe is to Northern Ireland," tweeted one regular passenger, Jason.

"As someone who travels with them frequently for work, Flybe's collapse would be a disaster for the NI economy.

"If this happens, Belfast City Airport will have only four flight routes. FOUR."

I'm going to suggest here that "Jason" is a PR guy for FlyBe in disguise. There's a cute trick at the end there. It mentions how many routes Belfast City Airport will have. What it doesn't mention is that there's also Belfast International Airport.

Easyjet alone fly Belfast to Bristol, Birmingham, Manchester, London, Newcastle, Glasgow and Edinburgh. OK, they're going to lose the direct service to places like Cardiff, but it's only another half hour from Bristol Airport to Cardiff.

And if this was so critical to people on this route, FlyBe wouldn't be in trouble, as they'd be falling over each other to snap up tickets rather than there being Belfast to Cardiff seats available next week for £140 return.

Despite Jason's heartfelt words, there are a number of other locations that owe just as much to Flybe in terms of connections to the wider world.

Cornish holiday resort Newquay, for one, has no direct rail services from London for much of the year and the journey takes about five hours. But Flybe can get you from London Heathrow to Newquay airport in little more than an hour.

Yeah, but it isn't "little more than an hour". You've got check-in time, parking, baggage, security, and all sorts of crap when you land at Heathrow. Then time from Heathrow to London on the Heathrow Express. Call it 3 hours door-to-door. And really, most of Cornwall isn't 5 hours, because go slightly east of Newquay and there's St Austell which runs direct trains to London in just over 4 hours. Other than a few people who want to go to their holiday homes, what's the critical link for Cornwall and London that can't wait 4 hours?

And if you live in the Isle of Man, Flybe's service can literally be a lifeline.

The airline has a contract with the government to transfer NHS patients from the island to medical facilities in Liverpool when they require treatment that cannot be provided closer to home.

And Easyjet also fly there, so just use them. Or get someone to schedule private jets. The Isle of Man aren't a British problem.

Small wonder, then, that Ben Bradshaw, the MP whose Exeter constituency includes Flybe's base, has spoken of the "valuable connectivity" that the carrier provides.

In fact, he described the airline as "a strategically important business".

Thanks to Flybe, Mr Bradshaw's constituents can fly from Exeter direct to a variety of destinations including Amsterdam, Paris and Geneva - places that would otherwise be accessible to them only after a lengthy trek via other places.

A lengthy trek? It's about an hour from Exeter to Bristol Airport that flies to Amsterdam and Paris.

Freelance art director Sarah Ward, who divides her time between London and Cornwall, is another Flybe frequent flyer. She tweeted that she would have to move house if the airline ceased to exist.

In an appeal to her local MP, Derek Thomas, she asked: "What are you doing to protect such vital infrastructure?"

Well, move house then. Figure out a way to work from home. Move job. You're the insane one with a 250 mile distance from home to work and depending on one airline. You did this.

If an airline goes out of business, no other operator automatically takes over their routes and there is no guarantee any would.

But hang on, this is a "vital link" to the country, but no-one can even fill a plane every day? Maybe, actually, they have a load of marginal routes like Belfast to Cardiff that most people just don't care about flying very often. Maybe it's a crap business that government should let go to the wall.

A mix of slightly larger and even smaller numbers

Yesterday I posted as follows

From The Evening Standard:

"Flybe owns about 6% of Gatwick's slots. Selling off some or all of these — to operators which could include easyJet, British Airways or Norwegian — could bring in, according to Liberum Capital's estimates, as much as £12.5 million."

I have no idea whether Flybe owns the best slot or the worst slots, but assuming a mix of both, that means the total value of the landing/take-off monopoly rights at Gatwick (after taxes etc) is around £200 million.

There was another interesting snippet in this morning's Metro:

Flybe is to sell all 25 of its runway slots at Gatwick airport to raise up to £20 million. The struggling regional airline saw its shares rise by 20 per cent on the new yesterday on hopes a deal can be found.

The only way to make sense of that is to assume that Flybe is making a loss from those slots but that analysts think that other airlines think that they will be able to use those slots profitably. Which might be e.g. because Flybe doesn't own tasty slots at the "other end".

The £20 million figure is a bit higher than the £12.5 million mentioned yesterday, fair enough. So the assumption is that those slots are worth between £500,000 and £800,000 each to an airline that can use them profitably.

Also worth noting is that one "slot" means the right to land and take off again at a fairly specified time each and every day of the year, i.e. 25 slots = 6% of all Gatwick slots, meaning that there are about 400 slots at Gatwick, call it one landing/take-off every minute and half for ten hours a day (or whatever).

We might as well turn that £500,000 - £800,000 per slot into an annualised value of £100,000 - £160,000 and divide it by 360 flights a year, which tells us that the anticipated super-profit (monopoly or rental income) per flight is only £300 or £400, call it £1 or £2 per passenger (the figure is depressed by APD). Or you could double the value of the slots for the "other end" and double the number of flights to arrive at the same figure, i.e. to fly from A to B and back again you need to control a slot at A and a slot at B.

The battle for air supremacy (Part 94)

From The Guardian:

Heathrow airport has been told to introduce a real-terms cut in the fees it charges airlines in order to curb its "substantial market power" (1) – a move that could put the brakes on spiralling air fare increases...(2)

But the airport, which is controlled by Spanish infrastructure group Ferrovial, warned that the proposals put at risk a long-term capital improvement programme designed to improve facilities for passengers.(3)

Heathrow's profits rose by 12% to £1.3bn in 2012, driven largely by an increase in the fees it charges airlines – by far its largest source of revenue.(4) Although the charges are paid by airlines they are passed on to passengers through higher air fares...(5)...

Publishing its proposals the CAA said: "At Heathrow, the CAA found clear evidence of substantial market power and is proposing a traditional price control mechanism.(6) After a decade when prices have risen – largely to enable major capital investments including new terminals to enhance passenger experience – the CAA is looking to encourage further investment whilst improving value for passengers in other ways."(7)

But Willie Walsh, the chief executive of British Airways parent IAG, warned that the proposals did not go far enough. The head of the largest airline operating from Heathrow said: "Heathrow airport is over-priced, over-rewarded and inefficient, and these proposals, which will result in an increase in prices, fail to address this situation."(8)

1) Airports clearly they do have enormous monopoly power and a large proportion of their landing/take-off charges are location rent, pure and simple. And that monopoly power arises because - for whatever reasons - the number of airports is strictly limited so airports near London are all running at 99.9% of capacity, thus the price which airports can charge is far above their actual costs. Actual spending on running costs is a small fraction of that, and this is the last thing they will cut or else their whole income stream dries up. And even if there were no limit on the number of runways and aircraft movements, I suppose their is a natural upper limit to the number of aircraft movements, the sky is only so big.

2) Similarly, the prices which airlines can charge for tickets is far above their actual running costs. Between them the airports and airlines are running a cartel-monopoly and the passenger pays. If demand increases and supply stays the same, what happens to prices?

3) They would say that, wouldn't they? What facilities, pray tell? Above and beyond the basics like baggage handling and passport control, passengers (and people who come to pick them up) are paying through the nose for parking and refreshments. They pay for themselves.

4) Hardly surprising is it, that an airport's charges, a large part of which is rent, see (1), are its largest source of revenue? And all their other revenues are just rents as well, like the money they get from parking charges or the rent they collect from all the shops and restaurants.

5) No they aren't. The availability of passenger places is just as limited as the landing slots, it's the same thing. Airlines base their tickets on "what the market will bear" and as long as that is above their actual costs, they will put on flights. We know that for most commonly flown routes there is a huge monopoly profit element, as evidenced by the fact that the landing/take-off slots themselves can sell for millions of dollars, all depending on where they are to and from and what time of the day. The slot for the eleven am flight to New York is worth ten times as much as the eleven pm flight to Siberia etc.

6) Control of which prices? Ticket prices or airport charges? If you restrict ticket prices to below market clearing level then admittedly that would put a downward pressure on airport charges as well, but that is just an opportunity for ticket touts, who would end up collecting the rent instead of the airports. And if you restrict airport charges, then the monopoly profits just get collected by the airlines instead, ticket prices wouldn't drop by one penny.

7) Like how? There's no reason to expect airlines and airports to run their operations at nothing less than absolute revenue-maximising prices? If you "enhance passenger experience" then those revenues will increase.

8) He would say that. wouldn't he? See (5).

No doubt he'll end up making Virgin Wine out of those sour grapes...

Easy, Tiger

Half a free market is better than none.

In case you were ever thinking about starting up an airline in the UK, presumably the first thing you'd do is get hold of the accounts for other UK airlines and look at the profit and loss account. Then you divide the profits you could make by the amount of money you'd have to invest in aeroplanes, and that gives you your return on capital. If that's more than, say, ten per cent, then you are on to a winner, yes?

Nope. There are two kinds of airlines in the UK - those who were granted take-off and landing slots for free when they were privatised in the 1980s (i.e. British Airways); and those who had to buy landing slots for their market value 'second hand' (most of the others). The accounts for the former will neither show the value of the landing slots (which is enormous, they are worth more than the aeroplanes) nor the associated amortisation*; the accounts for the latter will show the cost of the landing slots; the associated liability (or share capital) and the amortisation.

So before you can go into business, you need to buy some slots (and now might be a very good time to buy, the air travel industry being at rock bottom). How do you work out the value of the slots? Well, you work out your cash profit per flight and then deduct from that the required return on the money invested in aeroplanes; what is left over is a balancing figure - you then take a random figure as an "earnings multiple" and that's what you offer. Another airline with slots to spare does the same calculation, and provided your estimate is higher than theirs, they'll sell you it.

If you overestimate the value, then you are doomed, of course - you are committed to the corresponding loan and interest repayments for ever more, but the value of the slots can plummet (let's imagine that Eyeful o'yokel never stops erupting, for example). Or their value might rocket if the NIMBYs get their way and airports are never allowed to expand.

Anyways, getting back to the point in hand, Nick Drew looked at the Lib-Con Energy policy, and under "Good", he listed replacing Air Passenger Duty with per-flight duty. I commented thusly:

Per flight taxes are better than per passenger, but the best way of doing it is auctioning off the landing/take-off slots. The value of these is merely a balancing figure between revenues and costs; so however much the airlines voluntarily pay for the balancing figure does not change anything - it's a non-distortionary tax, because you cannot pass on a balancing figure.

In other words, instead of having to hand over a vast amount to another airline, every year or two, you would do your own calculations and turn up at the next auction and bid for the number of slots you think you need; and if yours is the winning bid, you buy an aeroplane or two to match (airlines who lose enough bids will no doubt have one or two spare), paint it in your colours and away you go. If you overbid for a slot for a year or two, you will go out of business, but at least the amount of money you have lost is much less than if you had overbid for buying up slots in perpetuity from another airline.

Nick D didn't seem to get the point, and replied:

I'd be cautious about price-setting distortions (market power) under your auction system, MW - auctions have been tried in many areas of the energy industry and have thrown up all manner of problems.

I specifically was not talking about auctions in the energy industry, which is all much trickier (because raw material costs fluctuate so wildly). Ah well. Here endeth today's.

* Applying normal accounting standards, BA only accounts for landing slots which is has acquired from third parties, which are stated as having cost £212 million in its 2009 accounts, the cost is amortised at £8m a year. Back in late 2008, BMI which owns 11% of Heathrow landing slots, valued them at £770 million (the value has fallen since), BA owns 41% of Heathrow landing slots (plus heck knows how many at Gatwick etc) so their total value a year or two ago must have been about £5 billion, about as much as all its aeroplanes put together.

Why can't they just admit it?

Weirder and weirder. The six-day flight ban had the fingerprints of the EU all over it, but nobody in this country wants to admit it, the Transport Minister, the Civil Aviation Authority, Nats, the airlines, the Met Office and all quangos east are playing pass-the-parcel in the blame game, as summarised in today's Evening Standard.

It's only right at the end that the article mentions, almost in passing:

The decision to lift the ban came when the European aviation body Eurocontrol switched to a map based on satellite observations rather than the much-criticised Nats model based on computer forecasting. The new agreed standard lifts the permissible amount of ash entering aero engines from zero to one two hundredth of a gram per square metre of air entering the engine per hour.

A spokesman for the CAA said it had “led the way” in opening the skies over Britain and Europe, adding: “When you are dealing with people's lives it is not enough to just make up a less restrictive standard, you have to agree one based on robust scientific evidence and data. The UK's work to prove this has now been adopted across Europe.

I mean, the ban may or may not have been the right thing to do; and we all use similar aeroplanes, so what's dangerous (or safe) in one country's airspace must be equally dangerous (or safe) in another country's, so why can't they admit that the flight ban was down to Eurocontrol; and that it was only lifted once Eurocontrol had been persuaded to change the rules?

And yes, I know that Eurocontrol is not strictly speaking an institution of the European Union, but it is certainly in close cahoots.

More carbon tomfoolery ...

From The Evening Standard:

As world leaders gathered for the long-awaited UN talks, the US Environmental Protection Agency was set to declare carbon dioxide was now officially a “public danger” — a move that will allow the President to bypass Congress and slash greenhouse gases.

From The Telegraph:

... passengers flying to and from Europe will pay an extra €23bn (£21bn) to €35bn on the price of their tickets between 2012 and 2020 based on an estimated carbon unit price of €25, [The Carbon Trust's] new report will say next week.

This would compensate the aviation companies for the amount of permits they will have to buy if the heavy emitters do not switch to greener fuels. However, the sector is given 82pc of its permits for free - and could see huge windfall profits if it adds the value of these free allowances on to ticket prices...

NB, The Carbon Trust is a quango, which begs the question, why is one arm of the government handing out these permits for free and another arm of the government explaining pointing out that they'll not achieve their intended purpose? Perhaps the EU dreamed this up ...

... ah, here we go. From The Times:

LAKSHMI MITTAL, Britain’s richest man, stands to benefit from a £1 billion windfall from a European scheme to curb global warming... The scheme grants companies permits to emit CO2 up to a specified “cap”. Beyond this they must buy extra permits. An investigation has revealed that ArcelorMittal has been given far more carbon permits than it needs. It has the largest allocation of any organisation in Europe.

The investigation has also shown that ArcelorMittal and Eurofer, which represents European steel makers at European level, have lobbied intensively in Brussels. This has included threatening to move plants out of Europe at a cost of 90,000 jobs, and asking European commissioners to meet Mittal...

What a difference a year makes ...

July 17 2008:

Ryanair, the cut-price Irish airline, today announced it will withdraw nearly a third of its aircraft from London's Stansted airport and suspend operations at seven other European airports because of higher fuel costs and airport fees. Michael O'Leary, chief executive at Ryanair, said his airline would operate 28 aircraft out of Stansted, down from 40.

It is the second straight year that Ryanair has reduced its activities at Stansted for its October to March winter period...

21 July 2009:

Budget airline Ryanair has announced a reduction in its services at Stansted Airport, blaming higher charges. Ryanair will reduce the number of aircraft it runs at the airport by 40% in its winter schedule, and will cut the number of flights by 30%, it said...

The company said that Stansted was one of its most expensive bases, and added that an increase in air passenger duty tax was also a factor in its decision. The airline operated 40 aircraft from Stansted in the summer, but said this would fall to 24 this winter.

Reader's letter of the day

From The FT:

Sir,

E.G. Nisbet (Letters, January 19) may wish to ponder why his (heavily subsidised) rail journey would cost him more than four times a comparable flight (after paying air passenger duty to the exchequer). His musings might lead him to conclude that one reason is the very expensive infrastructure (tracks and signalling) required to maintain the rail service; by comparison air traffic control and a couple of miles of track in the form of runways come pretty cheaply.

He might also reflect that this disproportionate use of resources, including the energy required to maintain the rail “system”, is one reason that the purported environmental benefits of rail might not be all they seem.

David Starkie, London, UK.

Which brings me back to a fundamental question: the knee jerk reaction of Greenies and NIMBYs is to prefer rail over air travel. Ignoring the practicalities that within conurbations rail or Tube is clearly the best form of transport, as is air travel over long distances, if we assume that 'CO2 emissions" is a relevant 'cost', has anybody ever done a full CO2 cost comparison between rail and air travel for a medium length journey over (say) 200 miles?

You'd have to include CO2 created in smelting steel for the actual rails and the heavy carriages, generating the electricity to power the trains and light the stations etc; and compare that with the CO2 emissions created in building the airport, manufacturing the much lighter aeroplanes as well as CO2 emitted by the jet engines. Focusing on that very last bit of the calculation on only one side of the comparison is meaningless.

Until I see such a calculation I am not convinced either way.

Hypocrite of the week

Emma Thompson

Valuing landing slots at Heathrow

Continuing my occasional series, the FT reported that Lufthansa had been tricked into paying £800 million for the 49% of BMI that they didn't already own, however "The value in BMI lies with its coveted take-off and landing slots at Heathrow, about a seventh of the total. Earlier this year, BMI put a balance sheet value on these slots at £770m."

The Times reckoned that BMI owned 11% of Heathrow's landing slots, so let's call it one-eighth in round figures. There are 471,000 aircraft movements at Heathrow each year, so that's 235,500 'pairs' (one to land, one to take-off) and BMI 'own' the right to land/take-off 30,000 times a year. £770 million ÷ 30,000 = £26,000 for the right to land/take-off once a year, in perpetuity.

Assuming that this right could be reasonably amortised over ten years, that's a notional cost of £2,600 per pair if you own them, and a real cost of £2,600 per pair if you have to buy them (cost of finance + uncertainty premium). In other words, if the local councils around Heathrow were allowed to auction off land slots, airlines would and could pay an average of £2,600 and still be profitable. Times that back up by 235,000 pairs gives local councils potential income of £611,000 million.

And the value of those landing slots is depressed by Air Passenger Duty. If we scrapped that crude tax as well, the annual 'rental' value of the slots would go up by another £673 million (67.3 million passengers at an average of £10 APD), bringing the total local revenues to a nice round £1.3 billion (rather less than my earlier estimate, I admit).

And in difficult times like these, the auction price would drop of course - in extremis to £nil in the short term. Great, that means that airlines can drop ticket prices by several per cent, which will hopefully keep things ticking over, minimise job losses and ensure that they recover much more quickly again in future (so the auction receipts quickly revive again, and so on and so forth).

"Planes fly empty to keep slots at Heathrow"

The Times devoted half of today's front page to this rather fascinating story, cont. page 8. This is well worth reading in full, if you have the time, but to sum up the salient facts:

Cost of running a flight from Heathrow to Edinburgh: £60,000
Take offs and landings on an average day at Heathrow: 1,303
Value of a peaktime Heathrow slot: £30 million
Average value of BMI's Heathrow slots: £5 million

Heathrow also have a rule that an airline that 'owns' a slot must use it at least 80% of the time or it forfeits it, which is why "It is, therefore, better for a carrier such as bmi to lose £20,000 per flight than to give up a £30 million slot. For bmi this is particularly important as it is trying to keep its value up for a potential sale this year. British Airways, Virgin Atlantic and Lufthansa are all interested in buying bmi, and the biggest attraction is the airline’s 11 per cent of Heathrow slots - the second-largest holding behind BA."

Of course, in a truly free market economy with no planning restrictions, supply and demand would even out and more airports would be built, so a landing slot would have negligible value. Indeed, if 'enough' airports were built in The Good Times, there would be a huge overcapacity in The Bad Times (fear of terrorist attacks, recession, high oil prices etc) and landing slots would have negative value - airports would have to pay airlines to land there (to skim off money from passengers at the airport shops etc). And it would, to be frank, be a bit of a waste of concrete and radar equipment to build airports that sometimes stand empty for year on end.

However the NIMBYs and Greenies are in charge, which is why we have chronic airport undercapacity - which is why the slots have such a colossal scarcity value - and it surely can't have been the intention of the NIMBYs and Greenies to generate windfall gains for BMI shareholders or to encourage a system whereby airlines fly empty planes, can it?* OTOH, air travel does have external costs - it causes noise and passengers use other local transport links to and from the nearest city.

Here's the interesting bit: "... some aviation analysts believe that there are no legal grounds for these carriers to own the slots, and advocate that they should belong to the State and be leased to the highest bidder. High prices for rented slots would encourage only profitable flights, which would almost certainly mean full flights."

I gave this a few hours thought a couple of months ago and came to exactly the same conclusion. The gimmick being that such an auction process only works if there is undercapacity.

The other possibility of course is that BAA just start charging much more for slots, but as they are Spanish-owned, why would anybody advocate this?

* That would be a good Conspiracy Theory - NIMBYs and Greenies are in fact all shareholders in smaller airlines.