Thursday 5 March 2020

Defining viability


Flybe may be the first major company to be tipped over the edge by a drop in sales as a result of the coronavirus, but it won’t be the last.  And it seems that the probability of company failures is likely to mirror the probability of a fatal infection in humans, in that it is the most vulnerable which are most at risk.  Flybe was certainly in the vulnerable category anyway; how long the company would have survived even without the drop in revenue resulting from the virus is an open question.  We may well see coronavirus becoming another convenient excuse for failures which might well have happened anyway.
That makes it harder for government – whether in Cardiff or in London – to decide when and how to intervene to support failing companies.  Whilst it’s clear that government intervention is the only way of preventing some failures during the probable epidemic facing us, governments are historically not very good at identifying which companies are good bets and which are poor ones.  At the level of individual companies, that may not always matter a great deal – after all, if a company was a good bet, it would usually be able to obtain commercial finance, and needing government action to fill a commercial gap is a sure sign that the commercial case isn’t as strong as it might be.  Expecting the same proportion of success from government investment as one might expect from commercial investment is wholly unrealistic; the more marginal the cases being assisted, the greater the probability of failure, a point not well understood by some critics of government policy, especially here in Wales.
That’s no excuse, though, for throwing public money into hopeless cases, especially where the public purse ends up carrying all the risk and all the potential reward flows to the company’s owners.  At its simplest, a company which cannot sell a sufficient quantity of its goods or services at a high enough price to at least cover its costs and liabilities (and preferably to make a profit on top) is not viable, and tax payment holidays or government grants cannot change that underlying picture.  A company which claims that it would be viable if only it didn’t have to pay one or other form of tax really isn’t viable in the real world within which companies must operate.  From all the news stories which have appeared in recent months, I rather suspect that Flybe is not a viable proposition, with or without coronavirus.  On many – perhaps most – of its routes, it is simply not selling enough seats at a high enough price to cover its costs.  As with vulnerable humans, the virus has merely brought the end forward a little.  I’m not sure that some of the politicians bemoaning the impact on Cardiff Airport fully understand that economic reality.
The question that needs to be asked now is not ‘how do we rescue Flybe or find another operator to take over the routes?’ so much as ‘why is the demand for the routes being flown insufficient to cover the costs of operating them?’.  Paying people to run loss-making and environmentally damaging flights in order to boost the fortunes of a loss-making airport doesn’t immediately strike me as the best way of meeting what appears to be a very limited demand for travel between the relevant places.

4 comments:

dafis said...

"Paying people to run loss-making and environmentally damaging flights in order to boost the fortunes of a loss-making airport doesn’t immediately strike me as the best way of meeting what appears to be a very limited demand for travel between the relevant places." Summed up neatly and illustrates the painful lack of nous at Cardiff Bay. Place is full of gesture politicians flailing around. Far more comfortable with sound bites and tokenism. Time to get real, lots of businesses will not be viable if we migrate towards a greener economy so they need to learn to adapt rather than do nothing and wait for a handout.

Anonymous said...

Oh, a bit of realism at last, well said 'dafis' at 09.35.

Spirit of BME said...

To Davis input can I say Hear! Hear! Hear!
There are a lot of things wrong with Cardiff Airport structurally and economically, with no one answer.
Let me dwell on one aspect.
In 1948 HMG devised a civil aviation policy and structure, which successive governments have adhered to in all the policies they have introduced since this date. At the time it was simple and practical, as it deemed the role of “regional” airports as feeder airports for the gateway airports in England, and the two most important were/are in the South East of England.
Since the introduction of this policy aircraft range and take-off weight changed and regional airports cash in on the package holiday boom of the 60`s, but HMG view when looking at the income stream comprising of slot allocation and taxes based on activity means ,that the gateway airport in England have to be protected against aggressive competition from regional airports.
It has been known for many years and well before HMG in Wales pumped so much of taxpayer’s money to rescues this operation, that the catchment area for Cardiff could never sustain any form of success for this airport.

John Dixon said...

Spirit,

I'm not sure that it's true to say that "...the catchment area for Cardiff could never sustain any form of success for this airport", but it does rather depend on how we define 'success'. The idea that it could ever offer the complete range of international flights of which its supporters (including the Welsh Government) dream is just a flight (excuse the pun) of fantasy. But as a largely holiday-based airport, failure is not inevitable. Maybe a small number of regular flights to European hub airports may be sustainable, but that only works if a sufficient number of people consider that flying to their ultimate destination in two hops with a potentially lengthy wait between the flights is preferable to the hassle of surface transport to a UK airport from which they could make the journey in a single hop. The problem is that the ambition of the politicians isn't grounded in hard reality. The question they ask seems to be always about how we get more people to use the airport, but the airport is just a means to an end. The questions they should be asking are how we get people from point A to point B, and should we be facilitating such travel anyway?