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.
Once I dipt into the future
11 hours ago
17 comments:
Bloody well done for commenting on this. I looked into it last week and could only find accounts of the most recently purchased slots. And concluded that all therefore must have been purchased on the open market. Wrong!
BTW each passenger that land costs the airline about £15 today. Keeps getting put up by the CAA ... for ... BAA.
You are also correct IMO to imply that any profit etc can only be taken out AFTER the rent has been paid. And that the rent is a cost that must be accounted for before capital and wages. That is, before any work can be done. And that BA are getting a lot of flying freehold and STILL cannot make a business out of it. They are dead to all intents. Why go on floggin it.
RS, I thought everybody knew this?
The point being, the costs that a monopolist occurs bear little relation to the price he charges.
The actual cash cost to BA of those free slots is £nil; for a newcomer airline, the cash cost of the slots (or the loan and interest repayments) is enormous. Yet mysteriously, the two airlines tend to charge similar prices for a similar service.
I assumed it was so from hearsay. When I looked into it I could find little. Only what the new slots and traded ones cost. So thanks.
The enigma is partially resolved if one talks to the crew. Many BA staff I know live in different countries. Their living costs are high, so wages demanded are high. Also BA allegedly give a better service. That is they look after the volcano victims better etc. I'm sure there are more similar examples.
Apparently BA made a billion or so in efficiencies last year too. I bet there is a lot of other stuff they would do better without the freehold.
So some of the imputed rent is used up in wages and some in capital and some in waste.
If that accounts completely for the freehold on landing slots I have no idea.
Might the question be: Is BA still a going concern if you subtract the free gifts. An accountant should be able to say immediately. Look out for your old town haberdasher next time that always seems empty. The property has been in the family for years. They do little relative trade. But they pay zero rent too. So sell it up to someone who can.
RS: "Is BA still a going concern if you subtract the free gifts?"
It's not a going concern anyway. It made losses of about £900 million in the past two years. By how much that loss would increase if you accounted for the amortisation and fall in value of the £5,000 million of landing slots is a matter for academic debate.
Blimey! May as well do a graceful redundancy. I would suggest doing something that allows them to start doing economically productive work then. But that would mean Real Reform!
BTW do you know the proportion of their free to purchased slots ?
This is all news to me. What happens to the free slots if BA goes under? Do they get to sell an asset that they don't have?
Normal bankruptcy rules I guess?
And guess who gets first grabs: BANKS!
http://bankruptcy-advice-uk.blogspot.com/2004/08/who-gets-paid-first-in-case.html
The producers get last go at it. Does this all sound familiar ?
RS, from educated guesswork, I would say ten or twenty free slots for each purchased one.
RLJ, that is the clever bit. It is not 'normal bankruptcy rules'. Whoever originally privatised BA made up a rule that if a lot is not used 80% of the time, it is forfeit. Which is why some airlines sometimes fly empty aircraft back and forth.
"lot" = "slot"
Jeezusss! 20:1 that's about a billion a year.
Yeah but wouldn't the liquidator trade the slots before they were forfeit. Could happen overnight
If not the situation would be worse. Because they would fall back to the BAA who didn't do anything to earn them. Right ? Else who gets them ?
RS, a company called "Airport Coordination Limited" is in charge of the slots, that company is owned by 9 airlines. The weather is far too nice to look into this any further right now :-)
Do ACL own the slots ?
Is BA actually at liberty to sell the free slots? If they aren't shown as an asset, and they are forfeit if not used, then that sounds more like the right of usage rather than ownership. A bit like one of their own tickets.
I don't know. But each way it doesn't matter. If BA disappear, the slots will still be available. Then whoever can use them will pay for them. I'm wondering who will get that income ? If its BAA, they are a private company and that would be wrong, theft. If normal bankruptcy applies it will likely be a BANK, as they get first dip and BA are in debt. By natural right they would be returned to the common fund from where they came and could be used to pay the deficit or something.
Robin, I think what Mark is saying is that if BA can't use them they are forfeit to ACL, which then sells them on and presumably divvies up the cash amongst the nine. I'm sure He'll be on soon to put me straight.
RLJ: Yes that is what I thought he meant too. But it is not clear yet. Even so ACL (A knee ligament) are still a private institution and the slots do not belong to them. For them to receive them would be theft in natural law. In human law it may be OK. In neither case is it just nor sustainable economically.
RS, RLJ, I don't know what happens to the slots either.
If BA sells them off sharpish before it forfeits them, then BA keeps the cash.
If BA lose them ....? Presumably they go to BAA or the government. They do not go to Airport Coordination Limited.
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