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Thursday, 13 June 2013

The ultimate dogmas about aviation in The Netherlands and why these dogmas are elementarily wrong

Lots of people – especially men – get a sparkle in their eyes when they talk about airplanes and aviation. Remembering their childhood, when they dreamt about becoming a pilot on a Boeing 747 Jumbo Jet, they still feel the unfulfilled yearning when the subject of discussion is ´aviation´.

Most people still love flying in general and love being at airports in particular. They like the atmosphere at an airport, with its unspoken promises of far destinations and new adventures, entering their often somewhat dull and predictable lives. They tuck into the international crowds with their exotic, foreign languages at the airport and rejoice the tanned and excited passengers and their happy and relieved families awaiting them.

And of course they admire the airport personnel with their colourful clothes and stylish uniforms, emitting authority, laid-back professionalism and expertise, based on years of experience and routine.

Large, modern airports are also beehives of economic activity:
  • Hundreds of day-and-night stores, selling a wide array of designer clothes, spirits, personal electronics and luxury products, are luring the travelers into spending their money on ‘tax-free’ articles;
  • Car rental companies are renting thousands of cars per day to business travelers and tourists from around the globe;
  • Hundreds of couriers and transport & distribution companies are working round the clock to facilitate the complex logistical operations at a large airport;
  • And numerous food, beverage and hospitality establishments offer services to uncountable hungry and tired travelers.
On top of that, many multinational companies tend to gather around the large international airports all over the world, as these are trying to reduce the time involved in air transport to the bare minimum. This behavior increases the importance of large airports as international business hubs. For instance Frankfurt, London, Paris, Berlin and Amsterdam are cities that profit extraordinarily from their large airports, as these bring many millions of tourists and business travelers each year.

All these economic activities combined render literally tens of thousands of jobs for the people surrounding these large, modern airports.

These are the reasons that airports and aviation companies receive loads of kudos and enjoy almost inexhaustible credit from the population, the politicians and officials in their country. This in spite of the ubiquitous, ´round the clock´ noise and air pollution and the increased risk for fatal incidents in the areas close to airfields. On top of that, there are the increasing traffic jams in the sky, the enormous (fuel) waste and environmental challenges, which are the unavoidable results of aviation in general. Nevertheless, most people support increasing air traffic and the growth strategies of national and local airports.

In this matter, the largest Dutch aviator KLM (now part of Air France/KLM) and ‘mainport’ Schiphol Amsterdam Airport are no exceptions, when it comes to nearly unlimited credit from the Dutch people and officials.
However, there is a dark side to this almost unconditional love for aviation companies and airports in The Netherlands and other countries. This love makes that people close their eyes for the obvious drawbacks of air traffic and stop thinking about different transport strategies, that are more cost effective and less harm the environment.

You could safely state that there are two ultimate dogmas upon aviation in The Netherlands (and perhaps in many other countries):

  • Air transportation is a viable and vivid, high-yielding business, which will bring thousands of new jobs and prosperity to formerly challenged regions;  
  • In order to remain competitive, the main national airport (in The Netherlands: Schiphol Amsterdam Airport) must grow… under all circumstances and should never be stopped in the development of its expansion plans; 

In the remainder of this article, I want to look into these dogmas and prove why these dogmas are elementarily wrong, based on today’s examples.

Dogma One: Air transportation is a viable, high-yielding business

No, it isn’t.

Exactly two years ago, the chairman of IATA, Giovanni Bisignani, held a keynote speech. From the summary of this speech came the following snips, which I printed in an earlier article, published on this blog (the link to the original article can also be found here):

Sustainable Profitability: Bisignani noted that sustainable profitability would be the biggest challenge for an industry with a net return of 0.1% over the last four decades. “We know what will not work. Cost-cutting alone does not increase long-term profits. Unbundling erodes the value of the base product. And re-regulation would kill efficiency and innovation,” said Bisignani.

What Bisignani stated, is that the whole aviation industry in average produced 0.1% in net profits over the last 40 years. Translated in plain English, this meant that when you had invested €1 million in the aviation industry, you earned in average €1000 in ROI. There probably isn’t one other industry that showed such poor results over such a long period.

As a matter of fact, many aviation companies have been chronic bleeders, which have almost never yielded viable profits in the past. Many of those aviation companies have already disappeared during the last years: PanAm, Sabena, SwissAir and many others. Of course, many other examples among these aviation companies have only dim chances for the future.

Due to this longterm economic crisis that we are in, but also due to the ubiquitously increasing safety regulations and controls, the soaring fuel prices and environmental charges and the murderous competition between the large, globally operating airliners and the more locally oriented price-fighters, the prospects of future prosperity for aviation companies will rather decrease than increase in the next few years.

There might still be a few ‘winners’ among the aviation companies these days. However, in reality most of these winners do this by flying around the clock, cutting costs to irresponsible levels and pushing the envelope for safety regulations. All others skim often at the edge of their sheer existance and often need a helping hand in any kind by their governments. Look for instance at the financial data of British Airways, Air France/KLM, Iberia, Alitalia and (to a lesser degree Lufthansa), where hardly any black figures can be found
Generally speaking, aviation is not only a poorly yielding business for the aviation companies themselves, but often also for the large and small airports, which have emerged everywhere in Europe. Look for instance at this map which shows airports with more than 1 million visitors all over Europe. I took this from Wikipedia:

Airports in Europe with more than 1 million passengers per annum
Click to enlarge
 When you look at this map, you will probably agree with me that Western Europe has an enormous excess capacity in commercial airports.

The Netherlands alone has already 8 airports with more than 1 million visitors per year and countries like Germany, Italy, France, Spain, Great Britain and Greece all have numerous airfields. Very little of these airports make decent profits, as the competition between those is murderous. Especially pricefighters, like Easyjet and Ryanair look for small airfields that give the most bang for the buck.

The owners of these airports are often willing to give enormous discounts to these pricefighters, in order to get more air traffic. This effectively leads to erosion of profits, faltering investments in people and equipment and ultimately to cannibalism among the airports.

These local airports have often been established with millions and millions in subsidies from local governments. However, most of the time those airports have a dissappointing life cycle, with hardly any profits left to pay back the investments. The new jobs, created at these airports, will only exist as long as local governments and investors are willing to foot the bill for the mounting losses and required investments of these airports.

Even at the very large Schiphol Amsterdam Airport and probably at the other large airports too, the handling of airplanes itself (obviously the main activity and ‘raison d’etre’ for an airport) is a business, which only delivers poor profits at best.

The cash cows that do turn Schiphol into a profitable airport, all have little to do with flying itself, but almost everything with “sucking the passengers dry”: shops, service organisations, food, beverage and hospitality units and car parking are used to ‘rob’ the passenger and occasional visitor from his hard-earned euro’s.

Also commercial real estate is a cash cow, as building terrain around a large airport is extremely expensive in general.

The only cash cow of the Schiphol company, that is loosely based upon flying, is the passenger handling in Amsterdam and other terminals in the world (a.o. New York and Hongkong have terminals, owned by Schiphol), which is done extremely efficient and (thus) cost-effective.

In the earlier mentioned speech, IATA’s Giovanni Bisignani already stated that sustainable profit will be the biggest challenge for the industry. And he is a ‘wings-man’.

An economist that would have no connection with the aviation industry would state, that aviation is probably the worst investment there is.

Dogma Two: Schiphol must grow… under any circumstances.

The second dogma is aimed at the Dutch national airport Schiphol Amsterdam Airport: the fourth biggest airport in Europe.

Schiphol has a longterm growth strategy for the coming years that aims at about 75 million passengers per years  (now 55 million per year) and a freight handling, somewhere north of 2 billion metric tons (now 1.48 billion tons).

In the past, Schiphol played every trick in the book to remain growing:
  • Rigging noise pollution data in such a way that the airport always remained within the thresholds for noise pollution, which allowed further growth. When the measured noise pollution data exceeded these thresholds at occasions, then the thresholds themselves were simply adjusted or the methodology of measurement was changed, with predictable results: growth enabled;
  • Land that was legally owned by people and investors outside Schiphol, has been expropriated from them by Schiphol: supposedly by using all kinds of legal tricks, like ‘safety and security regulations and standards, requiring expropriation’ and reputedly even through bribery of two justices from Dutch courts of justice;
  • Massively lobbying at national and local politicians in order to keep their growth path intact;
  • And was it a coïncidence that the Minister of Transport and Waterways, Camiel Eurlings, who took favorable decisions for Schiphol and Air France/KLM, will now become the next CEO for the Dutch branch of Air France/KLM?! Or is this just a rethorical question?!
The latest trick of Schiphol in order to grow, is to get rid of the low-yield charter flights to the European holiday resorts (‘Mom, Pop and the children’-vacations) and instead claim extra slots for high-yield, intercontinental transit flights.

Mom and Pop’s charters had already been banished to the early hours of the day, like f.i. 05.30AM, when every normal citizen is still sound asleep.
However, now mom and pop will be totally banished from Schiphol, in favor of Lelystad Airport: a small hobby-airport in a sleepy town at 50 km’s, north of Amsterdam.

Lelystad Airport will be refurbished to an international airport which can handle about 5 million charter passengers per year.

The local municipality in Lelystad has Euro-signs in their eyes and applauded this strategic move by Schiphol, hoping for hundreds of new jobs and new fame and glory for their 50 year old city:

  • That most regional airports suffer from a troubled existance is conveniently forgotten;
  • That charter companies, currently flying from Schiphol, are outraged with this latest trick from Schiphol is also forgotten. Lelystad hopes that these charter companies will swallow their pride and attend to the leash of Schiphol after all;
  • That Lelystad is the host of one of the most unique nature areas in Europe, which is yearly visited by many rare species of birds, is also forgotten. That approximately 20,000 flight movements per year will have a destructive influence on this nature area, is obvious. However, ‘who gives a rat’s *ss about these frigging birds?!’;
Nevertheless, even with all ‘cheapo’ charter passengers exiled to Lelystad and with 75 million high-class, international passengers per year, flying itself will still not be a lucrative business for Schiphol.

The profit model of Schiphol will still be based, almost exclusively, on ‘sucking the passengers and the visitors dry’:

  • €3,50 for a coffee, water or a soft-drink;
  • €4,50 for a beer
  • €4,50 for a basic sandwich;
  • €6 for an hour of parking;
And there is one more thing…

Air France is definitely the top dog within the Air France / KLM merged aviation company. When the going would get even tougher for Air France / KLM than it already is today, there is a considerable chance that the French / Dutch aviation company would abandon Schiphol as one of its main hubs and would exclusively operate from French airports like Orly and Charles de Gaulle.

Ergo: when Air France / KLM would leave Schiphol, it would be ‘the end of the line’ for this self-acclaimed ‘mainport’.

These are the main reasons that I look at Schiphol’s expansion plans with hardly concealed mistrust.

I agree with everybody that aviation is an important economic and strategic factor for a country, for Europe and for the world in general. I don’t want to deny this fact through this article. I also don’t deny that aviation will grow further in the coming 10 - 20 years.

However, with all these plans still in the loop for new commercial airports all over Europe and for the expansion of existing airports, the people should remember that aviation is one of the least profitable businesses in the world. 

Very little aviation companies and very few airports can show real profits.

And regarding the excess capacity of airports which already exists: the chance that a new or expanded airport will become more profitable within a few years, is that of a snowball in hell! This shows, in my humble opinion, that the ultimate dogmas about flying in The Netherlands are elementarily wrong! 

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