8.9% BAA Method, LAHT5 NTRS assumption
9.5 Productivity Gain
There are a number o f factors affecting future productivity level, some o f which have been discussed in the above analysis, such as hub-and-spoke network, competition amongst airlines, aircraft size, and technological advance. Above all, the liberalisation o f EU aviation market have tremendous implication in airline productivity, which in turn will affect the productivity level at Heathrow Airport, o f which nearly 70% staff are employed by airlines and airlines handling agents.^®
Experience from the US indicates that the deregulation and the resultant competition leads to a sharp upturn in productivity, attained by massive downsizing and restructuring its network operation. It is confirmed by studies revealing that major U.S. airlines are enjoying higher production efficiency and lower input cost^* than their European counterparts (See Figure 9-1).
Caves, c.1996
^ BAA, Heathrow Employment Surv^, 1992
91
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The productivity gain may arise from the benefits of competition and the hubbing strategy. However, it may also resulted from the lower unit cost with longer travel distance o f U.S. flights. Therefore, it is not clear to what extent of productivity growth that European airlines may benefit from the competition in the liberalised market.
Figure 9-1 Productivity Comparison o f M ajor Airlines
(a) Unit cost index: major Asian carriers.
(b) Unit cost index: major E uropean carriers.
2.5 2
I
- 1 0 5 0 2.5 2 1 1 0 5 0 A - A - Y e a r * — * ...g ..^ ^ - À - ' - " * B Q a n t a s A J AL ♦ KAL A- SIA A C a th a y T h ai * ANA ■ Air F r a n c e O L u f th a n s a ■A- KLM Tir S A S .V- Sw issair * B ritish A irw a y s 1986 1988 1990 1992 1987 1989 1991 1993 Y e a r(c) Unit cost index: North Am erican carriers
- A - .. A 0.5 * Air C a n a d a o C a n a d i a n A U S Air A C o n tin e n ta l D e lta * N o r th w e s t B U n ited O A m e ric a n 1986 1987 1988 1989 1990 1991 1992 1993 Y e a r
Source: Oum and Yu, 1995, Fig.1
* The above indices are normalised at American Airlines 1990.
Although European airlines still lag behind its American counterparts,^^ there are evidence in a continuous productivity growth in EU airlines since the liberalisation. Figure 9-2 shows that staff productivity measured by Available Tonne-kilometres (ATK) per employee has increased, whilst the level of employment by EU carriers has declined in recent years. Despite variations amongst airlines, large carriers including British Airways, KLM and Lufthansa have
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achieved significant reductions in labour costs per ATKs in constant prices. It is estimated that European airlines will achieve further productivity gains.^^
The increase in the labour productivity in Europe airlines has been more noticeable since 1991, three years after the passage of the first liberalisation package in 1988. It might imply the time lag o f the impact of liberalisation be felt, and further productivity gain would be anticipated in coming years after the completion of Third Package in 1997. In addition, the economic recession following the currency crisis in 1998 might also play a role in increasing the pressure for lower airline cost and higher productivity.
Figure 9-2 EU Airline Employment & Productivity
170 1 6 0 A T K p e r F . n i p l o v e e n o 1 10 1 0 0 - 1 9 9 . 1 1 9 9 4 19:1.1 1 9 8 7 1 9 8 9 1 9 9 0 1 9 9 1
Source: Alamdah and fviorrell, 1997, Figure 7
This trend is in consistent with the historic changes in productivity level at Heathrow Airport. Between 1983 and 1993 it saw an average 6% per annum increase in passengers and a 2% per annum increase in total airport employment, equating a 4% per annum gain in productivity measured in this way (see Figure 9-1).
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Figure 9-1 Historic Changes in Passenger Traffic, On-airport Employment and Productivity Gain at Heathrow Airport, 1971-1 9 9 2
■T 2 0 . 0 0 % 2 0.00% 15.00% 15.00% 10.0 0% 10.0 0% 5.00% 5.00% 0.0 0% 0.00% -5.00% - - -10.0 0% -10.0 0% -15.00% -15.00% L E m p lo y m e n t A n n u a l P r o d u c t i v i t y G a i n P A X /E M P P a s s e n g e r T h r o u g h p u t
Source: Data derived from BAA/1201 Table 4.3
Table 9-4 shows the productivity gain at Heathrow airport between 1980 and 1992. It can be seen that the massive reduction in on-airport employment in 1981/82 has lead to extra ordinarily high gain in productivity (9.3%) in 1981 to 1983. Another high rise period is 1987- 88 when Heathrow was experiencing rapid traffic growth, so is the case in 1992. Negative productivity gain has occurred in 1986-87 and 1988-89. The first case is resulted from temporary fall of air traffic after U.S. air raids in Libya and wide-spread fears of terrorist attack at airport and airplanes, whilst the second case is associated with the rapid rise of employment at Heathrow.
The first column of Table 9-4 shows the productivity gain per annum at Heathrow in 1980- 1992. It can be seen that the figures have extremely sharp ups and downs in response to changes in air traffic volume. For instance, a 14.8% productivity gain was recorded in 1987/88 between two years of negative productivity growth. It was the result of traffic demand recovery from terrorist threats in 1986 while few jobs were added after the recession.
To have a better idea in recent trends of productivity growth, the figures in first column is averaged and leveled in the last two columns. The average figures o f the precedent years might smoothen the extremes of the figures and shed light on the overall trends o f productivity gain. It indicates that the productivity gain at Heathrow has been declining since its peak in mid-80s. It rises again in early 1990s with the rapid growth of air traffic, reaching an average of 3.6%-
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3.8% p.a. In comparison, such figure is much higher than BAA and LAHTS^"* productivity gain assumptions, but not unattainable.
Table 9-4 Productivity gain p e r annum a t H eathrow Airport, 1980-92 Year Productivity Gain p.a. Productivity Gain p.a.
[3-yr A verage]
Productivity Gain p.a.
[5-yr A verage] 1980/81 0.9% 5.8% 5.8% 1981/82 9.3% 5.4% 5.6% 1982/83 9.3% 6.5% 5.9% 1983/84 1.3% 6.5% 6.1% 1984/85 6.9% 5.8% 6.0% 1985/86 2.4% 3.5% 5.6% 1986/87 -2.0% 2.4% 5.0% 1987/88 14.8% 5.1% 4.7% 1988/89 -1.0% 4.0% 4.2% 1989/90 1.0% 5.0% 4.0% 1990/91 5.4% 1.8% 3.6% 1991/92 2.0% 2.8% 3.7% 1992/93 8.4% 5.3% 3.8%
Source: compiled from Productivity Index in BAA/1201 Table 4.3
Note: Productivity Gain calculated in terms of on-airport employment per mppa. 3 year average refers to average figure from the previous three years.
On the other hand, historic trends may or may not have direct imphcations in future movement. There are a number o f market forces exerting counteracting forces in productivity level at Heathrow Airport, as shown in Table 9-5. Some o f the factors have been discussed in earlier sessions, such as traffic mix, aircraft size and EU liberalisation. There are other factors, such as commerciahsation o f airports, automation and subcontracting o f airport activities, the detailed elaboration o f which are beyond the scope o f this thesis. Nevertheless, their possible impacts on productivity level at Heathrow are briefly estimated, with the certainty o f these estimation evaluated.
BAA assumes 1.5% - 2.00% productivity gain for passenger-handling on-airport employment whilst LAHT5 adopts 90% of BAA’s assumption, i.e. 1.35% -1.80% p.a.
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Table 9-5 Factors Affecting Future P roductivity L evel a t H eathrow A irport Factor Impact On Productivity Level
at Heathrow Airport Estimation Of Net Impact On Productivity Level Certainty Of Future Trend Competition under EU liberalisation
It exerts continuous pressure for lower airline cost and higher productivity.
+++
Aircraft size Trends of m edium -size aircraft flying at high frequency in short-haul routes may deter further productivity gain; but aircraft size continues to rise in intercontinental routes. The net effect is not entirely clear.
??
Technological A dvance and Automation
The introduction of new technology may increase productivity in air traffic control, ground handling and other airport/airline functions. It may also allow increasing relocation of airport activities, i.e. ticketing.
++
Sub-contracting of airport activities
Sub-contracting reduces on-airport employment and allocate th e se activities in off-site firms. Therefore it may increase on-airport productivity level.
+
Increase in portion of Transit Traffic
Transit traffic requires little activities in landside, thus may have positive effect on productivity per passenger.
+++
Increase in Long- haul flight in Traffic Mix
There is possibility for Heathrow to sp ecialise in intercontinental flights and sq u eeze its dom estic and intra-European short-haul flights to other airports and transport m odes. If so, it would imply longer average flight distance and thus high productivity.
++ ???
Global alliance / Mergers
Global alliance and Frequent Flyer Programmes requires higher standard of custom er services for the “brand”. Thus BA may need to provide facilities for its ally-airline p assen gers, which imply an increase of airline employment.
?
Privatisation of Airline and Airport
Major impact of privatisation of BA and BAA has already been felt in the 1980s. Though no further major event is expected to boost productivity level, the private m anagem ent recognise the need to remain competitive in the liberal market.
+
Commericalisation of airports
Increase of retailing and con cession aires provide job openings. The forthcoming ban in intra-EU duty-free shopping may be a setback.
?