Is the UK Airline Industry Competitive - Essay Example

Introduction The Airline industry has been going through a rough patch over the past few years and the UK airline industry is no exception. Statistics collected from BATA1 indicate that there has been a decline of nearly 5 % in passengers with a significant decline in passengers for domestic flights. A similar trend is also visible in the freight cargo being handled over the past two years, both these factors indicating the difficulties the industry faces. Other factors regarding the industry is that it carries around 86 million people and 1 million tonnes of cargo employs nearly 71,000 people and contributes nearly 18.4 million dollars to the country’s Gross National Product. According to a report published in the nineties the major airline in the UK is British Airways and this remains mostly true even today. However the same report indicates that Virgin Atlantic also holds a significant share of the market. In addition BATA indicates the presence of other UK based airlines including Thomson Airways, flybe, bmi and DHL Air. Further research indicates that despite a decline in passengers and the economic downturn UK-based airlines have still been acquiring planes, with the number of commercial planes owned by the airlines in 2008 coming to around 967. The paper will simply take a look at some of the issues affecting this industry and their impact on its competitive nature. Taxation The aviation industry in UK does not pay tax on fuel and is also exempted from paying VAT. This state of affairs had met with a lot of criticism specially from environmental groups feeling that the tax structure was not reflecting the cost that the environment had to bear due to the massive carbon emissions for which airlines were responsible. They also raised the issue of why the airline industry should be given special treatment over other modes of transportation. In 2009 in response to this criticism the UK government introduced another kind of tax which is unique to their country and significant raises the cost of flying for passenger because the complete duty is passed onto them. The implementation of this tax has been met with dire warnings as exacerbating the wounds of an industry already in deep trouble. Those from the airline industry are seriously concerned that raising taxes would affect the competitiveness of the industry when compared to other modes of transportation that could act as substitutes and also that the industry would be uncompetitive when compared to airlines from US or other countries. Taxation is always a painful and complex issue with reverberations on all elements of the industry. However considering the relatively under-taxed nature of the UK airline industry it is possible that it will not be too badly hurt by the new tax although it might result in a decline in passengers. Labor Unions This is a significant issue facing the airline industry at the moment. British Airways is recently involved in a struggle to resolve with union officials after it has declared a strike because of BA’s refusal to meet it demands. BA’s after failing to come to an agreement with union over its cost-cutting program now appears to be focusing on wearing down its employees. The company has done whatever it can from out-sourcing to using volunteers and claims that it has managed to keep a lot of its flights running. However even if BA manages to wear down the Union officials to a compromise (although they are gearing up for a long fight) the real issue here is that bad relations with employees will detract from the competiveness of the industry. Eventually the airline industry is a very service oriented industry with a lot of employees in direct contact with customers. Therefore for the long-term success of the airline an amicable settlement needs to be reached. British Airways is a major airline and any issues affecting this particular have a serious impact on the industry. Regulatory Environment This is an extremely controversial issue with many supporters and detractors. A specific regulatory issue that comes up is that which does not allow cross-border ownerships amongst airlines . It became relevant to the UK industry when talks of an alliance between British Airways and American Airways were not possible because of regulation that savors of protectionism has been in place for a long time. As Glenn Tilton commenting on the restrictive regulatory environment that airlines face in particular over other industries says ‘These constraints in turn impact the very things government is rightly concerned with today – our ability to sustain jobs, to grow jobs, to provide service to communities and to enable growth in other industries, including travel and tourism that depend so heavily on consumer access to frequent, efficient air travel’ (Tilton Glenn ‘Glenn Tilton Speech to the UK Aviation Club’) He goes on to speak about the importance of discarding short-term considerations for long-term growth of the industry. However Richard Branson owner of the Virgin Group commenting on the proposed alliance between British and American Airways “It is the equivalent of Coca Cola and Pepsi merging, it would not be good for consumers and would inevitable push up fares on transatlantic routes out of Heathrow,” he said. “If it is allowed to go ahead it would wreak havoc in the airline industry. All we ask is to be able to compete on a level playing field.” (Starmer-Smith Charles ‘Airlines facing worst year in aviation history) The impact of regulation on competitiveness is a complicated one. It is also hard to assess whether the regulatory environment will change anytime in the near future specially considering the havoc that lack of regulation played on the financial markets. What is essential however that changes in regulation will definitely impact competitiveness but may impact different players and stake-holders in a different way. Analyzing performance If we take a look at financial indicators as a measure of the performance of the industry we can see that many firms have reported serious losses indicating troubled times for the industry. British Airways for example been in dire financial straits indicating losses far worse then what many had predicted and with no respite anytime soon. However Virgin Atlantic has reported profits indicating at least some god news for the industry. Analyzing the research Various parties have researched on the airline industry each with varying reasons and differing focuses. Some of the research on the industry is done by BATA, however this is limited mostly to a collection of factual data, however this data becomes an important tool for observing trends within the industry. For example the association provides accumulated data on common variables like ‘Available Seat Kilometers’ and also information on changing passenger demographics all of which are important to effectively analyze what direction the industry is doing in. Other reports include those done by environmental groups. Because these reports have specific agendas regarding taxation they cannot be considered a completely unbiased source of information. However these reports do provide analyses of varying perspectives on issues like taxation. For example Friends of Earth in its briefing on ‘Aviation and the Economy’ puts forward its perspective on why the airline industry should be more severely taxed. These reports also serve as an effective tool in analyzing the industry, for example this one states that the industry receives an unfair advantage by being under-taxed. Other researches include those by professionals and academics either designated by the government or acting independently. A report by the ‘Oxford Economic Forecasting’ for example makes a serious case on how hampering the growth of the airline industry could hurt overall economic growth of the country. Conclusion In conclusion we need to recognize that the airline industry has been particularly vulnerable the past few years. Although fuel prices have climbed down their hike in 2007 seriously hurt the financial strength of many airlines. To top it all off the economic recession has reduced the financial capacity of many potential passengers from the tourist segment of the market who constitute a significant chunk of the market. The UK industry is dominated by British Airways whose issues therefore have a serious impact on the industry and economy in general. The strike issue and non-agreement with labor unions is likely to be detrimental to both parties and needs serious consideration. The regulatory framework in which airlines work also needs to be reconsidered because as Mr Tilton points out that it is out-dated and does not reflect changing trends and requirements. At the same time however this does not immediately imply a relaxation in the framework. One issue that will continue to be a significant is that of green house emissions. As concern continues to rise about environmental issues, the UK government in collaboration with the international environment needs to find a way between concern over emissions and the economic downturn which ensures that the industry remains competitive. Because of the importance of the airline industry a significant amount of research has been devoted to it each one stressing the importance of this industry. References ‘Airlines call for rethink on tax’, 11 July 2009 BBC News Available: http://news.bbc.co.uk/2/hi/business/8145664.stm Accessed 30th March 2010 BATA: The British Air transport Association Available: http://www.bata.uk.com/Web/Default.aspx Accessed 30th March 2010 Starmer-Smith Charles ‘Airlines facing worst year in aviation history 2nd June 2009 Telegraph.uk Available: http://www.telegraph.co.uk/travel/travelnews/5427676/Airlines-face-worst-year-in- aviation-history.html Accessed 30th March 2010 Yarrow George’ AIRLINE DEREGULATION AND PRIVATIZATION IN THE UK’ Regulatory Policy Research Centre Hertford College, Oxford Available ; http://www.esri.go.jp/jp/archive/bun/bun150/bun143c.pdf Accessed 30th March 2010 ‘UK Airlines’ Activity 1997 – 2009’ BATA: The British Air transport Association Available http://www.bata.uk.com/Web/Documents/data/current/WebAirlines97-09.pdf Accessed 30th March 2010 ‘Aviation and the economy’ Friends of Earth May 2005 Available http://www.foe.co.uk/resource/briefings/aviation_and_the_economy.pdf Accessed 30th March 2010 ‘THE CONTRIBUTION OFTHE AVIATION INDUSTRY TO THE UK ECONOMY’ OXFORD ECONOMIC FORECASTING November 1999 Available : http://www.oef.com/Free/pdfs/Sumavuk.PDF Accessed 30th March 2010 Tilton Glenn ‘Glenn Tilton Speech to the UK Aviation Club’ Air Transport Association February 11, 2010 Available: http://www.airlines.org/news/speeches/speech_2-11-2010Tilton.htm Accessed 30th March 2010 Milmo Dan ‘British Airways dispute will undermine staff relations for years 30 March 2010 guardian.co.uk Available http://www.guardian.co.uk/business/2010/mar/30/ba-strike-staff- relations-dispute Accessed 30th March 2010 Milmo Dan British Airways makes worst ever loss 22nd May 2009 guardian.co.uk Available http://www.guardian.co.uk/business/2009/may/22/british-airways-record-loss Accessed 30th March 2010 Read More