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Virtual Learning Resource Centre

Airlines and airports industry - September 2007

British Airways (BA) is to start its first transatlantic flights from Continental airports next summer. Virgin Atlantic and bmi are seeking permission to form partnerships with American carriers on transatlantic flights. BA and Virgin Atlantic are vying to be the first to start regular, non-stop flights from London to Australia. BA has been fined both by the Office of Fair Trading and the US Department of Justice after it admitted colluding with Virgin Atlantic over fuel surcharges to compensate for higher fuel costs. The airline has come bottom of an industry league table for delayed and lost bags. BA is looking to replace 34 Boeing planes: a decision is to be made in September. In its first year under the ownership of Ferrovial, Heathrow’s revenues went up but its capital expenditure fell. Airlines and passenger groups have called on the Competition Commission to break up BAA’s monopoly of London’s airports. EasyJet has maintained its profit forecast for the year.

Air Lingus is to base three aircraft at Belfast International airport and Ryanair is to open two more operating bases in Spain. Before being outlawed by the EU, Ryanair has dropped its “1p flight” advertising. The Italian government is debating whether to launch a new auction for Alitalia or begin talks with suitors in an effort to salvage its national airline after a seven-month auction collapsed in late July.

According to the International Air Transport Association (IATA), global air passenger growth was 6.3% in the first six months of 2007. Singapore Airlines has announced that the new A380 superjumbo plane will make its first commercial flight on 25 October. Virgin Atlantic is taking a 20% stake and investing $7m in AirAsia X, a new Malaysian low-cost carrier. More than three quarters of people would be prepared to offset emissions when they next fly: last year the same survey showed that only 31% of travellers would consider offsetting carbon emissions.

UK

In a move that is expected to see retaliation from its larger European rivals, British Airways (BA) is to start its first transatlantic flights from Continental airports next summer. A new “airline-within-an-airline”, using modified Boeing 757s, is expected to fly from Brussels, Madrid and Paris to New York’s Kennedy airport. Until now restrictive treaties governing air services have prevented airlines from operating from other European countries. Last year Europe and America signed an “open skies” deal removing most of the restrictions, which will be lifted in April. Meanwhile, Virgin Atlantic and bmi are seeking permission to form partnerships with American carriers on transatlantic flights. Bmi has submitted an application to the US Department of Transport requesting permission to code-share with United Airlines. Virgin is expanding its code-share with Continental because the deal will give it greater access to the American domestic network.

BA and Virgin Atlantic are vying to be the first to start regular, non-stop flights from London to Australia. If Virgin buys Boeing’s 787 Dreamliner with a range of 8,500 nautical miles it could reach Perth, Western Australia and enter service in 2011. BA is considering a variant of the Airbus A350XWB, the A350-900R, with a range of 9,400 nautical miles that could fly to Sydney. However, it is not likely to enter into service until about 2015. Qantas also hopes to fly the route and would use extended-range 787s. A 9,200 nautical mile flight to Sydney would take up to 20 hours.

The Office of Fair Trading has fined BA £121.5m, and the US Department of Justice a further $300m (£147m), after it admitted colluding with Virgin Atlantic over fuel surcharges to compensate for higher fuel costs. Between August 2004 and January 2006, the surcharge on long-haul flights rose from £5 to £60. Because Virgin blew the whistle on the illegal arrangement it escaped prosecution on both sides of the Atlantic and saved itself millions of pounds in fines. In the context of BA’s annual revenues, the fine is small. Separately, BA has come bottom of an industry league table for delayed and lost bags and been accused of trying to hide the results of the quarterly survey compiled by the Association of European Airlines (AEA). While Air Malta had 3.2 bags delayed per 1,000 passengers and the AEA member average was 16, BA came in with 28, behind second worst performer TAP Portugal with 23.5 bags delayed per 1,000 passengers.

BA is looking to replace 34 Boeing planes (20 747s and 14 mid-sized 767s). A decision on whether to purchase Boeing’s new 787 Dreamliner, Airbus’ A380 and smaller A350XWB or a combination is to be made in September. Although the new planes will be worth around $5bn at list prices, BA is expected to negotiate a substantial discount. According to Willie Walsh, BA’s chief executive, green issues rather than cost were “at the top” of his priorities.

In its first year under the ownership of Ferrovial, Heathrow’s revenues went up by 14%, to £1.232bn from £1.077bn, but its capital expenditure fell by 15%, from £298m to £252m. The decline in investment comes as the airport is under fire over the poor state of terminals and long queues at check-in and security. Meanwhile, both airlines and passenger groups have called on the Competition Commission to break up BAA, the airport operator, which owns Heathrow, Stansted and Gatwick among other airports. The commission is to investigate whether BAA’s monopoly of London’s airports is bad for passengers. The quality of service received by passengers and airlines at all of BAA’s airports will come under scrutiny. The commission inquiry will report next year. Britain’s largest airlines would prefer to see control of Heathrow broken by the sale of individual terminals to rival companies, a similar system to that used at a number of US airports. Virgin proposes that BAA should be forced to sell Gatwick, while BA says it should be forced to sell Stansted.

In spite of a third quarter decline in average revenue per seat, easyJet has maintained its profit forecast for the year. It expects pre-tax profit growth of 40-50% for the year to September 30 even though revenue per seat is forecast to decline 5-10% in the second half of the year. Unit costs excluding fuel were 10% lower in the third quarter.

Europe

Air Lingus, Ireland’s national airline, is to base three aircraft at Belfast International airport and will operate eight routes initially, including a Heathrow service. It will be the airline’s first “foreign” hub and is seen as a step towards building an “island of Ireland” economic unit. However, Shannon airport, in southwest Ireland, will lose its Heathrow service together with about 100 jobs. A similar number of jobs will be created in Belfast. Meanwhile, Ryanair is to open two more operating bases in Spain in Valencia and Alicante. The growing Spanish aviation market is seeing fierce competition among Europe’s low-cost carriers.

Before being outlawed by the EU, Ryanair has dropped its “1p flight” advertising. Like easyJet and Flybe it will quote the total fare at all stages of the booking process on its website. The airline was reluctant to make the change because it makes substantial profits from people who book flights on a whim thinking that, because they are so cheap, it does not matter whether or not they use the tickets.

The Italian government is debating whether to launch a new auction for Alitalia or begin talks with suitors in an effort to salvage its national airline after a seven-month auction collapsed in late July. The airline, 49.9% owned by the government, has asked for extra capital to rebalance its books. TPG and MatlinPatterson, the US private equity consortium, will consider a new bid only if the Italian government relaxes its conditions for a sale. The consortium wants permission to negotiate with the unions on staffing before making an offer. Alitalia currently loses more than €1m a day.

Rest of the world

According to the International Air Transport Association (IATA), global air passenger growth was 6.3% in the first six months of 2007. Its director-general, Giovanni Bisignani, warns that governments have to remove obstacles to maintain this growth. He added: “A particular focus will be the UK, where unique screening policies inconvenience passengers with no improvement in security.”

Singapore Airlines, the first carrier to buy the new A380 superjumbo, has announced that the plane will make its first commercial flight on 25 October flying from its base at Changi airport to Sydney. Tickets for the 471 seats will be auctioned for charity on eBay. Meanwhile, Cathay Pacific is in early talks with Airbus and Boeing about spending up to $2bn on expanding its fleet. Cathay, which operates a mix of Airbus and Boeing aeroplanes in its 105 fleet, has already announced orders for a further 45 planes that are expected to be delivered by the end of 2011. The $2bn order is additional; the planes would be delivered after 2012.

Virgin Atlantic is taking a 20% stake and investing $7m in AirAsia X, a new Malaysian low-cost carrier. It will begin flying this year, launching flights from London Stansted to Kuala Lumpur for £90 return and from Malaysia to Australia’s Gold Coast.

Travellers are becoming more environmentally aware. According to an online poll conducted by Lonely Planet, more than three quarters of people would be prepared to offset emissions when they next fly. Last year the same survey showed that only 31% of travellers would consider offsetting carbon emissions. EasyJet has launched its own carbon-offsetting scheme. Initially funds raised will be used to buy carbon credits from the Perlabi hydroelectric project in Ecuador, a plant that uses water from a river in the Andes.

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