This report will discuss one of the many major privatisations that occurred in the United Kingdom. It is vital to start with what privatisation is. Privatisation is defined as the transfer of an enterprise from the public sector (government regulated) to the private sector (owned by shareholders). The primary aim of this transfer is believed to increase the efficiency of the company itself; whether it is avoiding X-inefficiency. This occurs when there is very little competition in a market resulting in average costs being higher than necessary whilst owners lack the incentive to control its costs. This could potentially be argued as to why nationalisation was deeply unfavoured by the Conservative Government. This may have been due to the fact that the Labour Government being in favour of keeping people in the work force to maintain the level of employment in the UK rather than making surplus workers redundant .
Moreover, Public Choice Theory, which suggests that individuals are primarily concerned about their self-interest, could also explain why privatisation was set in place. For example, shareholders would want to focus on achieving their goal of profit maximising and so they would ensure they meet that target whatever the cost maybe, unlike a nationalised firm. As a result of these concepts, the Tory political party, specifically Margaret Thatcher solemnly believed that privatisation was the cure for the battered nationalised industries.
History of Privatisation in the UK
Before privatisation was even considered, during 1945 to 1951, the Labour Government, who were in congress at the time were operating a major nationalisation scheme. This entailed state ownership of many utility appliances and some commodity industries. Some of these included: water, electricity, coal and steel. Post WW2, the government were not able to operate these markets as the costs of running these were too high for the government to cope with. In addition to this, the level of expertise was not up to a good standard in order for these industries to be successful. It was argued by Nigel Lawson that “no industry should remain under state ownership unless there is a positive and overwhelming case for it doing so.” .
Margaret Thatcher initiated this transfer from the nationalised industry. Thatcher stated, in her memoir, that privatisation is “fundamental to improving Britain’s economic performance”. Because of this belief, Thatcher decided to privatise many firms, one of whom was British Airways, The Royal Mail and National Rail. Privatisation, also known as denationalisation, was first implemented on large public-sector companies who were already producing large sums of profits. This process was made for these large firms to increase their revenues and eventually lessen the amount of capital borrowed from the government. (https://www.theguardian.com/commentisfree/2012/mar/29/short-history-of-privatisation).
History of British Airways’ Privatisation
Motives behind Privatisation:
There are many reasons as to why policy makers believe that Privatisation is fundamental for a firm’s success in any industry. Some believe that when companies are privately owned, there is a much greater incentive for them to profit maximise. In other words, they must lower their production costs as much as possible and operate whereby the companies marginal cost is equal to marginal revenue. These firm owners would proposedly operate in such a way that would benefit their private benefit but would, to some extent, overlook the benefits of the rest of public. This would be an example of a negative externality which does tend to arise commonly in private sector companies. The graph on the right illustrates the concept of negative externalities. Henry Sidgwick , the founder of Negative Externalities, claimed that that this type if externality proves that the market would operate at an output where socially optimum output is exceeded by the free market allocation. This tends to be a disadvantage for the rest of the public which is why some individuals would disagree with the concept of privatisation.
In terms of British Airways (BA), it was initially privatised to deal and solve the problem of the fact that there were many employees that were not necessarily needed for the company. In other words, BA faced the problem of overemployment- a prime example if X-inefficiency. As expected, overemploying meant that there was a massive cost to the business which initially resulted in BA’s profit earnings to deteriorate. Research shows that BA’s profits have risen drastically since the transfer from the public sector to the private sector. The figure to the right illustrated the increase in profit levels.
In addition, the graph above illustrates the overall nominal profits before and after BA was privatised. In 1983, nominal profits were roughly £70 million, pre-privatisation. Despite the decrease in profits post-privatisation in 1991, according to this graph there was an overall increase in profit levels which rose to approximately £600 million in 1998. As a result, this demonstrates that privatisation can in fact have its advantages. Positive spill overs could potentially take place. For example, the higher the profit levels, the more corporation tax needs to be paid to the government which could lead to greater public spending. Overall, privatisation can be advantageous for both parties.
Furthermore, prior to the Tories elected to govern the UK, the labour parties had set very strong labour unions, protecting the rights of workers. The Tories thought that the easiest way to get rid of these strict regulations was to sell off BA’s enterprise to shareholders in the private sector. This ultimately resulted in a more ‘free’ industry allowing these shareholders to operate in a way that would be best for the business. On the other hand, some may argue and say that these shareholders would only want to achieve their own personal business goals so may exploit members of the labour force. However, BA director stated “At British Airways, our people are at the heart of our business. We are fully committed to building a workforce that reflects the diversity of the customers we serve and to promote an inclusive and collaborative culture.” Given this statement, it is fair to say that BA does value their workforce which could prove that privatisation is exemplary.
Methodology of Privatizing
British Airways was privatized through a fixed price offer which means that the price of the share was not subject to bargaining. In other words, BA was purchased at a price that was initially set. This ultimately meant that the price was set by the negotiation between the government and the buyer.
Research also shows that there were more than one million applications received for potential shareholders to purchase British Airways shares. This clearly shows that there was a very high level of demand for this prestigious airline company at the time.
How your chosen industry was privatised?
Whether sale price was determined by the negotiation between government and the buyer? Or sales revenue was raised by selling share to the public? Or other methods were adopter?
Before and after Privatization
Costs and Benefits of Privatization
This section of the report will discuss the costs and benefit of British Airways once it was privatized. Starting off with the benefits, it is clear that this transfer from the public to the private sector has meant that BA has been a lot more profitable. this has not only benefitted the shareholders of the company but it has definitely helped the government in the short term, straight after the privatization.
In terms of the government, privatization allowed them to raise some capital after selling off the company to the chief executive officer, Colin Marshall. This meant that the government were able to reduce some of their deficits quickly. According to Lone (2014), he stated that between the years 1979 and 1999, denationalized firms, one of whom were British Airways, raised assets sales of roughly £70 billion . On this note, not only did this mean that the government were able to reduce their deficits, but could have also been able to raise public spending to increase the wellbeing of citizen in the UK. This in itself is not just a benefit for one party but for several.
Furthermore, prior to the privatization, British Airways had employed a significant amount of employees which were seen to be ‘unnecessary’ in comparison to other competitors in the industry. However, post privatization, one of the first changes that were implemented was to cut down the number of employees t ultimately make the business significantly more efficient but to also lower their costs of production. Figures have shown that BA made almost a third of the workers redundant.
On this note, this could also be seen as a disadvantage to some. Making workers redundant ultimately increased the level of unemployment in the economy. This may have been a difficult matter for some of these workers since they were no longer earning an income unless they were employed elsewhere.
Since the flights industry is not structured as a monopoly, this could be a significant benefit to consumers. This is primarily due to the fact that this industry is highly concentrated with many firms as BA’s competition. In relation to pricing, BA, in a way, are obliged not to set their prices too high to a point where it would deteriorate potential customers from purchasing tickets. In relation to this, BA is considerate of all aspects. For example, they charge different classes different prices i.e. Economy Class and Economy Class. They also provide other services that would in turn still allow them to produce more profit. As a result of this approach, BA can still gain large amounts of profits from different customers. All in all, customers are advantaged in the sense that they do not have to pay high prices to travel with BA and BA shareholders are still gaining profits by charging prices at different levels.