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Concorde’s economic lessons: a closer look – EP131

The British-French supersonic airplane Concorde soared through the skies at Mach 2 in the years 1976 to 2003. Its history illuminates several important economic and business lessons. Is a supersonic airplane simply uneconomic or will commercial passengers fly supersonic again? In Economics Explored episode 131, show host Gene Tunny and his fellow economist Arturo Espinoza Bocangel discuss.

British Airways Concorde aircraft

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A transcript and relevant links are below.

Transcript of EP131 – Concorde’s economic lesson: A closer look

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored.

Arturo Espinoza Bocangel  00:04

In probably France and Britain, they wanted to show to the war that they are able to produce this kind of supersonic airlines.

Gene Tunny  00:16

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is Episode 131, a closer look at the Concorde. And joining me to chat about Concorde is Arturo Espinoza, research assistant at Adept Economics joining me for the first time. Arturo, great to have you on the show.

Arturo Espinoza Bocangel  00:50

How are you? I’m really glad to be here with you.

Gene Tunny  00:53

Excellent. Yes, Arturo, it’s good to have you on. Arturo, you’re an economist too. You’re helping me out with economic research on various projects. And you’ve previously worked in the trade ministry in Peru and you’ve got a master’s from University of Queensland in economics and you’ve also got a degree from the Catholic University in Lima, haven’t you?

Arturo Espinoza Bocangel  01:19

Yes, that’s right.

Gene Tunny  01:21

Excellent. Excellent. Yes, you’re well qualified to chat about economics, so pleased to have you on. Excellent. Why I’m looking at Concorde, Arturo, is because in a recent episode I did with Tim Hughes, who I occasionally chat with on the show – Tim’s not an economist, he’s providing the man on the street view of things – we talked about my top 10 insights of economics. And one of those insights was about sunk costs. One of the key lessons from economics is to ignore sunk costs. Bygones are bygones.

And in illustrating the sunk cost, what’s often called the sunk cost fallacy – the fact that people too often don’t ignore sunk costs, they throw good money after bad – an example that’s often given is Concorde, because it was colossally expensive to develop. And the British and French just kept throwing money at it, even after it looked like it wasn’t going to be a commercial proposition. Often, they talk about the Concorde fallacy.

Now, I mentioned this in the show, and Tim and I had a bit of a chat about it. And I said, look, I think Concorde was always going to be a difficult proposition. It’s probably something they shouldn’t have invested in just because of the economics of it. And then, in the conversation, it became clear that I probably needed to do a bit more research on what the underlying economics of Concorde were.

One of my listeners, so Todd, he wrote in and he sent me a passage from an article. Based on that it looks like the there are multiple issues affecting Concorde and the economics and viability of Concorde. This passage he sent me is, “Aviation regulations mandated that Concordes would have to fly more slowly overland to reduce sound disturbances over the ground. This hit French Concordes particularly hard after the post-9/11 dip in air travel. The already struggling birds were even less in demand and therefore less profitable.”

Okay, so I thought we could have a chat about Concorde and just all of the issues involved, because there are multiple issues. There’s regulations, there’s the actual operating costs, because of the cost of oil. There was the fact that there was the Air France crash in 2000 at Charles de Gaulle, where 113 people died. There are multiple issues with Concorde. Are you happy to get underway on the Concorde, Arturo?

Arturo Espinoza Bocangel  04:17

Of course, Gene. Given all those facts behind the Concorde operational activities, I think there is an important issue, which is an externality. When we talk about economics about externalities is when one activity transfer those calls to third parties. Those third parties, they are not involved in that activity. They must assume that cost. Definitely, if we talk about this case of Concorde, and the most important negative externality was related to the noisy. The takeoff of Concorde, very noisy. Also when this type of supersonic flies affected possibly private properties. For example, in USA they found that some properties were affected by Concorde flights in terms of broken windows.

Gene Tunny  05:24

Seriously?

Arturo Espinoza Bocangel  05:25

Yes, so that’s why at that moment USA government banned Concorde flights in between cities or inland. That’s why at that moment Concorde flights only focused on transatlantic flights between New York, Paris, and UK. That’s why I’ve seen behind that, it was a very important limitation for potential demand of Concorde flights or Concorde airliners. Definitely that was a huge impact on potential demand for Concorde airliners.

Gene Tunny  06:14

Yeah. There are those regulations which would prevent Concorde if it were still operating. Neither Air France nor British Airways, which were the two airlines operating Concorde, they haven’t operated Concorde since 2003. But there are regulations that would prevent inter-city flights across land. And so therefore, you are restricted. They were restricted to just those transatlantic flights, so from Heathrow or Charles de Gaulle in Paris, to JFK in New York City. That really meant that it just limited the scope of those Concorde operations. I think that’s a good point.

We might chat about what Concorde is, I just want to make sure that if you’re listening and you’re unfamiliar with Concorde… I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft. It’s such a beautiful design, really sleek, and the delta wing, and that nose that… It’s like a beak, isn’t it, like the beak of a bird? I think they called it a droop nose, because it can move around. Depending on what stage of the flight you are, it will either be in the standard position or it will drop down. I think when they were coming into land, they would drop it down just to improve their visibility. It’s got an interesting nose there.

As you mentioned, it’s supersonic, so it can travel faster than the speed of sound. I think it actually travelled about two times the speed of sound, so at Mach two. It’s supersonic. When I was chatting with Tim, I said, “Oh, is it hypersonic?” No, it’s not hypersonic. Tim corrected me. It was supersonic. Supersonic is faster than the speed of sound, and hypersonic is five times the speed of sound, at least. I think there are some hypersonic missiles that have been developed that I’ve seen in the news reports.

It was a joint project. It was a joint venture in a way between the British and French governments. And the name for it came from an agreement that they reached in the early 1960s, I think. A treaty was signed on 29th of November, 1962. And so what you had was, this is something that came out of the 1950s. There were British and French companies that were investigating supersonic air travel. I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project, because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. They were providing funds for research and development by that British aircraft corporation. And there was also a French company, which was state-owned, Sud Aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft. They’d share the development costs. They would split the production of it across Britain and France with a view to creating jobs and all that. It was a British and French government project.

I would argue that this is a good example… There’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy, the fact you should ignore sunk costs. One principle, or close to a principle, I would argue, is that governments need to be very careful about going into business. Governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, national defence and the justice system, and arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. When you’ve got governments making these decisions and funding R and D for this sort of thing,  it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. That would be one thing, I would argue. Do you have any thoughts on that, Arturo?

Arturo Espinoza Bocangel  11:18

Of course, and that is an interesting point. In order to see what is the real scope of the government, definitely the government should focus on other issues that are more relevant for people, instead of promoting this kind of investment that, as we have seen, was a failure in terms of economic business perspective.

Gene Tunny  11:53

Who knows, maybe if things went right and the oil price didn’t increase three or four times over what it was previously after 1973, maybe the economics of the whole project would have been better and it could have been more of a mass market proposition. I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and CEOs of Fortune 500 companies who could actually afford to fly on Concorde, as we can talk about later. I think tickets ended up being about, in today’s dollars, I think over 10,000 US dollars, really. Expensive tickets. You really have to have deep pockets. You have to be someone who really doesn’t care how much they’re spending or it’s just absolutely time critical that you need to get from New York to London or the other way or Paris to New York, you need to get there in three hours or so, because it could fly incredibly quickly.

Now, I think the figures I’ve seen is that, so this thing’s flying at basically two times the speed of sound, whereas a Boeing 747 flies at .84 times the speed of sound. It’s not supersonic. The Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2,172 kilometres an hour. Just incredible. And at 60,000 feet too. Wouldn’t that be amazing to have been up that high?

And so it really ended up just becoming a transport option for the rich and famous in a way. One example of that, have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium? He performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport and hopped on the Concorde, and then got the Concorde to JFK, and then he ended up getting –

Arturo Espinoza Bocangel  14:32

Wow, that was tornadic. Wow.

Gene Tunny  14:35

It’s a huge logistical job. Where is it?

Arturo Espinoza Bocangel  14:38

Wow.

Gene Tunny 14:39

He took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at the stadium in Philadelphia, which I think might have been JFK Stadium in Philadelphia. That was in 1985, July 1985, so the big Live Aid concert for… I think it was to raise funds to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. That’s one of the famous examples of the use of the Concorde.

And another example of the sort of rich and famous, there’s a photo. And I’ll put a link to the article in the show notes, if you’re interested in seeing it and some other photos of the Concorde in operation. There’s a photo of Sting, the rockstar Sting, pouring a glass of champagne for Piers Morgan, so the noted media personality, editor of various newspapers that Rupert Murdoch owned. He was on Good Morning Britain. He’s doing something in Australia at the moment. I’m not entirely sure what. He’s anti-woke or he’s trying to cancel cancel culture, if I remember correctly. Big personality. He flew on a flight that they had in, I think it was late 2001. It was the first British Airways flight that they ran with Concorde after the crash at Charles de Gaulle in 2000.

There was a terrible crash when it was taking off from Paris, in the airport in Paris, and 113 people in total, so all of the passengers on the Concorde that had 100 passengers and nine crew. Then there are four people on the ground who were killed as well. Just an awful crash. There was an issue with the Concorde that meant that they had to sort of stop flying them for a while and just check that everything was okay and do some modifications to ensure that sort of thing didn’t happen again. And so what happened after that, you had that incident, and that means that fewer people want to fly on Concorde. I think that’s really what then led to both British Airways and Air France just not running Concorde again after 2003.

Concorde was launched in early 1976, in January 1976, and the final commercial flight was in October 2003. And it looks like what happened, so according to The Economist… The Economist did a good article on this in 2003, which I’ll link to in the show notes, although it may be paywalled. It looks like in 2003, they figured out that there was this cost associated with refitting the Concorde aircraft. A study commissioned by British Airways of the case for a 17 million pound refit of the supersonic aircraft showed the viability had ended with the turn-of-the-century stock market boom at the start of 2003. Airbus, the modern incarnation of the Anglo French manufacturing partnership that created Concorde, told Air France and BA, the aircraft’s only operators, it could no longer provide technical support for the aircraft at anything like a commercial price. Air France, which never made as much from Concorde as British Airways, stopped flying it in May. But BA said it would keep Concorde going into October simply to please its fans.

I think what they’re alluding to with the stock market boom is that after the share market crash in the early 2000s… In the late ‘90s you had the dot-com boom, and then there was a recession or a downturn in the early 2000s, associated with the dot-com crash in the US. And I think what they’re suggesting is that that meant that after that downturn, companies and wealthy people were less likely to splurge on a Concorde. And then there was the Air France crash, and that meant that not as many people were flying Concorde. That really just destroyed the viability of it on an ongoing basis.

Now, what I think’s interesting is that – and this is something I didn’t know until I had a closer look at Concorde for this episode – is that for a few years, Concorde was actually profitable for British Airways and Air France. It didn’t look like it was making huge amounts of money, but it was actually profitable from about the mid ‘80s and possibly up until that Air France crash. It wasn’t profitable for the governments that had invested in it originally because the cost of it just blew out massively. If we go back to the development costs of it, the cost of the British and French government’s ended up being, I think it was over one billion pounds before it even went into service. And in today’s dollars, that’s over 11 billion pounds, because it was reported as 11 billion in today’s dollars in – sorry, pounds, 11 billion pounds in today’s pounds, in 2003 by The Economist. That was 10 times what was budgeted for. The cost of it was just colossal.

It would never have been a commercial proposition if you tried to recover those R and D costs. But what happened was that the governments essentially wrote off those costs. After they’d already invested all this money, they basically let the company, so Air France and British Airways, buy the Concordes at a discounted price, so that they didn’t have to pay back or they didn’t have to pay for the cost of having the Concorde developed. The R and D costs of the Concorde weren’t actually included in the sale price of the Concordes, as far as I can tell.

What you’ve got as a situation where this huge R and D cost, it’s written off by the government. In a way, that’s the other side of the sunk cost proposition, that yes, this has already happened, this money’s already been spent. In a way, the Concorde is a gift from the governments of Britain and France to the aviation industry. It’s already developed. The technology is there. Then what matters for the aviation industry is can it make a profit with those Concorde planes as they are now? The aviation industry never had to make substantial enough profit to cover the original R and D costs, and so in that sense, Concorde was profitable for several years from the mid ‘80s.

It’s extraordinary. There was there was an AP, so an Associated Press report in 1986. Where is it? It’s basically saying that Concorde is an unexpected success, but it’s only unexpected or it’s only a success if you do ignore the fact that all of that billion pounds of research and development costs are written off, that you just accept that taxpayers aren’t going to get that money back. It ended up being an unexpected success for British Airways and Air France for a while, although not for the governments of Britain and France.

“Concorde, an unexpected success, marks 10th anniversary. London, 10 years after its detractors branded it as an enormous white elephant, the Concorde is the fastest, most luxurious, and to many the world’s most beautiful airliner. It makes money too. After years of losses and a $2.8 billion government development costs that has been almost completely written off, financial winds have turned in the plane’s favour. The Concorde brought a $17.3 million profit to British Airways last year, and a profit of 8.8 million to Air France in 1984. British Airways didn’t record profits from the Concorde until 1982, and Air France and until 1983.”

I found that quite interesting, and that was something that I wasn’t aware of. And I guess it sort of makes sense, because they wouldn’t have kept operating it for a couple of decades – because it did operate from 1976 to 2003 – they wouldn’t have done that if it wasn’t at least making a profit for those airlines. That sort of makes sense, but there’s no way in which the Concorde ever recovered the R and D costs that were paid for by the governments. Therefore, if you were back in the ‘60s looking at this project, and you’re in the British and French governments, and you had perfect foresight as to what would happen, you would have gone, “Okay, we’re going to stop spending money on this because we’re never going to recover and costs the blowing out. Let’s just cut our losses now.” Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  25:18

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Gene Tunny  25:47

Now back to the show. Does that all make sense, Arturo? Is there anything confusing there?

Arturo Espinoza Bocangel  25:54

It’s clear, everything about the factors behind unsuccessful operation of the Concorde. Perhaps the main objective of that project wasn’t to have the best economic successful in producing those airliners. I think probably France and Britain, they wanted to show to the world that they are able to produce this kind of supersonic airlines, that they had the best technology to share to the world. I think possibly that is another explanation and why they wanted to continue with operate.

Gene Tunny  26:48

That’s true. There’s that national prestige element involved. There was a cost-benefit analysis, a prospective cost-benefit analysis done in the early ‘70s before the Concorde was ever in operation. Do  you know that study? And I think the economist who did that, was it Woolley, he was arguing that okay, there’s actually a loss in economic terms to the governments of Britain and France from Concorde, of I think it was a negative 100-and-something million pounds, I’ll put a link in the show notes to the study so you can have a look at it if you’re interested. But he was arguing that okay, this means that the governments of Britain and France value these other elements, all these intangible elements of the Concorde project, which could include the national prestige, national pride, they value those elements as at least this much money.

And this is a point I made when I was chatting with Tim. This is a time when the great superpowers… The superpowers at the time were the US and the Soviet Union. And they were the ones who, they were in the space race. Britain and France were probably never going to get in the space race. Britain and France were once the great powers in the world, in the days of Nelson and Napoleon, the great powers in the… And I guess Spain as well. But yeah, France and in Britain were once great powers. And this could have been a way, they could have seen this as a way of getting back into that game. I think that’s a really good point.

I’m just trying to think what I should… Other things I should talk about, the operating costs of the Concorde. they did have higher operating costs per passenger than say 747. I think what I saw is that even though you’ve got 100 or so people on a Concorde versus more than 400, 400 to 500 on a Boeing 747, I think you need almost as much jet fuel. The cost per passenger per mile on a Concorde… There are some figures. There are various sources for figures. Wikipedia has got a great article on Concorde I’ll link to, and it has some figures in that. From what I can work out, Concorde had nearly twice the operating cost per passenger than a 747. It was never really going to be a mass market proposition.

I think certainly the oil shock in 1973 when the Arab nations restricted supply of oil… I think that was in response to the Yom Kippur War, where the Israelis pushed back the Arab invasion. And I think what happened was, because those higher oil prices meant that it was never going to be a mass market proposition, what you saw was that through the ‘70s, all the aircraft companies, the airliners that had previously expressed some interest in Concorde, other than Air France and British Airways, they just said, “Look, we’re no longer interested.” Partly that was because of higher oil prices. It could have been that they’re crunched the numbers and just worked out, we’re not going to make money on Concorde. The Boeing 747, it came out in I think it was 1969. And it was just such a great aeroplane. You could fit so many people on it. It’s just such a fantastic airline plane for international travel. And so I think they just worked out oh, look, Concorde’s not really going to work. Qantas here in Australia, I think it was looking at getting Concorde at one stage, but worked out it wasn’t gonna work. The only companies that ended up running it were Air France and British Airways.

Because of the higher operating costs, you needed to have a higher ticket price. And so you needed to appeal to those wealthy buyers. What I found, and this is something you notice too, Concorde, it was super quick, you’d save hours on your travel time, but it wasn’t a really luxurious experience, was it, flying Concorde, from what I could tell.

Arturo Espinoza Bocangel  31:50

Yes, that’s true. It was not comfy. I think due the design of the airliner, the people must be seated closely. It wasn’t too much comfortable to be there. I think that was one of the problems. You compare that airliners against Airbus or Boeing, those airliner offer you a better experience as a passenger?

Gene Tunny  32:26

Yes. I think I was reading that they didn’t even have enough room for on-flight movies. You’re really enclosed. You’re really close with other people. And in a way, that could be good, if you’ve got Paul McCartney or Sting or someone on the plane with you. That’s pretty special.

Arturo Espinoza Bocangel  32:48

Of course.

Gene Tunny  32:49

But otherwise, it wasn’the super comfortable. And I guess they tried to compensate for that by having the freely flowing champagne and caviar. But look, there’s only so much that only goes so far. If you’re on a business trip, you need to watch how much champagne you’re consuming. The combination of attributes that had only appealed to certain types of wealthy people. They might have wanted to impress or maybe they really did need to get – it was just absolutely time critical that they needed to get from London to New York or Paris to New York. And I think we’re talking about a really elite segment of the population. And then what happened was that after the Air France crash, a lot of those people decided well, okay, look, I’m not really sure I want to fly on the Concorde anymore.

That Economist article I mentioned before, it writes… In The Economist article it has, “In its heyday, Concorde typically flew three quarters full, earning BA about 20 million pounds in operating profits from 35,000 passengers a year. When it returned to service, paying over 8,000 pounds to fly supersonic had lost its appeal. BA could attract enough business for only one transatlantic flight a day, instead of the previous two. And even then, the aircraft was often carrying only a couple of dozen paying passengers.” You’ve got more than half your plane unfilled. Actually, three quarters of your plane if you’re only carrying –

Arturo Espinoza Bocangel  34:40

That is a loss.

Gene Tunny  34:41

“Extra seats were often filled by upgrading subsonic first-class and business-class customers. Delays and diversions due to bits falling off and engines faltering began to tarnish Concorde’s image and emphasise its age.” That’s part of the problem.

Apparently Concorde was quite fragile. And I saw one estimate that for every hour, it was every hour of flight time, it needed 18 hours of maintenance or something like that. It had this issue of needing all of this maintenance, and then they would have needed to have done a refurb of it, a refit in the early 2000s. British Airways and an Air France just looked at the numbers and thought, ah, that’s not gonna make any sense, so let’s just discontinue operations.

That’s a fascinating story. You’ve got this combination of the oil price, you’ve got a combination of it being… It wasn’t a mass market proposition. It had to become a niche, luxury proposition or for the business elite and the entertainment elite. Then that market was compromised by a downturn in the economy, people being less willing to splurge, and also the Air France crash, which hugely concerning. You really worry about Concorde.

Maybe if it was more mass market, if there was a larger number of Concordes in operation, maybe they could get more efficiencies in the operations of Concorde. They wouldn’t have the problems finding someone to service the Concordes. I just wonder if that would have meant that it would have been more viable if there were more of these planes. Certainly the British and French governments intended originally that there’d be many more Concordes in operation. I think they thought they’d be selling hundreds of these Concordes. I think I saw an estimate they were expecting by 1980, 350 or 400. I may have misremembered that, but I’ll try and put it in the show notes. And that cost-benefit analysis we saw, it had projections based on Concordes in the hundreds, whereas there are only ever 20 Concordes built, ever built. And only 14 of them were an operation. Six of them were for testing, were prototypes. It’s quite extraordinary.

Arturo Espinoza Bocangel  37:21

That’s crazy. Wow.

Gene Tunny  37:23

I think economics ultimately defeated the Concorde. Certainly the crash and the regulations contributed as well. The regulations we talked about, the fact that it couldn’t go supersonic over the land, that certainly affected viability, particularly for the French, for Air France, because I think it had to travel further overland from Paris to New York than you probably would… Maybe I’m wrong about that. Anyway, apparently it affected the French Concordes particularly hard, as that passage from Todd quoted. Then there’s the fact that you can’t do the cross-continental. You couldn’t go from New York City to Los Angeles. You couldn’t go from London to say Moscow or wherever or Beijing or something. I don’t know. There’d be a whole lot of other routes that you could travel if you didn’t have to worry about the sonic booms.

Arturo Espinoza Bocangel  38:28

The thing told you that USA government banned those kind of inland flights of the Concorde.

Gene Tunny  38:34

Right, of supersonic planes, yeah.

Arturo Espinoza Bocangel  38:38

Due to those negative impacts on private properties and people as well.

Gene Tunny  38:42

Yeah, I’ll have to look up the exact regulation. That makes sense to me. A couple of other interesting facts I thought would be worth talking about is that the Soviet Union or the Russians actually had a supersonic airliner too, the Tu-144. It had a different design from the Concorde. It looks similar, wasn’t as beautiful though, wasn’t as elegant, but it had similar features. I think it had the delta wing too, and it had the drooping nose but it just wasn’t as beautiful or as smooth as the Concorde was. And one of the problems it had, it was using an afterburner through the flight to go supersonic. And that meant that the cabin was really noisy, about 90 decibels, which I think is equivalent to a hairdryer. I think I read that.

Arturo Espinoza Bocangel  39:37

Wow.

Gene Tunny  39:40

In contrast, the Concorde turbo jets, they only needed the afterburner at takeoff, to take off. That Russian supersonic plane, it didn’t last and so they don’t run that anymore. But I thought that was fascinating that they had they had a supersonic plane themselves.

Now, is there a future of supersonic aircraft? I was surprised. This really surprised me. I read that, so the United Airlines, the US airline company, it’s announced that it will buy up to 50 of these Boom Overture Supersonic jets. And the idea is to get them operating by 2029. Now, this is a company in Denver, Colorado, that’s developing supersonic aircraft. It claims it’s going to be using sustainable aviation fuel, and so that minimises concerns you might have about impacts on the environment, climate change, because airline travel is a significant contributor to greenhouse gases.

Arturo Espinoza Bocangel  40:57

Yeah, definitely.

Gene Tunny 40:59

They’re claiming it’s sustainable. They’re also claiming that they’re looking at the aerodynamics, they’re working on the aerodynamics of the plane to reduce the sonic booms. It’ll only have a thud of 75 decibels compared with Concorde’s 105-decibel sonic boom. We’ll see how that all goes, how that works out. That’s interesting that potentially, there is a company that’s been looking at reviving supersonic flight. Now, let’s see how that all goes. I guess you want to try and look through the fact that the oil price now is spiked because of what’s happening in Ukraine. Hopefully, that’s all resolved by then. Look, I think, a supersonic aircraft, it’s still going to face that issue of the regulation. There’s always a risk that maybe it can’t fly the routes it wants to, even if it does get that sonic boom down. I don’t know. I think we’ll have to wait and see there. But I found that fascinating that that there could be supersonic flight in the next decade or so, again. Have you seen anything along those lines, Arturo?

Arturo Espinoza Bocangel  42:20

No, I haven’t checked that. But I think from my perspective, it’s going to be difficult for those ventures in order to develop these kind of supersonic aeroplanes. And of course, these aeroplanes are going to compete with these two big companies, which are Airbus and Boeing. Of course, they will face that limitation in terms of competition as well. I think that is going to be complex for them. Even if we talk about, for example, the many tries of Chinese government to develop their own airlines, or to compete with those big multinational companies, but we have seen that the results were unsuccessful.

Gene Tunny  43:15

It’ll have to have tickets priced a lot higher than standard travel. Let me have a look at this. There’s an article in the conversation in June 2021. “Supersonic flights are set to return. Here’s how they can succeed where Concorde failed.” This is by Peter Thomas, who’s an aerospace engineering lecturer at a university in the UK. I’ll put a link to that. He’s written, “Boom will be optimistic that it can overcome fuel efficiency challenges by the time its aircraft begins carrying fare-paying passengers in 2029. Those fares look set to be high, with Boom anticipating a 3,500 pound price tag per seat. In 1996, British Airways charged around 5,350 to 8,800 pounds in today’s prices for roundtrip tickets from New York to London.”

It’ll be cheaper than Concorde, but it’s still going to be much dearer than a normal fare that you’d pay, probably about, I don’t know, three times or so. I’m not sure what the exact fares from transatlantic fares are in pounds. But I’ll see if I can put something in the show notes. It’s certainly going to be more expensive than the standard fare.

“This means that like Concorde before it, the Boom Overture looks aimed at the luxury market, beyond the reach of even business class passengers.” I think that’s the problem. If you’re aiming the luxury market, then maybe it’s too narrow a segment to try and run an airline on I don’t know. That would be one of the concerns that I would have about that as a proposition, but let’s see how it develops. I’d certainly like to fly supersonic one day, I think it’d be one of those so-called bucket list things to do, if  you know what I mean.

Arturo Espinoza Bocangel  45:26

Yes, the same for me. I would like to do that.

Gene Tunny  45:30

Flying at 60,000 feet at Mach Two or whatever it is, just be spectacular. Some of the facts, or factoids you could say they are, that they have about, because who knows if they’re right or not. You just read these things on the internet. But I think one of them was saying by the time that the hostess or the stewardess pours your champagne, you’ve already travelled 26 miles or something ridiculous, in the Concorde. It’s flying that fast.

Arturo Espinoza Bocangel  46:02

Wow.

Gene Tunny 46:07

I don’t know whether that makes sense or not. You just think about how fast you’re travelling, and it’s just extraordinary. I wanted to end with my takeaways from this whole Concorde episode, or experience with the Concorde, because I think there are a lot of important economic lessons associated with Concorde. It’s more than that you should ignore sunk costs. This is the point that if the British and French governments were smart, or they were paying attention, or this thing wasn’t so caught up with their – it wasn’t such an exercise in national pride or national prestige – if they thought rationally about it, they would have cut their losses in the ‘60s sometime and just given up on it, but they didn’t do that. They ignored the key lesson, very important lesson from economics to ignore sunk costs. Bygones are bygones. Don’t throw good money after bad.

The other lesson, I think, is ultimately economics prevails. If something doesn’t stack up, it won’t survive. Even though Concorde was profitable for a while, over the long run it just wasn’t a commercial proposition. There the regulatory issues. There was the fact that it had higher operating costs than the standard aircraft because of the amount of fuel relative to passengers it needed. This meant it had to be a luxury proposition. That meant that the market was smaller, and more volatile, you could argue. I think that’s what happened. You had the Air France crash, and the downturn in travel associated with 9/11, and people being more budget conscious after the stock market fell, this perfect storm of things that happened that ultimately defeated Concorde.

Okay, my third takeaway is governments should be careful about going into business, i.e. picking winners. I think that’s something governments really need to be careful about. I used to work in the Industry Policy Division in Treasury and we would always cast a critical eye over any idea for government to get involved in business. I think you have to be really careful about that.

Number four, you need to think about those externalities. This is the point you made. There’s this externality associated with Concorde, the sonic booms. And if there is an externality, you need to think about what does that mean, what could governments do in response? And we saw that there was that regulatory response that the Concordes, they couldn’t go supersonic over land. And that really affected the economics of the operations.

Another externality, of course, is greenhouse gas emissions. And so you have to think about if you’re going to run a supersonic aircraft in the future, then what does that mean if there’s some sort of carbon tax or if there’s some crackdown on air travel because of people who are concerned about climate change? Of course, that’s why with this Boom technology company, which is looking at a new supersonic plane, that’s why it’s trying to get into sustainable aviation fuel. It’s looking at “Biofuels and synthetic kerosene that are manufactured using renewable and sustainable materials. It looks like it will mean an impressive 80%… ”  This is what the author of the article is writing. This is Peter Thomas. He writes, “An impressive 80% reduction in lifecycle CO2 emissions is often quoted.” Then he goes, “The key word here though is lifecycle. It doesn’t necessarily mean less harmful emissions from the engine.” Who knows what it’ll ultimately mean for the emissions and what potential carbon tax or carbon price they’d have to pay? Anything else we need to chat about with Concorde, Arturo?

Arturo Espinoza Bocangel  50:46

I think today, all that you have mentioned are enough to have a better idea of what happened about the case of this white elephant case.

Gene Tunny  51:04

I hope if you’re in the audience, you’ve got something out of this. I’ll put links to these articles that I’ve mentioned or have quoted from in the show notes. Check them out. There’s a lot that’s been written about Concorde, I think because people find it fascinating just because it’s such a beautiful aeroplane, and I guess the celebrities that have been on the plane and there are such interesting stories when you got Phil Collins and going to Live Aid, doing two Live Aid concerts in one day. I think even the Queen, Queen Mother, they’ve all travelled on Concorde. The Queen Mother, she’s no longer with us, but they travelled on Concorde at different times.

One other story I forgot to mention, there’s this idea that you can get a pricing lesson from the Concorde. Part of the reason that the profitability of Concorde, it became profitable in the mid ‘80s, was because British Airways figured out that they could put their prices up, because the people who were flying on Concorde, they were busy executives, or they were senior executives, and their secretaries were booking the flights. The actual people flying didn’t realise how much Concorde was costing. They thought it was actually more expensive than it was. British Airways did a survey. British Airways raised their prices and they didn’t have a fall in demand. They ended up making more money, because they increased their prices. How would economists describe that? At that point of the demand curve for those consumers, the demand is in elastic with respect to price. Is that the right way to explain it?

Arturo Espinoza Bocangel  53:00

Yes.

Gene Tunny  53:03

That’s what British Airways figured out. And so therefore, they could increase prices and therefore increase –

Arturo Espinoza Bocangel  53:12

The demand for or travelling, it wasn’t going to change.

Gene Tunny  53:20

Yeah, or very little for that group of consumers, the people who really weren’t budget conscious. I think that’s fascinating. There’s a great article, A Pricing Lesson From the Concorde from The Adaptive Marketer, Gerardo Dada, and I’ll put a link to that in the show notes.

Wow, I think we had a pretty comprehensive discussion of the Concorde, Arturo. Thanks for joining me on this conversation. I think that’s been really good.

Arturo Espinoza Bocangel  53:55

Thank you again for inviting me.

Gene Tunny  53:57

Yeah, of course. And if you’re listening in the audience, and you have any thoughts, any comments, any questions, please get in touch. You can email me, contact@economicsexplored.com. I also have a speak note service set up so you can send me a voice message. There’s a link to that in the show notes. Thanks for listening, and hope to speak with you again soon. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com, and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Links relevant to the conversation

EP129 which mentions the Concorde:

Economist article on the Concorde with good summary of what went wrong:

https://www.economist.com/business/2003/10/16/after-concorde

Conversation article on future of supersonic air travel:

https://theconversation.com/supersonic-flights-are-set-to-return-heres-how-they-can-succeed-where-concorde-failed-162268

AP article on Concorde being “unexpected success” in 1986:

https://apnews.com/article/fa1e281d544267a8afe77afceaf3f03f

Early seventies cost-benefit analysis of the Concorde mentioned in the episode:

http://www.bath.ac.uk/e-journals/jtep/pdf/Volume_V1_No_3_225-239.pdf

Other websites consulted:

https://www.businessinsider.com/concorde-supersonic-jet-history-2018-10?r=AU&IR=T

https://www.heritageconcorde.com/who-built-concorde

https://science.howstuffworks.com/transport/flight/modern/concorde2.htm

https://en.wikipedia.org/wiki/Concorde

https://ultimateclassicrock.com/phil-collins-live-aid/

https://www.cntraveler.com/story/celebrity-passengers-and-caviar-at-55000-feet-what-it-was-like-to-fly-concorde-in-the-70s

https://www.economist.com/1843/2018/09/03/when-concorde-was-the-future

Credits

Big thanks to my guest Arturo Espinoza Bocangel and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.