The Aviation Oracle
News, views and opinions from the world of aviation
UK-US post-Brexit bilateral agreed
November 29, 2018
WOW - the rise and decline
November 29, 2018
Just over six years ago a new airline took off from Iceland and was soon wowing the travelling public with its ultra-low fares and lurid purple colour scheme. Things went pretty well and routes to many major cities across Europe were opened. In its second year of operation (2013) the fledgling firm carried 400,000 passengers while just a year later it welcomed its 1,000,000th guest. Expansion to North America followed in 2015, still using the Airbus narrowbodies on which the fleet was founded, and in 2016 the firm welcomed its first two Airbus A330s and launched links to the US west coast.
Connecting the continents
WOW air’s success was built on connecting Europe to the Americas, with its hub in Iceland proving ideal for passengers to change planes, even if it became rather congested with Icelandair's traffic in the mix too. The very low fares on offer, with no frills unless they were paid for, helped mitigate the need to get on and off an aircraft half way across the Atlantic en route.
In 2017 the airline ordered seven more aircraft, including four A330-300neo widebodied jets and three additional A321s. Roll the calendar forward to the summer of this year and WOW air was running a fleet of three A330ceos, and 15 A320/A321s including some newer neo derivatives. However, the airline has often been the subject of criticism over to delays and meagre on-board service, and despite best efforts the ever more crowded conditions at Keflavik Airport weren’t everyone’s cup of tea. By September it had managed to generate EUR60m in refinancing from a EUR100m bond issue with Skuli Mogensen, CEO and owner of WOW air saying: “The positive outcome is a great motivation to continue to do our job and strengthen further the travel industry.”
Clearly though not everything was going well in Reykjavik. A vicious fare war broke out between WOW and Icelandair which, in addition to connecting Iceland to the world, also promoted Keflavik as a connecting hub. The two carriers competed on a number of routes, albeit with Icelandair placing more emphasis on frills. Downward pressure on revenue came from budget transatlantic carriers such as Norwegian that flew direct – if a wouldbe traveller didn’t have to pay more to fly direct, why should they break their journey on an island in the mid-Atlantic? There were persistent rumours – but only rumours – that WOW air was not doing well financially and its load factors certainly weren’t always stellar. There are only so many $99 fare sales that an airline can run before it needs to generate more serious revenue.
On November 5 this year news broke that the two Icelandic airlines were to merge: “Icelandair has entered into a share purchase agreement to purchase all shares in WOW air. The share purchase agreement contains certain conditions for the completion of the acquisition that will need to be satisfied before the end of November 2018.” WOW air shareholders will get little more than 5% of the combined company, pointing to the low-cost's precarious financial position.
As more details emerged it became apparent that the intention is to retain the two brands, with a suggestion that Icelandair might focus on business routes while WOW concentrates on leisure markets. The suits beavered away with the aim of gaining support from stock holders and the Icelandic competition authorities ahead of a shareholders’ meeting on November 30. Even while that was going on though there were more clouds on the horizon for WOW. On November 27 the airline published financial projections that were much weaker than forecast earlier in the year. A number of additional obstacles had emerged and Mogensen explained that there had been: “significant bad publicity about the financial health of the company which ended up having a more negative impact on the sales and credit position.”
He continued: “When Primera air collapsed in October the negativity escalated” and he added that a sale and leaseback arrangement expected to generate $25m had been cancelled. Further compounding the problems: “the company's lessors, creditors and authorities… demanded stricter payment terms.” Finally he pointed to a surge in oil prices and: “while this has since retreated the impact on the company's position during these weeks has not recovered accordingly.”
Tough times ahead
WOW air has announced that routes to Tel Aviv, St Louis, Cincinnati, Cleveland, Pittsburgh and New York JFK have been or will be dropped, while frequency to Los Angeles, Orlando, Berlin, Dublin, Brussels is to be reduced over the winter. On the same day as the airline announced its financial position had worsened, it reached agreement with lessors to return two Airbus A330s, and two A320s. They have already left the fleet reducing it to 16 and leaving only one widebody. Meanwhile, earlier in the week trading in Icelandair’s shares was temporarily suspended after it announced it might not be able to fulfil the conditions of the takeover and obtain agreement from shareholders and the competition authorities before month end. Then came the bombshell - on the morning of November 29, Icelandair announced that its acquisition of WOW air would not go ahead. In a statement is said that it could not meet the conditions necessary to proceed and that it did not intend to recommend an extension of the deadline.
It’s said to see an airline in a situation like this. It's going to be more difficult for WOW air to stand alone now with many of its US routes stopped or ceasing in the new yare, as its business proposition revolves primarily around Europe-North America travel. No doubt some uncertainty has also been spread among potential customers by the acquisition process and the statements about the firm's financial position, and that could adversely impact bookings. Let’s hope things work out well. Iceland is a wonderful place to visit and it needs at least a vibrant airline – one that is able to support tourism and business, as well as transatlantic travel.
AIR FRANCE TO RETIRE A380s - WHAT NEXT FOR THE SUPER JUMBO?
November 28, 2018
Air France has just announced that it will return five of its ten double-deck Airbus A380s to their owners as leases expire over the next couple of years. It's another blow for Airbus which is struggling to persuade Emirates to place yet another order while juggling with the A380plus and maybe even an A380neo concept. Meanwhile used aircraft could start stacking up in the desert unless more airlines like Portuguese HiFly, which has taken two of the airframes offloaded by Singapore Airlines, can be persuaded to take on the leviathan.
Airbus first started to study 500-800 seat very large commercial transport (VLCT) concepts as far back as 1990. It forecast that airlines would need 1,235 more aircraft in the category by 2020 and by the middle of the decade the European firm decided to go ahead with the project. But here we are just over a year short of the end date of the Airbus forecast, and only around 230 have been delivered with fewer than 100 still on order for the manufacturer to build. Many travellers agree that the A380 is the most comfortable very large aircraft to travel in, as its spacious cabin is a very pleasant environment and is also extremely quiet. The game isn't totally over yet and there is still a chance that there could be a revival in demand for the A380 but as the order drought continues that is looking less and less likely. So where did it all go wrong?
In the mid-1990s airports were filling up fast. Slots were at a premium. Demand was growing at a compound rate of 5% per annum, and almost everyone thought the answer were aircraft with greater capacity. Airbus' hopes were pinned on the A380 'Super Jumbo' which typically seats 400-500 in a mixed configuration but can accommodate as many as 800 passengers in with an all-economy fit. Meanwhile Boeing eventually countered with a slightly smaller aircraft, a much updated version of the original Jumbo Jet which it designated the 747-8i.
Things started fairly well for the A380 with several blue-chip clients including Air France, Lufthansa and Singapore Airlines signing up for early examples. Emirates and Qantas followed suit, as did China Southern Airlines and Korean Air. Other Middle East operators eventually felt the need to match their rivals, with Etihad and Qatar Airways also placing orders. Malaysia Airlines, Thai Airways and British Airways also made commitments. Japan's All Nippon Airlines is the most recent customer for new-builds, although its commitment was in part related to Airbus' involvement in the convoluted arrangements resulting from the collapse and takeover of Skymark Airlines. Emirates accounts for 50% of the firm commitments to date and few other airlines have shown any interest in taking on the largest widebody available.
Then things changed. Firstly the A380 was bigger than anything that came before, and that limited the airports it could fly into. At the peak of the A380 frenzy in the 90s, it was widely expected that the facilities at most large hubs would upgraded to accommodate the double-deck giant. It didn't quite happen that way, and many airports decided to wait to see how many A380s were ordered before embarking on costly infrastructure upgrades. The tardiness limited the scope for A380 operations in the early days, and still does today to some extent.
Next came the very capable Boeing 777-300/ER. The twin-engined Boeing can move 375 passengers the same distance or further than a 450 seat A380. The Boeing costs slightly more to operate per seat, but critically the overall cost of flying it from A to B is lower. The A380 is an excellent money earner - if an airline can fill every flight with passengers willing to pay a reasonable amount for a ticket. But when the market is down, seats on A380s might go empty, or fares have to be reduced to below cost-price to generate revenue.
Savvy airlines soon realised that it was better to fly an aircraft with a lower overall trip cost and fewer seats - seats that they were more certain to fill - than to struggle to fill the back end of an A380 at junk fares. They reasoned that sometimes a 777 might not satisfy demand, but that would often be preferable to having to almost give away the last few seats on an A380. So a few potential customers passed up on A380s or limited their orders and acquired more 777s instead.
The final challenge came from smaller Boeing 787s and A350s. The former in particular was sometimes marketed as a hub-bypass (or point-to-point) aircraft. It was capable of flying long haul but had a more sellable capacity, enabling to to be deployed on routes that would be uneconomic if flown with larger aircraft. The 787 made possible daily flights between city pairs such as Heathrow and Austin, TX or San Jose, CA. Previously passengers would have had to travel via Dallas or Los Angeles, but all of a sudden they could fly non-stop. The new direct flights to smaller airports took pressure of slots at some of the larger hubs and constrained growth on hub-to-hub routes.
The ethos behind the A380 was that slots were rare and capacity between hubs would need to be increased to cope with demand. All of a sudden the there were more lines on the world's route maps, and A380's primary raison d'etre was weakened.
Very few airlines not already flying A380s are persuaded by the aircraft's economics. When things go well it is a very good aircraft that can earn is operators a great deal of money, but when the market turns down most carriers losses will be greater with A380s than they will be with smaller aircraft. And that is the crux of the matter. Boeing's MOM is going to open more opportunities for hub-busting, so a substantial paradigm shift will be needed before the A380 order book perks up again. Airbus may be able to continue with a NEO or higher capacity version of the A380 with even better economics, but whether it is prepared to take a punt in the absence of significant demand for airlines remains open to significant doubt.
Over the next two or three years, Emirates is likely to start returning its early A380s to lessors and they will join examples from Singapore Airlines and possibly Air France that are parked. It will create a glut in the used aircraft market. Two examples already retired by Singapore Airlines have found a market with an ACMI operator but the rest are to be stripped for spares. No one has lost out yet because the owners will more than get a return on their investment. But as more A380s are grounded the secondary market is likely to take a downward turn. Will any other airlines take a punt on new A380s? It seems rather unlikely at the moment.
BACK TO BREXIT
November 27, 2018
With the UK’s political leaders running around like headless chickens trying to justify their disparate views on Britain’s exit from the EU, The Aviation Oracle thought it worthwhile to return briefly to the subject of Brexit and to review the latest state of play as far as air transport is concerned.
A little more clarity
Since the subject was last discussed, a 26 page political declaration has been issued as a supporting document to the earlier 585 page withdrawal agreement. This latter text “…establishes the parameters of an ambitious, broad, deep and flexible partnership across trade and economic cooperation, law enforcement and criminal justice, foreign policy, security and defence and wider areas of cooperation.”
All good then, as unlike the larger work aviation is mentioned. It is however only a framework – a starting point that establishes the principles both sides aim to adopt and it therefore not a foregone conclusion. So what does it actually say about aviation?
The Parties [the EU and the UK] should ensure passenger and cargo air connectivity through a Comprehensive Air Transport Agreement (CATA). The CATA should cover market access and investment, aviation safety and security, air traffic management, and provisions to ensure open and fair competition, including appropriate and relevant consumer protection requirements and social standards.
Basically there’s an agreement to be hammered out over the next two years or so, which it seems both sides expect will settle most of the areas of concern for intra-Europe air travel. Issues such as UK airlines flying across Europe (and vice versa), airline funding and ownership, even our rights to compensation when we are delayed, are up for debate. The framework does not propose an outcome, but I hope we can all support the concept of things post-Brexit remaining broadly as they are now for the ongoing business of transporting passengers and goods by air.
There’s further pointers too, in the area of regulation:
The Parties should make further arrangements to enable cooperation with a view to high standards of aviation safety and security, including through close cooperation between EASA and the United Kingdom's Civil Aviation Authority (CAA).
This seems to imply – despite what was previously thought – that the UK will not remain in EASA (the European Aviation Safety Agency), but instead both sides will aim for an alignment or commonality in EU and UK regulations which would aid mutual recognition. Hopefully matters such as common aircrew training and licence recognition, aircraft certification and safety standards will not be compromised. It certainly doesn’t follow that pilots or engineers will be able to work freely anywhere in Europe, and indeed some are scrambling to convert their UK-based qualification into their European equivalents ahead of march next year when the process is likely to become much less straight forward.
That’s about it for aviation although it’s good to learn that visa-free travel, at least for short holidays and business trips, is likely to be preserved. There are some other issues though, chief among which are the EU’s bilateral air service agreements with countries outside the union. There appears to be no commitment for the UK to remain inside a Europe-wide negotiating body when it comes to air services extending outside the region, and indeed it is perhaps unreasonable to expect the EU cares about the UK’s future access to long-haul air markets. But the problem remains – will other countries such as the USA give UK airlines the same access as they already give to European airlines? It’s a two-way street of course, and I don’t expect London to New York flights to suddenly stop next March and the good news is a new UK-US bilateral may be signed as soon as next week (more on that when it happens because there could be implications for the UK's airlines). But there’s negotiating to be done elsewhere, and when it comes to new agreements I can’t help wondering whether there is strength in numbers.
With the outcome of the House of Commons vote on December 11 far from a foregone conclusion, the question remains: what if the deal isn’t approved by parliament?
No doubt in the following days there will be a lot of political manoeuvring, particularly in the UK, and potentially Theresa May or her successor will return to the negotiating table to try again. The EU has already said it’s this or nothing though. Maybe they will bend a bit further if the bill does not pass smoothly. But the prospect remains – if the Commons rejects the deal, Britain may exit the EU next year without a deal.
The political declaration outlines areas of future co-operation and coordination between the EU and the UK. The ‘deal’ incorporates the shared objectives including continued access for airlines on both sides to the entire European air transport market, fair competition, mutual respect of standards, and ongoing consumer protection. If that’s what a deal includes, what does ‘no deal’ mean?
THE BATTLE FOR BEE
November 26, 2018
Over the weekend it was reported that International Airlines Group (IAG, parent of British Airways) was entering the fray, increasing the possibility that the fight to acquire Flybe (flight code BEE) might involve IAG's CEO Willy Walsh sparring with his arch-rival at Virgin Group, Sir Richard Branson. Such could become the stuff of airline legend as both men have big egos, but each now have their ambitions fettered by wider interests. In fact IAG has not even formally declared that it is throwing its hat into the ring yet, although some pundits see it as favourite to win the battle. Whatever unfolds over the days ahead, the possibility of a bidding war has already sent Flybe’s share price soaring – by lunchtime on Monday November 26 it was trading just over £0.22 while at its nadir ten days earlier the price was just under £0.09.
So the obvious question is: are these two potential suitors serious, and what could Flybe bring to either of them?
Firstly IAG. It is a multi-airline conglomerate that already owns British Airways, Ireland’s Aer Lingus, Spain’s Iberia and several smaller carriers including some in the budget and regional sectors. The group’s British Airways (BA) and BA Cityflyer operations are already well entrenched at London Heathrow, London Gatwick and London City, at each of which Flybe also holds slots. British Airways and its partners get very little domestic feed from Flybe, which prefers to channel its passengers onto BA’s rivals.
It seems almost inevitable that an IAG takeover of Flybe would face an investigation by the Competition and Markets Authority (CMA), much as its acquisition of bmi did six years ago. The likely outcome would be the surrender of another tranche of slots at BA’s key hubs, potentially opening the door to alternative and maybe stronger competition. Meanwhile, British Airways has largely forsaken the UK regional airports such as Belfast, Birmingham, Manchester and Glasgow, the only exception being links to London. So it’s difficult to see what positive impact acquiring of Flybe would have on IAG’s existing businesses. On the other hand IAG may see an underlying potential in Flybe – the latest accounts do point to some light at the end of the tunnel if it was rid of costly leases and onerous finance charges, while it could also gain from the better dollar-based fuel purchase rates that can be achieved by a much larger group. So if it could be turned around, Flybe might become a valuable stand-alone member of the group.
Virgin Atlantic on the other hand is only a long haul carrier with routes radiating out from London Heathrow, London Gatwick, Manchester, and to a lesser extent Glasgow and Belfast. It already has codeshare agreements with Flybe that channel passengers from some smaller UK airports through Manchester in particular and Heathrow to a lesser extent, onto its transatlantic services. Acquisition of Flybe would undoubtedly strengthen those connections, while losing to IAG could weaken them. Furthermore, Virgin is part-owned by Delta Air Lines of the USA (49%) and [soon] Air France / KLM (31%). Air France / KLM in particular is locked in a battle with IAG for European market share using links from its bases in Paris and Amsterdam to UK regional airports. It just happens that Flybe has a large at slot holding at both European hubs, through which it has the potential to carry passengers travelling between Exeter, Norwich, Southampton or East Midlands (to name just a few) and Asia, Africa or the Americas.
But Virgin and Flybe are geographically separated with headquarters in Crawley and Exeter respectively. They also have somewhat different business models and cultures. Has Virgin got the strength to take on Flybe? Sir RIchard doesn't rule the roost quite as much these days, so are his partners European and American partners prepared to bankroll Virgin through what would undoubtedly be a complex and time consuming acquisition?
Clearly Virgin Atlantic - along with its partners - has the most to gain from acquiring Flybe. But Virgin hasn’t been overly successful itself when it comes to profits over the last few years. Taking over another airline which carries more passengers and has a much more complex network, turning it around and making the sum of the two successful, could be risky. So Virgin has more to gain from Flybe – but also more to lose, especially financially, if merging two diverse organisations proves to be challenging.
Wild-card Stobart Air made a bid for Flybe earlier in the year and still has to decide whether it will make another approach. It is much smaller than IAG or Virgin and could find an acquisition on the scale of Flybe very challenging. On the other hand IAG has experience within to turn Flybe around even if that means stripping out the profitable core and dumping the rest – assuming the CMA didn’t impose too many onerous conditions. But does IAG really need Flybe? Perhaps it is just making mischief in the hope that will increase the price another suitor has to pay? Maybe it sees the acquisition of Flybe as a chance to block any expansionist aims in its rivals?
No money has changed hands yet, and indeed two of the parties involved – Flybe and Virgin – have gone on record as saying there is no guarantee a deal will be done. The Aviation Oracle thinks this one is too difficult to call right now. The winners so far are the Flybe shareholders, who have seen their investments more than double in less than two weeks. The Flybe share price is still a long way from its peak of £1.46 almost four and a half years ago, but at least its heading in the right direction.
SEAT ASSIGNMENTS - REVENUE VS NECESSITY
November 26, 2018
Last week Digital Minister Margot James told a UK parliamentary committee that she believed airlines use “cynical, exploitative means… to hoodwink the general public.”
Continuing, she added: “Some airlines have set an algorithm to identify passengers with the same surname travelling together. They’ve had the temerity to split the passengers up, and when the family want to travel together, they are charged more.”
Strong words. The Aviation Oracle agrees that deliberately splitting up families with children to generate additional revenue – if indeed that is what’s being done by some carriers – is verging on unethical. Not only that, but if there is an accident safety could be compromised as family members seek out separated loved ones rather than focus on getting out as quickly as possible. Notwithstanding the morality of the act, separate seat allocations often delays check-in and boarding when groups attempt to play musical chairs with other passengers aimed at being able to sit together.
The UK government’s newly formed Centre for Data Ethics is set to investigate the matter. If the industry is found guilty of malpractice, clearer guidelines or regulation could follow. However, there might be another explanation:
Most narrow-bodied airliners – the aircraft that are typically used to transport us around Europe – have three seats either side of a central aisle. Many airlines, including some ‘full service’ carriers, now charge for preassigned seating, and levy a further premium for those in more desirable locations. The ‘better’ seats are typically any with extra legroom, as well as those beside windows or aisles. Few airlines want to give up potential revenue from customers who are prepared to pay extra, by giving desirable seats to customers who are not. If an airline charges more to sit by a window or aisle and there are only three seats in each bank, it stands to reason that anyone who does not wish to pay will get a middle seat by default. And that means non-paying groups will get split up.
Perhaps then this issue actually boils down to revenue optimisation rather than exploitation? The UK Civil Aviation Authority is already investigating paid seat assignments, and its most recent report suggests that the chance of a group being split up varies depending on the airline involved. The regulator supports the idea that safety is a reason to seat family groups together but we already know that some airlines are more determined than others to extract every last penny from their customers. The Aviation Oracle believes that families with children should not be split up on an aircraft. Husband and wife? Yes, maybe the same. But what happens when partners with different surnames travel together - should they face discrimination versus their married counterparts? It seems very likely that airlines will resist giving responsible adults, even those who are part of the same group or household, fee-free access to seats which could be ‘sold’ at a premium.
It could be then that there’s an argument for persuading airlines to abandon charging for seat assignments? The practice has become a lucrative source of revenue, and money not raised from customers who wish to select seats will have to be recovered from other activities. Would passengers be happy to pay higher ticket prices, extra baggage fees, or more for inflight catering instead?
Hopefully the Centre for Data Ethics will get to the bottom of the matter and make a ruling that works for families but doesn’t dent airline auxiliary revenue streams too much.
NEWQUAY-HEATHROW - WIN-WIN FOR ALL?
November 23, 2018
The more The Aviation Oracle thinks about the newly announced route between Newquay and London Heathrow that is set to launch next year, the more it seems to make sense for all involved.
The government has renewed its Public Service Obligation (PSO) support for the link between London and Newquay. It can claim that it is doing what it can to support regional flying in the UK by providing a subsidy for services that would otherwise be difficult to operate profitably.
Heathrow will almost certainly have offered a £15 per passenger discount on service fees that it promised to encourage new UK-domestic route development. By doing this it can claim to be supporting the opening of new domestic services ahead of what is sure to continue to be a rocky road towards starting work on its third runway.
Due to it flying between Heathrow, Edinburgh and Aberdeen for more than a year, Flybe has access to more IAG/bmi remedy slots at Heathrow. It is therefore the only airline other than British Airways in a position to start a route to Newquay (see following piece for more detail) - and BA would not be able to use remedy slots anyway.
So Cornwall continues to have an air link to the capital and the government has done its bit - along with Heathrow. Flybe picks up a new route which is subsidised to the tune of £10 per passenger for each return trip, and its service charges at one end are lower than normal by £15 a head. All being well Newquay-Heathrow could end up being a nice little earner - even more so if the airline manages to cash in its three slot pairs at Gatwick.
It has also just emerged that Virgin is sniffing around Exeter Airport. Adding Flybe to the group would provide a good feed into the Virgin Atlantic's long haul network. It would also strengthen Delta Air Lines' and Air France / KLM's (both part-owners of Virgin Atlantic) positions in London and European cities such as Amsterdam and Paris. Newquay is one more positive, even if it is a small one.
There would seem to be other potential benefits in Virgin buying Flybe, but The Aviation Oracle will leave those thoughts for another day, if and when the story develops.
THE HEATHROW SLOT MIRACLE
November 22, 2018
Details of a new route between Newquay and London Heathrow have emerged. The link will operate four times per day starting in March 2019, replacing three daily runs to Gatwick that are supported by a Public Service Obligation (PSO) agreement funded by the UK government. Arrivals into Heathrow at 0830, 1205, 1540 and 1955 are complemented by returns to Cornwall at 0915, 1245, 1620 and 2040 – a very tidy schedule and nice day’s work for the 78-seat Flybe Bombardier Q400 that will be deployed on it.
On the face of it and compared to everything else that is going on in the airline and airport world – not to mention the wider UK – this might seem to be trivial news, albeit very good for the people and industry in the southwest of England. It’s not often that a completely new domestic route to Heathrow is announced, let alone one flown with a turboprop four times every day, so something significant must have occurred to enable it happen now.
Almost everyone involved appears to be claiming to have played a part. Cornwall Airport Newquay’s Managing Director Al Titterington, said: “We have been working for many years to make sure that Cornwall Airport Newquay has direct access to Europe’s busiest hub, and with this new service it opens not just a connection to the UK’s leading gateway, but also the world.”
Titterington has previously gone on record as stating that if the route was transferred from Gatwick to Heathrow, traffic would increase by as much as 30%, primarily due to the better global connectivity on offer at the west London airport. Connectivity is of course one of the cornerstones of Flybe’s attempts to revive its fortunes, as it is looking to sign up more code-share agreements with long-haul airlines.
John Holland Kaye, CEO of Heathrow Airport also added his seal approval: “We are delighted to secure a more regular service to Newquay, connecting exporters from Cornwall to global markets through Heathrow and making it easier for inward investors, tourists and students from all over the world to get there. Following the successful launch in 2016 of an Inverness service, the UK’s two furthest mainland airports will now be connected to the UK’s biggest port.”
Meanwhile, Transport Secretary Chris Grayling didn’t miss the opportunity to promote his department’s role in the switch, telling parliament that: “This new route between Cornwall Airport Newquay and Heathrow Airport, supported by the government, will provide passengers with hundreds of links to global destinations opening up new travel and business opportunities.”
Most ministers like to talk up their involvement in good news but when he said “supported by the government”, The Aviation Oracle assumes all he actually meant was that the PSO has been renewed – which it has. It seems almost inconceivable that the government would intervene to move one domestic air service to Heathrow while not doing the same for others.
Good news then - but how?
So a win-win for all. But a couple of questions come to The Aviation Oracle: why now, and more significantly where have the Heathrow slots come from? Plenty of airlines would give their eyeteeth to get four Heathrow slot pairs, so how did Flybe manage it – especially while it is facing financial challenges? Did Heathrow or the government help, or were there other forces at work?
While mulling the matter, the settlement the EU applied to IAG (parent of British Airways) when it bought rival airline bmi from Lufthansa in 2012 came to mind. Looking up the specifics of the case revealed that: “Where a New Air Services Provider has operated Competitive Air Service on two or more Identified City Pairs using Slots in accordance with these Commitments for at least two (2) consecutive IATA seasons, it shall be entitled to apply for any Slots still available… to operate Frequencies on any European Short-haul City Pair…”
Basically this bit means that if a new airline has been flying between Heathrow and Edinburgh (EDI) and Aberdeen (ABZ) for at least one summer and one winter it can request slots – which IAG has to relinquish – to fly additional routes. It just happens that Flybe has been operating between Heathrow and those two Scottish airports for a little more than a year now. There were originally twelve slot-pairs released by IAG as remedy for it being allowed to acquire bmi, of which eight are already allocated to Flybe’s EDI and ABZ services. That leaves four. Begin to see a potential connection now?
But there’s more. Not only did Flybe get four slot pairs for the new route, but they are at remarkably convenient times. Any airline executive knows that getting a Heathrow slot is difficult, but it is marginally easier than getting one at the right time. However, the EU decision includes some further language that might be revealing: “…IAG undertakes to make available Slots within the Time Window [+/-20 minutes] if it has such Slots. In the event IAG does not have any Slots within the Time Window, it shall offer to release Slots closest in time to the Prospective Entrant’s request.”
So in effect, if an airline that has been operating remedy routes from Heathrow to Scotland for at least a year comes along and wants to start a new European route, IAG has to give up slots within 20 minutes of the times requested. And no large payments – as is typically the case when Heathrow slots are exchanged – are involved.
It’s starting to come together now. Flybe moves its government PSO-supported Newquay-London route to Heathrow. As it’s been serving Heathrow for a year it gets the slots it needs to make the new service viable. The airline increases connectivity for Cornwall and for itself, which grows the traffic. Meanwhile, there will also be three vacant slots at Gatwick allocated to Flybe that come up for grabs.
These transactions take time to arrange, so no doubt the idea of moving the Newquay service Heathrow was under evaluation well before Flybe’s recent troubles emerged. But Flybe has been struggling – off and on – for a while now. Last week it sold one of its hangars at Exeter Airport for £5m, and immediately leased it back again. This week it has arranged a similar transaction involving one of the Dash-8 aircraft it previously owned. Is it perhaps now also attempting to obtain extra working capital by disposing of its last few Gatwick slots?
Selling more of the family silver? The Aviation Oracle can’t say for sure and doesn't really want to keep harping on about Flybe. The firm needs to pull through because the UK and its airline industry needs Flybe – or more particularly the routes it operates including the revised route to Cornwall. Let’s hope the changes have a positive impact and the future is brighter. For the Newquay route, that seems to be almost a dead-cert.
November 19, 2018
Just over two weeks ago, an almost new Boeing 737 MAX8 dived into the Java Sea in Indonesia with the loss of all lives on board. The crash attracted a great deal of attention because it involved the first example of the newest variant of the 737 to be lost, and because the airline involved has attracted some criticism of its safety record in the past. As the investigation got underway, issues emerged that pitched manufacturer, pilots and unions into vigorous debate and has already resulted in a safety notification being issued to operators of the jet. Although the final report on the accident is still a long way in the future, The Aviation Oracle looks at some of the issues involved.
Imagine you’re driving a shiny new car on cruise control. It’s quite a sophisticated vehicle and when it detects you’re getting too close to an object in front, it brakes for you. Great. However, the manufacturer configured the system so that once the road ahead clears it accelerates back to the speed that was set previously. That might be OK on many occasions, but perhaps not always. Oh, and the manufacturer hasn’t told you the car will do this. Even so you might still be fairly happy with the concept. But consider what it would be like if you can’t see through the windows – the only thing you have to go on is the speedo, and for the most part you have to ‘trust’ what the car is doing. Still comfortable?
As near as can be explained in layman’s terms, something similar has happened with the 737 MAX, the latest version of Boeing’s best-selling short-haul airliner. This new variant’s large low-slung engines are installed further forward and are canted up slightly to avoid them scraping the ground. But doing that increased – albeit only slightly – the risk that the aircraft might stall. This is not the same as a stall you occasionally get in a car – it happens when an aircraft is flown too slowly, or its nose is pitched up too much. A stalled wing doesn’t produce sufficient lift to keep an aircraft in the air, so it drops. And if the pilots don’t implement an expedient recovery the result could be a crash. Naturally pilots are trained to recognise conditions and instrument readings that could indicate the onset of a stall, and deal with it safely. However, since on-board software has become ever more sophisticated, manufacturers have implemented automated systems that help prevent a stall. These move the controls even if the pilots don’t react in an attempt to avert disaster, and for the most part they are an excellent safety measure. This is essentially what Boeing did with the 737 MAX – it installed what it called a Manoeuvring Characteristics Augmentation System (MCAS) designed to avert a stall by applying nose down trim, but it didn’t tell pilots what it had done. MCAS wasn’t a feature of earlier 737 variants, nor was it covered in the ‘differences’ training all pilots receive when they transfer onto an aircraft they haven’t flown before.
Lion Air 610
On October 29, Lion Air flight JT610 departed from Jakarta, Indonesia bound for Pangkal Pinang with 189 people on board. Thirteen minutes later is crashed into the Java Sea. Boeing 737 MAX8 PK-LQP was two months old and had flown a mere 800 hours since delivery; it was an almost new aircraft. During its short final trip aloft the pilots requested clearance to return to Jakarta, but the aircraft hit the Java Sea in a steep nose-down attitude 21 miles from the airport.
Fluctuating height and abnormal speed readings were transmitted to the ground by the aircraft’s systems. As an investigation got underway, the National Transportation Safety Committee revealed that there had been problems with the aircraft’s angle of attack (AoA) sensors and airspeed indicator on its last four flights. Replacement of some components had taken place, which had been expected to remedy the faults.
It is suspected that sensors – probes on the outside of the aircraft – might have been sending erroneous data to the on-board computers. If that was the case, the aircraft’s computers could have “thought” the aircraft was flying slower – or its nose was pitched up more steeply – than was actually the case. And when the computers detected the risk of a stall, they forced the nose of the aircraft down by applying nose down trim to the control surfaces on the horizontal tail. The pilots could counter the intervention of the computer and get things level again, but after ten seconds the process would start again. The Lion Air pilots didn’t know about the new system so it’s possible they could have been confused: the aircraft was going fast enough, the nose wasn’t pitched up steeply, and yet the controls were being forced downwards. Whatever happened on board, the end result was tragic.
Airworthiness authorities have since issued advisories to airline customers and pilots, making them aware of the MCAS and how to switch it off. It’s possible that there could be minor changes to the 737 MAX design in future, particularly if it is proven that faulty sensors were the root cause of the crash. But the fundamental question for now is – should pilots be made aware of systems and their effects when they are trained to fly a new aircraft type?
Staying in the loop
Learning to fly an airliner isn’t like learning to fly a car. Every commercial pilot receives very thorough training, not only in the art of flying but also on the systems in the aircraft they are going to fly. They are taken through faults that could arise, problem diagnosis, and resolution actions. Take for example a strong burning smell and smoke. In a car, you might stop and get out and find out what’s wrong. In an aircraft at 35,000ft it’s not that easy. But pilots are trained to know where the air they are breathing comes from – which engine provides the supply to the cockpit for example – and can thus take informed action to eliminate the problem before it becomes fatal, even if that means deactivating a system or shutting down an engine.
A lawsuit alleging a fault in the 737 MAX design has already been filed. It claims that “under certain conditions [the MCAS] can push the nose down unexpectedly and so strongly that the pilot cannot pull it back in time to avoid a crash.” It adds: “It is particularly surprising to hear from safety experts… that Boeing failed to warn its customers and the pilots of its new 737 MAX aircraft about this significant change in the flight control systems.”
The Aviation Oracle does not wish to pre-empt the findings of the ongoing investigation. It may be that the probes and the software were fine, and the tragic accident was a result of another cause. But a pilot training omission has already been acknowledged. Providing pilots with an intimate understanding of the workings of machines they fly is vital. Failure to do so could have ramifications for the safety of every airline passenger unfortunate to be in the wrong place at the wrong time. Let’s not make the same mistake again.
THE BREXIT CONUNDRUM
November 16, 2018
Brexit - and more particularly its potential adverse impact on aviation - has troubled The Aviation Oracle for some time now. With negotiations seemingly dragging on interminably, there was legitimate concern in some quarters that a deal would never be forthcoming, and that the UK would crash out of the EU without framework for airlines to continue operating. Maybe there would be some clarity when a deal was finally put on the table?
The long-awaited Draft Withdrawal Agreement between the UK and the European Union has finally been released. Unsurprisingly all the talk immediately afterwards was political, with ministers resigning and others said to be deeply concerned about the contents of the document. But what was in it for aviation?
Agreeing to what?
One thing is for sure. The 585 page PDF makes little mention of the ramifications for Europe’s air services Indeed the terms ‘air services’, ‘airline’ and ‘aviation’ appear just once while ‘air traffic’ and ‘EASA’ are not present at all. ‘Air’ gets a little more coverage, but almost exclusively in the context of environmental issues. That just leaves ‘airport’ which gets much more attention, almost all related to customs matters and the remainder dealing with specific arrangements in Gibraltar, Cyprus and Northern Ireland. So anyone expecting the document to provide total clarity for the aviation industry is going to be somewhat disappointed.
Some may have expected a lack of detail, while others might have assumed that this document would resolve the entire issue of Britain's divorce from the EU. Clearly anyone waiting for the latter was at best misguided, or even naive. Despite being rather scant on detail, the document does appear to propose both sides will continue to respect the common rules for operation of air services within the community - at least during a transition period that will last until December 2020. These long-standing aviation arrangements deal primarily with matters such as licencing of airlines, freedom of access for air carriers, and fare setting. The draft document also mentions a Council Directive covering access to the airport ground handling market and it also appears that the UK will remain committed to European rules on state aid to airlines and airports. But beyond that – there’s nothing else directly related to aviation.
So the direction for the next year or two is a little clearer now, at least in some respects - it seems the proposal is for air services between EU countries and the UK to not be affected. But there is no mention of wider bilateral agreements with countries outside the UK. Whether those already set up by the EU will be recognised and applied equally to a stand-alone UK, remains open to conjecture - and it will be very much up to the other countries to decide that for themselves. For example, there is an ‘open skies’ arrangement between the EU and the USA which more or less allows airlines on both sides to fly between the two continents as they wish. Will the USA grant UK carriers those same freedoms – from day one, or in the future? It’s not a foregone conclusion, and the Draft Withdrawal Agreement does nothing to settle the matter. So while British Airways, Air France, easyJet, Lufthansa, Ryanair, et al will continue to be able to wing their way between Europe and the UK, it is by no means certain that British Airways and Virgin Atlantic will continue to have unfettered access to other parts of the world.
The other side of the coin is freedom of movement, and on that score the Draft Withdrawal Bill is a little more forthcoming. The UK has never been part of the Schengen zone, so passports have always been a prerequisite to travel. And those arrangements will continue – passports or national identity cards, but not visas, for all EU citizens. So in theory intra-European air traffic levels should not decline. However, airline business remaining buoyant also depends on trade not declining, and that won’t be resolved until well into the transition period that commences next March and ends in December 2020.
Another aspect worth mentioning is aviation licencing and safety. As part of the EU, Britain is a member of EASA (European Aviation Safety Agency) which sets the regulatory standards for matters including pilot and engineer’s qualifications, training, aircraft certification and maintenance, air traffic control, and airfield management. The UK has already declared that it wishes to continue to be a member of EASA, observing all of its rules and guidelines. If that happens, then it follows that along with the wider right for citizens to live and work in an EU state – at least during the forthcoming transition period – UK aircrew will continue to be able to fly across Europe and work for its airlines. However, that’s just the regulatory aspects. The provision of services – such as a UK airline being able to have its aircraft repaired in [say] Bulgaria – is far from settled, and whether it will be as easy to arrange in future will only become clear during the transition negotiations.
Brave new world
All well and good then? Yes, maybe, sort of… The Draft Withdrawal Agreement is set to preserve our right to jet off to the Costas for our two weeks in the sun, or to make a one-day trip to Frankfurt on business. easyJet, Ryanair and Wizz Air will have opportunities to open routes from the UK to even more airports few people have ever heard of, and the airlines' staff will be able to operate the aircraft. British Airways might find it a tad more difficult to open a new service to the middle of the USA, but that’s a matter between the British and US governments. This certainly looks set to last until the end of the transition period in December 2020, by which time trade negotiations will have been completed and the longer term will be clearer. It could be nothing will change even then. Or maybe the aviation arrangements will change for the better
- or worse - again. Some would day we're just buying into more uncertainty.
All of this assumes that the Draft Withdrawal Agreement is approved by parliament, which is far from a foregone conclusion given all of the political wrangling going on at the moment. Many MPs – and their parties – have far bigger issues to concern themselves with than aviation, and our desire or need to travel is well down their list of priorities. We’ll only know whether the interim arrangements will stand in December, when the parliamentary vote takes place.
And what about no deal? That is a much gloomier picture. No guaranteed rights for airlines to freely fly across Europe, no recognition of licences and safety standards. Every proposed new air route would need to be approved at both ends. The UK could be free from a pesky Irish airline trying to muscle in on its domestic market (not that it does much of that anymore), but on the other hand there could be massive cut backs to flights between the UK and mainland Europe – if any at all operate on day one. No deal is going to involve some very quick negotiating if we are to continue to enjoy the same freedom to move around by air as we do now.
Brexit was always a vote for self-government over community commonality – the chance to set the rules rather than work within them. But with that came uncertainty – EU laws were a known quantity, whereas Britain on its own could end up better or worse off than it is (was) as part of a bigger cooperative. We now have some short-term clarity on the aviation side. Assuming the UK continues headlong down the Brexit path, the Draft Withdrawal Agreement gives us some cause for comfort, even if it’s not ideal in all respects. There are two other alternatives – abandon Brexit or exit without a deal. One of those could have very significant adverse impacts on the UK’s aviation industry, and needs to be averted at all costs.
FLYBE - THE SAGA CONTINUES
January 16, 2023
While directors at Flybe continue "discussions with strategic operators about a potential sale of the company", it has emerged that the beleaguered firm yesterday completed the sale of a major asset.
Hangar 1 of the New Walker Hangar, which forms part of the airline's headquarters, has been bought by Exeter & Devon Airport Ltd for £5m + VAT. The structure will be leased back to Flybe for a period of 25 years at a cost of £515,000 per annum. A statement to the stock markets says that proceeds from the transaction will be used for general working capital.
Meanwhile, Cardiff Airport's former head of marketing, Peter Phillips, has claimed that the loss of Flybe be would be "catastrophic" for the Welsh airport and for the country's economy. He has urged the government to offer help, "not buying the airline but... offering guarantee sweeteners to ensure any new owner ring-fences Cardiff Airport operations."
As mentioned by The Aviation Oracle two days ago, the demise of Flybe could have a far-reaching adverse implications for several UK regional airports where the airline is the major service provider. Phillips' comments exemplify these issues and put a focus on the value Flybe delivers by providing quick and affordable transport across the UK.
Of course it is by no means a foregone conclusion that Flybe will disappear - indeed the airline's management have already said that they are looking to make further cost cuts while also pursuing a possible merger or acquisition. However, Flybe has been struggling for years and whatever the outcome it seems that only drastic action will preserve part or all of it.
Shares, which have traded as high as £1.50, dropped precipitously in October when the airline issued a profits warning. By the time it revealed that talks over an acquisition had commenced they were priced at £0.12. Over the last two days a further decline to just £0.09 has taken place, which perhaps suggests the market doesn't foresee an overly rosy outcome.
DARK SKIES AHEAD FOR FLYBE?
November 14, 2018
It seems almost certain that there’s more turbulence ahead for beleaguered UK carrier Flybe. A month ago the airline issued a profits warning, which it followed on November 14 with an announcement that it was open to takeover bids. The latest financial filing shows that it made a profit during the first half of 2018 which was lower than the equivalent last year. Passenger volumes were up slightly but yield (the margin made from each passenger) was down. This came despite changes already having taken place within the business and an acknowledgement that urgent improvements to its financial position were going to be necessary.
Difficult trading conditions
The airline’s 2018 H1 results included some interesting titbits that further explain why Flybe is in a precarious position. Average revenue per seat increased to just over £60 during the first half of 2018 but the firm was hit by a 5.9% increase in costs, mainly from currency fluctuations and hikes in fuel prices. As a result its shares, which were valued near £0.50 in March and have been as high as £1.50, dropped substantially. Although there was a rebound immediately after the interim results were posted, the stock price has since bumped along at near £0.12.
Clearly the business is in need of further reform. Looking forward, a significant proportion of its current major problems – future currency and fuel costs – are hedged (committed in advance at a pre-determined price). But securing those deals has been expensive – fuel is now booked at £663 per tonne rather than £518 previously. Taking into consideration staffing that costs Flybe an average of £10.09 per passenger, £16.03 going to acquisition and maintenance the fleet, and £30.83 required to operate the aircraft (fuel, airport and navigation charges), it becomes obvious that there’s slim pickings left from the £60-odd that it typically extracts from each customer.
The fundamental problem is that the majority of Flybe’s business comes from short domestic flights. While lucrative business travel is part of the mix, it also competes with rail and road. Flybe’s lead-in fares are often competitive with – and sometimes lower than – surface transport, and even over shorter booking horizons it often betters flexible train fares. But the airfare paid by UK domestic travellers includes £13 Air Passenger Duty (APD) that goes directly to the government; on that basis alone the treasury makes more from every Flybe customer than the airline does itself.
On the other hand several train companies that Flybe competes against receive a subsidy (Cross Country - £0.051 per passenger per kilometre, Great Western - £0.048/pax/km, Virgin West Coast - £0.016/pax/km). On a 403 miles trip from London to Glasgow the direct tax take from an airline passenger is £13, while the railway receives £10.39 from the government for an equivalent journey. Another problem is that Flybe’s fuel and currency costs have also risen much faster than inflation. Flybe anticipates that these costs could increase further, and credit card issuers might demand additional cash to secure payments. And yet if it raises fares it risks losing customers, especially to rail where some ticket prices are regulated and can’t be increased by more than RPI + 1% each year.
It’s not all bad news though. Some aircraft that were expensive to operate have been removed from the fleet with more to follow over the next couple of years, while lease costs have been cut. Unprofitable routes have been abandoned, capacity is down and load factors are up – and that’s always a good mix. Managers are also seeking additional ‘code share’ partnerships with larger airlines, primarily on connections between long-haul routes and its plethora of links to smaller regional airports. These deals could be quite lucrative, as long as Flybe gets a reasonable share of the revenue (a failing that partly contributed to the demise of another UK airline, bmi, back in 2012). It’s obvious that progress is being made as future bookings are ahead of last year, but the business could be further weakened yet by the ongoing uncertainty over the Brexit outcome.
At the end of the first half, the comments of independent auditors PriceWaterhouseCoopers summed up the challenges succinctly: “Flybe's operating results vary significantly from quarter to quarter and the first half of the year is generally significantly stronger than the second half as the airline industry enjoys higher demand and yields during the Summer season…” and “[The possibility of card acquirers requiring more cash collateral] indicate the existence of a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern.”
The implications seem fairly clear – the best part of the year is over, the results weren’t great, and further change will be needed if the business is to survive.
The road ahead
With all that in mind it’s fairly obvious why the board has decided to raise the prospect of the business being acquired by or merged with a rival. It spurned an approach by Stobart Air earlier in the year, a decision which with the benefit of hindsight could perhaps be regarded as misguided since the market value of Flybe has declined by two thirds since then. The Flybe Group includes a well-respected aircraft engineering business that manages lucrative third party contracts in addition to servicing the in-house fleet and that could be sold-off to raise capital – but it would do little to address the fundamental challenges faced by the airline. So who would be interested in Flybe, and why?
First up, Stobart Air could come back to the table. Success now would come as a moral victory and at a much lower price than before. However, Stobart's aviation business faces its own internal boardroom problems at the moment. It also seems to be reshaping and downsizing its airline operations after successfully providing a platform on which much-needed business was brought to London Southend Airport, another part of the Stobart empire. Low-cost carriers including easyJet and Ryanair have also been touted as potential suitors. But this seems unlikely as the former has well-established operations on most of the UK’s major domestic air routes, while the latter has largely forsaken the UK market and would probably not want to return – at least until the ramifications of Brexit become clearer. In any case low-cost airlines specialise in volume and simplification (especially in fleet and operations), and Flybe offers little of that.
Newly resurgent Loganair and flybmi (formerly bmiRegional), both held by parent Airline Investments Limited (AIL) are cut from the same cloth as Flybe and understand the regional airline business. But with a combined fleet numbering little more than half of that flown by Flybe (and revenues largely in line with that differentiation) do they have the gravitas to take on more business and make it profitable in fairly short order? Flybe is cheap enough so an attempt might be made, but it’d be a big ask for AIL to turn round Flybe without overtaxing resources that it relies on to keep an eye on its existing businesses. Perhaps CityFlyer Express would have more of an appetite? It has a substantial operation at London City Airport where Flybe has recently been building a presence, and the two carriers share a common[-ish] fleet of Embraer regional jets. But thus far, and despite it being headquartered in Manchester, CityFlyer has displayed little interest in the UK regions other than dipping a toe in the weekend holiday market. Would it want to take on the complexity of Flybe’s network, when it has traditionally focused on a single ‘hub’ at London City?
The elephant in the room is British Airways (BA) and its parent International Airlines Group (IAG). But it’s hard to see what BA would get out of a deal. The ‘national carrier’ has largely forsaken the UK regions with the exception of trunk routes to London. Flybe could channel more passengers into BA’s long-haul operations, but that needs slots at Heathrow and the few held by Flybe are remedies from bmi and cannot easily be switched to other routes. Besides, IAG has been strengthening its hub in Dublin and Aer Lingus is doing a good job of connecting the UK regions to the rest of the world via the Republic of Ireland.
Aside from venture capital firms – which haven’t got a great reputation for rescuing UK airlines after the Monarch debacle – the only other opportunity to keep things intact appears to be a foreign carrier taking on Flybe. But do any of them actually want it at the moment, with Brexit looming? Flybe could be a cheap way to obtain an UK air operators certificate, but only if an overseas airline sees a future in what could be a segregated European market. It may be that Britain’s impending departure from the EU has little or no impact on aviation, but would anyone take a punt until the path forward becomes clearer?
Something is better than nothing
The bottom line is that Flybe has been struggling for quite some time now, with successive management teams failing to turn it around. At the same time, each has spent time publicly pointing to the challenges inherent in the operation – increasing costs, unpredictable demand and complexity. Flybe plays in small markets, and any future success (i.e. profits) seems likely to be similarly limited. None of its likely suitors have a magic wand that will enable them to turn things around quickly. So it will take patience and deep pockets.
The other alternative is that the business could be shuttered or broken up with the profitable bits being retained or cherry-picked by other airlines, and the rest dumped. The demise of Flybe - or a substantial reduction in its size - would come as a major blow to UK regional airports; Cardiff, Doncaster, Exeter, Guernsey, Jersey, Newquay, Norwich and Southampton to name a few. It would also have a significant impact at Birmingham and Manchester where the carrier accounts for a notable amount of business, especially UK connecting traffic. It would also affect travellers who prefer flying, rather than face a slow and expensive train journey or a tedious and congested road trip. But if Flybe disappears in its current form, which now seems quite possible, not all of its routes are likely to be filled by other carriers such as flybmi and Loganair, or even by easyJet or Stobart Air - plenty of gaps will be left and the UK transport market will be much the worst for it.
No doubt this subject will run for a while. The Aviation Oracle will keep an eye on it and report back as developments unfold.
Some good news today on the Brexit front as far as commercial aviation is concerned. On November 27 the UK and the US completed negotiations on a new bilateral air services agreement that will enable flights between the two countries to continue after the UK leaves the European Union next year. The arrangement has to be ratified by both governments.
In recent years the framework governing flight operations between Europe and the USA, and rules for airline ownership and joint ventures, have been applied on a pan-European 'open skies' basis. However, once Britain left the Union there was no legal basis on which transatlantic connections between the two countries could continue to operate. No one, least of all The Aviation Oracle, really believed that flights would just cease but new rules had to be negotiated and there was always room to doubt the process would be completed in time, especially with everything else the government had on the agenda.
Discussions over the deal have been ongoing for much of this year, with airline ownership being a particular sticking point. The US would normally require UK airlines to be majority owned by UK interests. That was clearly a problem with British Airways being part of the International Airlines Group headquartered in Spain, Virgin Atlantic in which Delta has a 49% interest and soon Air France / KLM another 31%, and Norwegian Air. Now that obstacle has been overcome with the Americans agreeing that existing UK carriers owned by EEA interests will retain grandfather rights to operate across the Atlantic. However, future airline ownership changes involving non-UK nationals will have to be agreed by the US. It is almost certain too that any new entrant into the market will have be majority British or American owned. The US has also stipulated that joint venture immunity for arrangements such as the shared revenue deal between American Airlines and British Airways on the London-New York route can be maintained.
Transport Secretary Chris Grayling said that “this new arrangement and those concluded with eight other countries around the world are proof that the UK will continue to be a major player on the world stage after we leave the EU.”
A government statement added that the deal “will guarantee the continuation of the vital transatlantic routes used by tens of millions of passengers a year, ensuring people can continue to travel easily between the UK and US and maintaining choice and good value travel.”
Grayling’s department has already signed similar deals with Albania, Georgia, Iceland, Israel, Kosovo, Montenegro, Morocco and Switzerland while the process with Canada has reached an advanced stage. While it is good to learn that progress is being made on signing up new bilateral air service agreements, there are still a lot of countries outside of the EU to which UK airlines might not have access come March next year.