IN MY OPINION: Institute of Management companion Bob Ayling, CEO of British Airways, says that government reform would benefit airlines, passengers and government alike

IN MY OPINION: Institute of Management companion Bob Ayling, CEO of British Airways, says that government reform would benefit airlines, passengers and government alike - Competition has always been the irresistible force in the airline industry. It is en

Last Updated: 31 Aug 2010

Competition has always been the irresistible force in the airline industry. It is endemic. It's the single most obvious fact about the industry.

And consumers have benefited enormously from it. Since 1970, the average fare has halved in real terms and the average fare across the Atlantic has halved in the past 10 years.

This has happened in spite of regulation, not because of it. Experience has shown that competition has always produced a more market-orientated result, of greater benefit to consumers. Governments have had very little to offer innovative entrepreneurs except to get out of their way. That's why the industry has found new airports, offered new destinations and ever lower fares.

Low-cost carriers (LCCs) have redefined the level of competition. The US has more LCC start-ups than the rest of the world combined, but Britain is catching up. We have Ryanair, easyJet, Virgin Express, Debonair, and Go constantly snapping at the heels of the major carriers and each other.

The good news for consumers is that it's going to get tougher. We have to live with that - and we do so cheerfully. But to do so we need productivity gains to keep ahead of the play.

In the past 50 years, two great waves have helped airline productivity.

Those waves have broken, and we now need a third. In the early days, technology gave us such liberal gains we simply didn't need to organise ourselves efficiently. Radar increased traffic flows hugely. Jet engines took our cruising speed up to 800km/h. There's more computing power in my laptop than they used to put a man on the moon.

When technological progress started slowing down in the 1980s, we got a boost from a different source. In the decade after privatisation in 1987, BA's productivity rose by 57%. That's some achievement in an organisation with 63,000 employees round the world.

But now we have had to find savings - major savings - to finance increasingly ambitious improvement programmes. This is not an option, it's a necessity.

As service levels rise, consumer expectations rise even more quickly.

So airlines today don't seek to match competitors' improvements. We leapfrog them. In the 1980s we would improve each class every three years. Today we're spending over dollars 500 million overhauling all our product areas at once.

In business class we've built a 'lounge in the sky' - with beds, a multi-channel entertainment system and in-seat power for laptops. In our economy product we've installed scientifically designed seats, personal video screens and a host of family-friendly improvements. So how do we pay for all this? Our stringent cost-control (amounting to pounds 1 billion of savings this year) means that we've hit a wall on in-house savings.

There are two main areas that could be addressed, and both involve the regulatory framework. Infrastructure costs have to come down. Airlines are showing disappointing results but airports are breaking records. The British Airports Authority (BAA) is making three times the profit of BA on a third of the turnover. When you compare the share price history of BA and BAA you see the gains have been distributed unequally. Inadequate airport infrastructure imposes costs over which we have no control. The same is true of air traffic control (ATC) services. In Europe we have 49 different ATC centres: and delays are getting worse.

My industry colleague Gordon Bethune has calculated that a 1% increase in American ATC efficiency would save the top 10 airlines dollars 200 million a year. I dread to think what the same calculation would yield for Europe.

Airlines have performed heroically in controlling their costs. The next phase must come from our suppliers. And where they are government monopolies, they will have to be controlled by political directives. Their costs and inefficiencies can no longer be passed through to consumers.

But governments frequently demonstrate a profound lack of understanding of how aviation markets work. The most fundamental business strategy is usually denied airlines. Consolidation is an essential element of sound operating economics in the industry. And yet airlines suffer from strict, and archaic, cross-border regulations.

Banks, steel mills, insurance companies, cars, trucks and ships - all can buy and sell interests or stock in each other.

Airlines all over the world are prevented from pursuing this normal business practice.

And yet there are significant economies of scale to be found in reservation systems, ground handling, engineering, catering.

Competition will drive the industry more than competition regulators. Low-cost carriers are not an aberration. Our industry has, because of periods of hyper-competition, been cash-negative since Kitty Hawk.

We can deliver even cheaper fares, more flights, greater comforts. But governments themselves have a real role to play in the next great leap of productivity. They need to focus on airport infrastructure and charges, ATC reform and competition policies to allow airlines to pursue normal business strategies. The sooner governments on both sides of the Atlantic take on these issues the better for passengers, stockholders - and in terms of tax revenues - for governments themselves.

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