Aviation in the Next Decade

MR. ARMSTRONG:

Distinguished guests, ladies and gentlemen: "Hey! Hey! Hey! The British Have a Way." So goes the somewhat mod and not so staid commercial of British Airways. And we in Canada who treasure our heritage from Britain of law and order and fine traditions realize that the changes which are taking place throughout the world are also taking place in Britain. As our global village shrinks through present day instant communication we are appalled with headlines such as appear in today's newspapers, giving blatant evidence of the sickness in our society.

It is not my purpose to preach on this occasion but to welcome on behalf of The Empire Club of Canada our distinguished guest of honour, Mr. David Nicolson, Chairman of British Airways Board. Mr. Nicolson is no stranger to us, having addressed our Club just over two years ago.

Our speaker was educated at Haileybury and Imperial College, London University, and from 1942-45 served in the Royal Corps of Naval Constructors at sea and in the invasion of Normandy. He recalls that his first experience in management came when, as a 22-year old Naval Lieutenant he had the task of clearing the Normandy beaches of obstacles in the way of invasion craft. He began with 15 men and had a force of 300 under him three weeks later. He states, "We worked 24 hours a day and I lost two stone in two weeks." For the uninitiated, two stone is 28 pounds and not pounds sterling.

In 1946 our speaker joined the management consulting firm, P-E Consulting Group Ltd. and except for a two-year period, as a production engineer in Milwaukee in the early 1950's, he remained with the consulting firm full-time until 1964, when he became its nonexecutive Chairman, from which position he resigned in 1969.

Mr. Nicolson was one of the first British businessmen to introduce American business techniques to Britain, specializing in company organization and corporate planning. He is a leading advocate of modern boardroom practice, notably in the field of the non-executive director. He became the first Chairman of British Airways Board in 1971 and is the architect of the merger of BOAC and BEA to form British Airways, the world's largest international airline.

A Fellow and Governor of Imperial College, London University, Mr. Nicolson was formerly Chairman of the British National Export Committee for Canada and a member of the Science Research Council. He has many other accomplishments too numerous to mention in this introduction, and brings us a message entitled, "Aviation in the Next Decade".

Ladies and gentlemen, I am very pleased to present Mr. David Nicolson, Chairman, British Airways Board.

Mr. Nicolson.

MR. NICOLSON:

It is a great privilege for me to have this opportunity of speaking to you this afternoon. While I don't need to dwell on the very close links that have tied our two countries together for a very long time, I would like to mention that I personally feel a very close affinity with Canada.

My father was a Canadian mining engineer who crossed the Atlantic and married an English girl. But it is not for that reason alone I regard Canada as my second home. I have been coming here for many years in connection with business and in recent years as a director of the Bank of Montreal, and for a time, as some of you may know, I was Chairman of the British National Export Council Committee for Canada.

Today my remarks are concerned with civil aviation, but this is part of the total travel business, which has become part of the standard of living in all the developed countries today.

Therefore, I do not think it would be inappropriate for me to mention briefly the economic and industrial problems that have faced Britain in the past few months.

I have certainly been surprised, even amused, to learn of some of the impressions in some countries about living conditions in Britain.

I do not wish to imply by saying that there are simple solutions to our problems but I don't think anyone should under-estimate Britain's ability to find the road back to a healthy, buoyant economy. And you must remember we now have the new potential of vast oil deposits in the North Sea which will not only make the UK independent of imported oil but an oil exporter.

Tough measures by the recently formed British Government will, of course, be needed in the meantime to redress the current situation regarding Britain's balance of payments and trading position.

Furthermore, new attitudes by both management and trade unions will be necessary in the field of industrial relations-and incidentally, I am pleased that British Airways is in the van of developing such techniques and I will enlarge on that in a little while.

It is not for me to predict what additional steps the British Government will take. But there is one question that I can answer with the utmost confidence-Britain is and will continue to be still as attractive as ever to the overseas visitor.

Of course, prices of most of goods and services in Britain have increased. Hotel accommodation costs more. So does food, clothes, taxis and even air fares have gone up in recent months. But Britain still offers the overseas visitor a very attractive and reasonably-priced proposition. For instance, an independent survey carried out by the London Financial Times in January this year showed that bed and breakfast in a good class hotel room in London costs $C33.60 and was $C3.40 cheaper than similar accommodation in Montreal. Compared with Paris and New York, London hotels are substantially cheaper.

Take an evening out in London as another example. The same survey showed that four people having a meal with all the trimmings at a fashionable restaurant, then visiting a nightclub, could expect to pay $C111 in London, but more than twice that in New York. In Paris the average cost was given as about midway between the two. In London clothes-for both men and women-were substantially cheaper, the survey proved.

You may think I am straying from my subject of "Aviation in the next decade", but aviation is part of the total trend and before talking about the next ten years I wanted very much to assure you that despite Britain's internal problems the overseas visitor, particularly from Commonwealth countries, will find a very warm welcome and certainly not experience any drop in standards.

Air travel particularly, is a tremendous bargain today even taking into account the recent surcharges we have had to impose because of the increased cost of fuel supplies.

When British Airways first introduced services between Montreal and London via Prestwick on April 15, 1947, the return fare was $C314.50. Today the economy return fare is $C405, an increase of only $C90 in twenty-seven years. Convert that $C405 into 1947 values and you will find it is equal to $C1235.

In those twenty-seven years prices in the UK have increased by 205%-but air fares by only 29%.

Civil aviation is the only industry that has consistently reduced the price of its products in the face of inflation.

Because of the developments in fuel price and other escalations in costs we shall not be able to keep up this trend in the next decade but if we can at least keep whatever increases are necessary within the bracket of the rate of inflation I think it will be a magnificent achievement and certainly not a factor that will hold back the development of the industry worldwide.

In our battle to keep costs down, the pooling agreement between British Airways and Air Canada will continue to be a great weapon in our armoury. The successes we achieve will not only benefit the two airlines but their customers as well.

This agreement, dating back to March 1, 1960, the date on which our Overseas Division obtained traffic rights into Toronto, enables both British Airways and Air Canada to pay the greatest attention to the question of providing the right amount of capacity between various cities in both our countries to meet the requirements of our markets.

Regretably, the same cannot be said of other markets. For many years the profitability of international airlines has been undermined by over-capacity on some routes and nowhere has this been more true than on the routes between the USA and Europe, where discussions have not been permitted by the US authorities until recently and then only because fuel supplies were reduced so drastically that there has to be some form of agreement to enable carriers to rationalise services.

The alternative to that was those airlines ceasing to fly the route when their supplies were exhausted.

The result was that the North Atlantic operators at long last had an agreement that was sensible and realistic in principle. Unfortunately this agreement is still only a temporary one. When the present fuel restrictions are eased I sincerely hope that those who regulate the air industry will not forget the lessons that have been learned and will think long and hard before they bring about a return to the illogical and unnecessary flooding of surplus capacity on the market.

Such a situation would not be to anyone's advantage, particularly when costs have increased greatly. In British Airways, increased fuel costs are expected to add $C159 million or £70 million to our costs in 1974. If you compare that £70 million with a total revenue of something in the order of £600 million you will see the size of the problem. And fuel is not the only cost that is going up.

In the last 12 months the average seat load factor on British Airways operating on all North Atlantic routes has been 55%. In simple terms this means that since last March British Airways has operated the equivalent of 2,375 jumbo jet flights across the North Atlantic without carrying a single passenger.

As we all know, the seat load factor on the Canadian route is, in actual terms, much higher than the average, so this means that most of the wastage is on routes between the UK and the USA.

Other international airlines are facing the same problem. In the US, for example, the major American international airlines are asking their Government for special federal legislation permitting financial aid to enable them to meet the high cost of fuel.

Surely it must be seen by everyone-governments, airlines and the travelling public-that there has never been a more appropriate time to firmly establish some form of capacity restraint based on orderly development to meet market requirements, on routes such as those between Europe and the US.

I am not suggesting that the airlines should seek measures that would automatically guarantee profits. Nor is it intended that the customer will be offered a reduction in service. I believe that a formula can be achieved that would enable the many North Atlantic operators to live together as competing enterprises, on the one hand without destroying the ideal of competition and all that means to the consumer and, on the other, relieving the airlines of the crippling burden of over-capacity, which on some North Atlantic routes meant that an average of 45 out of every 100 seats were unfilled.

These increased costs now being faced by airlines will inevitably mean that fares will have to rise. The market segments that require high seat availability on demand, like businessmen, must be prepared to pay an economic price covering the fuel and other costs of the unused seats which their needs make unavoidable.

Other segments, such as the holiday traveller, can accept conditions and limitations which enable an airline to improve its productivity, cutting the breakeven price by half or more. Capacity made available for low-fare traffic must be carefully selected and controlled so that high load factors are achieved in these seats. This will mean, of course, that seat availability for this type of traffic will be reduced at peak travel times on various routes.

In the past little or no thought was given by airlines as to whether the extra traffic generated by low fares was profitable by itself so, therefore, there were no controls over the fare-type mix. This meant that the airlines were powerless to prevent decline in profits as more and more traffic swarmed towards the lower fares, in some cases filling seats that should be available at a much later stage to the high-yield market.

British Airways believes that the industry should charge each of its customers a price that covers each of the very different costs levels incurred in satisfying each of their very different scales of mood. This is the concept our negotiators will take to the conference table at the IATA traffic conference for the North Atlantic area in June.

If anyone needed convincing that the merging of BOAC and BEA to form British Airways was the right decision, then surely recent events have done just that. As one airline we are in a much stronger position to face the financial pressures. In two years we have improved staff productivity by 25% and we have to improve it by a further 25% in the next five years. By that time-1979-we consider that the benefits of rationalisation will be worth over $C 113 million a year. Also, we are now in a position to offer a much better service to our customers by forming one airline with a common identity.

When I visited Cardiff in Wales a few weeks ago I found some pretty strong reaction to some of the steps we had taken. "Why have you dared to take the Welsh dragon off the tail of aircraft operating regional services between Wales and other UK cities?" I was asked. "And why are you painting all your planes the same colour? Is this the usual centralisation in London which ignores Welsh local needs?"

I could see I was going to be in deep trouble if I didn't have a good answer to those questions so I said: "You realise that now we are one airline and with the merging of BOAC and BEA we have more than 2,200 employees in North America."

They said: "That might be so-but so what?"

I replied: "You know that there are seven million people of Welsh descent who live in America?" and they agreed they did. I then asked: "Do you realise we are bringing 700 American travel agents to Wales in the next twelve months to sell them tours?"

Back came the instant reply: "Bach, it's all right. You go ahead and take the bloody dragon off."

This is one example of the by-products and benefits of size. It was something that could not be attained effectively and efficiently so long as BOAC and BEA remained as separate organisations.

But the formation of British Airways is not just a merger of two airlines. It is a massive reorganisation. We started off with two corporations that did many things in different ways and in many cases duplicated their facilities. It doesn't make much sense to have 300 people in one part of London's Heathrow Airport overhauling black boxes for BOAC and about 400 yards away have a similar number doing exactly the same thing for BEA.

So instead of two corporations we have ten divisions. The major operating ones are the Overseas Division, which is a large part of what was BOAC and has 64 aircraft, the European Division which is a large part of what was BEA and has 100 aircraft, the Regional Division which has about 50 aircraft and which operates most of our domestic services at present. In all, we have 222 aircraft operating along an unduplicated route network of 500,000 miles to 200 destinations in 90 countries.

As you know, we want to add Winnipeg, Calgary, Edmonton and Vancouver to our list of destinations. Air Canada has publically supported our plans to serve these Western Canadian points because they say that our presence will be good for the travelling public in the area as well as for the airline business.

We had tentatively proposed to have four flights between Western Canada and Britain this summer and two during the winter months. However, although we have a licence to operate these services from the British Civil Aviation Authority, we do not now expect a bilateral agreement with the Canadian Government can be signed in time to allow us to operate our planned summer schedule.

These new services will give Western Canada a much improved service to Europe because British Airways serves 90 points on the continent. In addition, promotion of Western Canada by British Airways throughout Europe will attract many more tourists to your country. It will also make it much easier for Canada's oilmen to travel between North Sea and Middle East ventures and Alberta's rich oil development. British Airways has become very much an oilman's airline, operating services between the oil capitals in North America, Europe and the Middle East. But we are even more involved in the oil industry. For instance, we are jointly sponsoring with the British Canadian Trade Association a seminar on the North Sea oil and gas industry here in Toronto on May 9.

Few industries can afford an isolationist attitude today-and airlines certainly cannot if they hope to stay out of the red. In British Airways we believe in the "total travel concept"-in the philosophy that we cannot market air travel in a vacuum. It must be part of a total travel product aimed at satisfying the needs of the leisure and business traveller. There is a major move in the airline industry towards the creation of travel complexes comprising airlines, hotels, package tour, villa and shipping companies.

This interest, as far as we are concerned, is represented in most cases by small investments in hotels in Europe, Africa, the Caribbean, the Middle and Far East and Fiji. We are not yet as involved as the major American airlines in hotels but we hope to improve our position.

We are particularly anxious to promote tourism in Canada. Our European network is the largest of all international airlines and we want to use this with a major selling effort in our own interests as well as yours in bringing many more tourists to this country. This also benefits Air Canada because it will increase the amount in the pool, which last year totalled about $C85 million.

You can get some idea of the market which is available to the airline industry when you realise that in the U K seven people out of every ten have not yet flown on an aircraft. And if you look at Japan, where there is a population of 110 million, only two and half percent of the people went overseas last year.

The opportunities are there. There are also opportunities for airlines to make a much greater contribution to cultural understanding between nations and in other fields such as education.

Take Canada's own Heritage Society programme, which is a scheme for taking youngsters in their last year at school over to Europe with their teachers as part of their studies to learn about overseas countries and languages. When the scheme was first launched 4,000 children took up the offer. This year the total is expected to be 17,000 and by 1980 about 65,000 Canadian youngsters are expected to visit Europe. British Airways will not be carrying all these youngsters but I think that these facts and figures give some indication of the scale of growth we in the airline industry will have to meet in the next decade. In all, we forecast that our traffic worldwide will double by 1980 and more than treble by 1990, which means by that time we will be carrying nearly 100 million passengers a year.

To meet the 1980 traffic demands, we shall be operating a fleet of about fifty wide-bodied aircraft-Boeing 747s and Lockheed TriStars. These two will be producing more than half the capacity in our fleet which, as now, will total about 220 aircraft.

Many of our requirements for the 1990s are likely to be met by these and other aircraft we already operate or by developed versions of these models. For instance, the 747 is capable of being lengthened by adding two sections in the fuselage which would give a seating capacity of 550 seats. There is also the possibility of the 747 having its top deck extended making it a double-decker passenger cabin giving about 750 seats, with a seat-mile cost down 25% on that of the present model.

However, before getting anywhere near to committing ourselves to such large aircraft we will have to carefully measure public feeling. If the reaction is strongly against such aircraft and people refuse to travel on them then we will have to take a hard look at our plans. Personally I don't believe we will have to do that because scheduled airlines have a great safety record. But I fully recognise the understandable human emotion to a tragedy like the recent DC10 crash near Paris.

Safety is of paramount importance to British Airways and will always be at the forefront. Next comes regularity and reliability, followed by service, which we are constantly trying to improve. Next on our list of priorities comes technology and therefore we are doing a great deal in fields such as autoland, which is automatic landings in poor visibility.

Another important aspect is the development of quieter aircraft. We want to be a quiet airline. The 707 jet has a noise footprint as we call itthis is the area affected by noise at landing and take-off near an airport of about 40 square miles.

With the new generation of wide-bodied aircraft like the Lockheed TriStar this footprint is ten square miles. I believe that even further dramatic reduction in noise levels is possible and will predict that prototypes already being developed will eventually lead to a noise footprint around airports of only two miles.

This is a level I am sure that will be acceptable to even the most ardent environmentalist living near an airport, for at the perimeter the noise will be no more than if the same environmentalist was standing on the kerb of a busy main street.

These then are the main cornerstones of our five-year plan-safety, regularity and reliability, passenger service and technological improvements.

There is one other that I touched on earlier-industrial relations. As I have said I believe Britain needs revised attitudes to management-staff relations.

Right from its formation the Board of British Airways recognised that if we were to achieve all our objectives we needed the support and co-operation of our staff, not an easy task when you consider we had 58,000 people worldwide and were about to enter what is normally an explosive period in the merger of two vast enterprises.

The new management, drawn largely from a wealth of experience in BOAC and BEA and complemented by a few businessmen and industrialists from outside companies, developed communications with staff to an unprecedented level. For example, when we were choosing the colour scheme for aircraft we showed the various proposals to about 10,000 staff in some 10 different countries and much of what they said helped us to reach a decision.

We have also involved staff in future planning of operations and the design of the organisation, making it perfectly clear, of course, that the end decision must rest with the management and the Board.

And it has worked just as we believed it would. Staff representatives have been participating with an equal number of management in study groups that have looked at some of the different aspects of our operation. The staff representatives report regularly back to their colleagues on progress being made and by this means we involve everyone concerned with the changes being made.

The results speak for themselves. We have achieved the merger and kept the planes flying, we have achieved a 25% increase in output per man with more, as I have already said, to come.

The next decade will bring many dramatic developments.

I think some people often don't appreciate the rate at which change is taking place in this industry.

It was about 1905, only 70 years ago, that well-qualified people said flying was not practical at all. In 1947 it took nearly 17 hours for scheduled passenger flights to travel from Montreal to London. Today that journey takes less than six hours.

The next ten years will be as exciting as any other decade in the history of civil aviation. And you can be equally certain that, like all preceding decades, it will have what appears to be more than its fair share of problems. Even major crises.

But I am confident that using all the skills at our disposal, we will be able to adapt our plans accordingly. If any one doubts that, then I invite them to ponder the problems we have faced-and overcome-in the past.

The appreciation of the audience was expressed by Mr. H. Ian Macdonald.