Silviase/jgov_v1.4_full_ann huggingface dataset:
Table 7. Average annual staff remuneration. European Airlines 1991 (US$000).

Pilots & co-pilots	Maintenance personnel	Ticketing & sales staff
Iberia	209.5	40.8	48.2
Sabena (1990)	185.7	n.a.	n.a.
Swiss air	191.4	n.a.	n.a.
Austrian	154.0	51.6	47.7
Lufthansa	152.2	48.3	46.0
SAS	134.9	61.5	44.7
KLM (1990)	131.4	39.4	n.a.
Air Portugal	103.7	25.4	36.4
Finnair	90.4	33.2	31.0
BA	87.1	31.1	35.0

Source: Doganis, from ICAO Digest of Statistics.

### 4.4 Productivity and costs

Movements in BA's employment and output before and after privatization are reflected in the enterprise's labour productivity record, which is shown in Figure 5. The chart shows the logarithm of ATKs per employee over time, and therefore its slope represents the proportionate rate of change of labour productivity. Average productivity growth in various sub-periods is summarised in Table 8, where the impact of the restructuring programme of the early 1980s is clearly visible.

Table 8. BA's average productivity growth by period.

1975 - 1982	5.6%
1982 - 1985	10.0%
1985 - 1991	3.0%
1991 - 1994	11.0%

Source: British Airways.

By the middle of the decade the initial restructuring programme was largely complete
and average productivity growth subsequently fell to around 3% per annum. Thus labour productivity growth in the immediate post-privatization period was significantly lower than in the late 1970s as well as being lower than in the period of pre-privatization restructuring. More recently, productivity growth has accelerated again, arguably in response to greater competitive and financial pressures on European airlines over the relevant period.

In general, however, there is no very clear break in the labour productivity record that can be confidently linked to either restructuring or privatization or deregulation, as becomes more clear if year to year percentage changes in employment are correlated with changes in BA's output/capacity (measured in ATKs). Figure 6 indicates, for example, that it is difficult to identify particular periods in which observations tend to lie on one or other side of the average (strongly positive) relationship between employment changes and output/capacity changes.

The lack of a clear break in productivity performance at the time either of BA’s flotation or of UK deregulation/liberalization is matched by data on load factors (see Figure 7). The scheduled passenger load factor moves somewhat erratically on year by year basis, but the trend is steadily upwards and does not change in any obvious way until the 1990s when its growth appears to come to a halt.

It is to be expected that the major swings in labour productivity over the period under examination would have had substantial effects on BA's unit costs, but the historical record of real unit costs exhibits a rather different pattern from that of labour productivity (see Figure 8) in that movements in real unit costs do show a marked shift in trend at around the time of UK liberalization (i.e. the mid 1980s). Between 1975 and 1985 BA's real unit costs were declining at a gentle trend rate of around 0.4% per annum; between 1985 and 1994 this trend of cost reduction increased sharply to an average rate of approximately 4.4% per annum.

Despite the sharp break in the unit cost series in 1985, it would probably be wrong to ascribe the emergence of the later trend simply to deregulation and privatization alone. As is clear from the employment data and from the business history of BA, the enterprise's major strategy shift occurred in 1981 with the arrival of Lord King and the new management team.

On the other hand, the restructuring of BA that occurred in the first half of the 1980s appears capable of providing only a partial account of the first phase of unit cost reductions that occurred after 1985. As Figure 8 shows, the trend in unit costs continued to be strongly downwards through into the 1990s. What then explains the apparent longer term improvement in unit cost performance?

Two major factors that are obvious candidates as explanatory variables are:

output expansion, and

increasing competitive pressures as more of BA’s routes came to be deregulated/liberalized.

As is indicated by Figures 3 and 4, the size of BA's operations increased quickly and
steadily from the mid 1980s onwards and in such circumstances economies of scale will be translated into falling unit costs. And, given the evidence on labour productivity growth in the EARLY 1990s, it is possible that deregulation/liberalization effects were becoming more significant towards the end of the period under study.

Figure 9 shows that changes in real unit costs are indeed negatively correlated with changes in output/capacity (the greater the increase in output the greater the reduction in unit costs). It can also be seen, however, that the observations for the periods 1982-4 and 1991-3 tend to lie below the average relationship. That is, correcting for volume changes, there is evidence of more rapid cost reduction in these two periods.

In summary, the apparent improvements in BA's unit cost performance can be linked to three major factors:

the restructuring of the company in the early 1980s, in response to financial crisis and in preparation for privatization;

- economies of scale in operation; and

competitive pressures linked to deregulation, liberalization and changes in international market conditions.

Restructuring likely had its major impact on unit costs in the first part of the 1982-94 period, whereas scale effects can be expected to have been relatively steady throughout. The intensity of competitive pressures grew over the period, and therefore likely had its greatest effect toward the end of the period. Thus, as the initial cost effects of restructuring diminished, the downward pressure on costs was re-established by increasing competitive pressures.

### 4.5 Investment and profits

The outline of the development of BA's gross capacity in the 1980s and 1990s is clear from Figures 3 and 4 above which respectively show changes in the airline's available tonne kilometres and changes in the size of its fleet. These numbers do not, however, necessarily capture the relevant investment profile in full, since investment in areas such as fleet modernisation and ground operations may improve performance but not increase overall capacity.

Data on investment are difficult to obtain, but Figure 10 shows estimates of real gross fixed capital acquisition derived by Galal et al (1994). Together with the capacity data, these indicate that real investment was falling slightly in the early 1980s, stabilised in the mid 1980s, and then increased sharply in the post-divestiture period. The initial decline corresponds with the period of financial difficulty and re-organization, during which period BA actually reduced its overall capacity, while the large hike in investment expenditures came in 1987/8 when BA acquired BCal.

Following the BCal acquisition, real investment fell sharply again but at the end of the
1980s still remained at something like two to three times its level in the mid 1980s. As Figures 3 and 4 show, the airline has continued to grow strongly in the first half of the 1990s, notwithstanding some difficult demand conditions, and further airline acquisitions have accounted for part of this growth.

In contrast, the time pattern of BA's financial performance is much more closely linked to the restructuring exercise of the early 1980s. Table 9 indicates that the major improvement in profit performance occurred in the early 1980s, and this can be ascribed fairly straightforwardly to the policies implemented by the new management in 1981. In particular, as Figures 1 and 8 together indicate, the profit recovery was due much more to price increases than to cost reductions. A further improvement occurs in the immediate post-privatization years (in the late 1980s), but this was a period in which market conditions were relatively favourable and other international airlines were also showing good profit performance. Much more significant is the way in which profitability, although falling somewhat, remained positive in the 1990s during years in which many major airlines made substantial losses.

Table 9. BA's Financial Performance (£ million).

Year	Turnover	Pre-tax profit
1981/2	2,241	-108
1982/3	2,497	74
1983/4	2,514	185
1984/5	2,943	191
1985/6	3,149	195
1986/7	3,263	162
1987/8	3,756	228
1988/9	4,257	268
1989/90	4,838	345
1990/1	4,937	130
1991/2	5,224	285 $ ^{*} $
1992/3	5,566	185

* Excluding profit on disposal of BA's engine overhaul business (= £149 million).

Source: British Airways Annual Reports and Accounts.
### 4.6 Economic welfare and its distribution

The welfare effects of deregulation/liberalization are exceedingly difficult to estimate because of the problems of distinguishing the effects from those of other changes in the market and in the policy environment that occurred over the period. This in turn is part of the more general difficulty of specifying a convincing counterfactual.

A similar exercise, aimed at evaluating the welfare effects of the divestiture of BA, has, however, been attempted by Galal et al (1994), and their conclusions are summarised in Table 10 (where all numbers are present values of estimated costs and benefits). It can be noted that, although the overall welfare impact of privatization is estimated to be strongly positive, Galal et al believe that the divestiture led to substantial losses of consumers' surplus. These losses arise because the study estimates, on the basis of comparisons of BA and BCal prices, that privatization of BA had a significant, upward effect on prices.

Table 10. Estimated welfare gains and losses from divestiture of BA (£ million).

Taxes 346
Net quasi rents -874
Net sales proceeds (cash) 843
Total 316
Employees 0
Private domestic shareholders 646
Foreign shareholders 126
Competitors -84
Consumers -323
OVERALL TOTAL 680

Source: Galal et al (1994).

Attribution of the price increases of the early 1980s entirely to privatization is, however, open to serious challenge. The period was one in which the UK Government was attempting to reduce the burden placed on the national finances by the state-owned sector as a whole, and price
increases aimed at improving financial returns were a common feature of several publicly-owned industries, including industries that were not immediate candidates for privatization (eg. electricity). Thus, while privatization of BA might have had some positive effect on prices -- because of the higher sales proceeds that a more profitable company could command -- it is likely that much of the observed price adjustment would have occurred even if BA had not been a leading candidate for privatization. Consequently, the Galal et al estimate of the consumers surplus loss from privatization of BA is probably an exaggeration.

Although the results of this type of welfare exercise are highly controversial -- for example, there can also be arguments about whether or not any price increases reflected quality of service improvements -- it can be noted that the results of an equivalent exercise aimed at assessing the effects of deregulation and liberalization would likely differ in at least two major ways:

there would not be substantial gains to government, and

consumers’ surplus effects associated with price changes might be expected to be positive rather than negative (although there are quality of service issues that would need to be addressed before such a conclusion could be firmly reached).

### 4.7 Market structure

As noted in section 2, the UK airline industry is dominated by British Airways, particularly in respect of the supply of scheduled services, and the general pattern of market shares has not been substantially changed by privatization and deregulation. As Table 11 shows, BA controlled over 60% of all available capacity (scheduled and charter) at the outset of the period of liberalization. There was then only one major rival in terms of the provision of scheduled services, BCal, although a significant number of niche operators served the charter market. Initially BA's share of capacity fell somewhat as a result of the rapid growth of charter business (in which BA was a much smaller presence) and the development of scheduled competitors, including new entrants such as Virgin Atlantic.
Table 11. Percentage shares of UK airlines' available tonne kms.

1982	1987	1992
British Airways	61.6	53.9	64.0
British Caledonian	13.3	12.7	-
Britannia Airlines	6.6	6.9	6.7
Dan Air	4.1	4.9	-
British Airtours	2.2	3.7	-
Air Europe	2.9	2.3	-
Monarch Airlines	2.1	3.2	3.9
Orion Airlines	1.7	2.1	-
British Midland	1.3	1.0	1.6
Tradewinds Airlines	1.2	0.3	-
Virgin Atlantic	-	2.8	8.1
Cal Air International	-	1.6	-
Air 2000	-	-	4.0
Caledonian Airways	-	-	2.8
Airtours International	-	-	2.0
Inter European Airways	-	0.1	1.5
Air UK Leisure	-	-	1.2

Source: Civil Aviation Authority.

In 1987, however, BCal was unable to sustain its competitive challenge and, after running into severe financial difficulties, was taken over by BA. More recently the airline Dan Air has suffered a similar fate. As a consequence, by the early 1990s BA's share of UK capacity had risen again to significantly in excess of 60% (and to over 80% of capacity for scheduled services). In fact, the position in the early 1990s is remarkably similar to that in the early 1980s with the difference that the main domestic challenger to BA is now Virgin Atlantic rather than Bcal. There continue to be many smaller airlines operating in the charter market and (as niche players) in scheduled services on a limited number of routes, although as Table 11 indicates there have been a significant number of both new entries and exits over the ten year period covered.

### 4.8 Safety considerations

The general safety record of UK airlines over the past forty years is summarised in Table 12. As can be seen, the safety record improved sharply in the period up to the end of the 1970s, but any subsequent trend is more difficult to detect.
Table 12. UK airlines safety record (scheduled services).

Fatal accidents	Fatal accidents per:	Passengers killed per hundred mills. pass. kms
100000 stage stage flights	hundred mills aircraft kms
1950-54	7	0.93	1.62	1.99
1955-59	7	0.63	1.09	0.63
1960-64	5	0.33	0.55	0.25
1965-69	6	0.35	0.52	0.39
1970-74	2	0.11	0.14	0.15
1975-79	1	0.06	0.07	0.03
1980-84	0	0.00	0.00	0.00
1985-89	2	0.08	0.10	0.02
1990-93	0	0.00	0.00	0.00

Source: Civil Aviation Authority.

Assessment of the possible effects of privatization and deregulation is made difficult by the relatively small number of fatal accidents (itself a reflection of the relatively small size of the overall sample compared with, say, what is available from the United States). For example, the CAA statistics record only 2 fatal air accidents in the period from 1980 to 1993 inclusive. The first of these, in 1986, involved one crew fatality only while the second, in 1989, involved 47 passenger fatalities. Perhaps, therefore, all that can be said at this stage is that deregulation does not appear to have led to any significant deterioration in the safety record.

### 4.9 Route structures

The geography of the UK is clearly substantially different from that of the US, and even compared with Japan distances between major cities tend to be shorter and traffic densities lower. The high concentration of population in the south east of the country makes the two London airports (Heathrow and Gatwick) much the busiest. The number of domestic trunk routes is very limited (London to Edinburgh and London to Glasgow being the main ones), and competing rail and bus services are generally available and have the advantage that termini are generally in city centres. Direct routes between provincial cities are generally characterised by low traffic volumes.

Liberalization and deregulation do appear to have led to some reduction in domestic routes. This includes loss of routes from some of the smaller airports to London as well as routes
between provincial airports. Illustrative statistics are set out in Table 13 which shows the loss of domestic routes from the two main London airports and from Aberdeen, the most northerly of Britain's major cities, over the period of most rapid domestic deregulation.

At a more general European level, however, the picture is somewhat different. General traffic growth (itself stimulated by deregulation) coupled with capacity constraints at London Heathrow have led to the opening up of more direct routes between major UK provincial airports and cities elsewhere in Europe and in the USA. For example, some US airlines, frustrated by the difficulties of obtaining landing slots at London Heathrow, are developing their transatlantic operations via cities such as Birmingham and Manchester. And the relatively small distances between these airports and London, together with the major concentrations of population in their own areas, mean that such cities offer direct competition to the more traditional, London-based routes.

Table 13. Changes in route structures.

Number of UK airports served in:
Destinations lost:
Airport:	1984	1990
London (Heathrow)	21	19	Blackpool, Carlisle, Dundee.
London (Gatwick)	19	12	Blackpool, Bristol, Cardiff, East Midlands, Liverpool, Norwich, Plymouth.
Aberdeen	25	18	Belfast, Carlisle, Isle of Man, Liverpool, Newquay, Plymouth, Prestwick.

Source: Civil Aviation Authority.

### 5. Conclusions

British and European airlines policies have changed substantially during the 1980s and 1990s. In very broad terms, there is a continuing transition from an industry structure dominated
by state-owned airlines operating in a highly protected market environment to a more competitive market structure which is populated increasingly by private operators. Among European countries, the UK has led the way in both privatization and deregulation/liberalization -- the national airlines of most Member States of the European Community are still state-owned for example -- but policies in all these countries have lagged well behind developments in the US.

In seeking to promote more competitive markets, the UK Government adopted a “multi-airline” policy based upon assisting and encouraging the entry and development of new companies on domestic and international routes. There was, however, always a tension in policy between promoting domestic rivals to BA and promoting BA in its competitive battles with other, major world airlines, and in the event the multi-airline policy was given the lower priority. Although measures were taken to weaken BA’s competitive position vis-a-vis other UK airlines, these were generally of a limited nature and were insufficient to prevent the demise of carriers such as BCal (the largest domestic rival to BA), Dan Air and Air Europe. Nevertheless, some of the new, smaller UK airlines have survived and even prospered (eg. Virgin Atlantic).

While the Government’s multi-airline policy has been a relative failure, measures aimed at improving BA’s performance have been much more successful. The new management introduced in 1981 quickly turned around the corporation’s financial performance in the early 1980s, gains that were partly motivated by, and later underwritten by, privatization in 1987. As a result of restructuring, BA was in a good commercial position to meet the challenges of the more competitive market conditions that were stimulated by deregulation and liberalization from the mid-1980s onwards, first in Britain and later in the European Community as a whole.

The performance record of BA during this period of deregulation/liberalization has been a good one. Prices have fallen, unit costs have fallen steadily, the airline has expanded considerably, investment has risen and profitability has been maintained in difficult market conditions. And, while the precise attribution of performance improvements to particular aspects of government policy (restructuring, divestiture, deregulation, liberalization, entry assistance) is a difficult exercise, ex post the sequence of financial restructuring followed by privatization and gradual liberalization appears to have worked well.
## References

Airline Competition Policy, (White Paper) Cmnd 9366, London: Her Majesty's Stationery Office (HMSO), 1984.

British Air Transport in the Seventies, Report of a Committee of Enquiry chaired by Sir Ronald Edwards, Cmnd 4018, London: HMSO, 1969.

Button, Kenneth, “Liberalising European Aviation: Is there an Empty Core Problem?”, Loughborough University: Department of Economics Working Paper, 1995.

Civil Aviation Authority, Airline Competition Policy, Paper 500, London: CAA, 1984.

Civil Aviation Policy, (White Paper) Cmnd 4213, London: HMSO, 1969.

Doganis, Rigas, “The impact of liberalization on European airline strategies and operations”, Journal of Air Transport Management, March 1994, pp15-26.

Future Civil Aviation Policy, (White Paper) Cmnd 6400, London: HMSO, 1976.

Galal, Ahmed, Leroy Jones, Pankaj Tandon and Ingo Vogelsang, Welfare Consequences of Selling Public Enterprises: An Empirical Analysis, Oxford: Oxford University Press, 1994.

McGowan, Francis and Paul Seabright, “Deregulating European Airlines”, Economic Policy, 9, 1989, pp284-344.

Stasinopoulos, Dinos, “The Second Aviation Package of the European Community”, Journal of Transport Economics and Policy, Jan. 1992, pp83-87.

Stasinopoulos, Dinos, “The Third Phase of Liberalisation in Community Aviation and the Need for Supplementary Measures”, Journal of Transport Economics and Policy, Sept. 1993, pp323-328.

Vickers, John and George Yarrow, Privatization: An Economic Analysis, Cambridge Mass.: MIT Press, 1988.

Vincent, Daniel and Dinos Stasinopoulos, “The Aviation Policy of the European Community”, Journal of Transport Economics and Policy, Jan. 1990, pp95-100.
Figure 1. British Airways: real revenue per passenger km (pence).

Figure 2. British Airways: number of employees.
Figure 3. British Airways: available tonne kilometres.

Figure 4. British Airways: number of aircraft.
Figure 5. British Airways: productivity (log ATKs per employee).

Figure 6. British Airways: employment growth vs capacity growth.
Figure 7. British Airways: scheduled passenger load factor.

Figure 8. British Airways: real unit costs.
Figure 9. British Airways: unit cost reductions vs capacity growth.

Figure 10. British Airways: gross fixed capital acquisition (£m).
3. Japan

# AIR TRANSPORT IN JAPAN: POLICY CHANGES AND ITS EVALUATION

Hirotaka YAMAUCHI

Faculty of Commerce,

Hitotsubashi University

and

Economic Research Institute,

Economic Planning Agency

&

Hideki MURAKAMI

School of Business Administration,

Kobe University

and

Economic Research Institute,

Economic Planning Agency