Flying Costs

The Maxim Gorky, a giant airliner built with money raised by the Union of Soviet Writers and Editors in 1934, was like nothing that had gone before it. The wings of the Tupolev-designed plane had a span of more than sixty metres, the same as a Boeing 747’s. It was driven by eight massive engines, generating between them 7000 horsepower. Its 11 cabins, connected by telephone lines and pneumatic tubes, housed a cinema, a photographic studio and a printing press, to disseminate Gorky’s works across the Soviet Union. There were ‘huge loudspeakers on the underside of the aircraft, through which might emerge’, according to David Pascoe, ‘passages from Memories of Lenin, interspersed with exhortations about the Five-Year Plan’. Eighty red lights on the fuselage allowed it to flash slogans to the remotest regions as it swooped across the Soviet Union at night. The first foreigner to fly on the Maxim Gorky was Antoine de Saint-Exupéry on 17 May 1935. Sitting in the cabin, Saint-Exupéry imagined himself on the balcony of a hotel set in the sky. The very next day, the Maxim Gorky collided with another plane during a propaganda flight over Moscow and crashed, killing its 36 passengers and crew, and three people in a house that was flattened, in what was then the world’s worst air accident. The New York Times wondered in an editorial if the limits of aviation ambition had been reached, and whether ‘national pride and human desire’ were to blame for the disaster.

Saint-Exupéry, the survivor of several crash landings, disappeared on a flight from Sardinia to France in 1944, having dedicated Wind, Sand and Stars ‘to the airline pilots of America and their dead’. Even Concorde was hastened to its end, after a 25-year blemish-free record, by the Paris crash in July 2000 that killed all 109 people on board. The Soviet Union’s supersonic airliner, the Tupolev 144 ‘Concordski’, like the Maxim Gorky, crashed on a propaganda flight, at the Paris Air Show in 1973. Indeed, the history of air travel is littered with catastrophic crashes and financial failures, misconceived projects that should never have made it off the drawing board.

‘It is an oddity of globalisation,’ the Financial Times noted earlier this year, ‘that the airline industry, one of those that do most to tie the world economy together, is also one of the last to operate on fragmented national grounds.’ It is just as much an oddity that this global (but not globalised) industry barely breaks even, with only a handful of major airlines, such as Southwest, British Airways and Cathay Pacific, able to return regular profits. Human desire and national pride keep the industry aloft. At 9.25 a.m. on 11 September 2001, the Federal Aviation Administration ordered all air traffic in the United States to land immediately. Within two hours, US airspace was empty of commercial planes and every airport was closed. Passenger flights didn’t resume for three days, but by 16 September, 70 per cent had restarted. A week after 11 September, despite predictions of collapse, commercial air travel was in most respects (from a passenger’s point of view) back to normal.

One reason is that the air industry has become an essential part of the economic infrastructure of the US. By 2000, civil aviation accounted for 9 per cent of its economic output, and employed two million people. The travel industry didn’t waste any time before starting to lobby for assistance. National pride, they argued, demanded that the government bail out the airlines, thus boosting the economy and undoing the disruption caused by the terrorists. Airline executives and board members made calls to members of the government, with one Continental Airlines director telling senators that aid was needed to turn ‘a moment of fear into a moment of faith’.

The result was the Air Transportation Safety and Stabilisation Act, signed into law by President Bush on 22 September 2001, which gave the air industry a $15 billion package. Andrew Thomas, in Aviation Insecurity, quotes a Republican senator’s awed observation: ‘It was masterful . . . the airline industry made a full-court press to convince Congress that giving them billions in taxpayer cash was the only way to save the Republic.’ Those same lobbyists had spent years resisting every attempt by the federal government to impose additional security measures. In 1996 a TWA spokesman rejected the very idea: ‘TWA last year carried 21 million people and we didn’t have a single plane blown out of the sky by someone who carried a bomb on the plane through security . . . I don’t see it as an issue.’

In the two years before 9/11, 30 cases were recorded of passengers forcing their way into the cockpit of commercial airliners. One of these, in December 2000, was on a British Airways flight from Heathrow to Nairobi. My wife was on board. A passenger suffering from acute paranoia entered the open flight deck and attacked the crew, accidentally knocking off the plane’s autopilot. The Boeing 747 plunged more than ten thousand feet, and came within seconds of flipping onto its back and crashing. Yet the industry failed to take even basic precautionary steps. In its final report on this incident, British Airways refused to recommend that cockpit doors should stay locked during flights.

In the US, a similar result followed the Gore Commission’s review of air travel safety and security in 1996: nearly all of its 50 recommendations were watered down or dropped after pressure from the airlines. ‘The cadre of lobbyists working for major US airlines have worked in the highest levels of government,’ Thomas writes. The list includes Harold Ickes, Bill Clinton’s deputy chief of staff, who lobbies for United; the former Republican National Committee chairman Haley Barbour, now in the pay of Delta; and Linda Daschle, the wife of the senior Senate Democrat Tom Daschle and a former deputy administrator of the FAA, whose clients include American Airlines and Boeing. It hasn’t just been one-way traffic: Elaine Chao, appointed to President Bush’s cabinet as labour secretary in 2001, was a board member of Northwest Airlines. In 2000 the industry spent $46 million on lobbyists, and five major airlines – including American and United – gave almost $5 million in election campaign donations to both the Republican and Democrat parties.

The $15 billion subsidies have done little to stop tens of thousands of airline employees being laid off since 9/11. The New York Times reported in September 2003 that there has been a wave of cut-backs, with smaller cities having regular services withdrawn. Airlines everywhere have blamed 9/11 for their financial difficulties, but the truth is that most of them were in trouble before then, having over-expanded during the economic boom of the late 1990s, and failed to respond to the threat from the squadrons of low-cost airlines. American, Delta, Northwest and Continental now have combined debts of $60 billion.

Boeing and Europe’s Airbus consortium between them supply all of the wide-body and most of the narrow-body passenger aircraft in modern airline fleets. The strength of both corporations is the result of careful state nurturing and financial support: Airbus is directly subsidised by European governments; Boeing is a leading member of the US military-industrial complex. (A current spat in the US over a contract to supply air tankers to the military has revealed that Boeing has been working alongside military lobbyists to win political approval for a lease arrangement that would cost the government $6 billion more than if it bought the planes outright.) The size and state support of Boeing and Airbus enable them to offer customers generous financing options and loan packages. There is little opportunity for new entrants to the market. The Japanese and South Koreans have stayed well away from passenger jets, while potential competitors such as Brazil’s Embraer or Canada’s Bombardier remain on the margins.

The basis for the international air industry has changed little since it was established in 1944. At the same time as the foundation of the World Bank and the IMF was being discussed in Bretton Woods, delegates from more than fifty countries met in Chicago to create the International Civil Aviation Organisation. It set out a series of ‘freedoms’ of international civil air travel, many of which are not freedoms but restrictions, because the Chicago system contained a glaring weakness. It confirmed the principle of state sovereignty over airspace, but did not agree on an international right to use national airspace. Instead of multilateral agreements, governments negotiated bilateral agreements: as a result, if an airline flies a service between the US and Japan, it has to be US or Japanese-owned. From the 1940s until the 1980s, when most airlines were operated and subsidised by state governments, these ownership restrictions weren’t really a problem. Like telephone networks and national broadcasting services, state-owned airlines operated in virtually every country outside the US. A national airline, as an arm of the state, was at the service of national economic interests.

In Britain, the first private air service began in 1911, carrying mail between London and Windsor. It lasted three weeks. Shortly after World War One, government-subsidised French airlines began successfully offering cross-Channel services. Winston Churchill, then secretary of state for air, told the fledgling British airlines in 1919 that they would have to ‘fly by themselves’ but it quickly became apparent that government intervention was needed to get the airline industry off the ground. By 1924 the government forced a series of mergers on the industry in order to create the state-owned Imperial Airways, the first step in a process of consolidation that culminated in the formation of British Airways as the UK’s sole flag-carrier in 1974. British Airways was sold for £900 million in 1987, after the Thatcher government’s decision that state-owned airlines were a fiscal drain, and that governments were unequal to running commercial enterprises in such a competitive business.

The identification of an airline with a home state has become increasingly tenuous. Most large airlines are now owned by shareholders, the majority of whom, in the West at least, are international insurance companies, investment banks and pension funds. The dead hand of Chicago has resulted in artificial arrangements to maintain the fiction that airlines are ‘substantially owned and effectively controlled’ by nationals of their supposed home country. When Air New Zealand made its ill-fated takeover of the Australian airline Ansett, it had to set up a separate venture with a majority of Australian shareholders in order to avoid losing Ansett’s Australian landing rights. The merger between KLM and Air France includes similar accounting chicanery designed to sidestep nationality restrictions. The complex web of bilateral arrangements is a barrier to the creation of new airlines or consolidation among existing ones.

The Chicago system also counts against airlines from developing nations whose governments don’t have the negotiating strength to win landing rights at prestigious destinations such as JFK or Heathrow, which are, obviously, much more popular than slots at, say, Algeria’s Houari Boumediene airport. Airlines from the wealthiest countries, with the busiest airports, therefore have a stronger bargaining hand in bilateral negotiations.

The biggest challenge to the Chicago system has come from budget airlines, and was made possible by US deregulation and, in Europe, by the foundation of the European Common Aviation Area, which allowed ‘open skies’ for passenger flights by airlines based in those domestic markets. US deregulation in 1978 resulted in the first radical challenge to the traditional airline model: Southwest Airlines, the original budget airline. Driven by its outspoken chief executive, Herb Kelleher, Southwest avoided the cumbersome ‘spoke and hub’ model, under which almost all flights are routed through one central airport (Heathrow for BA) and concentrated on point-to-point flying, along with rapid turnaround of aircraft. It cut ticket prices along with frills, and introduced money-saving innovations such as a standardised fleet of planes. The existing airlines at first failed to respond to the threat from Southwest. Then they launched their own low-cost subsidiaries, but – as British Airways discovered with its ill-conceived off-shoot, Go – these only cannibalised the parent airline’s markets. By the end of 2002, according to Nawal Tajema in Airline Survival Kit, Southwest’s stock-market capitalisation – the combined value of its shares – was more than $12 billion: more than double the market capitalisation of eight other major US airlines put together.

Other airlines have reproduced Southwest’s formula, including Virgin Blue in Australia, JetBlue and AirTran in the US, AirAsia in Malaysia, GOL in Brazil, EasyJet in Europe and, most notably, Ryanair. Ryanair was a struggling minor Irish airline, a hangover of the Ryan family’s aircraft leasing company, until the appointment of a new chief executive, Michael O’Leary, in 1993. An accountant who had previously run a small chain of newsagents, O’Leary visited Southwest and came back resolved to transform Ryanair: he even has Kelleher’s outspokenness, though he lacks his charm.

What O’Leary took away from Southwest was a simple lesson in economics: demand for air travel is much like that for any other product. Charge less for it, and demand goes up. While that now sounds like common sense, before the arrival of the budget carriers there was a sense that air travel was a luxury good, and thus that demand wouldn’t vary much according to price. O’Leary is so dedicated to cost-cutting that Ryanair is the only airline in Europe to charge for helping wheelchair-bound passengers at airports. ‘Do you know how many people British Airways has got working in customer service?’ O’Leary once said to me. ‘Two hundred of the fuckers. Do you know how many I’ve got? Three, and two of them are part-time.’ In terms of profit margin, Ryanair has been the world’s most successful airline, ahead of both EasyJet and Southwest. Ferociously anti-union and obnoxiously competitive, as Siobhán Creaton shows in Ryanair, O’Leary used his airline’s highly profitable share of the London-Dublin route to fund its expansion throughout Europe. Before Ryanair’s arrival, fewer than a million passengers flew annually between London and Dublin. By 1996 this had risen to more than three million, with more than half of them travelling on Ryanair. By 2003 Ryanair made annual profits of €240 million. Although its more recent figures have been less impressive, it still carried nearly 24 million passengers over the last financial year.

How budget airlines can sell seats at a fraction of the price charged by conventional carriers and still be profitable is now well known. EasyJet, for example, in 2002 sold one-way fares at an average price of just £48.70. The company makes a profit of £545 per flight. That may not sound like much, but multiplied by 156,000 flights a year it adds up to a very healthy balance sheet. Ryanair’s profit margin is even higher in part because it concentrates on flying to provincial airports which are willing to make very low or non-existent charges for landing and support, in effect subsidising the airline.

Ryanair and Southwest have expanded the potential market for air travel, as well as taking customers from mainstream carriers. But thanks to the Chicago system, the budget airlines remain caged in their open-skies zones. Discussions are underway between the EU and US about an open-skies agreement between the two economic blocs. Such an agreement is several years and many obstacles away, but it would lead to huge changes, as mergers, acquisitions and bankruptcies followed the removal of the barriers. The chances are that other areas around the world would follow suit, with China and South-East Asia likely to see spectacular growth.

Such changes would come at a cost. The cheaper and more popular flying gets, the more dangerous it is for the environment. One person’s return flight between the UK and Australia produces more carbon dioxide than the average British household emits in a year. Yet air travel was excluded from the Kyoto protocol on greenhouse gases, because governments failed to agree how to allocate responsibility for the emissions. As a result, commercial aircraft flights create 600 million tonnes of carbon dioxide annually, more than double the amount produced by India. Thanks, once again, to the Chicago convention, no tax is levied on aviation fuel for international flights. Matters are made worse by the altitude at which jets fly to achieve maximum fuel efficiency: in the stratosphere, carbon dioxide appears to take several years to disperse.

The Royal Commission on Environmental Pollution, which reported in 2002, expressed deep concern at the rapid growth in air travel: ‘The availability of cheap air transport currently enjoyed by the public is a very recent phenomenon. It is not a traditional "right” in any sense, but a privilege enjoyed by the global elite. Climate change, in contrast, will affect every person and its consequences may be most damaging for those in the developing world.’ According to the report, the worst offenders are short-haul flights such as those operated by budget airlines. The commission recommended a Europe-wide environmental surcharge of £35 on each leg of a flight, in order to clamp down on demand.

But price rises alone may not be enough to deal with the expected boom in air travel. With passenger numbers set to double at least within the next fifty years, the other limiting factor will be where all these additional flights are to take off and land. In the US this is less of a problem, but in Western Europe, finding the space for more and larger airports is increasingly difficult. Restricting landing slots could also moderate the environmental impact, but there are few signs that European governments are willing to stand in the way of airport expansion.

Michael O’Leary thinks that one day airlines may even pay passengers to fly with them – airlines will in effect sell a captive market to airports and regions bidding for tourists (i.e. consumers of holidays, car rentals and duty-free products). This isn’t as unlikely as it might sound. Airports are enormously profitable: even Ryanair earned a lower return on its capital than 27 of the world’s airports in 2000. The BAA Group, monopoly operator of London’s Heathrow, Stansted and Gatwick airports, made an operating profit of 34 per cent that year, while British Airways registered 0.9 per cent. In the 2003-04 financial year, despite the impact of the Iraq war and the Sars outbreak in Asia, BAA made profits of £550 million from revenues of less than £2 billion – and earned on average £4 in retail sales from each of the 133 million passengers passing through its airports. Anyone looking to make money out of global air travel would be better off buying a duty-free franchise than an airline.